Question & Answer

What is meant by “tax allocation within a period”? What is the justification for such practice?

Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services together with the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows. Oven only $ 800 Oven with installation service 850 Oven with maintenance services 975 Oven with installation and maintenance services 1,000 In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $175. Additionally, the incremental amount charged by Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $800. Instructions (a) Assume that a customer purchases an oven with both installation and maintenance services for $1,000. Based on its experience, Appliance Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately. Explain whether the conditions for a multiple-deliverable arrangement exist in this situation. (b) Indicate the amount of revenues that should be allocated to the oven, the installation, and to the maintenance contract.

What kinds of products are produced by blow molding?

Botticelli Inc. was organized in late 2012 to manufacture and sell hosiery. At the end of its fourth year of operation, the company has been fairly successful, as indicated by the following reported net incomes. 2012 $140,000a 2014 $205,000 2013 160,000b 2015 276,000 aIncludes a $10,000 increase because of change in bad debt experience rate. bIncludes extraordinary gain of $30,000. The company has decided to expand operations and has applied for a sizable bank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Botticelli Inc. therefore hired the auditing firm of Check & Doublecheck Co. and has provided the following additional information. 1. In early 2013, Botticelli Inc. changed its estimate from 2% of sales to 1% on the amount of bad debt expense to be charged to operations. Bad debt expense for 2012, if a 1% rate had been used, would have been $10,000. The company therefore restated its net income for 2012. 2. In 2015, the auditor discovered that the company had changed its method of inventory pricing from LIFO to FIFO. The effect on the income statements for the previous years is as follows. 2012 2013 2014 2015 Net income unadjusted—LIFO basis $140,000 $160,000 $205,000 $276,000 Net income unadjusted—FIFO basis 155,000 165,000 215,000 260,000 $ 15,000 $ 5,000 $ 10,000 $ (16,000) 3. In 2015, the auditor discovered that: (a) The company incorrectly overstated the ending inventory (under both LIFO and FIFO) by $14,000 in 2014. (b) A dispute developed in 2013 with the Internal Revenue Service over the deductibility of entertainment expenses. In 2012, the company was not permitted these deductions, but a tax settlement was reached in 2015 that allowed these expenses. As a result of the court’s finding, tax expenses in 2015 were reduced by $60,000. Instructions (a) Indicate how each of these changes or corrections should be handled in the accounting records. (Ignore income tax considerations.) (b) Present comparative income statements for the years 2012 to 2015, starting with income before extraordinary items. (Ignore income tax considerations.)

Matt Schmidt Company’s ledger shows the following balances on December 31, 2014. 7% Preferred stock—$10 par value, outstanding 20,000 shares $ 200,000 Common stock—$100 par value, outstanding 30,000 shares 3,000,000 Retained earnings 630,000 Instructions Assuming that the directors decide to declare total dividends in the amount of $366,000, determine how much each class of stock should receive under each of the conditions stated below. One year’s dividends are in arrears on the preferred stock. (a) The preferred stock is cumulative and fully participating. (b) The preferred stock is noncumulative and nonparticipating. (c) The preferred stock is noncumulative and is participating in distributions in excess of a 10% dividend rate on the common stock.

During 2014, Liselotte Company earned income of $1,500,000 before income taxes and realized a gain of $450,000 on a government-forced condemnation sale of a division plant facility. The income is subject to income taxation at the rate of 34%. The gain on the sale of the plant is taxed at 30%. Proper accounting suggests that the unusual gain be reported as an extraordinary item. Illustrate an appropriate presentation of these items in the income statement.

Campbell’s tax return was audited because they failed to report on their tax return interest they earned.  What IRS audit selection method identified their tax return?

Compare and contrast a retail CD and a negotiable CD. (LO2)

Describe the process of “borrowing at the Federal Reserve.” What rate is charged, and who sets it? Why do banks commonly borrow in the federal funds market rather than through the Federal Reserve? (LO2)

Fred currently earns $9,000 per month. Fred has been offered the chance to transfer for three to five years to an overseas affiliate. His employer is willing to pay Fred $12,000 per month if he accepts the assignment. Assume that the maximum foreign earned income exclusion for next year is $126,500.

