Financial 7 PassMaster

/in /by

Question-Keller Graduate School of Management AC555ON Financial 7 PassMaster

 

 

CPA-00928 Type1 M/C A-D Corr Ans: A PM#1 F 7-01

 

 

 

1. CPA-00928 FARE R03 #4 Page 5

 

 

 

On November 2, 2001, Platt Co. entered into a 90-day futures contract to purchase 50,000 Swiss francs

 

when the contract quote was $.70. The purchase was for speculation in price movement. The following

 

exchange rates existed during the contract period:

 

 

 

30-day futures Spot rate
November 2, 2001 $0.62 $0.63
December 31, 2001 0.65 0.64
January 30, 2002 0.65 0.68

 

 

 

 

 

What amount should Platt report as foreign currency exchange loss in its income statement for the year

 

ended December 31, 2001?

 

 

 

CPA-00930 Type1 M/C A-D Corr Ans: D PM#3 F 7-01

 

 

 

2. CPA-00930 FARE C98 #1 Page 3

 

 

 

Fair value disclosure of financial instruments may be made in the:

 

CPA-00931 Type1 M/C A-D Corr Ans: B PM#4 F 7-01

 

 

 

3. CPA-00931 FARE C98 #2 Page 3

 

 

 

Disclosures about the following kinds of risks are required for most financial instruments.

 

CPA-00933 Type1 M/C A-D Corr Ans: B PM#5 F 7-01

 

 

 

4. CPA-00933 FARE C98 #3 Page 3

 

 

 

Which of the following assets are financial instruments?

 

 

 

CPA-00934 Type1 M/C A-D Corr Ans: D PM#6 F 7-01

 

 

 

5. CPA-00934 FARE C98 #4 Page 3

 

 

 

Which of the following must be disclosed for most financial instruments?

 

 

 

CPA-00936 Type1 M/C A-D Corr Ans: A PM#7 F 7-01

 

 

 

6. CPA-00936 FARE C98 #5 Page 4

 

 

 

In order for a financial instrument to be a derivative for accounting purposes, the financial instrument

 

must:

 

I. Have one or more underlyings.

 

II. Require an initial net investment.

 

 

 

 

 

CPA-00938 Type1 M/C A-D Corr Ans: C PM#8 F 7-01

 

 

 

7. CPA-00938 FARE C98 #6 Page 4

 

 

 

The determination of the value or settlement amount of a derivative involves a calculation which uses:

 

 

 

I. An underlying.

 

II. A notional amount.

 

 

 

CPA-00941 Type1 M/C A-D Corr Ans: B PM#9 F 7-01

 

 

 

8. CPA-00941 FARE C98 #7 Page 6

 

 

 

On December 31, 199X, the end of its fiscal year, Smarti Company held a derivative instrument which it

 

had acquired for speculative purposes during November, 199X. Since its acquisition the fair value of the

 

derivative had increased materially. On December 31, how should the increase in fair value of the

 

derivative instrument be reported by Smarti in its financial statements?

 

 

 

CPA-00945 Type1 M/C A-D Corr Ans: C PM#11 F 7-01

 

 

 

9. CPA-00945 FARE C98 #9 Page 6

 

 

 

Gains and losses from changes in the fair value of a derivative designated and qualified as a fair value

 

hedge should be:

 

 

 

CPA-00948 Type1 M/C A-D Corr Ans: A PM#12 F 7-01

 

 

 

10. CPA-00948 FARE C98 #10 Page 5

 

 

 

Qualified derivatives may be used to hedge the cash flow associated with an/a:

 

 

 

 

 

CPA-00951 Type1 M/C A-D Corr Ans: C PM#13 F 7-01

 

 

 

11. CPA-00951 FARE C98 #11 Page 6

 

 

 

A change in the fair value of a derivative qualified as a cash flow hedge is determined to be either

 

effective in offsetting a change in the hedged item or ineffective in offsetting such a change. How should

 

the effective and ineffective portions of the change in value of a derivative which qualifies as a cash flow

 

hedge be reported in financial statements?

 

 

 

12. CPA-00954 FARE R96 #8 Page 4

 

 

 

Which of the following risks are inherent in an interest rate swap agreement?

 

 

 

I. The risk of exchanging a lower interest rate for a higher interest rate.

 

II. The risk of nonperformance by the counterparty to the agreement.

 

 

 

CPA-00958 Type1 M/C A-D Corr Ans: C PM#15 F 7-01

 

 

 

13. CPA-00958 FARE R96 #9 Page 3

 

 

 

If it is not practicable for an entity to estimate the fair value of a financial instrument, which of the

 

following should be disclosed?

 

I. Information pertinent to estimating the fair value of the financial instrument.

 

II. The reasons it is not practicable to estimate fair value.

 

CPA-00965 Type1 M/C A-D Corr Ans: A PM#16 F 7-01

 

 

 

14. CPA-00965 FARE May 95 #4 Page 3

 

 

 

Disclosure of information about significant concentrations of credit risk is required for:

 

 

 

CPA-04658 Type1 M/C A-D Corr Ans: B PM#17 F 7-01

 

 

 

15. CPA-04658 Released 2005 Page 3

 

 

 

Where in its financial statements should a company disclose information about its concentration of credit

 

risks?

 

 

 

CPA-05221 Type1 M/C A-D Corr Ans: D PM#26 F 7-01

 

 

 

16. CPA-05221 Released 2006 Page 3

 

 

 

Whether recognized or unrecognized in an entity’s financial statements, disclosure of the fair values of the

 

entity’s financial instruments is required when:

 

 

 

CPA-05193 Type1 M/C A-D Corr Ans: D PM#27 F 7-01

 

 

 

17. CPA-05193 Released 2006 Page 3

 

 

 

Which of the following financial instruments is not considered a derivative financial instrument?

 

 

 

CPA-00971 Type1 M/C A-D Corr Ans: A PM#2 F 7-02

 

 

 

18. CPA-00971 FARE R99 #10 Page 18

 

 

 

On January 15, 2000, Rico Co. declared its annual cash dividend on common stock for the year ended

 

January 31, 2000. The dividend was paid on February 9, 2000, to stockholders of record as of January

 

28, 2000. On what date should Rico decrease retained earnings by the amount of the dividend?

 

 

 

 

 

 

 

 

 

CPA-00976 Type1 M/C A-D Corr Ans: A PM#4 F 7-02

 

 

 

19. CPA-00976 FARE Nov 95 #18 Page 20

 

 

 

Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock at

 

December 31, 1993. During 1994, transactions involving Nest’s common stock were as follows:

 

May 3 – 1,000 shares of treasury stock were sold.

 

August 6 – 10,000 shares of previously unissued stock were sold.

 

November 18 – A 2-for-1 stock split took effect.

 

Laws in Nest’s state of incorporation protect treasury stock from dilution. At December 31, 1994, how

 

many shares of Nest’s common stock were issued and outstanding?

 

 

 

CPA-00981 Type1 M/C A-D Corr Ans: A PM#5 F 7-02

 

 

 

20. CPA-00981 FARE Nov 95 #19 Page 13

 

 

 

Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31, 1993,

 

Cyan’s retained earnings were $300,000. In March 1994, Cyan reacquired 5,000 shares of its common

 

stock at $20 per share. In June 1994, Cyan sold 1,000 of these shares to its corporate officers for $25

 

per share. Cyan uses the cost method to record treasury stock. Net income for the year ended

 

December 31, 1994, was $60,000. At December 31, 1994, what amount should Cyan report as retained

 

earnings?

 

 

 

CPA-01003 Type1 M/C A-D Corr Ans: C PM#7 F 7-02

 

 

 

21. CPA-01003 FARE Nov 95 #21 Page 17

 

 

 

A company issued rights to its existing shareholders without consideration. The rights allowed the

 

recipients to purchase unissued common stock for an amount in excess of par value. When the rights are

 

issued, which of the following accounts will be increased?

 

 

 

CPA-01004 Type1 M/C A-D Corr Ans: C PM#8 F 7-02

 

 

 

22. CPA-01004 FARE Nov 95 #22 Page 17

 

 

 

In September 1989, West Corp. made a dividend distribution of one right for each of its 120,000 shares of

 

outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West’s

 

$50 variable rate preferred stock at an exercise price of $80 per share. On March 20, 1993, none of the

 

rights had been exercised, and West redeemed them by paying each stockholder $0.10 per right. As a

 

result of this redemption, West’s stockholders’ equity was reduced by:

 

 

 

CPA-01007 Type1 M/C A-D Corr Ans: A PM#9 F 7-02

 

 

 

23. CPA-01007 FARE Nov 94 #28 Page 17

 

 

 

East Co. issued 1,000 shares of its $5 par common stock to Howe as compensation for 1,000 hours of

 

legal services performed. Howe usually bills $160 per hour for legal services. On the date of issuance,

 

the stock was trading on a public exchange at $140 per share. By what amount should the additional

 

paid-in capital account increase as a result of this transaction?

 

 

 

CPA-01009 Type1 M/C A-D Corr Ans: A PM#10 F 7-02

 

 

 

24. CPA-01009 FARE Nov 94 #29 Page 9

 

 

 

During 1992, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110 per share.

 

One share of preferred stock can be converted into three shares of Brad’s $25 par common stock at the

 

option of the preferred shareholder. On December 31, 1993, when the market value of the common stock

 

was $40 per share, all of the preferred stock was converted. What amount should Brad credit to

 

Common Stock and to Additional Paid-in Capital- Common Stock as a result of the conversion?

 

 

 

CPA-01011 Type1 M/C A-D Corr Ans: A PM#11 F 7-02

 

 

 

25. CPA-01011 FARE Nov 94 #30 Page 18

 

 

 

When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend

 

on the date of:

 

 

 

CPA-01014 Type1 M/C A-D Corr Ans: B PM#12 F 7-02

 

 

 

26. CPA-01014 FARE Nov 94 #31 Page 18

 

 

 

Long Co. had 100,000 shares of common stock issued and outstanding at January 1, 1993. During 1993,

 

Long took the following actions:

 

March 15 – Declared a 2-for-1 stock split, when the fair value of the stock was $80 per share.

 

December 15 – Declared a $.50 per share cash dividend.

 

In Long’s statement of stockholders’ equity for 1993, what amount should Long report as dividends?

