Worldcom Capstone

1137 Words Oct 9th, 2012 5 Pages
WorldCom Inc. – Capitalized Costs and Earnings Quality

September 12, 2012

Concepts a. (i.) According to FASB Statement of Concepts No. 6, paragraph 25, assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. They represent probable future economic benefits controlled by the enterprise. According to FASB Statement of Concepts No 6, paragraph 80, expenses are outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major, or central, operations. Expenses are gross outflows
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Line costs are fees that WorldCom paid to other telecommunication companies to use their networks for long distance calls. d. WorldCom capitalized $3.8 billion in line cost expenses. These were transactions that involved payment to local telephone companies to use their fiber optic network. These line costs are also called access charges or transport charges and are an operating cost. These costs do not meet the definition of an asset as described in FASB Statement of Concepts No. 6. Telecommunication companies can capitalize the costs and labor of installing lines or cable; however, they should not capitalize fees paid to another company for the use of their lines. e. WorldCom improperly capitalized the line costs as a debit to the asset account Transmission Equipment for $3.055 billion and credit to cash for the same amount. These costs improperly appear on the balance sheet as an asset under the category of Property and Equipment. These costs are incorrectly categorized as a capital expenditure in the investing section of the Statement of Cash Flows.
Analysis
f. The midpoint range for straight-line depreciation of transmission equipment is 22 years. The $771 million capitalized in the first quarter would be depreciated for a full year ($35,045,455). The $610 million in the second quarter would be depreciated for 9/12 of the year ($20,795,455). The $743 million

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