Marriott International Inc. (NASDAQ: MAR; Bethesda, MD;

Marriott International Inc. (NASDAQ: MAR; Bethesda, MD; hereafter, “Marriott” or “the Company”) is a worldwide operator, franchisor, and licensor of hotels and timeshare properties under numerous brand names at different price and service points, including the Ritz-Carlton, BVLGARI, and Courtyard by Marriott. The Company became a public company in 1998 when it was “spun off” as a separate entity by the company formerly named “Marriott International, Inc.”
Use the attached  financial statements and selected notes to the financial statements from  Marriott’s 10-K for the year ended December 31, 2014 to answer the following  questions. (You will not need  to supplement with outside sources of company data in order to answer the  questions.)
Write out the fundamental accounting equation, and identify the values for the fundamental accounting equation for the Company’s 2014 year end.
(You’ll notice something unusual about how this equation has balanced.  This question previews one of our topics for next week! For the rest of this  assignment, we’ll focus on liabilities…)

Liabilities  = Assets – Shareholder Equity and Shareholder Equity = Assets – Liabilities.
Compute and evaluate the Company’s current ratio as at December 31, 2014 and 2013. Based on these computations, has liquidity increased or decreased during the current year?

(a) Is the Company’s “Liability for guest loyalty programs” a deferred revenue or an accrued liability? Explain.
 
What percentage of the Company’s total liability for guest loyalty programs is expected to be resolved in the coming fiscal year (that is, in 2015)?

(a) The attached “Commitments and Contingencies” footnote indicates that the Company has a “commitment, with no expiration date, to invest up to $11 million in a joint venture for development of a new property” and that it expects “to fund this commitment in 2015.” Yet, the footnote also indicates that no liability has yet been recorded on the Balance Sheet.  Why not?

The attached “Commitments and Contingencies” footnote also indicates that the Company has been named as a defendant in a lawsuit filed by several former Marriott employees. Yet, no liability has been recorded on the Balance Sheet.  Under what circumstances would this be inappropriate?

The Company’s Long-Term Debt footnote (not attached) includes the following information: In the 2013 third quarter, we issued $350 million aggregate principal amount of 3.4 percent Series M Notes due 2020 (the “Series M Notes”). We received net proceeds of approximately $345 million from the offering, after deducting the underwriting discount and estimated expenses. We pay interest on the Series M Notes on April 15 and October 15 of each year, commencing on April 15, 2014.
These Series M Notes are described as:
Series M  Notes, interest rate of 3.4%, face amount of $350, maturing October 15, 2020  (effective interest rate of 3.6%)

What journal entry would have been recorded in the third quarter of 2013 to record the issuance of the Series M Notes?

Record the interest payment and interest expense on April 15 and October 15, 2014. Assume the
effective interest method, and record your responses to the nearest  thousand dollar
 

April 15:

October 15:

Assume that, at the end of 2014, the prevailing market rate for interest obligations similar to these notes was 4.0%. What would be the approximate net carrying or book value of the notes at the year end? Explain.

EXCERPTS FROM MARRIOTT INTERNATIONAL, INC.’S 10-K FOR THE YEAR ENDED DECEMBER 31, 2014

MARRIOTT INTERNATIONAL, INC.  CONSOLIDATED STATEMENTS OF INCOME

Fiscal Years  2014 , 2013 , and 2012

($  in millions, except per share amounts)

See  Notes to Consolidated Financial Statements.

MARRIOTT INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS

Fiscal  Years-Ended 2014 and 2013

($ in millions)

ASSETS

December 31,

                2014               

December 31,

                2013                

 Current assets                                                                                                                                                                                                        

See  Notes to Consolidated Financial Statements.

MARRIOTT INTERNATIONAL, INC.

[SELECTED]  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2 .      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue  Recognition

Our revenues  include: (1) base management and incentive management fees; (2) franchise fees  (including licensing fees from MVW after the spin-off of $60 million for 2014 ,  $61 million for 2013 and $61 million for 2012 ); (3) revenues from lodging  properties we own or lease; and (4) cost reimbursements. Management fees are  typically composed of a base fee, which is a percentage of the revenues of  hotels, and an incentive fee, which is generally based on hotel profitability.  Franchise fees are typically composed of initial application fees and  continuing royalties generated from our franchise programs, which permit the  hotel owners and operators to use certain of our brand names. Cost  reimbursements include direct and indirect costs that are reimbursed to us by  properties that we manage, franchise, or license.

