Question & Answer

In what order are the loss limitation rules applied to limit partners’ losses from partnerships?

conducting year-end inventory counts, your audit team is debating the impact of the client’s right of return policy both on inventory valuation and revenue recognition. The assistant controller argues that there is no need to worry about the return policies since they have not changed in a while. The audit senior wants a more authoritative answer and has asked you to conduct some research of the authoritative literature before she presses the point with the client. Instructions If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses. (a) What is the authoritative guidance for revenue recognition when right of return exists? (b) When is this guidance important for a company? (c) Sales with high rates of return can ultimately cause inventory to be misstated. Why are returns allowed? Should different industries be able to make different types of return policies? (d) In what situations would a reasonable estimate of returns be difficult to make?

Mike Devereaux Company shows the following entries in its Equipment account for 2015. All amounts are based on historical cost. Equipment 2015 2015 Jan. 1 Balance 134,750 June 30 Cost of equipment sold Aug. 10 Purchases 32,000 (purchased prior 12 Freight on equipment to 2015) 23,000 purchased 700 25 Installation costs 2,700 Nov. 10 Repairs 500 Instructions (a) Prepare any correcting entries necessary. (b) Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2015 under each of the methods listed below. Assume an estimated life of 10 years, with no salvage value. The machinery included in the January 1, 2015, balance was purchased in 2013. (1) Straight-line. (2) Sum-of-the-years’-digits.

List three examples of job cost records you would receive if you were building a new home. (Hint: Itemised bills made out to you are usually job cost records.)

Anne’s marginal income tax rate is 32 percent. She purchases a corporate bond for $10,000 and the maturity, or face value, of the bond is $10,000. If the bond pays 5 percent per year before taxes, what is Anne’s annual after-tax rate of return from the bond if the bond matures in one year? What is her annual after-tax rate of return if the bond matures in 10 years?

On January 1, 2012, a machine was purchased for $90,000. The machine has an estimated salvage value of $6,000 and an estimated useful life of 5 years. The machine can operate for 100,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2012, 20,000 hours; 2013, 25,000 hours; 2014, 15,000 hours; 2015, 30,000 hours; and 2016, 10,000 hours. Instructions (a) Compute the annual depreciation charges over the machine’s life assuming a December 31 year-end for each of the following depreciation methods. (1) Straight-line method. (3) Sum-of-the-years’-digits method. (2) Activity method. (4) Double-declining-balance method. (b) Assume a fiscal year-end of September 30. Compute the annual depreciation charges over the asset’s life applying each of the following methods. (1) Straight-line method. (3) Double-declining-balance method. (2) Sum-of-the-years’-digits method.

Distinguish between counterbalancing and noncounterbalancing errors. Give an example of each.

What is meant by hysteresis when applied to unemployment? How do you account for this phenomenon in the 1980s?

Scatter plot; cost function using regression The following scatter plot and simple regression results used revenue as a potential cost driver for research and development costs. Required (a)          Discuss whether the scatter plot suggests that revenue is a cost driver for research and development costs. (b)          Using the regression results, write the cost function for research and development costs. (c)           Based on the regression results, discuss whether it would be appropriate to use total revenue as a cost driver for research and development costs. (d)          If you use the cost function from part (b) to estimate next month’s research and development costs, what assumptions are you making? Identify at least three assumptions and discuss their reasonableness.

What is the difference between primary and secondary bonding in the structure of materials?

Identify and explain the major steps involved in preparing the statement of cash flows.

In what circumstances is the IRS method for allocating expenses between personal use and rental use for vacation homes more beneficial to a taxpayer than the Tax Court method?

The four axes are the three linear axes: X, Y, and Z; and the rotational axis:

Why is raw material preparation more important in the processing of new ceramics than for traditional ceramics?

Explain why many savings institutions experience financial problems at the same time. (LO3)

Use the information presented in BE7-15 for Horton Corporation. Prepare any entries necessary to make Horton’s accounting records correct and complete.

Wainwright Corporation had the following activities in 2014. 1. Sale of land $180,000. 4. Purchase of equipment $415,000. 2. Purchase of inventory $845,000. 5. Issuance of common stock $320,000. 3. Purchase of treasury stock $72,000. 6. Purchase of available-for-sale securities $59,000. Compute the amount Wainwright should report as net cash provided (used) by investing activities in its 2014 statement of cash flows.

Katherine Irving, controller of Lotan Corp., is aware of a pronouncement on accounting changes. After reading the pronouncement, she is confused about what action should be taken on the following items related to Lotan Corp. for the year 2014. 1. In 2014, Lotan decided to change its policy on accounting for certain marketing costs. Previously, the company had chosen to defer and amortize all marketing costs over at least 5 years because Lotan believed that a return on these expenditures did not occur immediately. Recently, however, the time differential has considerably shortened, and Lotan is now expensing the marketing costs as incurred. 2. In 2014, the company examined its entire policy relating to the depreciation of plant equipment. Plant equipment had normally been depreciated over a 15-year period, but recent experience has indicated that the company was incorrect in its estimates and that the assets should be depreciated over a 20-year period. 3. One division of Lotan Corp., Hawthorne Co., has consistently shown an increasing net income from period to period. On closer examination of its operating statement, it is noted that bad debt expense and inventory obsolescence charges are much lower than in other divisions. In discussing this with the controller of this division, it has been learned that the controller has increased his net income each period by knowingly making low estimates related to the write-off of receivables and inventory. 4. In 2014, the company purchased new machinery that should increase production dramatically. The company has decided to depreciate this machinery on an accelerated basis, even though other machinery is depreciated on a straight-line basis. 5. All equipment sold by Lotan is subject to a 3-year warranty. It has been estimated that the expense ultimately to be incurred on these machines is 1% of sales. In 2014, because of a production breakthrough, it is now estimated that 1/2 of 1% of sales is sufficient. In 2012 and 2013, warranty expense vwas computed as $64,000 and $70,000, respectively. The company now believes that these warranty costs should be reduced by 50%. 6. In 2014, the company decided to change its method of inventory pricing from average-cost to the FIFO method. The effect of this change on prior years is to increase 2012 income by $65,000 and increase 2013 income by $20,000. Instructions Katherine Irving has come to you, as her CPA, for advice about the situations above. Prepare a report, indicating the appropriate accounting treatment that should be given for each of these situations.

