Estimating Useful Life and Percent Used Up

The property and equipment footnotes from the Deere & Company balance sheet follows

The property and Depreciation A summary of property and equipment at October 31

HW No. 5 Answer the following questions from the textbook: E6 - 35 Estimating Useful Life and Percent Used Up The property and equipment footnotes from the Deere & Company balance sheet follows The property and Depreciation A summary of property and equipment at October 31 follows: Property and Equipment (millions) Land Buildings and building equipment Machinery and equipment Dies, patterns, tool, etc. All other Construction in process Total at cost Less accumulated depression Total Useful Lives (years) 23 11 7 5 2010 $113 2,226 3,972 1,105 685 478 8,579 4,856 $3,723 2009 $1,166 2,144 3,826 1,081 672 362 8,501 4,744 $3,457 Property and equipment is stated at cost less accumulated depreciation. Total property and equipment additions in 2010, 2009 and 2008 were $802 million, $798 million and $1,147 million and depreciation was $540 million, $513 million and $467 million, respectively. a. Compute the estimated useful life of Deere's depreciable assets at year-end 2010. (Hint: Exclude land and construction in process.) How does this estimate compare with the useful lives reported in Deere's footnote disclosure? b. Estimate the percent used up of Deere's depreciable assets at year-end 2010. How do you interpret this figure? E6 - 37 Computing and Assessing Plant Asset Impairment On July 1, Zeibart Company purchases equipment for $225,000. The equipment has an estimated useful life of 10 years and expected salvage value of $25,000. The company use straight-line depreciation. Four years later, economic factors cause the fair value of the equipment to decline to $90,000. On this date, Zeibart examines the equipment for impairment and estimates $125,000 in undiscounted expected cash inflows this equipment. a. Compute the annual depreciation expense relating to this equipment. b. Compute the equipment's net book value at the end of the fourth year. 1 c. Apply the test of impairment to this equipment as of the end of the fourth years. Is the equipment impaired? Show supporting computations. d. If the equipment is impaired at the end of the fourth year, compute the impairment loss. P6 - 42 Estimating Useful Life and Percent Used Up The property and equipment section of the Abbott Laboratories 2010 balance sheet follows. Property and equipment, at cost ($thousands) Land Buildings Equipment Construction in progress 2010 Less: accumulated depreciation and amortization Net property and equipment 2009 2008 $648,988 $546,204 4,334,236 4,010,439 11,813,618 11,325,450 577,460 604,813 17,374,302 16,486,906 $509,606 3,698,861 10,366,267 613,939 15,189,673 9,403,346 8,867,417 7,969,507 $7,970,956 $7,619,489 $7,219,166 The company also provides the following disclosure relating to the useful lives of its depreciable assets Property and EquipmentDepreciation and amortization are provided on a straight-line basis over the estimated useful fives of the assets. The following table shows estimated useful lives of property and equipment. Classification Buildings Equipment Estimated Useful Lives 10 to 50 years(average 27 years) 3 to 20 years(average 11 years) During 2010, the company reported $1,207,450 ($000s) for depreciation expense. Required a. Compute the estimated useful life of Abbott Laboratories' depreciable assets. How do you interpret this figure? b. Compute the estimated percent used up of Abbott Laboratories' depreciable assets. How do you interpret this figure? E7 - 33 Determining Bond Prices, Interest Rates, and Financial Statement Effects 2 Deere& Company's 2010 1o K reports the following footnotes relating to long-term debt for its equipment operations subsidiary. Deere's borrowings include $300 million, 7.125% notes, due in 2031. Long-term borrowings at October 31 consisted of the following in millions of dollars: Notes and debentures 6.95% notes due 2014:($700 principal) Swapped $300 to variable interest rate of 1.25%-2009 4.375% notes due 2019 7-1/2% debentures due 2022 6.55% debentures due 2028 5.375% notes due 2029 8.10% debentures due 2030 7.125% notes due 2031 Other notes Total 2010 2009 $763 750 105 200 500 250 300 461 $3,329 $800 750 105 200 500 250 300 168 $3,073 A recent price quote from Yahoo! Finance Bond Center on Deere's 7.125% notes follow. Current Fitch Type Issuer Price Coupon(%) Maturity YTM(%) Yield(%) Rating Callable Corp Deere&CO 131.84 7.125 2031 4.65 5.404 A No This price quote indicates that Deere's 7.125% notes have a market price of 131.84(131.84% of face value), resulting in a yield to maturity of 4.65%. a. Assuming that these notes were originally issued at par value, what does the market price reveal about interest rate changes since Deere issued its notes? b. Does the change in interest rate since the issuance of these notes affect the amount of interest expense that Deere reports in its income statement? Explain. c. How much cash would Deere have to pay to repurchase the 7.125% notes at the quoted market price of 131.84? How would the repurchase affect Deere's current income? d. Assuming that the notes remain outstanding until their maturity, at what market price will the notes sell on their due date in 2013? E7 - 35 part (a) only Analyzing and Reporting Financial Statement Effects of Bond Transactions On January 1, 2012, Trueman Corporation issued $600,000 of 20-year, 11% bonds for $554,860 yielding a market rate of 12%. Interest is payable semiannually on June 30 and December 31. (a) Confirm the bond issue price. 