 

 

 

CPA-01018 Type1 M/C A-D Corr Ans: C PM#13 F 7-02

 

 

 

27. CPA-01018 FARE Nov 94 #32 Page 13

 

 

 

If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be:

 

 

 

CPA-01025 Type1 M/C A-D Corr Ans: C PM#14 F 7-02

 

 

 

28. CPA-01025 FARE Nov 94 #37 Page 11

 

 

 

The primary purpose of a quasi-reorganization is to give a corporation the opportunity to:

 

 

 

CPA-01028 Type1 M/C A-D Corr Ans: D PM#15 F 7-02

 

 

 

29. CPA-01028 FARE May 94 #31 Page 18

 

 

 

East Corp., a calendar-year company, had sufficient retained earnings in 1993 as a basis for dividends,

 

but was temporarily short of cash. East declared a dividend of $100,000 on April 1, 1993, and issued

 

promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1, 1993, had a

 

maturity date of March 31, 1994, and a 10% interest rate.

 

How should East account for the scrip dividend and related interest?

 

 

 

CPA-01031 Type1 M/C A-D Corr Ans: B PM#16 F 7-02

 

 

 

30. CPA-01031 FARE May 94 #32 Page 18

 

 

 

 

 

On January 2, 1994, Lake Mining Co.’s board of directors declared a cash dividend of $400,000 to

 

stockholders of record on January 18, 1994, payable on February 10, 1994. The dividend is permissible

 

under law in the state where Lake is incorporated. Selected balances from its December 31, 1993

 

balance sheet are as follows:

 

Accumulated depletion $100,000

 

Capital stock 500,000

 

Additional paid-in capital 150,000

 

Retained earnings 300,000

 

 

 

CPA-01041 Type1 M/C A-D Corr Ans: A PM#18 F 7-02

 

 

 

31. CPA-01041 Th Nov 93 #15 Page 17

 

 

 

On November 2, 1992, Finsbury, Inc. issued warrants to its stockholders giving them the right to purchase

 

additional $20 par value common shares at a price of $30. The stockholders exercised all warrants on

 

March 1, 1993. The shares had market prices of $33, $35, and $40 on November 2, 1992, December 31,

 

1992, and March 1, 1993, respectively. What were the effects of the warrants on Finsbury’s additional

 

paid-in capital and net income?

 

 

 

CPA-01043 Type1 M/C A-D Corr Ans: C PM#19 F 7-02

 

 

 

32. CPA-01043 PI Nov 93 #48 Page 19

 

 

 

Cobb Co. purchased 10,000 shares (2% ownership) of Roe Co. on February 12, 1993. Cobb received a

 

stock dividend of 2,000 shares on March 31, 1993, when the carrying amount per share on Roe’s books

 

was $35 and the market value per share was $40. Roe paid a cash dividend of $1.50 per share on

 

September 15, 1993. In Cobb’s income statement for the year ended October 31, 1993, what amount

 

should Cobb report as dividend income?

 

 

 

CPA-01046 Type1 M/C A-D Corr Ans: A PM#20 F 7-02

 

 

 

33. CPA-01046 PII May 93 #1 Page 13

 

 

 

Rudd Corp. had 700,000 shares of common stock authorized and 300,000 shares outstanding at

 

December 31, 1991. The following events occurred during 1992:

 

January 31 Declared 10% stock dividend

 

June 30 Purchased 100,000 shares

 

August 1 Reissued 50,000 shares

 

November 30 Declared 2-for-l stock split

 

At December 31, 1992, how many shares of common stock did Rudd have outstanding?

 

 

 

CPA-01048 Type1 M/C A-D Corr Ans: D PM#21 F 7-02

 

 

 

34. CPA-01048 PII May 93 #2 Page 13

 

 

 

Beck Corp. issued 200,000 shares of common stock when it began operations in 1990 and issued an

 

additional 100,000 shares in 1991. Beck also issued preferred stock convertible to 100,000 shares of

 

common stock. In 1992, Beck purchased 75,000 shares of its common stock and held it in Treasury. At

 

December 31, 1992, how many shares of Beck’s common stock were outstanding?

 

 

 

 

 

CPA-01050 Type1 M/C A-D Corr Ans: A PM#22 F 7-02

 

 

 

35. CPA-01050 Th May 93 #2 Page 18

 

 

 

A property dividend should be recorded in retained earnings at the property’s:

 

 

 

36. CPA-01052 PII May 93 #3 Page 11

 

 

 

The following changes in Vel Corp.’s account balances occurred during 1992:

 

Increase

 

Assets $89,000

 

Liabilities 27,000

 

Capital stock 60,000

 

Additional paid-in capital 6,000

 

Except for a $13,000 dividend payment and the year’s earnings, there were no changes in retained

 

earnings for 1992. What was Vel’s net income for 1992?

 

 

 

CPA-01056 Type1 M/C A-D Corr Ans: B PM#24 F 7-02

 

 

 

37. CPA-01056 PII May 93 #4 Page 9

 

 

 

At December 31, 1991 and 1992, Carr Corp. had outstanding 4,000 shares of $100 par value 6%

 

cumulative preferred stock and 20,000 shares of $10 par value common stock. At December 31, 1991,

 

dividends in arrears on the preferred stock were $12,000. Cash dividends declared in 1992 totaled

 

$44,000. Of the $44,000, what amounts were payable on each class of stock?

 

 

 

CPA-01058 Type1 M/C A-D Corr Ans: A PM#25 F 7-02

 

 

 

38. CPA-01058 PII May 93 #5 Page 11

 

 

 

At December 31, 1991, Eagle Corp. reported $1,750,000 of appropriated retained earnings for the

 

construction of a new office building, which was completed in 1992 at a total cost of $1,500,000. In 1992,

 

Eagle appropriated $1,200,000 of retained earnings for the construction of a new plant. Also, $2,000,000

 

of cash was restricted for the retirement of bonds due in 1993. In its 1992 balance sheet, Eagle should

 

report what amount of appropriated retained earnings?

 

 

 

CPA-01061 Type1 M/C A-D Corr Ans: A PM#26 F 7-02

 

 

 

39. CPA-01061 PI May 93 #6 Page 8

 

 

 

On April 1, 1993, Hyde Corp., a newly formed company, had the following stock issued and outstanding:

 

• Common stock, no par, $1 stated value, 20,000 shares originally issued for $30 per share.

 

• Preferred stock, $10 par value, 6,000 shares originally issued for $50 per share.

 

Hyde’s April 1, 1993, statement of stockholders’ equity should report:

 

 

 

CPA-01094 Type1 M/C A-D Corr Ans: C PM#27 F 7-02

 

 

 

40. CPA-01094 Th May 93 #10 Page 15

 

 

 

In 1990, Fogg, Inc. issued $10 par value common stock for $25 per share. No other common stock

 

transactions occurred until March 31, 1992, when Fogg acquired some of the issued shares for $20 per

 

share and retired them. Which of the following statements correctly states an effect of this acquisition

 

and retirement?

 

 

 

 

 

CPA-01095 Type1 M/C A-D Corr Ans: D PM#28 F 7-02

 

 

 

41. CPA-01095 PI May 93 #11 Page 15

 

 

 

On December 1, 1992, Line Corp. received a donation of 2,000 shares of its $5 par value common stock

 

from a stockholder. On that date, the stock’s market value was $35 per share. The stock was originally

 

issued for $25 per share. By what amount would this donation cause total stockholders’ equity to

 

decrease?

 

 

 

CPA-01097 Type1 M/C A-D Corr Ans: D PM#29 F 7-02

 

 

 

42. CPA-01097 Th May 93 #13 Page 9

 

 

 

Quoit, Inc. issued preferred stock with detachable common stock warrants. The issue price exceeded the

 

sum of the warrants’ fair value and the preferred stock’s par value. The preferred stock’s fair value was

 

not determinable. What amount should be assigned to the warrants outstanding?

 

 

 

CPA-01099 Type1 M/C A-D Corr Ans: D PM#30 F 7-02

 

 

 

43. CPA-01099 Th May 93 #14 Page 22

 

 

 

In a compensatory stock option plan for which the grant and exercise dates are different, the stock

 

options outstanding account should be reduced at the:

 

 

 

CPA-04681 Type1 M/C A-D Corr Ans: A PM#31 F 7-02

 

 

 

44. CPA-04681 Released 2005 Page 19

 

 

 

Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a 30%

 

stock dividend. The market value was $50 per share, the par value was $10, and the average issue price

 

was $30 per share. By what amount will Universe decrease stockholders’ equity for the dividend?

 

 

 

 

 

 

 

CPA-04682 Type1 M/C A-D Corr Ans: B PM#32 F 7-02

 

 

 

45. CPA-04682 Released 2005 Page 13

 

Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year.

 

Murphy reacquired 30,000 of those shares at a cost of $15 per share, and recorded the transaction using

 

the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share, and recognized a

 

$50,000 gain on its income statement on May 20. Which of the following statements is correct?

 

 

 

 

 

CPA-05228 Type1 M/C A-D Corr Ans: B PM#33 F 7-02

 

 

 

46. CPA-05228 Released 2006 Page 13

 

 

 

Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The

 

par value of the stock is $1 per share. During January of the current year, Porter bought back 500 shares

 

at $6 per share, which were reported by Porter as treasury stock. The treasury stock shares were

 

reissued later in the current year at $10 per share. Porter used the cost method to account for its equity

 

transactions. What amount should Porter report as paid-in capital related to its treasury stock

 

transactions on its balance sheet for the current year?

 

 

 

CPA-05442 Type1 M/C A-D Corr Ans: A PM#35 F 7-02

 

 

 

47. CPA-05442 Released 2007 Page 13

 

 

 

Baker Co. issued 100,000 shares of common stock in the current year. On October 1, Baker

 

repurchased 20,000 shares of its common stock on the open market for $50.00 per share. At that date,

 

the stock’s par value was $1.00 and the average issue price was $40.00 per share. Baker uses the cost

 

method for treasury stock transactions. On December 1, Baker reissued the stock for $60.00 per share.

 

What amount should Baker report as treasury stock gain at December 31?

