ACCOUNTING 3220 CORPORATE FINANCIAL REPORTING 1 Spring 2018

Assignment #9 – Noncurrent Liabilities

This assignment is due at 9:00am Monday, April 30, 2018 regardless of your section. The assignment must be submitted electronically via D2L. DO NOT EMAIL ME YOUR HOMEWORK.

You may submit your homework in Excel, Word, or .pdf style (not .zip or other). Please format the pages for printing and clearly state all group members’ names and section numbers on the first page.

The assignment may be done in groups (ideally, not more than 3 people). You may work with students across sections if you prefer. However, each person must submit a copy of the homework through D2L to ensure submission is done properly.

The standard university Honor Code applies to this assignment. Other than the members of your group, you may not consult with any other person about this assignment.

Kraft Foods Inc. issued four tranches of notes in 2010 to finance its acquisition of Cadbury. The four types of notes were individually priced. Below you will find excerpts from their prospectuses and 8-K disclosure of material events. The Settlement Date is the date on which Kraft Foods Inc. received the proceeds from the note issue (some terms were modified for analytical simplicity). Questions for the assignment follow the excerpts.

Kraft Foods Inc.'s notes prospectus

Filed pursuant to Rule 433 Relating to Preliminary Prospectus Supplement dated February 3, 2010 to Prospectus Dated December 4, 2007 Registration Statement No. 333-147829

Pricing Term Sheet

$9,500,000,000
$1,000,000,000 2.625% Notes due 2013 (the “2013 Notes”) $1,750,000,000 4.125% Notes due 2016 (the “2016 Notes”) $3,750,000,000 5.375% Notes due 2020 (the “2020 Notes”) $3,000,000,000 6.500% Notes due 2040 (the “2040 Notes”)

Issuer:
Offering Format: Size:

Maturity:

Coupon:

Price to Public:

Interest Payment Dates:

Kraft Foods Inc. (“Kraft”)

SEC Registered

$1,000,000,000 of 2013 Notes $1,750,000,000 of 2016 Notes $3,750,000,000 of 2020 Notes $3,000,000,000 of 2040 Notes

2013 Notes: May 8, 2013
2016 Notes: February 9, 2016 2020 Notes: February 10, 2020 2040 Notes: February 9, 2040

2013 Notes: 2.625% 2016 Notes: 4.125% 2020 Notes: 5.375% 2040 Notes: 6.500% 2013 Notes: 99.731% 2016 Notes: 99.658% 2020 Notes: 99.176% 2040 Notes: 99.036%

2013 Notes: Semi-annually in arrears on May 8 and November 8, commencing on November 8, 2010

Settlement Date:

2016 Notes: Semi-annually in arrears on February 9 and August 9, commencing on August 9, 2010

2020 Notes: Semi-annually in arrears on February 10 and August 10, commencing on August 10, 2010

2040 Notes: Semi-annually in arrears on February 9 and August 9, commencing on August 9, 2010

May 8, 2010

Interest on the 2013 Notes is payable semiannually on May 8 and November 8, commencing November 8, 2010, to holders of record on the preceding April 23 and October 24. Interest on the 2016 Notes is payable semiannually on February 9 and August 9, commencing August 9, 2010, to holders of record on the preceding January 25 and July 25. Interest on the 2020 Notes is payable semiannually on February 10 and August 10, commencing August 10, 2010, to holders of record on the preceding January 26 and July 26. Interest on the 2040 Notes is payable semiannually on February 9 and August 9, commencing August 9, 2010, to holders of record on the preceding January 25 and July 25. Interest on the Notes will be computed on the basis of a 360-day year consisting of twelve 30-day months.

The 2013 Notes will mature on May 8, 2013. The 2016 Notes will mature on February 9, 2016. The 2020 Notes will mature on February 10, 2020. The 2040 Notes will mature on February 9, 2040.

Answer the following questions based on the prospectus of Kraft Foods Inc.'s bond issue. You can provide your answers in the spaces below or in a separate document.

