# Accounting Mba- Worldcom

803 Words Feb 16th, 2012 4 Pages
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
3. Compute the line cost-to-revenue ratio as reported for quarter 1, 1999 through quarter 1, 2002 from the information in Exhibit 1. Refer to Exhibits 2 and 3, and estimate the revised line cost-to-revenue ratio for each quarter after adjusting for a) the release of accruals, b) the line costs that were capitalized, c) other line cost adjustments not discussed in the case, and d) ‘improper’ and ‘questionable’ adjustments to revenue. What do you observe? Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q3 01 Q4 01

Line Cost
Rev

4116
9001

3927
8944

3887
9186

4011
9989

4092
9978

4152
10193

3867
10047

3351
8872

4108
9720

3730
8910

3745
8966

3156
7583

2.1868 3188

2.2775 66

2.3632 62

2.4904 01

2.4384 16

2.4549 61

2.5981 38

2.6475 68

2.3661 15

2.3887 4

2.3941 26

2.4027 25

- Line adjustments got increasing higher

4. Refer to Exhibits 1 through 3 and estimate revised quarterly statements of operating income for quarter 1, 1999 through quarter 1, 2002. Comment on how the reported and restated amounts differ. - Restated amounts show that accrual releases great drastically from Q2 99 to Q4 2000 - Capitalization began in the following Q1 of 2001 and the capitalization amounts continued to