 

 

 

CPA-01102 Type1 M/C A-D Corr Ans: A PM#1 F 7-03

 

 

 

48. CPA-01102 FARE R01 #9 Page 29

 

 

 

Deck Co. had 120,000 shares of common stock outstanding at January 1, 1998. On July 1, 1998, it

 

issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of

 

nonconvertible cumulative preferred stock. What is the number of shares that Deck should use to

 

calculate 1998 earnings per share?

 

 

 

CPA-01105 Type1 M/C A-D Corr Ans: B PM#2 F 7-03

 

 

 

49. CPA-01105 FARE C98 #10 Page 29

 

 

 

Which of the following items, if dilutive and if other conditions are met, would enter into the determination

 

of the weighted average shares outstanding to be used in the basic earnings per share (basic EPS)

 

calculation?

 

 

 

I. Stock options.

 

II. Contingent shares.

 

 

 

CPA-01107 Type1 M/C A-D Corr Ans: C PM#3 F 7-03

 

 

 

50. CPA-01107 FARE C98 #11 Page 28

 

 

 

Elizabeth Corporation acquired Allen Corporation at the end of 19X8. Under terms of the acquisition

 

agreement, Elizabeth agreed to provide former Allen shareholders 1,000 additional shares of Elizabeth

 

stock for each new retail outlet opened during 19X9. Two new outlets were opened during 19X9:

 

• One on May 1, 19X9

 

• One on September 1, 19X9

 

What number of shares related to the openings of the new retail outlets should enter into the calculation

 

of Elizabeth’s basic earnings per share as of December 31, 19X9, the end of its fiscal year?

 

 

 

 

 

CPA-01123 Type1 M/C A-D Corr Ans: A PM#4 F 7-03

 

 

 

51. CPA-01123 FARE R98 #5 Page 28

 

 

 

In computing the weighted-average number of shares outstanding during the year, which of the following

 

midyear events must be treated as if it had occurred at the beginning of the year?

 

 

 

CPA-01193 Type1 M/C A-D Corr Ans: B PM#5 F 7-03

 

 

 

52. CPA-01193 FARE C97 #1 Page 35

 

 

 

Earnings per share disclosure is required for which of the following:

 

 

 

CPA-01195 Type1 M/C A-D Corr Ans: B PM#6 F 7-03

 

 

 

53. CPA-01195 FARE C97 #3 Page 34

 

 

 

Which one of the following is not considered contingent shares for purposes of computing EPS?

 

 

 

 

 

CPA-01201 Type1 M/C A-D Corr Ans: A PM#10 F 7-03

 

 

 

54. CPA-01201 Th Nov 93 #16 Page 27

 

 

 

When computing the weighted average of common shares outstanding for basic earnings per share,

 

convertible securities are:

 

 

 

CPA-01203 Type1 M/C A-D Corr Ans: B PM#11 F 7-03

 

 

 

55. CPA-01203 PI May 93 #60 Page 29

 

 

 

The following information pertains to Jet Corp.’s outstanding stock for 1992:

 

Common stock, $5 par value

 

Shares outstanding, 1/1/92 20,000

 

2-for-1 stock split, 4/1/92 20,000

 

Shares issued, 7/1/92 10,000

 

Preferred stock, $10 par value, 5% cumulative

 

Shares outstanding, 1/1/92 4,000

 

What are the number of shares Jet should use to calculate 1992 earnings per share?

 

 

 

CPA-01205 Type1 M/C A-D Corr Ans: C PM#12 F 7-03

 

 

 

56. CPA-01205 FARE Nov 92 #23 Page 28

 

 

 

On January 31, 1992, Pack, Inc. split its common stock 2 for 1, and Young, Inc. issued a 5% stock

 

dividend. Both companies issued their December 31, 1991, financial statements on March 1, 1992.

 

Should Pack’s 1991 earnings per share (EPS) take into consideration the stock split, and should Young’s

 

1991 EPS take into consideration the stock dividend?

 

 

 

CPA-01209 Type1 M/C A-D Corr Ans: B PM#13 F 7-03

 

 

 

57. CPA-01209 PI Nov 91 #60 Page 29

 

 

 

Strauch Co. has one class of common stock outstanding and no other securities that are potentially

 

convertible into common stock. During 1989, 100,000 shares of common stock were outstanding. In

 

1990, two distributions of additional common shares occurred: On April 1, 20,000 shares of treasury stock

 

were sold, and on July 1, a 2-for-1 stock split was issued. Net income was $410,000 in 1990 and

 

$350,000 in 1989. What amounts should Strauch report as earnings per share in its 1990 and 1989

 

comparative income statements?

 

 

 

 

 

CPA-01210 Type1 M/C A-D Corr Ans: A PM#14 F 7-03

 

 

 

58. CPA-01210 FARE May 91 #29 Page 32

 

 

 

In determining earnings per share, interest expense, net of applicable income taxes, on convertible debt

 

that is dilutive should be:

 

 

 

CPA-01211 Type1 M/C A-D Corr Ans: B PM#15 F 7-03

 

 

 

59. CPA-01211 FARE Nov 90 #34 Page 33

 

 

 

When computing diluted earnings per share, convertible securities are:

 

 

 

CPA-01213 Type1 M/C A-D Corr Ans: B PM#16 F 7-03

 

 

 

60. CPA-01213 PI Nov 90 #52 Page 27

 

 

 

Poe Co. had 300,000 shares of common stock issued and outstanding at December 31, 1988. No

 

common stock was issued during 1989. On January 1, 1989, Poe issued 200,000 shares of

 

nonconvertible preferred stock. During 1989, Poe declared and paid $75,000 cash dividends on the

 

common stock and $60,000 on the preferred stock. Net income for the year ended December 31, 1989

 

was $330,000. What should be Poe’s 1989 earnings per common share?

 

 

 

 

 

CPA-01214 Type1 M/C A-D Corr Ans: D PM#17 F 7-03

 

 

 

61. CPA-01214 PII May 90 #51 Page 27

 

 

 

Peters Corp.’s capital structure was as follows:

 

December 31

 

19X1 19X2

 

Outstanding shares of stock:

 

Common 110,000 110,000

 

Convertible preferred 10,000 10,000

 

8% convertible bonds $1,000,000 $1,000,000

 

 

 

During 19X2, Peters paid dividends of $3.00 per share on its preferred stock. The preferred shares are

 

convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shares of

 

common stock. Net income for 19X2 was $850,000. Assume that the income tax rate is 30%. The basic

 

earnings per share for 19X2 is:

 

 

 

 

 

 

 

CPA-01217 Type1 M/C A-D Corr Ans: B PM#18 F 7-03

 

 

 

62. CPA-01217 PI Nov 89 #54 Page 32

 

 

 

Jones Corp.’s capital structure was as follows:

 

December 31

 

1988 1987

 

Outstanding shares of stock:

 

Common 110,000 110,000

 

Convertible preferred 10,000 10,000

 

8% convertible bonds $1,000,000 $1,000,000

 

During 1988, Jones paid dividends of $3.00 per share on its preferred stock. The preferred shares are

 

convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shares of

 

common stock. Net income for 1988 is $850,000. Assume that the income tax rate is 30%.

 

The diluted earnings per share for 1988 is:

 

 

 

CPA-01218 Type1 M/C A-D Corr Ans: B PM#19 F 7-03

 

 

 

63. CPA-01218 FARE Nov 88 #33 Page 30

 

 

 

Dilutive stock options would generally be used in the calculation of:

 

 

 

Basic Diluted

 

 

 

earnings per share earnings per share

 

 

 

CPA-04775 Type1 M/C A-D Corr Ans: B PM#20 F 7-03

 

 

 

64. CPA-04775 Released 2005 Page 27

 

 

 

During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of

 

$20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The

 

bonds were originally issued at par, and each bond was convertible into 30 shares of common stock.

 

During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What

 

amount was Comma’s basic earnings per share for the current year?

 

 

 

CPA-05417 Type1 M/C A-D Corr Ans: A PM#20 F 7-03

 

 

 

65. CPA-05417 Released 2007 Page 27

 

 

 

Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative

 

preferred stock. No dividends on common stock were declared during the year. Net income was

 

$2,000,000. What was Jen’s basic earnings per share?

 

 

 

CPA-05446 Type1 M/C A-D Corr Ans: C PM#22 F 7-03

 

 

 

66. CPA-05446 Released 2007 Page 28

 

 

 

The following information pertains to Ceil Co., a company whose common stock trades in a public market:

 

Shares outstanding at 1/1 100,000

 

Stock dividend at 3/31 24,000

 

Stock issuance at 6/30 5,000

 

What is the weighted-average number of shares Ceil should use to calculate its basic earnings per share

 

for the year ended December 31?

 

 

 

 

 

CPA-01219 Type1 M/C A-D Corr Ans: B PM#1 F 7-04

 

 

 

67. CPA-01219 FARE R97 #3 Page 38

 

 

 

In its 1996 income statement, Kilm Co. reported cost of goods sold of $450,000. Changes occurred in

 

several balance sheet accounts as follows:

 

Inventory $160,000 decrease

 

Accounts payable-suppliers 40,000 decrease

 

What amount should Kilm report as cash paid to suppliers in its 1996 cash flow statement, prepared

 

under the direct method?

 

 

 

CPA-01221 Type1 M/C A-D Corr Ans: D PM#2 F 7-04

 

 

 

68. CPA-01221 FARE Nov 95 #47 Page 36

 

 

 

Mend Co. purchased a three-month U.S. Treasury bill. Mend’s policy is to treat as cash equivalents all

 

highly liquid investments with an original maturity of three months or less when purchased. How should

 

this purchase be reported in Mend’s statement of cash flows?

 

 

 

CPA-01223 Type1 M/C A-D Corr Ans: D PM#3 F 7-04

 

 

 

69. CPA-01223 FARE Nov 95 #48 Page 42

 

 

 

Which of the following is not disclosed on the statement of cash flows when prepared under the direct

 

method, either on the face of the statement or in a separate schedule?

 

 

 

 

 

CPA-01227 Type1 M/C A-D Corr Ans: C PM#6 F 7-04

 

 

 

70. CPA-01227 FARE May 95 #49 Page 40

 

Which of the following information should be disclosed as supplemental information in the statement of

 

cash flows?

 

 

 

CPA-01228 Type1 M/C A-D Corr Ans: C PM#7 F 7-04

 

 

 

71. CPA-01228 FARE Nov 94 #7 Page 42

 

 

 

Which of the following should not be disclosed in an enterprise’s statement of cash flows prepared using

 

the indirect method?

