Essay about Worldcom Capstone

1148 Words Oct 20th, 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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The journal entry to record the related depreciation expense for 2001 is a debit to Depreciation and Amortization Expense for $83,306,819 and a credit to Accumulated Depreciation for the same amount. (See attached schedule.)
g. The improperly capitalized accounts resulted in a depreciation expense of $83,306,819 for 2001. This amount should be subtracted from depreciation expense for the year. However, the total line costs of $3.055 billion should have been expensed as line costs for the year. Since the depreciation should not have been expensed, the use of generally accepted accounting principles results in an additional $2,971,693,181 in expenses for 2001. Operating income would be reduced to $542,306,819. Assuming that Other Income stayed the same, Income before Income taxes, minority interest, and cumulative effect of accounting change would be a net operating loss of ($578,693,181). Applying the 2001 NOL Carryback to 1999 would result in a tax refund of $647,000,000 (rounded). According to 740-20-45-3, “the tax benefit of an operating loss carryforward or carryback (other than for the exceptions related to the carryforwards identified at the end of this paragraph) shall be reported in the same manner as the source of the income or loss in the current year.” Thus, the tax refund results in 2001 adjusted net income of $103,000,000 (rounded). The difference in net income is…

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