On January 30, 2013, a suit was filed against Frazier Corporation under the Environmental Protection Act. On August 6, 2014, Frazier Corporation agreed to settle the action and pay $920,000 in damages to certain current and former employees. How should this settlement be reported in the 2014 financial statements? Discuss.

Performance evaluation and sustainability balanced scorecard Refer to comprehensive example 3 and search online for more details about these disasters. Could a performance measurement system be useful in mitigating disasters such as these? Is there any way management accounting could provide useful early warning signals for senior management operating in large decentralised organisations such as these? (LO4)

What major types of items are reported in the retained earnings statement?

Explain the dilemma faced by banks when determining the optimal amount of capital to hold. A bank’s capital is less than 10 percent of its assets. How do you think this percentage would compare to that of manufacturing corporations? How would you explain this difference? (LO3)

1.       : In zero-based budgeting, every account starts at $0, and every dollar added to the budget is supported by an actual, documented need. Identify the possible advantages of zero-based budgeting.

What is meant by the paradox of aggregates? Of what importance might they be for how we analyse macroeconomic problems?

What is a solid solution in the context of alloys?

Shared bonus pool Sarah Tesar is the lead partner of a medium-sized accounting firm. The eight partners share in an annual bonus pool. The characteristics of the bonus pool system include: • The bonus pool size each year is calculated as 40 per cent of annual profit. • The bonus pool is allocated on the basis of bonus units awarded according to the partners’ performance against target fees generated from new clients. This is meant to reinforce the firm’s strategy of growth through new client acquisition. If the fees target is met, one bonus unit is awarded; if the fees target is exceeded by 10 per cent, two bonus units are awarded; if the fees target is exceeded by 20 per cent, four bonus units are awarded; and if the fees target is exceeded by more than 20 per cent, six bonus units are awarded.   This year the annual profit was $2.2 million and the partner performance according to their fees from new client target was as follows: three partners achieved 10 per cent above target; three other partners achieved 20 per cent above target; and two partners exceeded the target by more than 20 per cent.   Required (a) Calculate: (i) the value of the bonus pool to be shared (ii) the value of one bonus unit (iii) the value of the bonus each manager would receive for the year.   One of the partners, Russell Morris, has sought a meeting with Sarah to discuss the shared bonus pool system. He wrote in an email to Sarah ‘I spend a lot of my time providing our in-house training programs . . . I can’t be out chasing new clients at the same time! Why do we only have one measure for the bonus system?’   (b) How important is the selection of the bonus allocation formula and the measure(s) to be used? (c) In the light of Russell’s email, would you advise Sarah to make any changes to the current system? Explain. (LO4)

Clarence Weatherspoon, a super salesman contemplating retirement on his fifty-fifth birthday, decides to create a fund on an 8% basis that will enable him to withdraw $20,000 per year on June 30, beginning in 2018 and continuing through 2021. To develop this fund, Clarence intends to make equal contributions on June 30 of each of the years 2014–2017. Instructions (a) How much must the balance of the fund equal on June 30, 2017, in order for Clarence Weatherspoon to satisfy his objective? (b) What are each of Clarence’s contributions to the fund?

Briefly describe the Glass-Steagall Act, and then explain how the related regulations have changed since it was enacted. (LO2)

In the past several years, Shakira had loaned money to Shakira Inc. (an S corporation) to help the corporation keep afloat in a downturn.  Her stock basis in the S corporation is now $0, and she has deducted $40,000 in losses, reducing her debt basis from $100,000 to $60,000.  Things appear to be turning around this year, and Shakira Inc. repaid Shakira $20,000 of the $100,000 outstanding loan.  What is Shakira’s income, if any, on the partial loan repayment?

What is meant by the terms elements and items as they relate to the income statement? Why might items have to be disclosed in the income statement?

Vandross Company has recorded bad debt expense in the past at a rate of 1½% of net sales. In 2014, Vandross decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $380,000 instead of $285,000. In 2014, bad debt expense will be $120,000 instead of $90,000. If Vandross’s tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

Explain how the Sarbanes-Oxley Act improved the transparency of banks. Why might the act have a negative impact on some banks? (LO2)

Explain why Fannie Mae and Freddie Mac experienced mortgage problems during the credit crisis. (LO5)