 

 

 

CPA-01231 Type1 M/C A-D Corr Ans: C PM#8 F 7-04

 

 

 

72. CPA-01231 FARE May 94 #5 Page 36

 

 

 

The primary purpose of a statement of cash flows is to provide relevant information about:

 

 

 

CPA-01232 Type1 M/C A-D Corr Ans: B PM#9 F 7-04

 

 

 

73. CPA-01232 FARE May 94 #50 Page 40

 

 

 

Fara Co. reported bonds payable of $47,000 at December 31, 1992, and $50,000 at December 31, 1993.

 

During 1993, Fara issued $20,000 of bonds payable in exchange for equipment. There was no

 

amortization of bond premium or discount during the year. What amount should Fara report in its 1993

 

statement of cash flows for redemption of bonds payable?

 

 

 

 

 

CPA-01233 Type1 M/C A-D Corr Ans: A PM#10 F 7-04

 

 

 

74. CPA-01233 PI Nov 93 #5 Page 38

 

 

 

Lino Co.’s worksheet for the preparation of its 1992 statement of cash flows included the following:

 

December 31 January 1

 

Accounts receivable $29,000 $23,000

 

Allowance for uncollectible accounts 1,000 800

 

Prepaid rent expense 8,200 12,400

 

Accounts payable 22,400 19,400

 

Lino’s 1992 net income is $150,000. What amount should Lino include as net cash provided by operating

 

activities in the statement of cash flows?

 

 

 

CPA-01234 Type1 M/C A-D Corr Ans: B PM#11 F 7-04

 

 

 

75. CPA-01234 PI Nov 93 #6 Page 38

 

 

 

Karr, Inc. reported net income of $300,000 for 1992. Changes occurred in several balance sheet

 

accounts as follows:

 

Equipment $25,000 increase

 

Accumulated depreciation 40,000 increase

 

Note payable 30,000 increase

 

Additional information:

 

• During 1992, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a

 

gain of $5,000.

 

• In December 1992, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note

 

payable of $30,000.

 

• Depreciation expense for the year was $52,000.

 

In Karr’s 1992 statement of cash flows, net cash provided by operating activities should be:

 

 

 

CPA-01235 Type1 M/C A-D Corr Ans: A PM#12 F 7-04

 

 

 

76. CPA-01235 PI Nov 93 #7 Page 39

 

 

 

Karr, Inc. reported net income of $300,000 for 1992. Changes occurred in several balance sheet

 

accounts as follows:

 

Equipment $25,000 increase

 

Accumulated depreciation 40,000 increase

 

Note payable 30,000 increase

 

Additional information:

 

• During 1992, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a

 

gain of $5,000.

 

• In December 1992, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note

 

payable of $30,000.

 

• Depreciation expense for the year was $52,000.

 

In Karr’s 1992 statement of cash flows, net cash used in investing activities should be:

 

 

 

CPA-01239 Type1 M/C A-D Corr Ans: C PM#13 F 7-04

 

 

 

77. CPA-01239 PI Nov 93 #8 Page 40

 

 

 

During 1992, Xan, Inc. had the following activities related to its financial operations:

 

Payment for the early retirement of long-term

 

bonds payable (carrying amount $370,000) $375,000

 

Distribution in 1992 of cash dividend declared in 1991 to preferred shareholders 31,000

 

Carrying amount of convertible preferred stock in Xan, converted into common shares 60,000

 

Proceeds from sale of Treasury stock (carrying amount at cost, $43,000) 50,000

 

In Xan’s 1992 statement of cash flows, net cash used in financing operations should be:

 

 

 

CPA-01241 Type1 M/C A-D Corr Ans: D PM#14 F 7-04

 

 

 

78. CPA-01241 PI Nov 93 #9 Page 38

 

 

 

Duke Co. reported cost of goods sold of $270,000 for 1992. Additional information is as follows:

 

December 31 January 1

 

Inventory $60,000 $45,000

 

Accounts payable 26,000 39,000

 

If Duke uses the direct method, what amount should Duke report as cash paid to suppliers in its 1992

 

statement of cash flows?

 

 

 

CPA-01242 Type1 M/C A-D Corr Ans: A PM#15 F 7-04

 

 

 

79. CPA-01242 Th Nov 93 #41 Page 39

 

 

 

In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a cash inflow from

 

investing activities equals the carrying amount of the equipment:

 

 

 

CPA-01244 Type1 M/C A-D Corr Ans: C PM#16 F 7-04

 

 

 

80. CPA-01244 Th Nov 93 #42 Page 40

 

 

 

On July 1, 1992, Dewey Co. signed a 20-year building lease that it reported as a capital lease. Dewey

 

paid the monthly lease payments when due. How should Dewey report the effect of the lease payments

 

in the financing activities section of its 1992 statement of cash flows?

 

a. An inflow equal to the present value of future lease payments at July 1, 1992, less 1992 principal and

 

interest payments.

 

 

 

CPA-01245 Type1 M/C A-D Corr Ans: D PM#17 F 7-04

 

 

 

81. CPA-01245 Th May 93 #32 Page 39

 

 

 

On September 1, 1992, Canary Co. sold used equipment for a cash amount equaling its carrying amount

 

for both book and tax purposes. On September 15, 1992, Canary replaced the equipment by paying cash

 

and signing a note payable for new equipment. The cash paid for the new equipment exceeded the cash

 

received for the old equipment. How should these equipment transactions be reported in Canary’s 1992

 

statement of cash flows?

 

 

 

CPA-01247 Type1 M/C A-D Corr Ans: C PM#18 F 7-04

 

 

 

82. CPA-01247 Th May 93 #33 Page 38

 

 

 

How should a gain from the sale of used equipment for cash be reported in a statement of cash flows

 

using the indirect method?

 

 

 

 

 

CPA-04657 Type1 M/C A-D Corr Ans: C PM#19 F 7-04

 

 

 

83. CPA-04657 Released 2005 Page 37

 

 

 

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness

 

did not capitalize any interest during the current year. Decreases occurred in several balance sheet

 

accounts as follows:

 

Accrued interest payable $17,000

 

Prepaid interest 23,000

 

In its income statement for the current year, what amount should Ness report as interest expense?

 

 

 

CPA-04691 Type1 M/C A-D Corr Ans: D PM#20 F 7-04

 

 

 

84. CPA-04691 Released 2005 Page 36

 

 

 

The following are held by Smite Co.:

 

Cash in checking account $20,000

 

Cash in bond sinking fund account 30,000

 

Post-dated check from customer dated one month from balance sheet date 250

 

Petty cash 200

 

Commercial paper (matures in two months) 7,000

 

Certified of deposit (matures in six months) 5,000

 

What amount should be reported as cash and cash equivalents on Smite’s balance sheet?

 

 

 

CPA-04653 Type1 M/C A-D Corr Ans: B PM#20 F 7-04

 

 

 

85. CPA-04653 Released 2005 Page 36

 

 

 

Reed Co.’s 2001 statement of cash flows reported cash provided from operating activities of $400,000.

 

For 2001, depreciation of equipment was $190,000, amortization of goodwill was $5,000, and dividends

 

paid on common stock were $100,000. In Reed’s 2001 statement of cash flows, what amount was

 

reported as net income?

 

 

 

CPA-05202 Type1 M/C A-D Corr Ans: C PM#22 F 7-04

 

 

 

86. CPA-05202 Released 2006 Page 37

 

 

 

Payne Co. prepares its statement of cash flows using the indirect method. Payne’s unamortized bond

 

discount account decreased by $25,000 during the year. How should Payne report the change in

 

unamortized bond discount in its statement of cash flows?

 

 

 

CPA-05219 Type1 M/C A-D Corr Ans: C PM#23 F 7-04

 

 

 

87. CPA-05219 Released 2006 Page 37

 

 

 

Which of the following items is included in the financing activities section of the statement of cash flows?

 

 

 

CPA-05229 Type1 M/C A-D Corr Ans: C PM#24 F 7-04

 

 

 

88. CPA-05229 Released 2006 Page 37

 

 

 

New England Co. had net cash provided by operating activities of $351,000; net cash used by investing

 

activities of $420,000; and cash provided by financing activities of $250,000. New England’s cash

 

balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of

 

$25,000 and proceeds of $40,000 were received from the sale. What was New England’s cash balance

 

at the end of the year?

 

 

 

CPA-05423 Type1 M/C A-D Corr Ans: A PM#26 F 7-04

 

 

 

89. CPA-05423 Released 2007 Page 39

 

Business Law Assignment

/in /by

You will find the following 3 mini-cases covering ethical dilemmas:

· Speedy Sale

· Pizza Puzzle

· Lottery Mania

Your job is to read the cases and answer the questions attached to each case. Please answer all the questions as completely as you can but I am looking for brief responses. I will grade the project based on the amount of thought and effort you put into answering all the questions. I am not looking for a “right answer” so understand that there can be a number of correct answers to the questions. Just make sure your answers each question completely and you provide a thoughtful response. Resubmit this Word Document with your answers.

 

 

 

The Speedy Sale

 

Topic: Unethical Sales Presentation Techniques

 

Characters:

· Sam, Consumer electronics salesperson for an outlet of a major discount store

· Bernie, Sam’s customer for a color television set

· Michelle, Sales manager for the consumer electronics department at the discount outlet

 

Bernie is very interested in buying a color television. He tells Sam, the salesperson in the discount store where he feels he can get the best buy, that his old color TV recently died and he really misses seeing his favorite shows. The sooner he can buy and get a new TV delivered, the better, he explains. Sam knows that the particular model which Bernie seems to prefer by far to the others will go on sale for 15 percent off in three and a half weeks. However, he assumes that Bernie is not willing to wait that long and might look elsewhere. Also, Sam will not make as much commission on the reduced price. Therefore, he reasons that it would make little sense to inform Bernie of the pending sale.

 

When Sam tells Bernie that the TV set he is interested in is currently out of stock and will not be in for another week, Beanie is dearly disgruntled. Fearing losing the sale, Sam goes out to the back room to ask his sales manager, Michelle, if anything can be done to speed up delivery. Michelle says that this would be impossible, and she suggests that Sam could tell Bernie that the store can get the set within 24 hours and simply sell him the demonstration model. Michelle explains that the demo is in as-new condition and Bernie will never know the difference.

