The Big Bank of America Settlement

On November 7, 2011, a federal judge gave final approval to a $410 million settlement in a class-action lawsuit affecting more than 13 million Bank of America customers who had debit card overdrafts during the past decade.  The settlement became final a week after Charlotte, N.C.-based Bank of America backed off a plan to charge a $5 monthly fee for debit-card purchases. The outcry prompted other major banks, including JPMorgan Chase & Co. and Wells Fargo & Co., to cancel trial tests of their own debit card fees.

 

Questions:

1.  Although the judge awarded $410 Million in the suit, what percentage did Barry Himmelstein, an attorney for customers, anticipate was the actual amount collected by Bank of America for the overdrafts?

2.   Explain how the suit claimed that Bank of America maximized these fees.  Give an example that includes 5 overdraft incidences.

3.  Make the journal entry for Bank of America for the settlement, including amounts to be paid to the class-action lawyers.

Sources:

Associated Press Staff (2011). Judge Approves $410 Million Settlement of Lawsuit Against Bank of America On Overdraft Fees, Nov. 7 (Retrievable online at http://www.washingtonpost.com/national/judge-mulling-over-410-million-settlement-in-bank-of-america-overdraft-lawsuit/2011/11/07/gIQACKjZuM_story.html)

Youtube video (2011). Bank of America Agrees in Overdraft Fee Lawsuit to Pay $410 Million (Retrievable online at http://www.youtube.com/watch?feature=player_embedded&v=1Ov6QBMStt8)

Slinky: Imitated but never duplicated

Other manufacturers have tried and failed to duplicate the classic toy, which is why every Slinky sold in the world is still made in the U.S.A. It is estimated that more than 250 million Slinky’s have been sold worldwide.

Questions:

1. In which city are Slinky’s made according to the video?
2. How was the Slinky discovered?
3. What year was the company acquired from Betty James? What was the average seniority of the workforce when acquired? Based on this, would you assume that the company had a low or high unemployment tax rate? What effect does employee turnover have on unemployment taxes for employers?
4. Research the Slinky. (see http://inventors.about.com/od/sstartinventions/a/slinky.htm) Why is it considered such an entrepreneurial success story? Where did the name come from? What was the turning point for the company’s success? What was the original investment in the company? If you were recording the original investment, what journal entry would you make for the James Spring & Wire Company?
5. If you assume that the number sold was an equal amount of the total each year since 1945 and the average price was $3, what is the amount of total revenues over the period and annually?

Sources:

Bellis, M. (2011) History of the Slinky Toy, About.com (Retrievable online at http://inventors.about.com/od/sstartinventions/a/slinky.htm)

CNN staff (2011) Slinky: Imitated but Never Duplicated, CNN Money, Nov. 1 (Retrievable online at http://money.cnn.com/video/smallbusiness/2011/11/01/smb_hwgs_slinky.cnnmoney/)

Rhode Island Nearly Broke?

The current general treasurer of Rhode Island, Gina Raimondo, warns that the state will soon be broke due to its debt problems. After decades of drift, denial and inaction, Rhode Island’s $14.8 billion pension system is in crisis. Ten cents of every state tax dollar now goes to retired public workers and that figure will climb perilously toward 20 cents. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent; the real number for the last decade is about 2.4 percent. This article explains some of the challenges facing the state and Ms. Raimondo.

Questions:
1. How many reform plans has Rhode Island tried to institute since 2005 to fix the pension system? Do you agree with Ms. Raimondo’s approach? Why or why not?
2. Who did Ms. Raimondo learn was investigating the state and city finances of Rhode Island, as soon as she was sworn in? Why were they investigating?
3. What do the percentages in the article refer to in terms of the calculations made to calculate pension expenses? How do these changes affect the amount of pension expense?
4. In recent months, Ms. Raimondo has crisscrossed the state trying to sell a different plan that would allow the pensions to survive and avoid additional plans within the next couple of years. What type of pension structure is she trying to save? Explain this structure and whether or not it is the most common type for most companies.
5. The article mentioned that when the board voted to lower the projected long-term investment return assumption to 7.5 percent, the state’s pension shortfall instantly rose to $9 billion from $7 billion. Make the journal entry to show this effect.

Source:
Walsh, M.W. (2011) The Little State With a Big Mess. The New York Times, Oct. 22 (Retrievable online at http://www.nytimes.com/2011/10/23/business/for-rhode-island-the-pension-crisis-is-now.html?src=me&ref=business)

Typos cost businesses money

Websites could be losing millions in online sales because of poor spelling and grammar. This is because Internet users are becoming more wary of scams which are typically riddled with errors and are then reluctant to make purchases on websites. As the BBC reported in July 2011, Charles Duncombe, an Internet entrepreneur based in the United Kingdom, measured the revenue per visitor to the tightsplease.co.uk website and found that the revenue was twice as high after an error was corrected. Typos affect not only online sales, but sizable contracts in all lines of business.
Questions:
1. Which example presented in the article was your favorite?
2. What are typosquatters? Explain how people make money from this concept.
3. What journal entry would Google make for the revenue it makes associated with typosquatters?

