Compute and evaluate the Company’s current ratio as at December 31, 2014 and 2013.

ACCT 607                                                                                          Name                                      

Applied Case Assignment #6 (Chapters 9 and 10)


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.)


  1. Write out the fundamental accounting equation, and identify the values for the fundamental accounting equation for the Company’s 2014 year

(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.




2.      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?







  1. (a) Is the Company’s “Liability for guest loyalty programs” a deferred revenue or an accrued liability? Explain.








(b)   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)?


  1. (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?






(b)   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?







  1. 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,

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%)


(a)    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 dollars.


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?





Fiscal Years 2014 , 2013 , and 2012

($ in millions, except per share amounts)


December 31,


December 31,


  December 28,


Base management fees $ 672 $ 621     $ 581  
Franchise fees   745   666       607  
Incentive management fees   302                           256                             232  
Owned, leased, and other revenue   1,022   950       989  
Cost reimbursements   11,055   10,291       9,405  
    13,796   12,784       11,814  
 OPERATING COSTS AND EXPENSES                                                                                                                                                                              
Owned, leased, and other-direct   775   729       785  
Reimbursed costs   11,055                      10,291                          9,405  
Depreciation, amortization, and other   148   127       102  
General, administrative, and other   659   649       582  
    12,637   11,796       10,874  
OPERATING INCOME   1,159   988       940  
Gains and other income   8   11       42  
Interest expense   (115 ) (120 )     (137 )
Interest income   30   23       17  
Equity in earnings (losses)   6   (5 )     (13 )
INCOME BEFORE INCOME TAXES   1,088   897       849  
Provision for income taxes                          (335 )                                   (271 )         (278 )
NET INCOME $ 753 $ 626     $ 571  
EARNINGS PER SHARE-Basic                  
Earnings per share $ 2.60 $ 2.05     $ 1.77  
EARNINGS PER SHARE-Diluted                  
Earnings per share $ 2.54 $ 2.00     $ 1.72  


See Notes to Consolidated Financial Statements.



Fiscal Years-Ended 2014 and 2013

($ in millions)





December 31,


December 31,



Current assets

Cash and equivalents $                         104   $                         126
Accounts and notes receivable, net 1,100   1,081
Current deferred taxes, net 311   252
Prepaid expenses 64   67
Other 109   27
Assets held for sale 233   350
  1,921   1,903
Property and equipment, net 1,460   1,543
Intangible assets      
Contract acquisition costs and other 1,351   1,131
Goodwill 894   874
  2,245   2,005
Equity and cost method investments 224   222
Notes receivable, net 215   142
Deferred taxes, net 530   647
Other noncurrent assets 270   332
  $                     6,865   $                     6,794
Current liabilities      
Current portion of long-term debt $                         324   $                             6
Accounts payable 605   557
Accrued payroll and benefits 799   817
Liability for guest loyalty programs 677   666
Accrued expenses and other 655   629
  3,060   2,675
Long-term debt 3,457   3,147
Liability for guest loyalty programs 1,657   1,475
Other noncurrent liabilities 891   912
Shareholders’ deficit      
Class A Common Stock 5   5
Additional paid-in-capital 2,802   2,716
Retained earnings 4,286   3,837
Treasury stock, at cost (9,223)   (7,929)
Accumulated other comprehensive loss                              (70)      (44)
  (2,200)   (1,415)
  $                     6,865   $                     6,794


See Notes to Consolidated Financial Statements.






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 .




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.”



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:


A commitment to invest up to $8 million of equity for a non-controlling interest in a partnership that plans to purchase North

American full-service and limited-service properties, or purchase or develop hotel-anchored mixed-use real estate projects. We expect to fund $1 million of this commitment in 2015. We do not expect to fund the remaining $7 million of this commitment, which expires in 2016.

A commitment, with no expiration date, to invest up to $11 million in a joint venture for development of a new property. We expect to fund this commitment in 2015.
Several commitments aggregating $32 million with no expiration date and which we do not expect to fund.


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.

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