 

Sam feels that selling the demonstration model to Bernie wouldn’t be on the level. Knowing that it will take five working days to have a new set delivered to the store, Sam thinks of a different sales strategy–tell Bernie he can get a set to him in two days, then call Bernie tomorrow to say it will be sometime next week due to a flood of orders at the factory. Sam wonders how he can lock in the sale today.

 

Author: Geoffrey P. Lantos, Associate Professor of Marketing, Stonehill College.

 

 

 

 

 

 

 

 

 

 

 

Speedy Sale Case – Answer these questions.

Identify all the potential ethical issues in the case. Explain each one.

 

 

 

 

 

 

 

 

 

 

 

 

 

Decide if the proposed actions by the employees are ethical or unethical. Explain your reason why for each ethical issue.

 

 

 

 

 

 

 

 

 

 

 

Identify the stakeholders who may be harmed by unethical behavior in this situation and how it could harm them.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What kind of systems can the company create in order to prevent the type of unethical behavior you have identified and further to promote ethical behavior?

 

 

 

 

 

 

 

 

 

 

 

The Pizza Puzzle

 

Topic: Deceptive Advertising

 

Characters:

· George Hansen, General Manager, Augusta Marigold Inn, Subsidiary of Hospitality Enterprises

· Sharon Coombs, Food Services Manager, Augusta Marigold Inn

· George Hansen is General Manager for the Marigold Inn in Augusta, Georgia

 

 

 

Sharon Coombs is Restaurant and Food Services Manager for the Inn. She reports to George. Two years ago, Sharon noticed a decline in room service business, the highest margin portion of her operation. This decline coincided with an increase in the national sales of pizza delivery and carryout firms as well as an increase in the number of empty pizza boxes from these firms being left in guest rooms in the Inn. Her immediate response was to install a pizza oven in the kitchen and offer room service pizza to guests. The effort met with modest success, though it was well below her expectations. Questionnaires completed by departing guests revealed a problem of product quality.

 

Focusing on this problem, Sharon improved the Inn’s pizza until blind taste tests judged it at least equal in quality to the products of the two major pizza delivery competitors in Augusta. Sales did not improve, convincing Sharon that the problem was a perceived mismatch between the hotel’s image and guests’ expectations of pizza makers. Guests simply did not seem to believe that the traditional steak and seafood restaurant at the Inn could make a high-quality, authentic pizza.

 

Based on this conclusion, Sharon presented the following proposal to George:

 

“Sales of room service pizza are stagnant due to guests’ misperception that our product is lower in quality than that of competitors. This misperception is based on the belief that until we disassociate our pizza from the Marigold Inn name. Therefore, to capture more room service pizza business, we should create a ‘Napoli Pizza’ image for our guest room delivery service by:

 

• Preparing ‘Napoli Pizza’ brochures for each guest room, complete with a phone number with a prefix different from that of Marigold Inn. The number will reach a special phone in room service, which will be answered, Napoli Pizza, authentic Italian pizza from old, family recipes.’

• Using special ‘Napoli Pizza’ boxes for delivering room service pizza to guests.

• Issuing ‘Napoli Pizza’ hats and jackets to room service personnel for use in pizza delivery. Room service waiters and waitresses will wear these garments to deliver pizza. They will change to their regular uniforms for other deliveries.”

 

 

Author: Fred L. Miller, Associate Professor of Marketing, Murray State University

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pizza Puzzle – Answer these questions.

Identify all the potential ethical issues in the case. Explain each one.

 

 

 

 

 

 

 

 

 

 

 

 

Decide if the proposed actions by the employees are ethical or unethical. Explain your answer to each one.

 

 

 

 

 

 

 

 

 

 

 

 

What could the company do in order to provide the proposed service and still maintain ethical behavior? Explain your answer.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Would the company’s core values make a difference in the action that George decides? Explain.

 

 

 

 

 

 

 

 

 

 

 

 

 

Lottery Mania

 

Topic: Marketing Management (Event Marketing)

 

Characters:

· Jane, Recently appointed Director of Event Marketing for the Anystate Lottery

· Jim, Marketing Director for the Anystate Lottery Sal, Commissioner of the Anystate Lottery

 

 

Jane was recently hired out of college as the Director of Event Marketing for the Anystate Lottery. Although Jane’s father was a compulsive gambler and she received several betterpaying job offers, she decided to take the lottery job because she is a strong supporter of education and 50 percent of lottery sales go to supporting public education. Her family was against her accepting the job.

 

The Anystate Lottery started five years ago after it was approved by 80 percent of the electorate. Two years ago, sales began to decline. This has led Jim, Marketing Director for the Anystate Lottery, to consider segmenting the population of Anystate into frequent, occasional, and nonparticipating players. Jim decided to target frequent players for the new lottery game, “Lottery Mania.” The probability of winning Lottery Mania was estimated to be one in 24 million.

Frequent players of the lottery spend, on the average, $20 per week. Members of various minority groups constitute a large proportion of frequent players. Research conducted by the Anystate Lottery found that many minority frequent players use part of their limited grocery money to play lottery games. In some cases, people have gone hungry in order to play the lottery in hopes of winning the big prize.

 

As Commissioner of the lottery, Sal is concerned about any negative publicity that may surround the operation of the lottery. However, he has directed Jim to increase sales of lottery tickets by 10 percent during the new game of Lottery Mania. Jim called Jane and ordered her to develop several promotional events to be targeted toward minority lottery players. These events will be used to launch Lottery Mania scheduled to start four weeks from now. Event marketing has been used very successfully for targeting minority consumers for a variety of products.

 

Jane is upset about the task of specifically targeting minority segments over all other segments in the population of Anystate. Jane is a member of a minority group. Jane knows that additional money for education will help all students in Anystate, especially minority students. Yet she can’t help but think about all the families that will play the lottery even though they can’t afford it.

 

 

 

Author: Craig A. Kelley, Professor of Marketing, California State University, Sacramento.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lottery Mania – Answer these questions.

 

Identify all the potential ethical issues in the case. Explain each one.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decide if the proposed actions by the employees are ethical or unethical. Explain your answer to each one.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What should Jane do? Explain and justify your answer.

What’s interesting or helpful about this view?

/in /by

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Source: StockSnap, Untitled Image, pixabay.com (accessed Mar. 13, 2019)

Free college programs come in different forms but generally refer to the government picking up the tab for tuition costs, while students pay for other expenses such as room and board. [50] At least 38 states have existing or proposed variations of free college programs. [48]

Tuition at public four-year institutions more than doubled over the past thirty years, and the average student loan debt more than doubled from the 1990s to the 2010s, according to the US Department of Education. [29] There are currently around 17 million students in undergraduate programs in the United States. [49] As the 2020 presidential election heats up, many candidates are bringing the issue of free college into the national spotlight. [47]

Is tuition-free college an economy-boosting solution to unequal college access and sky-high college debts? Or is tuition-free college a taxpayer burden that will still result in high student debt and drop-out rates? The pros and cons of the tuition-free college debate are detailed below.

Should Public College Be Tuition-Free?

 

 

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Pro 1

Tuition-free college will help decrease crippling student debt. If tuition is free, students will take on signi�cantly fewer student loans. Student loan debt in the United States exceeds $1.5 trillion. 44.2 million Americans have student loan debt, and 10.7% of those borrowers are in default. [1][2] The average 2016 graduate owed $37,172 in college loans. [2]

Student loan debt has risen 130% since 2008, and public college costs have risen 213% between 1987 and 2017. [1][4] Students are coming out of college already buried under a mountain of debt before they have a chance to start their careers. [5]

Senator Bernie Sanders (I-VT), an advocate for free college, stated, “It is insane and counter-productive to the best interests of our country and our future, that hundreds of thousands of bright young people cannot afford to go to college, and that millions of others leave school with a mountain of debt that burdens them for decades. That shortsighted path to the future must end.” [6]

Con 1

Tuition-free college is not free college and students will still have large debts. Tuition is only one expense college students have to pay and accounts for 39.5% of total average college costs. [22]

On average, in-state tuition at a public college costs $10,230 for each year. Fees, room, and board for on-campus housing are another $11,140. [23] Books and supplies are another $1,240, transportation adds $1,160, and other expenses cost another $2,120. Without tuition, college still costs an average of $15,660 per year. [22]

Tuition accounts for just one-�fth of the average community college student’s budget, which runs $17,930 annually on average. [22]

Sweden has free college and yet students in that country had an average of $19,000 in student debt for living costs and other expenses in 2013, compared to the $24,800 in debt US college students had the same year. [24][1]

Pro 2

The US economy and society has bene�ted from

Con 2

Taxpayers would spend billions to subsidize tuition,

 

 

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tuition-free college in the past. Nearly half of all college students in 1947 were military veterans, thanks to President Roosevelt signing the GI Bill in 1944 to ensure military servicemembers, veterans, and their dependents could attend college tuition-free. The GI Bill allowed 2.2 million veterans to earn a college education, and another 5.6 million to receive vocational training, all of which helped expand the middle class. [7][8][9] An estimated 40% of those veterans would not have been able to attend college otherwise. GI Bill recipients generated an extra $35.6 billion over 35 years and an extra $12.8 billion in tax revenue, resulting in a return of $6.90 for every dollar spent. [10]

The bene�ciaries of the free tuition contributed to the economy by buying cars and homes, and getting jobs after college, while not being burdened by college debt. They contributed to society with higher levels of volunteering, voting, and charitable giving. [11]

The 1944 GI Bill paid for the educations of 22,000 dentists, 67,000 doctors, 91,000 scientists, 238,000 teachers, 240,000 accountants, 450,000 engineers, three Supreme Court Justices (Rehnquist, Stevens, and White), three presidents (Nixon, Ford, and H.W. Bush), many congressmen, at least one Secretary of State, 14 Nobel Prize winners, at least 24 Pulitzer Prize winners, many entertainers (including Johnny Cash,

while other college costs remained high. The estimated cost of Bernie Sanders’ free college program is $47 billion per year, and has states paying 33% of the cost, or $15.5 billion. [25] According to David H. Feldman, PhD, and Robert B. Archibald, PhD, both Professors of Economics at William & Mary College, “This will require tax increases, or it will force states to move existing resources into higher education and away from other state priorities like health care, prisons, roads and K-12 education.” [26]

