Starbucks Corporation
Materiality
If we were investors in this company, we would consider 5% to be material. The company does not seem to have any high risk of fraud or material misstatement, so we are very comfortable with the quality of its financial reporting. A misstatement of 5% or above in any of the significant company accounts, or a combined misstatement of 5% or above for the company accounts as a whole, would require increased investigation and would reduce our confidence in the records. Any misstatement under 5% would be permissible.
Journal Entry
The journal entry for the August 2007 issue of debt at 6.25% interest rate and the interest expense journal entry for 2007 and 2008 related to this debt are as follows:
August 1, 2007 Issue of Debt:
Cash 549,000,000
Senior N/P Discount 1,000,000 Senior Notes Payable 550,000,000
December 31, 2007:
Interest Expense 14,357,084 Interest Payable 14,315,417 (550,000,000 x .0313 x 5/6) Discount 41,667 (50,000 x 5/6)
February 1, 2008:
Interest Payable 14,315,417
Interest Expense 2,872,916 Cash 17,187,500 Discount 8,333 (50,000 x 1/6)
August 1, 2008:
Interest Expense 17,237,500 Cash 17,187,500 Discount 50,000
December 31, 2008:
Interest Expense 14,357,084 Interest Payable 14,315,417 Discount 41,667
3.13% of the Note is Payable in February and August and 5/6th of this expense is accrued at each year-end. It is to be paid at the start of the next February. With no knowledge of the market rate, we amortized the discount evenly over the 20 periods and added the $50,000 to total interest expense for each semi-annual period. Interest payable for each 6-month period (August through January, February through July) is 0.313x550,000 and total interest expense is the payable plus the 50,000 discount amortization. Totals for year-end are the accrued interest expense and discount amortization for 5 months of the 6 month period.
Each ratio we computed for Starbucks, we
If we were investors in this company, we would consider 5% to be material. The company does not seem to have any high risk of fraud or material misstatement, so we are very comfortable with the quality of its financial reporting. A misstatement of 5% or above in any of the significant company accounts, or a combined misstatement of 5% or above for the company accounts as a whole, would require increased investigation and would reduce our confidence in the records. Any misstatement under 5% would be permissible.
Journal Entry
The journal entry for the August 2007 issue of debt at 6.25% interest rate and the interest expense journal entry for 2007 and 2008 related to this debt are as follows:
August 1, 2007 Issue of Debt:
Cash 549,000,000
Senior N/P Discount 1,000,000 Senior Notes Payable 550,000,000
December 31, 2007:
Interest Expense 14,357,084 Interest Payable 14,315,417 (550,000,000 x .0313 x 5/6) Discount 41,667 (50,000 x 5/6)
February 1, 2008:
Interest Payable 14,315,417
Interest Expense 2,872,916 Cash 17,187,500 Discount 8,333 (50,000 x 1/6)
August 1, 2008:
Interest Expense 17,237,500 Cash 17,187,500 Discount 50,000
December 31, 2008:
Interest Expense 14,357,084 Interest Payable 14,315,417 Discount 41,667
3.13% of the Note is Payable in February and August and 5/6th of this expense is accrued at each year-end. It is to be paid at the start of the next February. With no knowledge of the market rate, we amortized the discount evenly over the 20 periods and added the $50,000 to total interest expense for each semi-annual period. Interest payable for each 6-month period (August through January, February through July) is 0.313x550,000 and total interest expense is the payable plus the 50,000 discount amortization. Totals for year-end are the accrued interest expense and discount amortization for 5 months of the 6 month period.
Each ratio we computed for Starbucks, we