3 HW No. 6 Please answer the following questions from the textbook: P10-28 Analyzing, Interpreting and Capitalizing Operating Leases The Abercrombie & Fitch 10-K report contains the following footnote relating to leasing activities. This is the only information is discloses relating to its leasing activity. At January 29, the Company was committed to nonancelable lessees with remaining terms of one to 17 years. A summary of operating lease commitments under noncancelable leases follows (thousands): Fiscal 2011 Fiscal 2012 Fiscal 2013 Fiscal 2014 Fiscal 2015 Thereafter $331,151 319,982 303,531 285,337 262,586 1,110,598 Required a. What lease assets and lease liabilities does Abercrombie report on its balance sheet? How do we know? b. What effects does the lease classification have on A&F balance sheet? Over the life of the lease, what effect does this classification have on the company's net income? c. Using a 6% discount rate that A&F fails to report a result of its off-balance-sheet lease financing. d. What adjustments would we consider to A &F income statement corresponding to the adjustments we would make to its balance sheet in part c? e. Indicate the direction of the effect that capitalizing these leases would have on the following financial items and ratios for A&F: return on equity (ROE), net operating profit after tax (NOPAT), net operating assets (NOA), net operating profit margin (NOPM), net operating asset turnover (NOAT), and measures of financial leverage. 4 HW No. 7 Please answer the following questions from the textbook: P10 - 31 Analyzing and Interpreting Pension Disclosures DuPont's 10-K report has the following disclosures related to its retirement plans ($ millions). Obligation and Funded Status December 31($ millions) Change in benefit obligation Benefit obligation at beginning of year Service cost Interest cost Plan participants' contributions Actuarial loss Benefits paid Amendments Net effects of acquisitions/divestitures Benefit obligation at end of year Pension Benefits 2010 2009 $22,770 207 1,262 18 1,218 (1,584) $21,506 192 1,270 17 1,392 (1,608) 33 23,924 1 $22,770 Changes in plan assets Fair value of plan assets at beginning of year Actual gain on plan assets Employer contributions Plan participants' contributions Benefit paid Net effects of acquisitions/divestitures Fair value of plan assets at end of year $17,143 2,015 782 18 (1,584) 29 $18,403 $16,209 2,219 306 17 (1,608) Funded status U.S. plans with plan assets Non-U.S. plans with plan assets All other plans Total (3,408) (652) (1,461) $(5,521) (3,594) (543) (1,490) $(5,627) 5 $17,143 Components of net periodic benefit cost (credit) and amounts recognized in other Comprehensive income Net periodic benefit (credit) cost Service cost Interest cost Expected return on plan assets Amortization of loss Amortization of prior service cost Curtailment/settlement loss Net periodic benefit (credit)cost Pension Benefits 2010 2009 2008 Changes in plan assets and benefit obligations recognized in other comprehensive income Net loss (gain) Amortization of loss Prior service cost Amortization of prior service cost Curtailment/settlement loss Total recognized in other comprehensive income Total recognized in net periodic benefit cost and other comprehensive income $207 1,262 (1,435) 507 16 $192 1,270 (1,603) 278 18 $557 $155 634 (507) 781 (278) (16) (18) $111 $668 $485 $640 Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 Discount rate Expected return on plan assets Rate of compensation increase $209 1,286 (1,932) 56 18 1 ($362) 6,397 (56) 4 (18) (1) $6,326 $5,964 Pension Benefits 2010 2009 2008 5.80% 6.14% 6.01% 8.64% 8.75% 8.74% 4.24% 4.30% 4.26% The following benefit payments, which reflect future services, as appropriate, are expected be paid: ($ millions) 2011 2012 2013 2014 2015 Years 2016 - 2020 Pension Benefits $1,593 1,528 1,521 1,527 1,544 8,002 Required a. How much pension expense does DuPont report in its 2010 income statement? 6 b. DuPont reports a $1,435 million expected return on pension plan assets as an offset to 2010 pension expense. Approximately, how is the amount computed (estimate from the number reported)? What is DuPont's actual gain or loss realized on its 2010 pension plan assets? What is the purpose of using the expected return instead of the actual gain or loss? c. What main factors and dollar amounts affected DuPont's pension liability during 2010? What main factors affected its pension plan assets during 2010. d. What does the term funded status mean? What is the funded status of the 2010 DuPont pension plans? e. DuPont decreased its discount rate from 6.14% to 5.80% in 2010. What effects does the increase have on its balance sheet and its income statement? f. How did DuPont's pension plan affected the company's cash flow in 2010? g. In 2010, DuPont contributed $782 million to its pension plan. Explain how the