According to a 2016 Campaign for Free College report, states could lose between $77 million (Wyoming) and $5 billion (California) in tuition revenue from their state colleges and universities, and have to pay an additional $15,000 (Wyoming) to $55 million (New York) to subsidize a tuition-free plan. [27]

Neal McCluskey, PhD, director of the Cato Institute’s Center for Educational Freedom, calculated that free college funded by tax dollars would cost every adult taxpayer $1,360 a year, or $77,500 over a lifetime. “Why should people who want to go to college get it paid for in part by people who pursue on-the-job training or other forms of noncollege education?,” he wrote in the Wall Street Journal, adding, “Indeed, why should anyone get a degree to increase their lifetime earnings on the backs of taxpayers?” [28]

College costs have increased for of a number of reasons unrelated to tuition,

 

 

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Paul Newman, and Clint Eastwood), and many more. [8][12][13]

During the post-World War II era, the United States ranked �rst in the world for college graduates, compared to tenth today. [14]

including fancy dorms, amenities like lazy rivers and climbing walls, student services (such as healthcare), athletics, increases in administrative personnel, and cuts in state funding. [31][32][33][46]

Pro 3

Everyone deserves the opportunity to get a college education. Jamie Merisotis, President and CEO of the Lumina Foundation, stated, “A dramatic increase in the number of Americans with college credentials is absolutely essential for our economic, social and cultural development as a country.” [15]

The rapid rise of tuition has limited access to higher education, which is essential in today’s workforce: three- quarters of the fastest-growing occupations now call for education beyond high school, according to the US Department of Education. [29] College graduates earn $570,000 more than a high school graduate over a lifetime, on average, and they have lower unemployment rates. [16] [17] Students from low- and moderate- income families are unable to afford as many as 95% of American colleges. [30]

Max Page, PhD, Professor of Architecture, and Dan Clawson, PhD, Professor of Sociology, both at the University of Massachusetts Amherst,

Con 3

Tuition-free college will decrease completion rates, leaving students without the bene�ts of a full college education and degree. Jack A. Chambless, Economics Professor at Valencia College, said that with a free college program, “Potentially millions of young people who have no business attending college would waste their time — and taxpayer dollars — seeking degrees they will not obtain… Free tuition would dupe young people into a sense of belonging, only to �nd that their work ethic, intelligence and aptitude are not up to the rigors of advanced education.” [34]

Under California’s community college fee waiver program, over 50% of the state’s community college students attended for free (before a 2017 program change), but only 6% of all California community college students completed a career technical program and fewer than 10% completed a two- year degree in six years. [35]

Vince Norton, Managing Partner at

 

 

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stated: “A century ago high school was becoming a necessity, not a luxury; today the same is happening to college. If college is essential for building a career and being a full participant in our democracy as high school once was, shouldn’t it be free, paid for by public dollars, and treated as a right of all members of our country?” [21]

Norton Norris, a campus marketing company, stated, “Students will enroll at a ‘free college’ and borrow money for the cost of attendance. Then, they will drop out and have a student loan – but no skills. Brilliant.” [36]

College tuition is set by state policy or by each individual institution. Some colleges, especially federal land grant schools, had free tuition beginning in the 1860s. And some states had tuition-free policies at state colleges and universities for in-state students well into the twentieth century. According to Ronald Gordon Ehrenberg, PhD, Professor at Cornell University, “Public colleges and universities were often free at their founding in the United States, but over time, as public support was reduced or not increased su�ciently to compensate for their growth in students and costs (faculty and staff salaries, utilities etc.), they moved �rst to a low tuition and eventually higher tuition policy.” [37]

About 2.9% of American 18- to 24-year olds went to college for the 1909-1910 school year, compared to 41.2% for the 2016-2017 school year. [ 38][39]

Federally, free college programs have been in effect for military personnel since the 1944 GI Bill. [7][8][ 9] At least 26 other countries have free or nearly free college tuition: Argentina, Austria, Brazil, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Iceland, Kenya, Luxembourg, Malaysia, Mexico, Morocco, Norway, Panama, Poland, Scotland, Slovenia, Spain, Sweden, Turkey, and Uruguay. [42][43][ 44]

According to a Sep. 2017 poll, 63% of Americans support making public colleges and universities tuition-free. [35][45]

Footnotes:

1. Michelle Singletary, “U.S. Student Loan Debt Reaches a Staggering $1.53 Trillion,” washingtonpost.com, Oct. 3, 2018

2. Zack Friedman, “Student Loan Debt Statistics in 2018: A $1.5 Trillion Crisis,” forbes.com, June 13, 2018

 

 

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3. Institute of Education Science, “Fast Facts: Back to School Statistics,” nces.gov (accessed Mar. 8, 2019)

4. Emmie Martin, “Here’s How Much More Expensive It Is for You to Go to College Than It Was for Your Parents,” cnbc.com, Nov. 29, 2017

5. Dan Caplinger, “Rising Cost of College Creating a Financial Hole for Parents, Students: Foolish Take,” usatoday.com, June 9, 2018

6. Harlan Green, “What Happened to Tuition-Free College?,” hu�ngtonpost.com, June 1, 2016

7. History Channel, “G.I. Bill,” history.com, Aug. 21, 2018

8. American RadioWorks, “The History of the GI Bill,” americanradioworks.org, Sep. 3, 2015

9. Suzanne Mettler, “How the GI Bill Built the Middle Class and Enhanced Democracy,” scholars.org, Jan. 1, 2012

10. Debs-Jones-Douglass Institute, “GI Bill of Rights: A Pro�table Investment for the United States,” djdinstitute.org (accessed Mar. 7, 2019)

11. Dennis W. Johnson, The Laws That Shaped America: Fifteen Acts of Congress and Their Lasting Impact, 2009

12. Andrew Glass, “FDR Signs GI Bill, June 22, 1944,” politico.com, June 22, 2017

13. Megan Slack, “By the Numbers: 3,” obamawhitehouse.archives.gov, Apr. 27, 2012

14. Arne Duncan and John Bridgeland, “Free College for All Will Power 21st-Century Economy and Empower Our Democracy,” brookings.edu, Sep. 17, 2018

15. Claudio Sanchez, “Should Everyone Go to College?,” npr.org, July 15, 2009

16. Erin Currier, “How Generation X Could Change the American Dream,” pewtrusts.org, Jan. 26, 2018

17. Bureau of Labor Statistics, “Unemployment Rate 2.5 Percent for College Grads, 7.7 Percent for High School Dropouts, January 2017,” bls.gov, Feb. 7, 2017

18. Marcelina Hardy, “7 Bene�ts of Earning a College Degree,” education.yahoo.net, 2013

19. Sandy Baum, Jennifer Ma, and Kathleen Pays, “Education Pays 2010: The Bene�ts of Higher Education for Individuals and Society,” collegeboard.com, 2010

20. Trade Schools, Colleges and Universities, “Should College Be Free? Pros, Cons, and Alternatives,” trade-schools.net (accessed Feb. 27, 2019)

21. Max Page and Dan Clawson, “It’s Time to Push for Free College,” nea.org (accessed Mar. 7, 2019)

22. College Board, “Average Estimated Undergraduate Budgets, 2018-2019,” trends.collegeboard.org (accessed Feb. 25, 2019)

 

 

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23. College Board, “Tuition and Fees and Room and Board over Time,” trends.collegeboard.org (accessed Feb. 25, 2019)

24. Matt Philips, “College in Sweden Is Free but Students Still Have a Ton of Debt. How Can That Be?,” qz.com, May 30, 2013

25. Bernie Sanders, “Summary for Sen. Sanders’ College for All Act,” sanders.senate.gov (accessed Mar. 4, 2019)

26. David H. Feldman and Robert B. Archibald, “Why Bernie Sanders’s Free College Plan Doesn’t Make Sense,” washingtonpost.com, Apr. 22, 2016

27. Campaign for Free College Tuition, “How Expensive Is Free College for States?,” freecollegenow.org, Sep. 30, 2016

28. Neal McCluskey, “Should College Education Be Free?,” wsj.com, Mar. 20, 2018

29. US Department of Education, “College Affordability and Completion: Ensuring a Pathway to Opportunity,” ed.gov (accessed Mar. 14, 2019)

30. Emily Deruy, “Measuring College (Un)affordability,” theatlantic.com, Mar. 23, 2017

31. Hillary Hoffower, “College Is More Expensive Than It’s Ever Been, and the 5 Reasons Why Suggest It’s Only Going to Get Worse,” businessinsider.com, July 8, 2018

32. Sattler College, “Why Is College So Expensive?,” sattlercollege.org, Nov. 29, 2017

33. Earnest, “Why Is College So Expensive? 4 Trends Contributing to the Rising Cost of College?,” earnest.com (accessed Mar. 7, 2019)

34. Jack Chambless, “Clinton’s Free-College Nonsense Would Plunder Taxpayers, Dupe Students,” dallasnews.com, Aug. 2016

35. Jennifer E. Walsh, “Why States Should Abandon the ‘Free College’ Movement,” nationalreview.com, Mar. 19, 2018

36. Vince Norton, “Why Free College Is a Bad Idea,” nortonnorris.com, Mar. 16, 2018

37. Amy Sherman, “Was College Once Free in the United States, as Bernie Sanders Says?,” politifact.com, Feb. 9, 2016

38. Michael Stone, “What Happened When American States Tried Providing Tuition-Free College,” time.com, Apr. 4, 2016

39. Digest of Education Statistics, “Table 302.60. Percentage of 18- to 24-year-olds Enrolled in College, by Level of Institution and Sex and Race/Ethnicity of Student: 1970 through 2016,” nces.ed.gov (accessed Mar. 7, 2019)

40. Ashley Smith, “Obama Steps up to Push for Free,” insiderhighered.com, Sep. 9, 2015

41. College Promise Plan, “About Us,” collegepromise.org (accessed Mar. 4, 2019)

42. Edvisors, “Countries with Free or Nearly Free Tuition,” edvisors.com (accessed Feb. 21, 2019)

 

 

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https://www.procon.org/headline.php?headlineID=005432 9/10

 HOME ABOUT CITE THIS PAGE REPRINTING POLICY PRIVACY POLICY

DISCLAIMER

43. Alanna Petroff, “New York Offers Free College Tuition. So Do These Countries,” money.cnn.com, Apr. 10, 2017

44. Lisa Goetz, “6 Countries with Virtually Free College Tuition,” investopedia.com, Feb. 12, 2019

45. Morning Consult and Politico, “National Tracking Poll #170911 September 14-17, 2017,” morningconsult.com, Sep. 2017

46. Elizabeth Warren, “The Affordability Crisis: Rescuing the Dream of College Education for the Working Class and Poor,” warren.senate.gov, June 10, 2015

47. Andrew Kreighbaum, “Free College Goes Mainstream,” insidehighered.com, Sep. 26, 2018

48. Sophie Quinton, “‘Free College’ Is Increasingly Popular — and Complicated for States,” pewtrusts.org, Mar. 5, 2019

49. National Center for Education Statistics, “Back to School Statistics,” nces.ed.gov (accessed Mar. 18, 2019)

50. Katie Lobosco, “6 Things to Know about Tuition-Free College,” money.cnn.com, Apr. 26, 2016

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Depreciation At Delta Air Lines: The “Fresh Start”

/in /by

Depreciation at Delta Air Lines: The “Fresh Start”

 

Case Questions

Respond to the Case Questions/Prompts listed below. These are also found in the Depreciation at Delta Airlines and Singapore Airlines (A) PDF on p. 4.

