11 Depreciation, Impairments, and Depletion Financial Reporting Problem 11
Financial Reporting Problem
The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.
Instructions
Refer to P&G’s financial statements and the accompanying notes to answer the following questions.
(a) What descriptions are used by P&G in its balance sheet to classify its property, plant, and equipment?
(b) What method or methods of depreciation does P&G use to depreciate its property, plant, and equipment?
(c) Over what estimated useful lives does P&G depreciate its property, plant, and equipment?
(d) What amounts for depreciation and amortization expense did P&G charge to its income statement in 2014, 2013, and 2012?
(e) What were the capital expenditures for property, plant, and equipment made by P&G in 2014, 2013, and 2012?
Comparative Analysis Case
The Coca-Cola Company and PepsiCo., Inc.
The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies’ complete annual reports, including the notes to the financial statements, are available online.
Instructions
Use the companies’ financial information to answer the following questions.
(a) What amount is reported in the balance sheets as property, plant, and equipment (net) of Coca-Cola at December 31, 2014, and of PepsiCo at December 31, 2014? What percentage of total assets is invested in property, plant, and equipment by each company?
(b) What depreciation methods are used by Coca-Cola and PepsiCo for property, plant, and equipment? How much depreciation and amortization was reported by Coca-Cola and PepsiCo in 2014? In 2013? (Use cash flow statement amounts.)
(c) Compute and compare the following ratios for Coca-Cola and PepsiCo for 2014.
(1) Asset turnover.
(2) Profit margin on sales.
(3) Return on assets.
(d) What amount was spent in 2014 for capital expenditures by Coca-Cola and PepsiCo?
Financial Statement Analysis Case
McDonald’s Corporation
McDonald’s is the largest and best-known global food-service retailer, with more than 32,000 restaurants in 118 countries. On any day, McDonald’s serves approximately 1 percent of the world’s population. The following is information related to McDonald’s property and equipment.
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Instructions
(a) What method of depreciation does McDonald’s use?
(b) Does depreciation and amortization expense cause cash flow from operations to increase? Explain.
(c) What does the schedule of cash flow measures indicate?
Accounting, Analysis, and Principles
Electroboy Enterprises, Inc. operates several stores throughout the western United States. As part of an operational and financial reporting review in a response to a downturn in its markets, the company’s management has decided to perform an impairment test on five stores (combined). The five stores’ sales have declined due to aging facilities and competition from a rival that opened new stores in the same markets. Management has developed the following information concerning the five stores as of the end of fiscal 2016.
Original cost $36 million
Accumulated depreciation $10 million
Estimated remaining useful life 4 years
Estimated expected future annual cash flows (not discounted) $4.0 million per year
Appropriate discount rate 5 percent
Accounting
(a) Determine the amount of impairment loss, if any, that Electroboy should report for fiscal 2016 and the book value at which Electroboy should report the five stores on its fiscal year-end 2016 balance sheet. Assume that the cash flows occur at the end of each year.
(b) Repeat part (a), but instead assume that (1) the estimated remaining useful life is 10 years, (2) the estimated annual cash flows are $2,720,000 per year, and (3) the appropriate discount rate is 6 percent.
Analysis
Assume that you are a financial analyst and you participate in a conference call with Electroboy management in early 2017 (before Electroboy closes the books on fiscal 2016). During the conference call, you learn that management is considering selling the five stores, but the sale won’t likely be completed until the second quarter of fiscal 2017. Briefly discuss what implications this would have for Electroboy’s 2016 financial statements. Assume the same facts as in part (b) above.
Principles
Electroboy management would like to know the accounting for the impaired asset in periods subsequent to the impairment. Can the assets be written back up? Briefly discuss the conceptual arguments for this accounting.
