Accounting Mba- Worldcom
WorldCom
Sunday, November 07, 2010 10:27 PM
The following entries are hypothetical and intended to illustrate the initial recording, and subsequent ‘release’ and ‘capitalization’ of line costs.
a. Prepare a journal entry to record $3,500 million of estimated line costs for quarter 1. DR - Accrued Line cost $3,500
CR - Cash and Cash Equivalents $3,500 b. Assume that you find out in quarter 2 that the prior quarter’s estimate was too large by $100 million. Prepare the necessary journal entry to reflect this new information. What is the effect on pre-tax operating income for quarter 2? DR - Cash and Cash Equivalent $100 CR - Accrued Line cost $100
Pre-tax income for the quarter is higher
c. Now ignore part b above and assume that you find out in quarter 2 that the prior quarter’s estimate was too low by $50 million. Prepare the necessary journal entry to reflect this information. What is the effect on pre-tax operating income for quarter 2?
DR - Accrued Line cost $50
CR - Cash and Cash Equivalent $50
Pre-tax income for the quarter is lower
d. Prepare a journal entry to capitalize $225 million of line costs in quarter 3. What is the effect on pre-tax operating income for quarter 3? DR - Cash and Cash Equivalent $225
CR - Adj Accrued Line cost $225
Pretax income is now $225 Higher
2. WorldCom entered into long-term, fixed-rate leases for network capacity in order to meet the anticipated increase in customer demand. What arguments can be made for capitalizing the long-term capacity agreements made between WorldCom and other telecommunications companies? What facts in the case undermine these arguments? WorldCom page 15 Arguments for capitalization of line costs: (1) It embodies a probable future benefit - World Com obtains revenue from assets it does not own
EMBA 505B - Accoutning Page 1
(2) A particular entity can obtain the benefit and control other 's access to it - WorldCom is controlling assets they do not own
(3) The transaction
Sunday, November 07, 2010 10:27 PM
The following entries are hypothetical and intended to illustrate the initial recording, and subsequent ‘release’ and ‘capitalization’ of line costs.
a. Prepare a journal entry to record $3,500 million of estimated line costs for quarter 1. DR - Accrued Line cost $3,500
CR - Cash and Cash Equivalents $3,500 b. Assume that you find out in quarter 2 that the prior quarter’s estimate was too large by $100 million. Prepare the necessary journal entry to reflect this new information. What is the effect on pre-tax operating income for quarter 2? DR - Cash and Cash Equivalent $100 CR - Accrued Line cost $100
Pre-tax income for the quarter is higher
c. Now ignore part b above and assume that you find out in quarter 2 that the prior quarter’s estimate was too low by $50 million. Prepare the necessary journal entry to reflect this information. What is the effect on pre-tax operating income for quarter 2?
DR - Accrued Line cost $50
CR - Cash and Cash Equivalent $50
Pre-tax income for the quarter is lower
d. Prepare a journal entry to capitalize $225 million of line costs in quarter 3. What is the effect on pre-tax operating income for quarter 3? DR - Cash and Cash Equivalent $225
CR - Adj Accrued Line cost $225
Pretax income is now $225 Higher
2. WorldCom entered into long-term, fixed-rate leases for network capacity in order to meet the anticipated increase in customer demand. What arguments can be made for capitalizing the long-term capacity agreements made between WorldCom and other telecommunications companies? What facts in the case undermine these arguments? WorldCom page 15 Arguments for capitalization of line costs: (1) It embodies a probable future benefit - World Com obtains revenue from assets it does not own
EMBA 505B - Accoutning Page 1
(2) A particular entity can obtain the benefit and control other 's access to it - WorldCom is controlling assets they do not own
(3) The transaction