  1. Calculate the annual depreciation expense that Delta and Singapore would record for each $100 gross value of aircraft.
    • For Delta, what was its annual depreciation expense (per $100 of gross aircraft value) prior to July 1, 1986; from July 1, 1986 through March 31, 1993; and from April 1, 1993 on?
    • For Singapore, what was its annual depreciation expense (per $100 of gross aircraft value) prior to April 1, 1989; and from April 1, 1989 on?
  2. Are the differences in the ways that the two airlines account for depreciation expense significant? Why would companies depreciate aircraft using different depreciable lives and salvage values? What reasons could be given to support these differences? Is different treatment proper?
  3. Assuming the average value of flight equipment that Delta had in 1993, how much of a difference do the depreciation assumptions it adopted on April 1, 1993 make? How much more or less will its annual depreciation expense be compared to what it would be were it using Singapore’s depreciation assumptions?
  4. Singapore Airlines maintains depreciation assumptions that are very different from Delta’s. What does it gain or lose by doing so? How does this relate to the company’s overall strategy?
  5. Does the difference in the average age of Delta’s and Singapore’s aircraft fleets have any impact on the amount of depreciation expense that they record? If so, how much?

    _____________________________________________________________________________________________________________________

    Professor William J. Bruns prepared this case specifically for the Harvard Business Publishing Brief Case Collection, solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. The key information in the case has been taken from publicly available sources. Copyright © 2009 Harvard Business School Publishing. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise— without the permission of Harvard Business Publishing. Harvard Business Publishing is an affiliate of Harvard Business School.

     

    W I L L I A M J . B R U N S

    Depreciation at Delta Air Lines: The “Fresh Start”

     

    Plant, property and equipment is one of the largest asset categories for airline companies. Flight equipment and ground property and equipment are often more than half of the total assets of an airline, and depreciation of those assets is a major operating expense. Depreciation is an exercise in cost allocation undertaken to match the cost of assets with the revenues earned during the periods that assets are used. Depreciation is not an attempt to measure the current value of assets. The amount of depreciation estimated by an airline company for each operating period is based on the cost of assets, estimates of asset lives, and assumptions about residual values at the end of the asset lives. These estimates and assumptions have changed through the years for almost all airlines. Delta Air Lines is no exception.

    Delta Air Lines filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in September 2005 and emerged from bankruptcy as a new company one year ahead of schedule on April 30, 2007. (Bankruptcy is a process providing protection of the court during a period when a company tries to restructure itself and its operations to return to viability.) Upon emergence from bankruptcy Delta adopted “fresh start” accounting in accordance with American Institute of Certified Public Accountants’ Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (SOP 90-7).

    Fresh start accounting requires resetting the historic net book value of assets and liabilities to fair value and becoming a new entity for financial reporting purposes. Delta’s consolidated financial statements after May 1, 2007, are not comparable to consolidated financial statements before that date. On May 1, 2007, Delta adopted policies regarding estimated lives and residual values for aircraft, but it was far from the first time it had changed its estimates. Depreciation practices had been changed several times before as flight equipment and industry conditions changed.

    Delta Air Lines began 2008 with more worldwide destinations than any other airline, with 321 destinations in 58 countries. Delta added more international capacity during 2006 and 2007 than any other major U.S. airline. In 2008 Delta merged with Northwest Airlines to become the largest airline in the world.

     

    4013 R E V : N O V E M B E R 2 3 , 2 0 1 0

     

     

    4013 | Depreciation at Delta Air Lines: The “Fresh Start”

    2 BRIEFCASES | HARVARD BUSINESS PUBLISHING

    Depreciation at Delta Air Lines

    A significant number of factors can be considered in estimating the economic life of a commercial aircraft—physical or economic life, corporate strategy, planned uses, expected technological changes all come to mind. Delta Air Lines has changed assumptions of economic life of aircraft four times since 1986, each time extending the expected life by five years. Intense competition and deregulation during this period invite consideration of regular extension of aircraft lives. This is at least partly motivated by the desire to reduce annual depreciation amounts in order to report higher net income or reduce losses, but there may have been other factors that make extended lives make sense in the industry.

    Consider the issue of physical life of the modern jet-powered aircraft. The first commercial jet passenger planes were sold in 1957. Before that year the majority of commercial aircraft were powered by piston engines, which subjected airframes to destructive vibrations. Ten-year lives were the norm in airline depreciation policies and had been for some time. With no real experience with turbofan-powered planes, management was reasonable in assuming that the new generation of aircraft would be similar in life span to the old generation. Experience showed that the turbofan engines offered considerably less wear and tear on the airframes and that the physical life of aircraft powered by jet engines was considerably longer than that of piston-engine powered planes.

    Furthermore, as the passenger airline industry converted fleets to jet-powered aircraft, the replacement cycle lengthened because of production and delivery backlogs. From a competitive strategy point of view, it was important for an airline to offer jet planes, but whether those planes were new or considerably older became less important. Size of planes and economy of operation became more important factors in fleet selection as experience with new aircraft showed that their physical lives were going to be longer than those of prior generations of airplanes. Passengers sought out jet planes whether they were new or older models.

    Other changes were also taking place in the airline industry. Deregulation brought competitive pricing and the introduction of “hub and spoke” route systems. Discount airlines emerged to challenge legacy carriers. All airlines experienced more pressure on profitability, and longer depreciable lives meant lower depreciation and the possibility of higher incomes. All airlines extended lives of aircraft. Delta Air Lines was more conservative than some in extending lives but more aggressive than others.

    Exhibit 1 summarizes the depreciable life estimates and policies used by Delta Air Lines for flight equipment from before 1986 to 2008. The extension of estimated lives was typical of other airline companies during these periods as experience was gained with modern jet aircraft technologies. Other airlines used longer estimated lives than Delta—as long ago as 30 years earlier—as pressures to report profits caused them to report less depreciation than in the early years of jet powered flight. All major U. S. airlines use straight-line depreciation.

    Exhibit 2 summarizes the active fleet of Delta Air Lines’ flight equipment at December 31, 2007. Aircraft owned or leased on capital leases are all subject to depreciation. In addition, at the end of 2007 Delta had 76 aircraft on order for delivery in the 2008 to 2010 period and options on 160 more in the 2009 through 2012 period. The magnitude of these commitments can be appreciated in the summary of jet airplane prices quoted by Boeing shown in Exhibit 3.

    The “Fresh Start”

    Delta Air Lines adopted fresh start accounting on April 30, 2007, becoming a new entity for financial reporting purposes. Consolidated Financial Statements on or after May 1, 2007, are not comparable to financial statements prior to that date. Management did combine the results of operations for the eight months ended December 31, 2007, of the Successor; the four months ended April 30, 2007, of the Predecessor; and the years ended December 31, 2006, and 2005, of the Predecessor. In their Form 10-K

     

     

    Depreciation at Delta Air Lines: The “Fresh Start” | 4013

    HARVARD BUSINESS PUBLISHING | BRIEFCASES 3

    (Form 10-K is an annual report which must be filed with the U. S. Securities and Exchange Commission each year) discussion of these combined financial results, they wrote as follows:

    For purposes of management’s discussion and analysis of the results of operations for the year ended December 31, 2007 in this Form 10-K, we combined the results of operations for the four months ended April 30, 2007 of the Predecessor with the eight months ended December 31, 2007 of the Successor. We then compared the combined results of operations for the year ended December 31, 2007 with the corresponding period in the prior year of the Predecessor and discussed significant fresh start reporting adjustments (“Fresh Start Adjustments”) which impacted comparability. (page 26, Form 10-K)

    We believe the combined results of operation for the year ended December 31, 2007 provide management and investors with a more meaningful perspective of Delta’s ongoing financial and operational performance and trends than if we did not combine the results of operations of the Predecessor and Successor in this manner.

    Exhibits 4 and 5 show the resulting Consolidated Balance Sheets and Consolidated Statements of Operations shown in the Form 10-K for 2007 and prior years.

    The Fresh Start adjustments for property and equipment and flight equipment were described in notes to the consolidated financial statements as follows:

    Depreciation We revalued property and equipment to fair value, which reduced the net book value of these assets by $1.0 billion. In addition, we adjusted the depreciable lives of flight equipment to reflect revised estimated useful lives. As a result, depreciation expense decreased by $127 million for the year ended December 31, 2007. (Fresh Start Adjustments, p. 28, Form 10-K)

    Fresh Start Reporting xx As previously noted, upon emergence of Chapter 11, we adopted fresh start reporting, which required us to revalue our assets and liabilities to fair value. In estimating fair value, we based our estimates and assumptions on the guidance prescribed by SFAS No. 157, “Fair Value Measurements” (SFAS 157), which we were required to adopt in connection with our adoption of fresh start reporting. SFAS 157, among other things, defines fair value, established a framework for measuring fair value and expands disclosure about fair value measurements. (p. 42, Form 10-K)

    Long-Lived Assets Our flight equipment and other long-lived assets have a recorded value of $11.7 billion on our Consolidated Balance Sheet at December 31, 2007. This value is based on various factors, including the assets’ estimated useful lives and their estimated salvage values. In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), we record impairment losses on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the estimated future cash flows generated by those assets are less than their carrying amounts. The impairment loss recognized is the amount by which the asset’s carrying amount exceeds its estimated fair value.