1. Are the notes issued at a premium or discount? How do you know?

2. What is the coupon interest rate on the “2013 Notes”?

3. What is the market rate of interest rate (also known as effective interest rate) on the “2013 Notes”?

4. Show the journal entry for the “2013 Notes” on May 8, 2010.

5. Construct an amortization schedule that shows premium/discount amortization over the life of the “2013 Notes” (similar to the examples in class).

6. Show the journal entries for the “2013 Notes” on November 8, 2010.

7. Assume the fiscal year ends on December 31, 2010. Show the appropriate adjusting entries related to the “2013 Notes” (round interest for the period to the nearest month for simplicity).

8. Show the entries on May 8, 2011 (related to the “2013 Notes”), assuming the financial statements were correct on December 31, 2010 (round interest for the period to the nearest month for simplicity).

9. Show the entries on November 8, 2011 (related to the “2013 Notes”).

10. Assume 60% of the “2013 Notes” are redeemed early on May 8, 2012 for $595,000,000 in cash. Provide all the journal entries required on this date related to the “2013 Notes,” assuming the financial statements were correct on December 31, 2011.

11. Does the early redemption affect the income statement? If so, what is the effect?

A company issued $1000 par value 20- year zero coupon bonds on jan.1,2020. The purpose was to raise $100 million of funding for future development. Yield to Maturity on this bond is 3.5%

1. Calculate the total cash amount that the company needed to have available on the maturity date of jan.1,2040 to pay all the bondholders?

2. Use the IRS amortization rule to calculate the company's total interest expense for on the bonds for 2020/

Pro Forma balance sheet- Peabody & Peabody has 2019 sales of 10.4 milion. it wishes to analyze expected performance and financing needs for 2021- 2 years ahead. Given the following information respond to parts a. and b.

1. the percent of sales for items that vary directly with sales are as follows: Accounts receivable 12.2%, inventory 18.2%, accounts payable, 13.6% , Net Profit margin 3.3%

2. Marketable securties and other current liabilites are expected to remain unchanged.

3. a minimum cash balance of $483,000 is desired.

4. A new machins costing $648,000 will be acquired in 2020 and equipement costing $853,00 wil be purchased in 2021. Total deprication in 2020 is forecast as $286,00 and in 2021 $392,000 of depreciation will be taken.

5. Accurals are expected to rise $502,000 by the end of 2021.

6. No sales or retirement of long-term debt is expected

7. No sale or repurchase of common stock is expected

8. the dividend payout of 50% of net profits is expected to continue.

9. Sales are expected to be $11.5 million in 2020 and $11.3 million in 2021.

10. The december 31, 2019 balance sheet is here.

a. Prepare a pro forma balance sheet dated December​ 31,2021

b. Discuss the financing changes suggested by the statement prepared in part (a​).

Chapter Questions

1.     Explain why good research habits are important and how they relate to personal integrity and ethics. (Obj. 4)

2.     Howard Schultz, Starbucks president and CEO, has been described as a “classic entrepreneur: optimistic, relentless, mercurial, and eager to prove people wrong.” Schultz has followed his gut instinct mostly to success while scoffing at established management practices. Unlike other executives, until the Great Recession hit, he was not interested in cost control, advertising, and customer research. “I despise research,” he said. “I think it’s a crutch. But people smarter than me pushed me in this direction, and I’ve gone along.”Starbucks continues to be one of the most followed companies on Facebook. For the most recent year on record, Starbucks’ net income reached $359 million.What do you think Howard Schultz meant when he called consumer research a “crutch”? Can you explain why the corporate maverick hates it so much? (Obj. 3)

3.     Is information obtained on the Web as reliable as information obtained from journals, newspapers, and magazines? How about information derived from Wikipedia and blogs? (Obj. 3)

4.     Some people say that business reports never contain footnotes. If you were writing your first report for a business and you did considerable research, what would you do about documenting your sources? (Obj. 4)

13.5

Proposal: BioMed Sports Medicine Comes to Town (Obj. 1)

Sports medicine is increasingly popular, especially in university towns. A new medical clinic, BioMed Sports Medicine, is opening its doors in your community. A friend recommended your small business to the administrator of the clinic, and you received a letter asking you to provide information about your service. The new medical clinic specializes in sports medicine, physical therapy, and cardiac rehabilitation services. It is interested in retaining your company, rather than hiring its own employees to perform the service your company offers.