Sources:
CNN videos. Typos cost millions in online revenue, Oct. 14 (Retrievable online at www.cnn.com)
Wooten, A. (2011). Million dollar typos cause worldwide losses, Deseret News, Oct. 7 (Retrievable online at http://www.deseretnews.com/article/705392032/Million-dollar-typos-cause-worldwide-losses.html)

“Gettysburg” Debt

Ron Maxwell, the director of two acclaimed Civil War movies, has not repaid a $300,000 loan from 2002 to Washington County Maryland and county officials aren’t happy with the pace of his repayments. The loan, which came with a 4.5 percent annual interest rate, was supposed to be paid off in 2010. However, the Herald-Mail newspaper of Hagerstown, Maryland reports that Maxwell still owes $263,041 in total. Furthermore, Maxwell hasn’t made a payment on the loan since June 2008, county officials told the paper.

Questions:

1. Based on the article, how much interest would Maxwell owe if he paid off the loan by December 31, 2011, assuming that he last paid on the loan on June 1, 2008?

2. Using the information in question 1, assume that Maxwell completely pays off the debt on December 31, 2011.  What journal entry would he make for his production company?

3. How much principal has Maxwell paid on the loan, based on the information in the article?  Based on your answer, how much has he paid annually toward principal, assuming a straight-line basis?

4. Compare your answer in Question 3 to an estimate of what you think he has made on the films since their release. If you were his accountant, does it seem reasonable that he has not paid the loan back yet?  Explain whether this will help or hinder his lawyers’ positions. What do you believe the outcome will be?

5. Do you think the loan is accounted for using the straight-line or effective interest rate method? Why?

 

Source:

Staff. (2011). Film Director owes Washington Co. Hundreds of Thousands, NBC News, Oct. 15 (Retrievable online at http://www.nbcwashington.com/news/local/131920608.html)

YouTube.com Video. Gettysburg And Gods and Generals Trailer. (Retrievable online at http://youtu.be/WFLH6wwGbdE)

New Banking Fees

Customers are frustrated by new controversial fees from banks. However, they are finding out that it is not so easy to disentangle your life from your bank.

Questions:
1. What does the article list as the main reason(s) that customers will stay with a bank, even though they are unhappy about new fees?
2. Which accounts at Bank of America will not carry the new fees? Why do you think those have been chosen?
3. How do you think the banks will record these fees in their general ledger? Give the assumed journal entry.
4. The article said,” Studies commissioned by Fiserv using data from SunTrust and Wachovia in 2007 and 2008 emphasize how online banking and e-bills reduce customer turnover while substantially raising profits per customer.” Does this statement help support or refute the need for increased fees? Discuss your reaction to the video.

Source:
Schwartz, N.D. (2011). Online Banking Keeps Customer on Hook for Fees, The New York Times, Oct. 15 (Retrievable online at http://www.nytimes.com/2011/10/16/business/online-banking-keeps-customers-on-hook-for-fees.html?_r=3&hp)

Food – Beautiful – Food!

Have you ever wondered how restaurant chains get the food to look so good on TV?  This is the work of a micro-niche of advertising.  While you may not know the names of the directors, like your favorite movie, there are five or six major players in this industry that fill the $4 billion in television air time bought by restaurant chains and food conglomerates each year.  Fast-food, casual-dining and pizza chains, as well as what are lumped together as “doughnut and coffee restaurants,” spent $300 million more on TV ads in 2010 than they did in 2007, according to Kantar Media, a market research firm. If patterns hold, the numbers will be even larger this year.  “Generally speaking, restaurant chains spend about 3 percent of revenue on advertising,” says Michael Gallo, an analyst at C. L. King & Associates. “Because these restaurant systems are large and have density, television is an easy way to reach customers in a cost-effective way.”

Questions:

1. Assume you own a drive-in Sonic restaurant that grosses about $250,000 per year.  Based on this article, how much of this would probably go to television advertising of your food?

2.  How did Campbell Soup Company get in trouble with the FTC in the 1970’s regarding food advertisements?  Assume that the fine was $500,000.  How would you as an accountant for Campbell Soup record the journal entry for this fine?