return on pension assets affects the amount of cash that DuPont must contribute to find the pension plan. P8 - 57, parts: (a), (b), (c), (d), (f) Interpreting Disclosure on Employee Stock Options Intel Corporation reported the following in its 2010 10-K report. Share-Based Compensation Share-based compensation recognized in 2010 was $971 million. During 2010, the tax benefit that we realized for the tax deduction from share-based awards totaled $266 million. We use the Black-Scholes option pricing model to estimate the fair value of options granted under our equity incentive plans and rights to acquire stock granted under our stock purchase plan. We based the weighted average estimated values of employee stock option grants and rights granted under the stock purchase plan, as well as the weighted average assumption used in calculating these values, on estimated at the date of grant, as follows: Estimated values Expected life (in years) Risk-free interest rate Volatility Dividend yield Stock Option 2010 2009 2008 $4.82 $4.72 $5.75 4.9 4.9 5 2.50% 1.80% 3.00% 28% 46% 37% 2.70% 3.60% 2.70% 7 Stock Purchase Plan 2010 2009 2008 $4.71 $4.14 $5.32 0.5 0.5 0.5 0.20% 0.40% 2.10% 32% 44% 35% 3.10% 3.60% 2.50% Additional Information with respect to stick option activity is as follows: Number of Options 665.9 24.9 (33.6) (42.8) (2.4) Weighted Average Exercise Price $27.76 $20.81 $19.42 $31.14 $22.84 December 27,2008 Grants Assumed in acquisition Exercises Cancellation and forfeitures Exchanged Expirations 612 118.5 9 (3.6) (29.6) (217.4) (37.6) $27.70 $18.01 $15.42 $15.90 $28.16 $26.75 $31.92 December 26,2009 Grants Exercises Cancellation and forfeitures Expirations December 25,2010 451.3 20.2 (16.6) (16.1) (52.4) 386.4 $25.08 $23.25 $18.36 $24.76 $60.68 $20.45 Options exercisable as of December 27,2008 December 26,2009 December 25,2010 517 297.7 263 $28.78 $28.44 $21.03 (In millions, expected per option amounts) December 29,2007 Grants Exercises Cancellation and forfeitures Expirations Required a. What did Intel expense for share-based compensation for 2010? How many option did Intel grant in 2010? Compute the fair value of all options granted during 2010. Why do the fair value of the option grants and the expense differ? b. Intel used the Black-Scholes formula to estimate fair value of options granted each year. How did the change in volatility from 2009 y=to 2010 affect share-based compensation in 2010? What about the change in risk-free rate? c. How many options were exercised during 2010? Estimate the cash that Intel received from its employees when these options were exercised? 8 d. What was the intrinsic value per share of the option exercised in 2010? If employees who exercised options in 2010 immediately sold them, what \"profit\" did they make from the share? f. What was the average exercise price of the options that expired in 2010? Explain why employees might have let these options expire without exercising them. P9 - 39 Analyzing and Interpreting Available-for-sale Securities Disclosures Following is a portion of the financial performance of insurance companies such as MetLife, and investments comprise a large part of MetLife's assets. MetLife accounts for its fixed maturity investment as available-for sale securities. December 21,2010(in millions) Fixed Maturity Securities U.S. corporate securities Foreign corporate securities RMBS Foreign government securities U.S Treasury, agency and government guaranteed securities CMBS ABS State and political subdivision securities Other fixed maturity securities Total fixed maturities Equity Securities: Common stock Non-redeemable preferred stock Total equity securities Cost or Amortized Cost Gain Gross Unrealized Temporary OTTI* Estimated Fair Loss Loss Value $89,713 65,784 44,468 42,154 $4,486 3,333 1,625 1,856 $1,631 939 917 610 32,469 1,394 559 20,213 14,725 740 274 266 590 10,476 171 918 10,129 6 $320,008 1 $13,907 $6,030 7 $327,284 $2,060 1,565 $3,625 $146 76 $222 $12 229 $241 9 470 $92,568 68,178 44,733 43,400 33,304 12 119 $601 20,675 14,290 $2,194 1,412 $3,606 December 21,2010(in millions) Cost or Amortized Fixed Maturity Securities Cost U.S. corporate securities Foreign corporate securities RMBS Foreign government securities U.S Treasury, agency and government guaranteed securities CMBS ABS State and political subdivision securities Other fixed maturity securities Total fixed maturities Equity Securities: Common stock Non-redeemable preferred stock Total equity securities Gain Gross Unrealized Temporary OTTI* Estimated Loss Fair Value Loss $72,075 37,254 45,343 11,010 $2,821 2,011 10234 1,076 $2,699 1,226 1,957 139 25,712 745 1,010 16,555 14,272 191 189 1,106 1,077 7,468 151 411 7,208 20 $229,709 1 $8,419 2 $9,627 19 $227,642 $1,537 1,650 $3,187 $92 80 $172 $8 $ 267 $275 $ $10 9 600 $72,187 38,030 44,020 11,947 25,447 18 222 $859 15,622 13,162 $1,621 1,463 $3,084 a. At what amount does MetLife report its fixed maturity securities on its balance for 2010 and 2009? b. What is the difference between realized and unrealized gains and losses? c. What are the net unrealized gain (losses) for 2010 and 2009 on its fixed maturity securities? How did these unrealized gain (losses) affect the company's reported income in 2010 and 2009? 10