1. Describe, in your own words, WorldCom\'s financial scandal in 2001? Specifica

Question

1. Describe, in your own words, WorldCom's financial scandal in 2001? Specifically, describe the types of costs that were improperly capitalized at WorldCom. Explain, in your own words, what transactions give rise to these costs. Do these costs meet your definition of assets from requirement 3?

2. In a sworn statement to the Securities and Exchange Commission, WorldCom revealed details of the improperly capitalized amounts in 2001 (in millions): $771 in the first quarter, $610 in the second quarter, $743 in the third quarter, and $931 in the fourth quarter. Assume that WorldCom planned to depreciate these capitalized costs over the midpoint of the range for transmission equipment as disclosed in note 1. Further assume the depreciation begins in the quarter that assets are acquired (or costs are capitalized). Calculate the related depreciation expense for 2001. Prepare the journal entries to record this depreciation.

3. Use your answer from requirement 5 & 6, to determine what WorldCom's net income would have been in 2001 had line costs not been improperly capitalized. Use 35% as an approximation of its income tax rate in your calculations. State any other assumptions you make.

Explanation / Answer

2) Assume depreciation midpoint range is 20 years.

Assume that depreciation begins in the Quarter that assets are acquired.

Journal Entries :-

Qtr. Amount(Million $) months 20 Years(240 Months) Amount(Million$) 1 771 10 240 32.125 2 610 7 240 17.792 3 743 4 240 12.383 4 931 1 240 3.879 3055 66.179

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