Question & Answer

Explain how the CAMELS ratings are used. (LO4)

What are some of the limitations of adhesive bonding?

Czeslaw Corporation’s research and development department has an idea for a project it believes will culminate in a new product that would be very profitable for the company. Because the project will be very expensive, the department requests approval from the company’s controller, Jeff Reid. Reid recognizes that corporate profits have been down lately and is hesitant to approve a project that will incur significant expenses that cannot be capitalized due to the requirements of the authoritative literature. He knows that if they hire an outside firm that does the work and obtains a patent for the process, Czeslaw Corporation can purchase the patent from the outside firm and record the expenditure as an asset. Reid knows that the company’s own R&D department is first-rate, and he is confident they can do the work well. Instructions Answer the following questions. (a) Who are the stakeholders in this situation? (b) What are the ethical issues involved? (c) What should Reid do?

Below is the income statement for a British company, Avon Rubber plc. Avon prepares its financial statements in accordance with IFRS.   Instructions (a) Review the Avon Rubber income statement and identify at least three differences between the IFRS income statement and an income statement of a U.S. company as presented in the chapter. (b) Identify any irregular items reported by Avon Rubber. Is the reporting of these irregular items in Avon’s income statement similar to reporting of these items in U.S. companies’ income statements? Explain.

Compute the percentage volumetric contraction of a polyethylene molded part, based on the value of shrinkage given in Table 13.1

Determine the direction of bond prices over the last year and explain the reason for it. (LO1, LO2)

For each of the following citations, identify the type of authority (statutory, administrative, or judicial) and explain the citation.

Explain the use of bond collateral and identify the common types of collateral for bonds. (LO2)

Outline the so-called ‘disposition effect’. Provide an explanation of why it might occur.

How do speculators use put options? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option? (LO3)

1.              : Continue the current policy that leaves it up to the Muslim workers as to when they leave the assembly line to perform their sunset rituals.

Referring to Figure 2.15, use the mid-point formula to calculate the price elasticity of demand between (a) P = 6 and P = 4; (b) P = 4 and P = 2. What do you conclude about the elasticity of a straight-line demand curve as you move down it?

Griseta & Dubel Inc. was formed early this year to sell merchandise credits to merchants who distribute the credits free to their customers. For example, customers can earn additional credits based on the dollars they spend with a merchant (e.g., airlines and hotels). Accounts for accumulating the credits and catalogs illustrating the merchandise for which the credits may be exchanged are maintained online. Centers with inventories of merchandise premiums have been established for redemption of the credits. Merchants may not return unused credits to Griseta & Dubel. The following schedule expresses Griseta & Dubel’s expectations as to percentages of a normal month’s activity that will be attained. For this purpose, a “normal month’s activity” is defined as the level of operations expected when expansion of activities ceases or tapers off to a stable rate. The company expects that this level will be attained in the third year and that sales of credits will average $6,000,000 per month throughout the third year. Actual Merchandise Credit Credit Sales Premium Purchases Redemptions Month Percent Percent Percent 6th 30% 40% 10% 12th 60 60 45 18th 80 80 70 24th 90 90 80 30th 100 100 95 Griseta & Dubel plans to adopt an annual closing date at the end of each 12 months of operation. Instructions (a) Discuss the factors to be considered in determining when revenue should be recognized in measuring the income of a business enterprise. (b) Discuss the accounting alternatives that should be considered by Griseta & Dubel Inc. for the recognition of its revenues and related expenses. (c) For each accounting alternative discussed in (b), give balance sheet accounts that should be used and indicate how each should be classified.

Presented below is information related to Waveland Inc. Cost Retail Inventory, 12/31/14 $250,000 $ 390,000 Purchases 914,500 1,460,000 Purchase returns 60,000 80,000 Purchase discounts 18,000 — Gross sales revenue (after employee discounts) — 1,410,000 Sales returns — 97,500 Markups — 120,000 Markup cancellations — 40,000 Markdowns — 45,000 Markdown cancellations — 20,000 Freight-in 42,000 — Employee discounts granted — 8,000 Loss from breakage (normal) — 4,500 Instructions Assuming that Waveland Inc. uses the conventional retail inventory method, compute the cost of its ending inventory at December 31, 2015.

Cost function using account analysis and high-low method The Elder Clinic, a not-for-profit entity, provides limited medical services to low-income elderly patients. The manager’s summary report for the past four months of operations is reproduced here.     The clinic receives an operating subsidy from the city, but unfortunately, the operating loss that has been incurred through June $(79 392) is larger than anticipated. Part of the problem is the salary increase that went into effect in June, which had been overlooked when the budget was submitted to the city last year. To compound the problem, the cold winter months traditionally bring with them an increase in cold-related health problems. Thus, the clinic is likely to experience an increase in patient visits during July.   The clinic’s managers are considering an increase in patient fees to reduce losses. However, they are reluctant to raise fees because the patients have low incomes. They will raise fees only if it is necessary.   Required (a)          Use your judgement to classify costs as fixed, variable, or mixed. Explain how you classified each item. (b)          Create a cost function for the Elder Clinic. Use the high-low method to estimate the function for any mixed costs. (c)           Use the cost function to estimate July expenses based on a projection of 940 patient visits. (d)          List reasons why management of the Elder Clinic cannot know with certainty what the expenses will be during July. List as many reasons as you can. (e)           Describe the pros and cons of using your cost estimate from part (C) to decide whether to raise patient fees. (f)           The managers need your July cost estimate to decide whether to raise patient fees. Use the information you learned from parts (a) and (b)  to write a memo to the director of the Elder Clinic presenting your estimate of July costs. Provide the director with appropriate information for understanding your methodology and evaluating the reliability of your cost estimate.

