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ACCT 607 Applied Case Assignment #6 (Chapters 9 and 10) Name_____________________ Marriott International Inc. (NASDAQ: MAR; Bethesda, MD; hereafter, \"Marriott\" or \"the Company\") is a worldwide operator, franchisor, and licensor of hotels and timeshare properties under numerous brand names at different price and service points, including the Ritz-Carlton, BVLGARI, and Courtyard by Marriott. The Company became a public company in 1998 when it was \"spun off\" as a separate entity by the company formerly named \"Marriott International, Inc.\" Use the attached financial statements and selected notes to the financial statements from Marriott's 10-K for the year ended December 31, 2014 to answer the following questions. (You will not need to supplement with outside sources of company data in order to answer the questions.) 1. Write out the fundamental accounting equation, and identify the values for the fundamental accounting equation for the Company's 2014 year end. (You'll notice something unusual about how this equation has balanced. This question previews one of our topics for next week! For the rest of this assignment, we'll focus on liabilities...) 2. Compute and evaluate the Company's current ratio as at December 31, 2014 and 2013. Based on these computations, has liquidity increased or decreased during the current year? 3. (a) Is the Company's \"Liability for guest loyalty programs\" a deferred revenue or an accrued liability? Explain. (b) What percentage of the Company's total liability for guest loyalty programs is expected to be resolved in the coming fiscal year (that is, in 2015)? Page 1 of 6 4. (a) The attached \"Commitments and Contingencies\" footnote indicates that the Company has a \"commitment, with no expiration date, to invest up to $11 million in a joint venture for development of a new property\" and that it expects \"to fund this commitment in 2015.\" Yet, the footnote also indicates that no liability has yet been recorded on the Balance Sheet. Why not? (b) The attached \"Commitments and Contingencies\" footnote also indicates that the Company has been named as a defendant in a lawsuit filed by several former Marriott employees. Yet, no liability has been recorded on the Balance Sheet. Under what circumstances would this be inappropriate? 5. The Company's Long-Term Debt footnote (not attached) includes the following information: In the 2013 third quarter, we issued $350 million aggregate principal amount of 3.4 percent Series M Notes due 2020 (the \"Series M Notes\"). We received net proceeds of approximately $345 million from the offering, after deducting the underwriting discount and estimated expenses. We pay interest on the Series M Notes on April 15 and October 15 of each year, commencing on April 15, 2014. These Series M Notes are described as: Series M Notes, interest rate of 3.4%, face amount of $350, maturing October 15, 2020 (effective interest rate of 3.6%) (a) What journal entry would have been recorded in the third quarter of 2013 to record the issuance of the Series M Notes? (b) Record the interest payment and interest expense on April 15 and October 15, 2014. Assume the effective interest method, and record your responses to the nearest thousand dollars. April 15: October 15: (c) Assume that, at the end of 2014, the prevailing market rate for interest obligations similar to these notes was 4.0%. What would be the approximate net carrying or book value of the notes at the year end? Explain. Page 2 of 6 EXCERPTS FROM MARRIOTT INTERNATIONAL, INC.'S 10-K FOR THE YEAR ENDED DECEMBER 31, 2014 MARRIOTT INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME Fiscal Years 2014 , 2013 , and 2012 ($ in millions, except per share amounts) December 31, 2014 REVENUES Base management fees Franchise fees Incentive management fees Owned, leased, and other revenue Cost reimbursements $ OPERATING COSTS AND EXPENSES Owned, leased, and other-direct Reimbursed costs Depreciation, amortization, and other General, administrative, and other 672 745 302 1,022 11,055 13,796 December 31, 2013 $ 621 666 256 950 10,291 12,784 December 28, 2012 $ 581 607 232 989 9,405 11,814 OPERATING INCOME Gains and other income Interest expense Interest income Equity in earnings (losses) INCOME BEFORE INCOME TAXES Provision for income taxes NET INCOME $ 775 11,055 148 659 12,637 1,159 8 (115 ) 30 6 1,088 (335 ) 753 $ 729 10,291 127 649 11,796 988 11 (120 ) 23 (5 ) 897 (271 ) 626 $ 785 9,405 102 582 10,874 940 42 (137) 17 (13) 849 (278) 571 EARNINGS PER SHARE-Basic Earnings per share $ 2.60 $ 2.05 $ 1.77 EARNINGS PER SHARE-Diluted Earnings per share $ 2.54 $ 2.00 $ 1.72 See Notes to Consolidated Financial Statements. Page 3 of 6 MARRIOTT INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS Fiscal Years-Ended 2014 and 2013 ($ in millions) December 31, 2014 ASSETS Current assets Cash and equivalents Accounts and notes receivable, net Current deferred taxes, net Prepaid expenses Other Assets held for sale $ Property and equipment, net Intangible assets Contract acquisition costs and other Goodwill Equity and cost method investments Notes receivable, net Deferred taxes, net Other noncurrent assets $ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Current portion of long-term debt Accounts payable Accrued payroll and benefits Liability for guest loyalty programs Accrued expenses and other $ Long-term debt Liability for guest loyalty programs Other noncurrent liabilities Shareholders' deficit Class A Common Stock Additional paid-in-capital Retained earnings Treasury stock, at cost Accumulated other comprehensive loss $ 104 1,100 311 64 109 233 1,921 1,460 1,351 894 2,245 224 215 530 270 6,865 324 605 799 677 655 3,060 3,457 1,657 891 5 2,802 4,286 (9,223) (70) (2,200) 6,865 December 31, 2013 $ $ $ $ 126 1,081 252 67 27 350 1,903 1,543 1,131 874 2,005 222 142 647 332 6,794 6 557 817 666 629 2,675 3,147 1,475 912 5 2,716 3,837 (7,929) (44) (1,415) 6,794 See Notes to Consolidated Financial Statements. Page 4 of 6 MARRIOTT INTERNATIONAL, INC. [SELECTED] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Our revenues include: (1) base management and incentive management fees; (2) franchise fees (including licensing fees from MVW after the spin-off of $60 million for 2014 , $61 million for 2013 and $61 million for 2012 ); (3) revenues from lodging properties we own or lease; and (4) cost reimbursements. Management fees are typically composed of a base fee, which is a percentage of the revenues of hotels, and an incentive fee, which is generally based on hotel profitability. Franchise fees are typically composed of initial application fees and continuing royalties generated from our franchise programs, which permit the hotel owners and operators to use certain of our brand names. Cost reimbursements include direct and indirect costs that are reimbursed to us by properties that we manage, franchise, or license. Rewards Programs Marriott Rewards and The Ritz-Carlton Rewards are our frequent guest loyalty programs. Program members earn points based on the money they spend at our hotels, purchases of timeshare interval, fractional ownership, and residential products and, to a lesser degree, through participation in affiliated partners' programs, such as those offered by car rental and credit card companies. Members can redeem points, which we track on their behalf, for stays at most of our hotels, airline tickets, airline frequent flyer program miles, rental cars, and a variety of other awards. Points cannot be redeemed for cash. We provide Marriott Rewards and The Ritz-Carlton Rewards as marketing programs to participating properties, with the objective of operating the programs on a break-even basis to us. We sell the points for amounts that we expect will, in the aggregate, equal the costs of point redemptions and program operating costs over time. We defer revenue we receive from managed, franchised, and Marriott-owned/leased hotels and program partners. Our management and franchise agreements require that properties reimburse us currently for the costs of operating the rewards programs, including marketing, promotion, communication with, and performing member services for rewards program members. Due to the requirement that properties reimburse us for program operating costs as incurred, we recognize the related cost reimbursements revenues from properties for our rewards programs when we incur and expense such costs. We also recognize the component of revenue from program partners that corresponds to program maintenance services when we incur and expense such costs. When points are redeemed we recognize the amounts we previously deferred as revenue and the corresponding expense relating to the costs of the awards redeemed. The recorded liability related to these programs totaled $2,334 million at year-end 2014 and $2,141 million at year-end 2013 . We estimate the reasonableness and the value of the future redemption obligations using statistical formulas that project timing of future point redemptions based on historical levels, including an estimate of the \"breakage\" for points that members will never redeem, and an estimate of the points that members will eventually redeem. A ten percent reduction in the estimate of \"breakage\" would have increased the estimated year-end 2014 liability by $142 million . Page 5 of 6 7. COMMITMENTS AND CONTINGENCIES Guarantees We issue guarantees to certain lenders and hotel owners, chiefly to obtain long-term management contracts. The guarantees generally have a stated maximum funding amount and a term of four to ten years. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are inadequate to cover annual debt service or to repay the loan at the end of the term [...] Guarantee fundings to lenders and hotel owners are generally recoverable as loans repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels [...] Our liability at year-end 2014 for guarantees for which we are the primary obligor is reflected in our Balance Sheet as $4 million of \"Accrued expenses and other\" and $51 million of \"Other noncurrent liabilities.\" Commitments In addition to the guarantees we note in the preceding paragraphs, at year-end 2014, we had the following commitments outstanding, which are not recorded on our Balance Sheet: A commitment to invest up to $8 million of equity for a non-controlling interest in a partnership that plans to purchase North American full-service and limited-service properties, or purchase or develop hotel-anchored mixed-use real estate projects. We expect to fund $1 million of this commitment in 2015. We do not expect to fund the remaining $7 million of this commitment, which expires in 2016. A commitment, with no expiration date, to invest up to $11 million in a joint venture for development of a new property. We expect to fund this commitment in 2015. Several commitments aggregating $32 million with no expiration date and which we do not expect to fund. Legal Proceedings On January 19, 2010, several former Marriott employees (the \"plaintiffs\") filed a putative class action complaint against us and the Stock Plan (the \"defendants\"), alleging that certain equity awards of deferred bonus stock granted to the plaintiffs and other current and former employees for fiscal years 1963 through 1989 are subject to vesting requirements under the Employee Retirement Income Security Act of 1974, as amended (\"ERISA\"), that are in certain circumstances more rapid than those set forth in the awards. The action was brought in the United States District Court for the District of Maryland (Greenbelt Division), and Dennis Walter Bond Sr. and Michael P. Steigman were the remaining named plaintiffs. Class certification was denied, and on January 16, 2015, the court granted Marriott's motion for summary judgment and dismissed the case. Plaintiffs have filed a notice of appeal with the U.S. Court of Appeals for the Fourth Circuit. In March 2012, the Korea Fair Trade Commission (\"KFTC\") obtained documents from two of our managed hotels in Seoul, Korea in connection with an investigation which we believe is focused on pricing of hotel services within the Seoul region. Since then, the KFTC has conducted additional fact-gathering at those two hotels and also has collected information from another Marriott managed hotel located in Seoul. We understand that the KFTC also has sought documents from numerous other hotels in Seoul and other parts of Korea that we do not operate, own or franchise. We have not yet received a complaint or other legal process. We are cooperating with this investigation. Page 6 of 6