Your Task. First, decide what service you offer It could be landscaping, uniforms, uniform laundering, general cleaning, computerized no-paper fling systems, online medical supplies, patient transportation, supplemental hospice care, temporary office support, social media guidance, or food service.

Develop a letter proposal outlining your plan, staffing, and budget. Use persuasion to show why contracting your services is better than hiring in-house employees. In the proposal letter, request a meeting with the administrative board. .Send your proposal to Dr. Tim Krahnke, Director, BioMed Sports Medicine. Supply a local address.

Integrative Case 3.6

China Merchants Group’s Acquisition of the Newcastle Port

Hao Tan (University of Newcastle, Australia)

Why was China Merchants Group, a state-owned enterprise, able to successfully close the deal to acquire the Newcastle port of Australia?

On April 30, 2014, the world’s largest coal export port, the Newcastle port of Australia, changed hands. The owner of the Australian port, the new south wales state government, agreed to lease the port for 98 years to a consortium formed by the China Merchants Group (hereafter “Merchants”) and Australia’s Hastings Funds Management, for A$1.7 billion (US$1.57 billion). Over the lease period, the consortium will exercise control over the port, as well as the land, roads, railways, and other infrastructure within the wharf area, and will be entitled to earnings derived from the ports operations.

In the 2012- 2013 financial year, the Newcastle port exported 140 million tons of coal, worth A$15 billion (US$13.8 billion). The spot price of coal at the Newcastle Port is a benchmark for the international coal market. Given the significance of the port, the lease had attracted bidders from all over the world. These included Cheung Kong Infrastructure, owned by the Hong Kong tycoon Li Ka-Shing; China State construction; Deutschland Bank; and Macquarie Bank. The short term and long term financial benefits of this acquisition for Merchants remain to be seen. However, it’s successful bid will certainly create opportunities to further internationalize its infrastructure business, and synergies well with its existing shipping and port operations. Control of the Newcastle port will further help the company- a large state owned enterprise (SOE) from China- to play a more significant part in the global energy transport market.

Mergers and acquisitions in Western countries by china’s large SOEs have faced considerable political difficulties for a long time, especially for those mergers and acquisitions that concerned “strategic” assets in host countries. In 2009, an acquisition bid by the Aluminium Corporation of China (Chinalco) for Rio Tinto, of the top three global mining companies, failed. This was largely because of strong objections in Australia over concerns related to Chinalco’s state ownership. However, the acquisition of the Newcastle port by merchants appeared to generate much less criticism in Australia. After the announcement of the bidding outcome, the Australian media has been largely positive about the deal. For other Chinese companies that are considering to “go abroad”, there seem to be at least three lessons they can learn from the success of Merchants.

First, the acquisition came at a beneficial time, making it a win-win-win situation for the government, the local community, and the foreign investor. The acquisition came as a result of governmental changes in Australia, both at the state and the federal levels, from labor party control to that of the Liberal party. The new liberal government appealed to the public with plans to invest in new infrastructure. Many of those infrastructure projects had been long overdue in New South Wales and elsewhere in Australia. The Newcastle port acquisition will provide capital for some of those much-needed projects in the local area of Newcastle. Thus it is widely welcome by the government and the community. This is quite different from the bid of Rio Tinto by Chinalco a few years ago, where the Chinese company was perceived by many as a potential monopolist in the Australian resource sector seeking to take advantage of that period’s industry downturn.

Second, it appears that merchants had convinced the owner of the port and the Australian public that the motivation for its acquisition was a commercial rather than a political one. State ownership may be a winning factor for SOEs in China. However, it is often seen as a negative factor in foreign markets. Fully aware of this difference, merchants, and its bid efforts, had highlighted a range of commercial advantages of the company, such as is long experience in the shipping and port industries over the last 140 years; it’s current investments and management portfolio , with a number of large ports across continents; the related businesses of the company enabling operational synergies, including a super tanker fleet and the world’s largest container manufacturing business; and the governance of the company, as a Hong Kong-based and Hong Kong-listed company. As a result, the company’s industry expertise was well received and its state ownership less of a concern.