3.  Assume you are a consultant for a restaurant chain.  How would you advise them between the difference of enhancement and fakery if they are trying to film a commercial for a $5.99 pizza? What are some of the issues of concern?

4.  How have the economics of shooting food changed in recent times?

5.  What issue in this article was the most interesting to you?

Sources:

Segal, David (2011) Grilled Chicken, That Temperamental Star, New York Times, Oct. 8 (Retrievable online at http://www.nytimes.com/2011/10/09/business/in-food-commercials-flying-doughnuts-and-big-budgets.html?hp)

 

New York Times video. 2011. (Retrievable online at http://video.nytimes.com/video/2011/10/08/business/100000001098327/steamy-scenes-of-pasta.html)

 

Made in America

More than 60 billion sets of chopsticks are produced every year in China, so you’d have thought they would be making enough. But a chopstick shortage is growing in the Far East, prompting a U.S. company in Georgia to start exporting millions to the country. Georgia Chopsticks is producing an incredible two million sets of the utensils every day, reported the Daily Telegraph.

Questions:
1. What type of woods is the company using to make the chopsticks?
2.  Assume that the company owns its own land with these trees on it and harvests the raw materials for the chopsticks.   Explain how should the company should record the land and account for the trees in its accounting records.
3. If Georgia Chopsticks currently produces 2 million sets of chopsticks a day and wants to export 10 million pairs a day by the end of the year, what percent increase is that in their production?

Source:
Duell, M. (2011).  U.S. exporting millions of chopsticks to China as wood shortage grows in Far East, Mail online, August 4 (Retrievable online at http://www.dailymail.co.uk/news/article-2022211/US-exports-chopsticks-China-Georgia-producing-utensils-wood-shortage-grows.html)

Yahoo video, Georgia Company Exports Chopsticks to China (Retrievable online at http://news.yahoo.com/video/us-15749625/georgia-company-exports-chopsticks-to-china-25959962.html)
 

 

Who’s Next?

The struggling town of Central Falls Rhode Island filed a bankruptcy petition on Monday, August 1. A Boston bankruptcy judge held the first hearing on Wednesday August 3, stressing that the court is in “unchartered waters” as it sorts through the $80 million in unfunded pension and benefits liabilities and a $5 million budget deficit.

Questions:

1. Central Falls filed a Chapter 9 bankruptcy.  What is the difference between Chapter 9 and a Chapter 11 bankruptcy?

2.  The Acting Auditor General of Rhode Island, Dennis Hoyle stated that the “At $2.4 billion, the newly disclosed unfunded liability for other post-employment benefits provided by municipalities overshadows the collective unfunded liability for all locally administered pension plans which now totals $1.9 billion. Based on this statement, explain the term “unfunded liability” in terms of pension accounting.

3.  What is the difference between post-employment benefits and pension plans?

4. Explain unfunded pension benefits, using a journal entry or entries to illustrate your answer.

Sources:

CNN video. (2011). Bankrupt town a “cautionary tale,” August 4 (Retrievable online at www.cnn.com/video)

Johnson, D. (2011). Fiscal Disasters Like Central Falls’ Are Being Replicated In Cities Across The U.S., Business Insider, Aug. 4 (Retrievable online at http://www.businessinsider.com/fiscal-disasters-like-central-falls-are-being-replicated-in-cities-across-the-us-2011-8)

Rubenstein, J. (2011). Central Falls Bankruptcy Triggers CU Ads, Credit Union Times, August 4 (Retrievable online at http://www.cutimes.com/2011/08/04/central-falls-bankruptcy-triggers-cu-ads)

Negotiating Down Student Loans

According to these experts, it is possible that you can negotiate down your student loans. Outstanding student loan debt is a major problem for many graduates. It is possible to negotiate with your creditors and possibly reduce or even eliminate your student loan debt. If you’re not up to the negotiations yourself, you can hire a company to negotiate with creditors on your behalf. However, if you fully intend and have the ability to pay your debt, it’s usually better to contact your creditors yourself. If you reach the stage where you can’t keep up with the repayments, it’s vital that you contact your creditors as soon as possible and explain your situation.

Questions:

1. What are the key issues to consider in the negotiations? What is the difference between consolidation and forgiveness?  From the loaning entity’s point of view, would the accounting be different for these two options?  

2.  What percentage of student loans did these experts indicate were in default?

3.  Which types of student loans did these experts suggest were easier to negotiate?

 

Source:

CNN.com Video. Negotiating Down Student Loans, July 13, 2011

Staff. (2009). Negotiate your Student Debt. Tidbits and Stuff.com, November 4, 2009 (Retrievable online at http://www.tidbitsandstuff.com/money-matters/credit-debt/82-negotiate-your-student-loan-debt/)

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