Way to go Detroit!

Chrysler has turned its first profit since leaving bankruptcy two years ago. The company reported first-quarter net income of $116 million and revenues of $13.1 billion on Monday. The profit is a milestone in Chrysler’s long road back to health after its 2009 bankruptcy. It last reported a profit in 2007.

Questions:

1. What percentage of revenues is Chrysler’s profit?

2.  According to the article, what factors led to this profit?

3. The U.S. government remains a part owner of Chrysler.  What percentage does it hold?

3. (a) According to the article, Fiat SpA gave Chrysler a vote of confidence when it said it will spend $1.3 billion to raise its stake in the American company. That will increase Fiat’s holdings from 30 percent to 46 percent. Based on this information, how much is Fiat paying for each percent of Chrysler that it buys?

(b) The U.S. government remains a part owner of Chrysler.  What percentage does it hold?

(c) Based on your answer in 3(a) and 3(b), what is the current market value of the U.S. holdings in Chrysler?  

Source:

Durbin, Dee-Ann (2011). Chrysler Posts First Profit Since Bankruptcy, Huffington Post, May 2 (Retrievable online at http://www.huffingtonpost.com/2011/05/02/chrysler-profit_n_856215.html)

The Avandia Disaster

GlaxoSmithKline (GSK)’s $3.4 billion legal charge on the diabetes drug Avandia probably isn’t the last of the costs the company will record against this drug. That means Avandia will probably be a lossmaker for GSK, proving that former CEO Jean-Pierre Garnier 1999 failure to follow up on worries about heart attack deaths associated with Avandia was a strategic disaster for the company, costing it billions in actual dollars and billions more in lost-opportunity dollars. Avandia had only been on the market for one month in 1999 at the time the CEO raised concerns in an email to his staff, yet the drug remained on the market until 2010.

Questions:

1.  What are some examples of opportunity costs this drug had for the company?

2.  Based on the article by Edwards, what types of contingency disclosures do you think the company should disclose for 2011?

3.  According to the 2010 article by Edwards, what settlement was made in July?  How should that be reported in the accounting records?

 Source:
Edwards, J. (2011). How GSK’s CEO Ignored His Own Worries and Wasted $16B on a Failed Diabetes Drug, BNET.com, January 18 (Retrievable online at http://www.bnet.com/blog/drug-business/how-gsk-8217s-ceo-ignored-his-own-worries-and-wasted-16b-on-a-failed-diabetes-drug/7094?tag=mantle_skin;content)

Edwards, J. (2010) Glaxo CEO Worried in Email Over Heart Attacks From Avandia — in 1999, BNET.com, July 13 (Retrievable online at http://www.bnet.com/blog/drug-business/glaxo-ceo-worried-in-email-over-heart-attacks-from-avandia-8212-in-1999/5110?tag=content;drawer-container)

Bad Business through Facebook

A Florida woman who fell behind on her car payments is suing the company she claims has been using Facebook to contact her family members in a campaign to embarrass and intimidate her into paying the debt. Melanie Beacham of St. Petersburg alerted the company, Mark One Financial, had to take a medical leave of absence from her job this summer and that she might fall behind on her monthly $362 car payments. Two months later, Mark One representatives began calling Beacham up to 20 times a day and then contacted her cousin and sister on Facebook to ask them to have Melanie call a phone number that leads to a debt collector.

Questions:

1. What are the arguments that the article says that debt collectors will claim?

2. Did Melanie do the right thing by contacting her car payment company in the first place?

3.  If Mark One Financial did as the article claims, have they violated any laws?  Discuss.

Source:

Bassett, L. (2010). Woman Sues Debt Collectors Over Alleged Facebook Harrassment. Huffington Post, November 17 (Retrieved online at http://www.huffingtonpost.com/2010/11/17/melanie-beacham-sues-debt-collectors-harassment_n_785105.html)

New rules for Debt-Relief Services

Starting this week, for-profit companies marketing debt-relief services over the telephone are prohibited from charging a fee before they settle or reduce a customer’s debt to the Internal Revenue Service, credit card company, or other unsecured debt. The new rule by the Federal Trade Commission covers telemarketers of for-profit debt-relief services, including credit counseling, debt settlement, and debt negotiation services. Nonprofit firms are not affected by the rule.