Finally, the bid of merchants had been greatly helped by its track record in developed countries, especially in Australia. Merchants had been operating in Australia for more than 20 years. It’s track record included acquisitions of Loscam Ltd. in 2010 and the Terminal link in 2013. Majority of the foreign investments made by merchant had proved successful, which had enhanced the positive image of the company as a responsible multinational corporate citizen. In other words, merchants was not a total stranger to Australia, which significantly reduced its liability of foreignness.

Of course, the confidence of the owner and the public in the host country not only relies on the good story the company tells, but also on its fundamentals, including its financial capabilities, as well as the conditions and terms of its bit. However, it is certainly important for the management of a multinational company to be able to frame and communicate effectively to various stakeholders the motivations and the consequences of its international mergers and acquisitions. As the philosopher Terrance McKenna used to say, “ The world is made of words.” The stories we receive affect how we understand and participate in the world. The stories a company can tell also affect whether it can reduce resistance in the host country, gain support from stakeholders, and eventually succeed in its internationalization endeavors.

In 150 words or more answer the follwoing Case Discussion Question:

What are the challenges facing large state-owned enterprises (SOEs) in their efforts to acquire strategic assets in foreign countries in comparison with those by private firms? What can SOEs due to deal with those challenges?

Integrative Case 3.6

China Merchants Group’s Acquisition of the Newcastle Port

Hao Tan (University of Newcastle, Australia)

Why was China Merchants Group, a state-owned enterprise, able to successfully close the deal to acquire the Newcastle port of Australia?

On April 30, 2014, the world’s largest coal export port, the Newcastle port of Australia, changed hands. The owner of the Australian port, the new south wales state government, agreed to lease the port for 98 years to a consortium formed by the China Merchants Group (hereafter “Merchants”) and Australia’s Hastings Funds Management, for A$1.7 billion (US$1.57 billion). Over the lease period, the consortium will exercise control over the port, as well as the land, roads, railways, and other infrastructure within the wharf area, and will be entitled to earnings derived from the ports operations.

In the 2012- 2013 financial year, the Newcastle port exported 140 million tons of coal, worth A$15 billion (US$13.8 billion). The spot price of coal at the Newcastle Port is a benchmark for the international coal market. Given the significance of the port, the lease had attracted bidders from all over the world. These included Cheung Kong Infrastructure, owned by the Hong Kong tycoon Li Ka-Shing; China State construction; Deutschland Bank; and Macquarie Bank. The short term and long term financial benefits of this acquisition for Merchants remain to be seen. However, it’s successful bid will certainly create opportunities to further internationalize its infrastructure business, and synergies well with its existing shipping and port operations. Control of the Newcastle port will further help the company- a large state owned enterprise (SOE) from China- to play a more significant part in the global energy transport market.

Mergers and acquisitions in Western countries by china’s large SOEs have faced considerable political difficulties for a long time, especially for those mergers and acquisitions that concerned “strategic” assets in host countries. In 2009, an acquisition bid by the Aluminium Corporation of China (Chinalco) for Rio Tinto, of the top three global mining companies, failed. This was largely because of strong objections in Australia over concerns related to Chinalco’s state ownership. However, the acquisition of the Newcastle port by merchants appeared to generate much less criticism in Australia. After the announcement of the bidding outcome, the Australian media has been largely positive about the deal. For other Chinese companies that are considering to “go abroad”, there seem to be at least three lessons they can learn from the success of Merchants.

First, the acquisition came at a beneficial time, making it a win-win-win situation for the government, the local community, and the foreign investor. The acquisition came as a result of governmental changes in Australia, both at the state and the federal levels, from labor party control to that of the Liberal party. The new liberal government appealed to the public with plans to invest in new infrastructure. Many of those infrastructure projects had been long overdue in New South Wales and elsewhere in Australia. The Newcastle port acquisition will provide capital for some of those much-needed projects in the local area of Newcastle. Thus it is widely welcome by the government and the community. This is quite different from the bid of Rio Tinto by Chinalco a few years ago, where the Chinese company was perceived by many as a potential monopolist in the Australian resource sector seeking to take advantage of that period’s industry downturn.