Tones Company purchased a warehouse in a downtown district where land values are rapidly increasing. Gerald Carter, controller, and Wilma Ankara, financial vice president, are trying to allocate the cost of the purchase between the land and the building. Noting that depreciation can be taken only on the building, Carter favors placing a very high proportion of the cost on the warehouse itself, thus reducing taxable income and income taxes. Ankara, his supervisor, argues that the allocation should recognize the increasing value of the land, regardless of the depreciation potential of the warehouse. Besides, she says, net income is negatively impacted by additional depreciation and will cause the company’s stock price to go down. Instructions Answer the following questions. (a) What stakeholder interests are in conflict? (b) What ethical issues does Carter face? (c) How should these costs be allocated?

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.

Potomac Corporation wants to sell a warehouse that it has used in its business for 10 years. Potomac is asking $450,000 for the property. The warehouse is subject to a mortgage of $125,000. If Potomac accepts Wyden Inc.’s offer to give Potomac $325,000 in cash and assumes full responsibility for the mortgage on the property, what amount does Potomac realize on the sale?

The Sarbanes-Oxley Act was enacted to combat fraud andcurb poor reporting practices. What are some key provisionsof this legislation?

Ellison Inc., a manufacturer of steel school lockers, plans to purchase a new punch press for use in its manufacturing process. After contacting the appropriate vendors, the purchasing department received differing terms and options from each vendor. The Engineering Department has determined that each vendor’s punch press is substantially identical and each has a useful life of 20 years. In addition, Engineering has estimated that required year-end maintenance costs will be $1,000 per year for the first 5 years, $2,000 per year for the next 10 years, and $3,000 per year for the last 5 years. Following is each vendor’s sale package. Vendor A: $55,000 cash at time of delivery and 10 year-end payments of $18,000 each. Vendor A offers all its customers the right to purchase at the time of sale a separate 20-year maintenance service contract, under which Vendor A will perform all year-end maintenance at a one-time initial cost of $10,000. Vendor B: Forty semiannual payments of $9,500 each, with the first installment due upon delivery. Vendor B will perform all year-end maintenance for the next 20 years at no extra charge. Vendor C: Full cash price of $150,000 will be due upon delivery. Instructions Assuming that both Vendors A and B will be able to perform the required year-end maintenance, that Ellison’s cost of funds is 10%, and the machine will be purchased on January 1, from which vendor should the press be purchased?

{Planning} Alan inherited $100,000 with the stipulation that he “invest it to financially benefit his family.”  Alan and Alice decided they would invest the inheritance to help them accomplish two financial goals: purchasing a Park City vacation home and saving for their son Cooper’s education.     Vacation Home Cooper’s Education Initial Investment $50,000 $50,000 Investment Horizon 5 years 18 years   Alan and Alice have a marginal income tax rate of 30 percent (capital gains rate of 15 percent), and have decided to investigate the following investment opportunities.      5 Years Annual After-Tax Rate of Return 18 Years Annual After-Tax Rate of Return Corporate bonds (ordinary interest taxed annually) 5.75%   4.75%   Dividend-paying stock (no appreciation and dividends are taxed at 15%)   3.50%     3.50%   Growth stock Future Value is $65,000   Future Value is $140,000   Municipal bond (tax-exempt) 3.20%   3.10%     Complete the two annual after-tax rates of return columns for each investment and provide investment recommendations for Alan and Alice.

Adams Inc. will deposit $30,000 in a 12% fund at the end of each year for 8 years beginning December 31, 2014. What amount will be in the fund immediately after the last deposit?

Vedula Advertising Agency was founded by Murali Vedula in January 2009. Presented on the next page are both the adjusted and unadjusted trial balances as of December 31, 2014.   Instructions (a) Journalize the annual adjusting entries that were made. (b) Prepare an income statement and a retained earnings statement for the year ended December 31, and a classified balance sheet at December 31. (c) Identify which accounts should be closed on December 31. (d) If the note has been outstanding 10 months, what is the annual interest rate on that note? (e) If the company paid $10,500 in salaries and wages in 2014, what was the balance in Salaries and Wages Payable on December 31, 2013?

Determine the value of the strain-hardening exponent for a metal that will cause the average flow stress to be 3/4 of the final flow stress after deformation

If a taxpayer has owned a building for 10 years and decides that it should make significant improvements to the building, what is the recovery period for the improvements?