The purpose of this assignment is to apply principles and skills associated with investing and operating activities.
Using what you have learned from the topic resources, complete the following problems and cases from the textbook.
- Problems and Cases 8.21
- Integrative Case 8.1
- Problems and Cases 9.14
- Problems and Cases 9.20
Prepare the assignment in Excel with each problem or case as a separate tab. All narrative questions should be fully addressed within the Excel document on the tab associated with the problem or case.
The purpose of this assignment is to apply principles and skills associated with investing and operating activities. Using what you have learned from the topic resources, complete the following proble
8.21 Variable-Interest Entities. Molson Coors Brewing Company (Molson Coors) is the ﬁfth-larges t brewer in the world. It is one of the leading brewers in the United States and Canada; the company’s brands include Coors, Molson Canadian, Carling, and Killian’s Irish Red. Molson and Adolph Coors Brewing Company merged in early 2005. In the ﬁnal annual report of Adolph Coors Brewing Company for the year ended December 26, 2004, sales exceeded 32 million barrels (1 U.S. barrel equals 31 gallons). Coors reported $4.3 billion of net sales for 2004. The ﬁrm invests in various entities to carry out its brewing, bottling, and canning activities. The investments take the legal form of partnerships, joint ventures, and limited liability corporations, among other arrangements. The ﬁrm states in its 2004 annual report, issued under the Molson Coors name, that each of these arrangements has been tested to determine whether it qualiﬁes as a VIE. The following excerpt is taken from the ﬁrm’s note on VIEs in its 2004 annual report: Note 3. Variable-Interest Entities. Once an entity is determined to be a VIE, the party with the controlling ﬁnancial interest, the primary beneﬁciary, is required to consolidate it. We have investments in VIEs, of which we are the primary beneﬁciary. Accordingly, we have consolidated three joint ventures in 2004, effective December 29, 2003, the ﬁrst day of 2004. These include Rocky Mountain Metal Container (RMMC), Rocky Mountain Bottle Company (RMBC) and Grolsch (UK) Limited (Grolsch). The impacts to our balance sheet include the addition of net ﬁxed assets of RMMC and RMBC totaling approximately $65 million, RMMC debt of approximately $40 million, and Grolsch net in tangibles of approximately $20 million (at current exchange rates). The most signiﬁcant impact to our cash ﬂow statement for the year ended December 26, 2004, was to increase depreciation expense by approximately $13.2 million and cash recognized on initial consolidation of the entities of $20.8 million. Our partners’ share of the operating results of the ventures is eliminated in the minority interests’ line of the Consolidated Statements of Income. Molson Coors also provides additional information in its annual report on each of the consolidated joint ventures, as follows: 1. RMBC is a joint venture with Owens-Brockway Glass Container, Inc., in which we hold a50% interest. RMBC produces glass bottles at a glass-manufacturing facility for use at the Golden, Colorado brewery. Under this agreement, RMBC supplies our bottle requirements and Owens-Brockway has a contract to supply the majority of our bottle requirements not met by RMBC. In 2003 and 2002, the ﬁrm’s share of pretax joint venture proﬁts for the venture, totaling $7.8 milli on and $13.2 million, respectively, was included in cost of goods sold on the consolidated income statement. 2. RMMC, a Colorado limited liability company, is a joint venture with Ball Corporation in which we hold a 50% interest. RMMC supplies the ﬁrm with substantially all the cans for our Golden, Colorado brewery. RMMC manufactures the cans at our manufacturing facilities, which RMMC operates under a use and license agreement. In 2003 and 2002,the ﬁrm’s share of pretax joint venture proﬁts (losses), totaling $0.1 million and ($0.6)million, respectively, was included in cost of goods sold on the consolidated income statement. As stated previously, on consolidation of RMM C, debt o f ap proximately$40 million was added to the balance sheet. As of December 26, 2004, Coors is the guarantor of this debt. 3. Grolsch is a joint venture between CBL and Royal Grolsch N.V. in which we hold a 49%interest. The Grolsch joint venture markets Grolsch branded beer in the United Kingdom and the Republic of Ireland. The majority of the Grolsch branded beer is produced by CBL under a contract brewing arrangement with the joint venture. CBL and Royal Grolsch N.V. sell beer to the joint venture, which sells the beer back to CBL (for onward sale to customers) for a price equal to what it paid plus a marketing and overhead charge and a proﬁt margin. In 2003 and 2002, the ﬁrm’s share of pretax proﬁts for this venture, totaling $3.6 million and $2.0 million, respectively, was included in cost of goods sold on the consolidated income statement. As stated previously, on consolidation, net ﬁxed assets of approximately $4 million and net intangibles of approximately $20 million were added to our balance sheet. REQUIRED a. Describe the operational purpose of the three VIEs consolidated by Molson Coors. b. Molson Coors is the primary beneﬁciary for three investments that the ﬁrm identiﬁed as VIEs. What criteria did Molson Coors apply to determine that the ﬁrm is the primary beneﬁciary for these three investments? c. For each investment, Molson Coors reports the income statement impact as a reduction of cost of goods sold on the consolidated income statement. What is the rationale for reporting the impact this way on the income statement? d. The ﬁrm states, ‘‘Our partners share of the operating results of the ventures is eliminated in the minority interests’ line of the Consolidated Statements of Income.’’ Deﬁne minority interests as it appears on the income statement. Discuss why Molson Coors subtracts it to calculate consolidated net income. e. RMBC, RMMC, and Grolsch are consolidated with the ﬁnancial statements of Molson Coors because the three investments qualify as VIEs as deﬁned in Interpretation No. 46and the ﬁrm determined that it is the primary beneﬁciary for the investments. Explain what reporting technique Molson Coors would use to account for the investments if, in fact, they did not qualify as VIEs. What would be the impact on the balance sheet? What would be the impact on the income statement? What would be the impact on the statement of cash ﬂows? f. The ﬁrm reports that the depreciation expense on the statement of cash ﬂows for 2004increased by approximately $13.2 million as a result of consolidating the VIEs. Why did consolidating the VIEs increase depreciation expense? INTEGRATIVECASE 8.1 Walmart Walmart makes signiﬁcant investments in operating capacity, primarily via investments in prop-erty, plant, and equipment, but al so via investments in wholly and partially owned subsidiaries. Walmart also has signiﬁcant non-U.S. operations in its Walmart International segment. The Chapter 8 online appendix provides Walmart’s January 31, 2016, Consolidated Financial Statements and accompanying notes, which describe these signiﬁcant investments. REQUIRED a. Estimate the average total estimated useful life of depreciable property, plant, and equipment. Does the estimate reconcile with stated accounting policy on useful lives for property, plant, and equipment? Explain. b. How should an analyst interprets ﬂuctuations in this estimate for a given company overtime? How should an analyst interpret differences in this estimate between a company and its competitors? c. Estimate the average age of depreciable assets, the percentage of PP&E that has been used up, and the remaining useful life. How might an analyst use this information? d. Has Walmart recognized impairment of property, plant, and equipment or goodwill during the ﬁscal year ending January 31, 2016? Why is it important for the analyst to know the answer to this question? e. Under U.S. GAAP, the impairment tests for goodwill and PP&E are different. Describe the main difference. f. Walmart must consolidate subsidiaries that are partially owned. Evidence of this fact can be found in the income statement, the balance sheet, and the statement of cash ﬂows, where noncontrolling interests in net income, noncontrolling interest in net assets, and cash ﬂows related to noncontrolling interests are referenced. Explain the meaning of the noncontrolling interest in net income and the noncontrolling interest in net assets. g. Generally speaking, ﬁrms, including ﬁrms that are partially owned subsidiaries, pay out only a portion of their net income during a period (i.e., the dividend payout ratio is generally less than one). The January 31, 2016, balance sheet reports a decrease in noncontrolling interest in net assets. Do other statements (and note information) provide evidence as to what might have happened? h. What was the gain or loss from foreign currency translation for the year ended January31, 2016? Where is it reported, and what is the rationale for reporting it there? i. What happened to foreign exchange rates during the year? 9.14 Income Recognition for Various Types of Businesses. Discuss when each of the following types of businesses is likely to recognize revenues and expenses. a. A bank lends money for home mortgages. b. A travel agency books hotels, transportation, and similar services for customers and earns a commission from the providers of these services. c. A major league baseball team sells season tickets before the season begins and signs its players to multiyear contracts. These contracts typically defer the payment of a significant portion of the compensation provided by the contract until the player retires. d. A producer of ﬁne whiskey ages the whiskey 12 years before sale. e. A timber-growing ﬁrm contracts to sell all timber in a particular tract when it reaches 20years of age. Each year it harvests another tract. The price per board foot of timber equals the market price when the customer signs the purchase contract plus 10% foreach year until harvest. f. An airline provides transportation services to customers. Each ﬂight grants frequent-ﬂier miles to customers. Customers earn a free ﬂight when they accumulate sufﬁcient frequent ﬂier miles. 9.20 LIFO and FIFO Cost-Flow Assumptions for Inventory. A large manufacturer of truck and car tires recently changed its cost-ﬂow assumption method for inventories at the beginning of 2017. The manufacturer has been in operation for almost 40 years, and for the last decade it has reported moderate growth in revenues. The ﬁrm changed from the LIFO method to the FIFO method and reported the following information (amounts in millions): December 31 2016 2017 Inventories at FIFO cost $ 788.1 $ 861.7 Excess of FI FO cost over LIFO cost (429.0) (452.4) Cost of goods sold (FIFO) — 4,150.8 Cost of goods sold (LIFO) — 4,417.1 REQUIRED Calculate the inventory turnover ratio for 2017 using the LIFO and FIFO cost-ﬂow assumption methods. Explain why the costs assigned to inventory under LIFO at the end of 2016 and 2017are so much less than they are under FIFO.