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1. Write out the fundamental accounting equation, and identify the values for the fundamental
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ACCT607                                                                                           Name                                      

Applied Case Assignment #6 (Chapters 9 and 10)

 

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 thefundamental accounting equation for the Company’s 2014 yearend.

(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…)

 

Liabilities = Assets – Shareholder Equity and Shareholder Equity = Assets – 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 currentyear?

 

 

 

 

 

 

  1. (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, in2015)?

 

  1. (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 fordevelopment 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.  Whynot?

 

 

 

 

 

(b)   The attached “Commitments and Contingencies” footnote also indicates that the Company hasbeen 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 beinappropriate?

 

 

 

 

 

 

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 payinterest 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 theissuance of the Series MNotes?

 

 

 

 

 

  1. Record the interest payment and interest expense on April 15 and October 15, 2014. Assumethe

effective interest method, and record your responses to the nearest thousand dollars.

 

April :

 

 

 

 

October 15:

 

 

 

 

  1. Assume that, at the end of 2014, the prevailing market rate for interest obligations similar tothese notes was 4.0%. What would be the approximate net carrying or book value of the notes at the year end?Explain.

 

 

 
 

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              

December 31,

               2013              

 

December 28,

               2012              

REVENUES

 

 

Base management fees

$

672

$                       

621

 

 

$                     

581      

 

Franchise fees

 

745

 

666

 

 

 

607

 

Incentive management fees

 

302

                          256

 

                          232     

 

Owned, leased, and other revenue

 

1,022

 

950

 

 

 

989

 

Cost reimbursements

 

11,055

 

10,291

 

 

 

9,405

 

 

 

13,796

 

12,784

 

 

 

11,814

 

OPERATING COSTS ANDEXPENSES                                                                                                                                                             

 

 

 

 

 

 

 

 

 

Owned, leased, and other-direct

 

775

 

729

 

 

 

785

 

Reimbursed costs

 

11,055

                     10,291

 

                       9,405      

 

Depreciation, amortization, and other

 

148

 

127

 

 

 

102

 

General, administrative, and other

 

659

 

649

 

 

 

582

 

 

 

12,637

 

11,796

 

 

 

10,874

 

OPERATING INCOME

 

1,159

 

988

 

 

 

940

 

Gains and other income

 

8

 

11

 

 

 

42

 

Interest expense

 

(115

)

(120

)

 

 

(137

)

Interest income

 

30

 

23

 

 

 

17

 

Equity in earnings (losses)

 

6

 

(5

)

 

 

(13

)

INCOME BEFORE INCOME TAXES

 

1,088

 

897

 

 

 

849

 

Provision for income taxes

                         (335

)                                  

(271

)    

 

 

(278

)

NET INCOME

$

753

$

626

 

 

$

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.

 

MARRIOTT INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS

Fiscal Years-Ended 2014 and 2013

($ in millions)

 

 

 

ASSETS

 

December 31,

                2014              

 

December 31,

                2013               

 

Currentassets                                                                                                                                                                                                         

Cash and equivalents

$                         104

 

$                         126

Accounts and notes receivable, net

1,100

 

1,081

Current deferred taxes, net

311

 

252

Prepaid expenses

64

 

67

Other

109

 

27

Assets held for sale

233

 

350

 

1,921

 

1,903

Property and equipment, net

1,460

 

1,543

Intangible assets

 

 

 

Contract acquisition costs and other

1,351

 

1,131

Goodwill

894

 

874

 

2,245

 

2,005

Equity and cost method investments

224

 

222

Notes receivable, net

215

 

142

Deferred taxes, net

530

 

647

Other noncurrent assets

270

 

332

 

$                     6,865

 

$                     6,794

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ DEFICIT

 

 

 

Current liabilities

 

 

 

Current portion of long-term debt

$                         324

 

$                             6     

Accounts payable

605

 

557

Accrued payroll and benefits

799

 

817

Liability for guest loyalty programs

677

 

666

Accrued expenses and other

655

 

629

 

3,060

 

2,675

Long-term debt

3,457

 

3,147

Liability for guest loyalty programs

1,657

 

1,475

Other noncurrent liabilities

891

 

912

Shareholders’ deficit

 

 

 

Class A Common Stock

5

 

5

Additional paid-in-capital

2,802

 

2,716

Retained earnings

4,286

 

3,837

Treasury stock, at cost

(9,223)

 

(7,929)

Accumulated other comprehensive loss

                             (70)   

 

(44)

 

(2,200)

 

(1,415)

 

$                     6,865

 

$                     6,794

 

See Notes to Consolidated Financial Statements.

 

MARRIOTT INTERNATIONAL, INC.

[SELECTED] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2 .      SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

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 .

 

7 .      COMMITMENTS ANDCONTINGENCIES

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.

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