    In order to evaluate potential impairment as required by SFAS 144, we group assets at the fleet type level (the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of passenger yield, fuel costs, labor costs and other relevant factors. We estimate aircraft fair values using published sources, appraisals and bids received from third parties, as available. (page 44, Form 10-K )

     

     

     

    4013 | Depreciation at Delta Air Lines: The “Fresh Start”

    4 BRIEFCASES | HARVARD BUSINESS PUBLISHING

    Exhibit 1 Delta Air Lines Depreciation Estimates and Policies for Flight Equipment Using Straight-line Depreciation

    Estimated Useful Lives of Flight Equipment

    Residual Values

    1985 and prior 10 Years 10% of Cost 1986 to 1992 15 Years 10% of Cost 1993 to 1997 20 Years 5% of Cost 1998 to 2006 25 Years Between 5% and

    10% of Cost 2007 21 – 30 Years 10% of Cost

    Source: Note to Delta Airlines financial statements 1987, 1993, 2007

     

    Exhibit 2 Delta Air Lines Active Aircraft Fleet at December 31, 2007

    Current Fleet

    Owned Capital Lease

    Operating Lease *

    Total

    Average Age

    B-737-800 71 – – 71 7.2 B-757-200 68 34 18 120 16.3 B-757-200ER – 2 11 13 10.0 B767-300 4 – 17 21 16.9 B767-300ER 50 – 9 59 11.9 B767-400ER 21 – – 21 6.8 B777-200ER 8 – – 8 7.9 MD-88 63 33 21 117 17.5 MD-90 16 – – 16 12.1 CRJ-100 28 13 49 90 10.3 CRJ-200 5 – 12 17 5.2 CRJ-700 17 – – 17 4.2 CRJ-900 8 – – 8 0.2 Total 359 82 137 578 12.4

    Source: Note to Delta Air Lines financial statements, 2007

    *Aircraft on operating leases are not included in the balance sheet or in depreciation in the income statement.

     

     

    Depreciation at Delta Air Lines: The “Fresh Start” | 4013

    HARVARD BUSINESS PUBLISHING | BRIEFCASES 5

    Exhibit 3 Commercial Airline Prices of Boeing Airplane Families (millions of dollars)

    Airplane Families 2007

    737 Family

    737-600 50.0 – 57.0 737-700 57.0 – 67.5 737-800 70.5 – 79.0 737-900ER 74.0 – 85.0

    747 Family

    747-400/400ER 228.0 – 260.0 747-400/400ER Freighter 232.0 – 261.0 747-8 285.5 – 300.0 747-8 Freighter 294.0 – 297.0

    767 Family

    767-200ER 124.5 – 135.0 767-300ER 141.0 – 157.5 767-300 Freighter 151.0 – 162.0 767-400ER 154.0 – 169.0

    777 Family

    777-200ER 200.0 – 225.0 777-200LR 231.0 – 258.5 777-300ER 250.0 – 279.0 777 Freighter 246.0 – 254.0

    787 Family

    787-3 146.0 – 151.5 787-8 157.0 – 167.0 787-9 189.0 – 200.0

     

    Source: Boeing Aircraft Prices on Internet

     

     

     

    4013 | Depreciation at Delta Air Lines: The “Fresh Start”

    6 BRIEFCASES | HARVARD BUSINESS PUBLISHING

    Exhibit 4 Delta Air Lines, Inc., Consolidated Balance Sheets

    ASSETS (in millions)

    Successor December 31,

    2007

    Predecessor December 31,

    2006

    CURRENT ASSETS: Cash and cash equivalents $ 2,648 $ 2,034 Short-term investments 138 614 Restricted cash 520 750

    Accounts receivable, net of allowance for uncollectible accounts of $26 at December 31, 2007 and $21 at December 2006

    1,066

    915

    Expendable parts and supplies inventories, net of an allowance for obsolescence of $11 at December 31, 2007 and $161 at December 31, 2006

    262

    181

    Deferred income taxes, net 142 402 Prepaid expenses and other 464 489

    Total current assets 5,240 5,385

    PROPERTY AND EQUIPMENT: Flight equipment 9,525 17,641 Accumulated depreciation (299) (6,800)

    Flight equipment, net 9,226 10,841 Ground property and equipment 1,943 4,575 Accumulated depreciation (246) (2,838)

    Ground property and equipment, net 1,697 1,737 Flight and ground equipment under capital leases 602 474 Accumulated amortization (63) (136)

    Flight and ground equipment under capital leases, net 539 338 Advance payment for equipment 239 57

    Total property and equipment, net 11,701 12,973

    OTHER ASSETS: Goodwill 12,104 227 Identifiable intangibles, net of accumulated amortization of $147 at

    December 31, 2007 and $190 at December 31, 2006

    2,806

    89 Other noncurrent assets 572 948 Total other assets 15,482 1,264 Total assets $32,423 $19,622

     

     

    (Exhibit 4 continues on next page)

     

     

    Depreciation at Delta Air Lines: The “Fresh Start” | 4013

    HARVARD BUSINESS PUBLISHING | BRIEFCASES 7

    Exhibit 4 (continued) Delta Air Lines, Inc., Consolidated Balance Sheets

    LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) ($ in millions, except share data)

    Successor December 31,

    2007

    Predecessor December 31,

    2006

    CURRENT LIABILITIES: Current maturities of long-term debt and capital leases $ 1,014 $ 1,503 Air traffic liability 1,982 1,797 Deferred revenue 1,100 363 Accounts payable 1,045 936 Accrued salaries and related benefits 734 405 Taxes payable 320 500 Note payable 295 – Other accrued liabilities 115 265

    Total current liabilities 6,605 5,769

    NONCURRENT LIABILITIES: Long-term debt and capital leases 7,986 6,509 Pension and related benefits 3,002 – Deferred revenue 2,532 346 Post-retirement benefits 865 – Deferred income taxes, net 855 406 Other noncurrent liabilities 465 368

    Total noncurrent liabilities 15,705 7,629 LIABILITIES SUBJECT TO COMPROMISE – 19,817

    COMMITMENTS AND CONTINGENCIES SHAREOWNERS’ EQUITY (DEFICIT): Common stock:

    Predecessor common stock at $0.001 per value; 900,000,000 shares authorized, 202,081,648 shares issued at December 31, 2006

    –

    2

    Successor common stock at 50.0001 par value; 1,500,000,000 shares authorized, 299,464,669 shares issued at December 31, 2007

    –

    –

    Additional paid-in capital 9,512 1,561 Retained earnings (accumulated deficit) 314 (14,414) Accumulated other comprehensive income (loss) 435 (518) Predecessor stock held in treasury, at cost, 4,745,710 shares at December 31,

    2006

    –

    (224) Successor stock held in treasury, at cost, 7,238,973 shares at December 31,

    2007

    (148)

    – Total shareowners’ equity (deficit) 10,113 (13,593) Total liabilities and shareowners’ equity (deficit) $32,423 $19,622

     

    Source: Annual Report, Form 10-K

     

     

    4013 | Depreciation at Delta Air Lines: The “Fresh Start”

    8 BRIEFCASES | HARVARD BUSINESS PUBLISHING

    Exhibit 5 Delta Air Lines, Inc., Consolidated Statements of Operations ($ in millions)

    Successor Predecessor

    Eight Months Ended

    December 31,

    Four Months Ended

    April 30,

    Year Ended

    December 31, 2007 2007 2006 2005

    OPERATING REVENUE: Passenger:

    Mainline $8,929 $3,829 $11,640 $11,367 Regional affiliates 2,874 1,296 3,853 3,225

    Cargo 334 148 498 524 Other net 1,221 523 1,541 1,364

    Total operating revenue 13,358 5,796 17,532 16,480

    OPERATING EXPENSES: Aircraft and related taxes 3,416 1,270 4,433 4,466 Salaries and related costs 2,887 1,302 4,365 5,290 Contract carrier arrangements 2,196 956 2,656 1,318 Depreciation and amortization 778 386 1,276 1,273 Contracted services 670 326 918 936 Aircraft maintenance and outside repairs 663 320 921 893 Passenger commissions and other selling expenses 635 298 888 948 Landing fees and other rents 475 250 881 878 Passenger service 243 95 332 348 Aircraft rent 156 90 316 543 Profit sharing 144 14 – – Restructuring, asset write-downs, pension

    settlements and related items, net

    –

    –

    13

    888 Other 299 189 475 700

    Total operating expense 12,562 5,496 17,474 18,481 OPERATING INCOME (LOSS) 796 300 58 (2,001)

    OTHER (EXPENSE) INCOME: Interest expense (contractual interest expense

    totaled $366 for the four months ended April 30, 2007, and $1,210 and $1,169 for the years ended December 31, 2006 and 2005, respectively)

     

    (390)

     

    (262)

     

    (870)

     

    (1,032) Interest income 114 14 69 59 Miscellaneous, net 5 27 (19) (1)

    Total other expense, net (271) (221) (820) (974) INCOME (LOSS) BEFORE REORGANIZATION

    ITEMS, NET

    525

    79

    (762)

    (2,975) REORGANIZATION ITEMS, NET – 1,215 (6,206) (884) INCOME (LOSS) BEFORE INCOME TAXES 525 1,294 (6,968 (3,859) INCOME TAX (PROVISION) BENEFIT (211) 4 765 41 NET INCOME (LOSS) 314 1,298 (6,203) (3,818) PREFERRED STOCK DIVIDENDS – – (2) (18) NET INCOME (LOSS) ATTRIBUTABLE TO

    COMMON SHAREOWNERS

    $ 314

    $1,298

    $(6,205)

    $(3,836) BASIC INCOME (LOSS) PER SHARE $ 0.80 $ 6.58 $(31.58) $(23.75) DILUTED INCOME (LOSS) PER SHARE $ 0.79 $ 4.63 $(31.58) $(23.75)

    Source: Annual Report, Form 10-K

     

     

     

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