Second, it appears that merchants had convinced the owner of the port and the Australian public that the motivation for its acquisition was a commercial rather than a political one. State ownership may be a winning factor for SOEs in China. However, it is often seen as a negative factor in foreign markets. Fully aware of this difference, merchants, and its bid efforts, had highlighted a range of commercial advantages of the company, such as is long experience in the shipping and port industries over the last 140 years; it’s current investments and management portfolio , with a number of large ports across continents; the related businesses of the company enabling operational synergies, including a super tanker fleet and the world’s largest container manufacturing business; and the governance of the company, as a Hong Kong-based and Hong Kong-listed company. As a result, the company’s industry expertise was well received and its state ownership less of a concern.

Finally, the bid of merchants had been greatly helped by its track record in developed countries, especially in Australia. Merchants had been operating in Australia for more than 20 years. It’s track record included acquisitions of Loscam Ltd. in 2010 and the Terminal link in 2013. Majority of the foreign investments made by merchant had proved successful, which had enhanced the positive image of the company as a responsible multinational corporate citizen. In other words, merchants was not a total stranger to Australia, which significantly reduced its liability of foreignness.

Of course, the confidence of the owner and the public in the host country not only relies on the good story the company tells, but also on its fundamentals, including its financial capabilities, as well as the conditions and terms of its bit. However, it is certainly important for the management of a multinational company to be able to frame and communicate effectively to various stakeholders the motivations and the consequences of its international mergers and acquisitions. As the philosopher Terrance McKenna used to say, “ The world is made of words.” The stories we receive affect how we understand and participate in the world. The stories a company can tell also affect whether it can reduce resistance in the host country, gain support from stakeholders, and eventually succeed in its internationalization endeavors.

In 150 words or more answer the follwing Case discussion question:

What are your recommendations for China Merchants Group to effectively manage and operate the Newcastle port after its acquisition?

Schedule C

Dave Sanders does computer consulting work on the side. He received a 1099 from his largest client showing that he made $25,300 from his work for that company. He also earned an additional $3750 from other clients. Dave incurred the following expenses:

Office supplies                 $226

Insurance                         $535

Advertising                       $545

Telephone                        $767

He also drove 1585 business miles in 2020 and would like to use the standard mileage rate rather than actual expenses.

Complete the Schedule C for Dave. He uses his social security number 123-45-6789 and does not have an employer identification number. The name of the business is Dave’s Computer Consulting and he does the work from his home at 221 Main St, Heron, IL 61820. He uses the cash method of accounting. This business was started in 2012. He does not need to file 1099 forms.

Word length: 2,500 words/excluding references References: Yes using either APA or AGLC style and include a reference list

Scenario:

James Strong is a managing director of ABC Pty Ltd, a large private Company that specialises in accounting services.

For the current income year, James has the following receipts and expenses:

a) Salary of $500,000

b) Rent from his apartment in London that derives $600 (equivalent) per week

c) An amount of $20,000 received by James for personal injury, $5,000 of this amount was for loss of salary

d) $5,000 incurred by James for undertaking a Graduate Certificate in Accounting.

e) Reimbursement of his telephone bill by ABC Pty Ltd.

f) Dividends of $20,000 received on his Telstra Share portfolio

g) A bottle of wine worth $2,000 he receives from the CEO of ABC Pty Ltd at Easter

Task: Your firm has been approached by James Strong to provide a letter of advice in relation to the tax implications of these amounts. You are to write a letter of advice that addresses these issues citing the relevant cases and legislation. At this time, you are not required to perform any calculations.

The grade appeal process at a university requires that a jury be structured by selecting five individuals randomly from a pool of eight students and thirteen faculty.​

(a) What is the probability of selecting a jury of all​ students?

(b) What is the probability of selecting a jury of all​ faculty?

(c) What is the probability of selecting a jury of three students and two ​faculty?

​​(Round to five decimal places as​ needed.)

A university system enrolling thousands of students needs to determine how many credit hours, on the average, each student takes per quarter. From previous studies, the population standard deviation is known to be 2.3 credit hours per quarter. Suppose the administration wanted to estimate the mean to within 0.1 hours with 95% confidence. How large a sample would they need to take?