Questions:
1.  What is this ruling meant to prevent?  Explain this in terms of GAAP recognition of revenue.
2. Under the new ruling, providers’ fees for a single debt must be in proportion to the total fee that would be charged if all of the debts had been settled.  Assume that John Smith has 3 debts enrolled ($150,000, $450,000, and $300,000) and the company agrees to settle the debts for a charge of $1,200 for settling the debt.  When they settle the $450,000 debt according to the new ruling, how much of this fee can they collect?
3. Under the ruling, if a consumer enrolls multiple debts into one debt relief program and the provider bases its fee on the percentage of what the consumer saves as result of using its services, the percentage charged must be the same for each of the consumer’s debts, according to the FTC. Can you think of a possible situation where manipulation of this part of the ruling may be used by debt-relief services to gain greater fees?  If so, how do you think this can be investigated?

Source:
Staff. (2010). FTC rule prohibits debt-relief companies from collecting up-front fees. AccountingWEB, October 27. (Retrievable online at http://www.accountingweb.com/topic/tax/ftc-rule-prohibits-debt-relief-companies-collecting-front-fees)

Robo-Signers Forge The Foreclosure Mess

Bank of America, the nation’s largest bank by assets, is placing a moratorium on all foreclosure proceedings and sales across the United States, according CNBC and a report on The Wall Street Journal’s Web site. The postponement takes effect Saturday, October 9. JPMorgan and Ally’s GMAC Mortgage unit have delayed foreclosures in 23 states where courts have jurisdiction over home seizures.

 
Questions:
1. What is a “hydra?” Why does Dr. Henning say that the foreclosure mess is going to “become a hydra?” What ethical breaches are part of this story?
2. What is a defective title? Who will be sued for this and why?  What are the potential avenues of liability in this crisis?
3. The article mentions civil suits. Do you think there will be criminal court actions also? Is this fraud?
4. How do you think this story came to the media’s attention?

 

Source:

Fisk, M. C., and K. M. Howley. (2010) Why the Foreclosure Mess Could Last for Years. Businessweek, October 8 (Retrievable online at http://msnbc.msn.com/id/39562824/ns/business-real_estate)

Accept Credit Cards at Garage Sales and Bake Sales

Why can’t everyone accept credit cards? Now there is no good reason because the Square Up system eliminates card reading equipment by providing cell phone users with an app that snaps into a headphone jack. The plug is free and you are spared the contracts, the minimums and the monthly fees. For each transaction, Square charges you 2.75 percent of the total, plus 15 cents. Alternatively, you can accept credit card payments without the card itself — over the phone, for example. You just need the card number, expiration date and security code, although these transactions cost you more (3.5 percent).

Questions:

1. Assume that you sold a surfboard on Craigs List to someone who paid you $100 and gave you a credit card. If you swipe the card, how much would you pay to Square for the use of their system?
2. Assume the same facts as in Question 1, except that you do not have the card to swipe, but enter the number, expiration date and security code. How much would you pay for Square to process the transaction?
3. Assume that you sold the surfboard from your small business. What journal entry would you make in Questions 1 & 2?
4. Why do you think that Square has restrictions on deposits over $1,000 for first time users?

Source:
Pogue, D. (2010). A Simple Swipe on a Phone, and You’re Paid, The New York Times, September 30 (Retrieved online at http://www.cnbc.com/id/39438067/)

Mickey D’s in the News: Which story is right?

According to the Wall Street Journal, McDonald’s Corp. has warned federal regulators that it could drop its health insurance plan for nearly 30,000 hourly restaurant workers unless regulators waive a new requirement of the U.S. health overhaul.  However, less than an hour after that release, ABC News  and Reuters reported that McDonald’s and the Obama administration said the claims of the  Wall Street Journal are false, regarding the dropping of its “mini-med” health insurance for hourly workers because of the new health care reform law.

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Question:

1.  Why do you think the stories are so different and why do you think there was such a quick response from McDonalds and the Obama administration?