What federal income-related taxes are (or might) taxpayers (be) required to pay? In general terms, what is the tax base for each of these other taxes on income?

Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position. (a) The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability. (b) Relevant information only has predictive value, confirmatory value, or both. (c) Information that is a faithful representation is characterized as having predictive or confirmatory value. (d) Comparability pertains only to the reporting of information in a similar manner for different companies. (e) Verifiability is solely an enhancing characteristic for faithful representation. (f) In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities.

Assume that a bank expects to attract most of its funds through short-term CDs and would prefer to use most of its funds to provide long-term loans. How could it follow this strategy and still reduce interest rate risk? (LO3)

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for investments.

Lee is 30 years old and single. Lee paid all the costs of maintaining his household for the entire year. Determine Lee’s filing status in each of the following alternative situations: a. Lee is Ashton’s uncle. Ashton is 15 years old and has gross income of $6,000. Ashton lived in Lee’s home from April 1 through the end of the year. b. Lee is Ashton’s uncle. Ashton is 20 years old, is not a full-time student, and has gross income of $7,000. Ashton lived in Lee’s home from April 1 through the end of the year. c. Lee is Ashton’s uncle. Ashton is 22 years old and was a full-time student from January through April. Ashton’s gross income was $6,000. Ashton lived in Lee’s home from April 1 through the end of the year. d. Lee is Ashton’s cousin. Ashton is 18 years old, has gross income of $3,000, and is not a full-time student. Ashton lived in Lee’s home from April 1 through the end of the year. e. Lee and Ashton are cousins. Ashton is 18 years old, has gross income of $3,000, and is not a full-time student. Ashton lived in Lee’s home for the entire year.

Cost drivers; value chain; strategy; organisational structure Australian fashion designer Sean Ashby commenced his men’s swimwear and clothing business aussieBum in 2001. A keen swimmer and surfer, he was unable to find a good pair of men’s cossies and used his life savings of $20 000 to make a series of prototypes, buy materials and commence manufacturing in Australia. Despite rejection from local retailers who did not see the potential for aussieBum to compete with international brands, Ashby has proven critics wrong. He had no choice but to take his business online, with instant exposure to the international market. It now takes thousands of orders a day.   Since the company’s inception, Ashby says that aussieBum has ‘taken on its own little cult revolution’, with celebrities such as Ewan McGregor, Billy Connolly and David Beckham fans of the aussieBum brand. Even Kylie Minogue’s male dancers wore aussieBum cossies in the film clip for her song ‘Slow’. The marketing thrust behind Ashby’s aussieBum is to live the dream — ‘the dream to be independent and present our gear in a way that gets noticed. We don’t apologise for pushing the boundaries . . . We have a saying at aussieBum — If you doubt yourself, wear something else’.   The company doubled in size every year in its first five years and continued to grow by 20 per cent every quarter. By 2005, aussieBum earned more than $5 million in sales and carried no debt. The aussieBum brand now takes pride of place in stores such as Selfridges in the UK; Brown Thomas in Ireland; La Maison Stores in Canada; Alpha Male in Melrose Drive, Los Angeles; KaDeWa in Germany; as well as others in Spain, The Netherlands, Sweden, Poland and Russia. As well as direct department store sales, aussieBum’s internet retail orders are booming, with aussieBum being distributed to more than 70 countries. It now has over 200 000 consumers ordering direct via its custom built e-commerce site.   Most of the raw materials are sourced from Italy and China. By manufacturing in Australia, aussieBum hopes to promote Australia’s culture and relaxed lifestyle as well as eliminate restrictions that might come with outsourcing production to other countries. Moreover, producing locally (through independent manufacturers) provides flexibility and a reduced timeframe in getting new products to market. With a heavy emphasis on innovative product design, aussieBum pays close attention to the design phase of the product process.   Two recent examples of aussieBum’s flexibility and innovative approach to product development and marketing are worthy of note. First, it was able to capitalise on the consumer backlash against competitor Bonds when that company transferred more of its manufacturing offshore. Ashby estimates that aussieBum’s sales grew by at least 40 per cent as a result. Second, aussieBum was able to achieve continued growth during the global financial crisis. The company continues to avoid debt and own all its assets outright.       Required (a) With reference to the information provided, distinguish between structural and executional cost drivers. (b) Illustrate and describe the industry and organisational value chain in which aussieBum operates. (c) Classify aussieBum’s likely strategy as low cost or product differentiation. Explain. (d) Classify aussieBum’s organisational structure as centralised or decentralised. Explain. (e) With reference to disruptive innovation, do you consider aussieBum to be a disruptor to the traditional garment industry value chain? Discuss why or why not.

Why might pension funds be exposed to interest rate risk? How can pension funds reduce their exposure to interest rate risk? (LO7)