Rewards  Programs

Marriott  Rewards and The Ritz-Carlton Rewards are our frequent guest loyalty programs.  Program members earn points based on the money they spend at our hotels,  purchases of timeshare interval, fractional ownership, and residential products  and, to a lesser degree, through participation in affiliated partners’  programs, such as those offered by car rental and credit card companies.  Members can redeem points, which we track on their behalf, for stays at most of  our hotels, airline tickets, airline frequent flyer program miles, rental cars,  and a variety of other awards. Points cannot be redeemed for cash. We provide  Marriott Rewards and The Ritz-Carlton Rewards as marketing programs to  participating properties, with the objective of operating the programs on a  break-even basis to us. We sell the points for amounts that we expect will, in  the aggregate, equal the costs of point redemptions and program operating costs  over time.

We defer  revenue we receive from managed, franchised, and Marriott-owned/leased hotels  and program partners. Our management and franchise agreements require that  properties reimburse us currently for the costs of operating the rewards  programs, including marketing, promotion, communication with, and performing  member services for rewards program members. Due to the requirement that  properties reimburse us for program operating costs as incurred, we recognize  the related cost reimbursements revenues from properties for our rewards  programs when we incur and expense such costs. We also recognize the component  of revenue from program partners that corresponds to program maintenance  services when we incur and expense such costs. When points are redeemed we  recognize the amounts we previously deferred as revenue and the corresponding  expense relating to the costs of the awards redeemed.

The recorded  liability related to these programs totaled $2,334 million at year-end 2014 and  $2,141 million at year-end 2013 . We estimate the reasonableness and the value  of the future redemption obligations using statistical formulas that project  timing of future point redemptions based on historical levels, including an  estimate of the “breakage” for points that members will never redeem, and an  estimate of the points that members will eventually redeem. A ten percent  reduction in the estimate of “breakage” would have increased the estimated  year-end 2014 liability by $142 million .

7 .      COMMITMENTS AND CONTINGENCIES

Guarantees

We issue  guarantees to certain lenders and hotel owners, chiefly to obtain long-term  management contracts. The guarantees generally have a stated maximum funding  amount and a term of four to ten years. The terms of guarantees to lenders  generally require us to fund if cash flows from hotel operations are inadequate  to cover annual debt service or to repay the loan at the end of the term […]  Guarantee fundings to lenders and hotel owners are generally recoverable as loans  repayable to us out of future hotel cash flows and/or proceeds from the sale of  hotels […] Our liability at year-end 2014 for guarantees for which we are the  primary obligor is reflected in our Balance Sheet as $4 million of “Accrued  expenses and other” and $51 million of “Other noncurrent liabilities.”

Commitments

In addition to  the guarantees we note in the preceding paragraphs, at year-end 2014, we had  the following commitments outstanding, which are not recorded on our Balance  Sheet:

Legal  Proceedings

On January 19,  2010, several former Marriott employees (the “plaintiffs”) filed a putative  class action complaint against us and the Stock Plan (the “defendants”),  alleging that certain equity awards of deferred bonus stock granted to the  plaintiffs and other current and former employees for fiscal years 1963 through  1989 are subject to vesting requirements under the Employee Retirement Income  Security Act of 1974, as amended (“ERISA”), that are in certain circumstances  more rapid than those set forth in the awards. The action was brought in the  United States District Court for the District of Maryland (Greenbelt Division),  and Dennis Walter Bond Sr. and Michael P. Steigman were the remaining named  plaintiffs. Class certification was denied, and on January 16, 2015, the court

granted Marriott’s motion for  summary judgment and dismissed the case. Plaintiffs have filed a notice of  appeal with the U.S. Court of Appeals for the Fourth Circuit.

In March  2012, the Korea Fair Trade Commission (“KFTC”) obtained documents from two of  our managed hotels in Seoul, Korea in connection with an investigation which we  believe is focused on pricing of hotel services within the Seoul region. Since  then, the KFTC has conducted additional fact-gathering at those two hotels and  also has collected information from another Marriott managed hotel located in  Seoul. We understand that the KFTC also has sought documents from numerous  other hotels in Seoul and other parts of Korea that we do not operate, own or  franchise. We have not yet received a complaint or other legal process. We are  cooperating with this investigation.