2.  What is the medical loss ratio in the new legislation?

3. What effects do you think the new legislation will have on the financial statements of companies?

4.  What do you see as the costs and the benefits of this new legislation?

Sources:

 Adamy, J. (2010). McDonald’s May Drop Health Plan, Wall Street Journal, September 30 (Retrieved online at http://online.wsj.com/article/SB10001424052748703431604575522413101063070.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsThird)

Arnall, D. and H. Khan. (2010). McDonald’s Fights Back Against Report It Will Drop Health Care Plan, ABC News, September 30 (Retrieved online at http://abcnews.go.com/Politics/HealthCare/mcdonalds-fights-back-report-drop-health-care-plan/story?id=11764596)

Reuters. (2010). McDonald’s Denies Its Cutting Health Insurance, MSNBC, September 30 (Retrievable online at http://www.cnbc.com/id/39435771)

WSJ Video. (2010). AM Report: McDonald’s May Drop Health Plan, September 30.  (Retrievable online at http://online.wsj.com/public/page/0_0_WP_3001.html?currentPlayingLocation=37&currentlyPlayingCollection=The%20News%20Hub&currentlyPlayingVideoId={088AC31E-1087-428F-AD84-62AA9E6D5EA6})

The Fabulous Fab is Back in the News

Fabrice Tourre, a controversial personality in the Goldman Sachs Group Inc transaction of 2007, asked a judge to throw out a U.S. regulator’s fraud lawsuit against him.  About two and a half months ago, the bank settled its part of the case for $550 million.

In his filing, Tourre asked that the U.S. Securities and Exchange Commission case be dismissed because the 2007 “Abacus” transaction, which involved collateralized debt obligations (CDOs) tied to subprime mortgages, took place outside the United States.

Questions:

1. What are collateralized debt obligations?

2. Where would CDOs appear in the financial statements of the bank that bought them?

3. Do you think he will prevail in his dismissal of the charges?

4.  How do you think the Goldman Sachs Group reported the $550 million settlement in its financial records?  

Source:

Stempel, J. (2010). Goldman’s Tourre says SEC suit should be dismissed, Reuters, September 30 (Retrieved online at http://www.reuters.com/article/idUSTRE68T3L120100930?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28News+%2F+US+%2F+Business+News%29)

Bank of America: It Depends On How You Define Materiality

Bank of America incorrectly classified as much as $10.7 billion in short-term lending and repurchase deals for mortgage securities as sales. This claim surfaced in a May 13 letter to the SEC where the banking corporation alleges that the transactions were immaterial and that it would be beefing up its internal accounting controls.  This letter was sent in response to an SEC request of finance chiefs at about two dozen firms in March, asking whether they employed accounting strategies like Repo 105 used at Lehman Brothers Holdings Inc.

Questions:

1. In the letter, the bank said its incorrect accounting for the six trades wasn’t intentional. “We do not deliberately structure transactions that are economically disadvantageous simply for the purpose of recording a sale or reducing recorded liabilities.” What must their incorrect journal entries have been?

2. Why did the bank include the phrase that “its incorrect accounting for the six trades wasn’t intentional?”

3. What does “end-of-quarter window dressing” mean in terms of this event? What is Repo 105?

4. Do you agree or disagree that this amount is not material enough to disclose? Explain your answer.

Source:

Rebel Traders (2010). Bank Of America (NYSE: BAC) Admits To Hiding Debt, iStock Analysts, July 12 (Retrievable online at http://www.istockanalyst.com/article/viewarticle/articleid/4299094)

Video: Lehman Brothers ‘Accounting Gimmick’: Repo 105 Lehman Hid Assets (Retrievable online at http://www.youtube.com/watch?v=Zb3DLWeHCks)

Staff reporter. (2010). Bank of America Wrongly Classified Transactions, China Daily, July 12 (Retrievable online at http://english.sina.com/business/2010/0711/328707.html)

Bond Rating Under Fire

E-mails and other documents were presented as evidence at a hearing examining the causes of the financial crisis on Capitol Hill on April 23, 2010.  This hearing is part of an 18-month investigation by the Senate Permanent Subcommittee on Investigations, led by Senator Carl Levin. Subcommittee assertions are that the rating agencies were well aware of the risks in the housing market and recklessly used rating models that they knew inflated the grades given to securities.

Questions:

1.  Briefly summarize the level of complexity and problems with Congress to regulate the ratings agencies, as noted by Arturo Cifuentes, former V.P of Moody’s (as shown in the video)?

2. What high profile investment firm was implicated as pressuring the ratings agencies? How do you think Congress can prevent this from happening in the future?

3. In 2007, what percentage of AAA-rated mortgage securities were downgraded to junk status?

Source:

Ellis, Blake. (2010). “How credit watchdogs fueled the financial crisis,” CNN Money.com, April 24 (Retrievable online at http://money.cnn.com/2010/04/23/news/economy/credit_rating_agencies_hearing/index.htm?postversion=2010042411)

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