Question & Answer

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

Presented below is information related to Ivan Calderon Corp. for the year 2014. Net sales $1,300,000 Write-off of inventory due to obsolescence $ 80,000 Cost of goods sold 780,000 Depreciation expense omitted by accident in 2013 55,000 Selling expenses 65,000 Casualty loss (extraordinary item) before taxes 50,000 Administrative expenses 48,000 Cash dividends declared 45,000 Dividend revenue 20,000 Retained earnings at December 31, 2013 980,000 Interest revenue 7,000 Effective tax rate of 34% on all items Instructions (a) Prepare a multiple-step income statement for 2014. Assume that 60,000 shares of common stock are outstanding. (b) Prepare a separate retained earnings statement for 2014.

What is the nature of a “sale-leaseback” transaction?

What is a “wash sale”? What is the purpose of the wash sale tax rules?

Suppose in Example 30.3 in the text that the fuel used in the welding operation is MAPP instead of acetylene, and the proportion of heat concentrated in the 9 mm circle is 60% instead of 75 %. Compute (a) rate of heat liberated during combustion, (b) rate of heat transferred to the work surface, and (c) average power density in the circular area.

Explain how the accounting method applied to mortgage-backed securities made it more difficult for banks to satisfy capital requirements during the credit crisis of 2008–2009. (LO2)

Eddie Zambrano Corporation began operations on January 1, 2011. During its first 3 years of operations, Zambrano reported net income and declared dividends as follows. Net Income Dividends Declared 2011 $ 40,000 $ –0– 2012 125,000 50,000 2013 160,000 50,000 The following information relates to 2014. Income before income tax $240,000 Prior period adjustment: understatement of 2012 depreciation expense (before taxes) $ 25,000 Cumulative decrease in income from change in inventory methods (before taxes) $ 35,000 Dividends declared (of this amount, $25,000 will be paid on Jan. 15, 2015) $100,000 Effective tax rate 40% Instructions (a) Prepare a 2014 retained earnings statement for Eddie Zambrano Corporation. (b) Assume Eddie Zambrano Corp. restricted retained earnings in the amount of $70,000 on December 31, 2014. After this action, what would Zambrano report as total retained earnings in its December 31, 2014, balance sheet?

Red Hot Chili Peppers Co. had the following activity in its most recent year of operations. (a) Purchase of equipment. (g) Amortization of intangible assets. (b) Redemption of bonds payable. (h) Purchase of treasury stock. (c) Sale of building. (i) Issuance of bonds for land. (d) Depreciation. (j) Payment of dividends. (e) Exchange of equipment for furniture. (k) Increase in interest receivable on notes receivable. (f) Issuance of capital stock. (l) Pension expense exceeds amount funded. Instructions Classify the items as (1) operating—add to net income; (2) operating—deduct from net income; (3) investing; (4) financing; or (5) significant non-cash investing and financing activities. Use the indirect method.

Potlatch Corporation has issued various types of bonds such as term bonds, income bonds, and debentures. Differentiate between term bonds, mortgage bonds, debenture bonds, income bonds, callable bonds, registered bonds, bearer or coupon bonds, convertible bonds, commodity-backed bonds, and deep discount bonds.

Explain the similarities and dissimilarities between depreciation, amortization, and depletion. Describe the cost recovery method used for each of the four asset types (personal property, real property, intangible property, and natural resources).

How would a redistribution of income to the powerful be likely to affect GNY?

Explain how TARP was expected to help resolve problems during the credit crisis. (LO6)

Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2014. (000 omitted) Net sales revenue $640,000 Costs and expenses Cost of goods sold $500,000 Selling, general, and administrative expenses 66,000 Other, net 17,000 583,000 Income before income tax 57,000 Income tax 19,400 Net income 37,600 Retained earnings at beginning of period, as previously reported 141,000 Adjustment required for correction of error (7,000) Retained earnings at beginning of period, as restated 134,000 Dividends on common stock (12,200) Retained earnings at end of period $159,400 Additional facts are as follows. 1. “Selling, general, and administrative expenses” for 2014 included a charge of $8,500,000 that was usual but infrequently occurring. 2. “Other, net” for 2014 included an extraordinary item (charge) of $6,000,000. If the extraordinary item (charge) had not occurred, income taxes for 2014 would have been $21,400,000 instead of $19,400,000. 3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made). 4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements. Instructions Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)

According to this chapter, have banks been able to insulate themselves against interest rate movements? Explain. (LO3)

Give some examples of supply-side policies that would help to reduce the natural rate of unemployment.

Identify three ways taxpayers can pay their income taxes to the government.

Bobek Inc. has recently reported steadily increasing income. The company reported income of $20,000 in 2011, $25,000 in 2012, and $30,000 in 2013. A number of market analysts have recommended that investors buy the stock because they expect the steady growth in income to continue. Bobek is approaching the end of its fiscal year in 2014, and it again appears to be a good year. However, it has not yet recorded warranty expense. Based on prior experience, this year’s warranty expense should be around $5,000, but some managers have approached the controller to suggest a larger, more conservative warranty expense should be recorded this year. Income before warranty expense is $43,000. Specifically, by recording a $7,000 warranty accrual this year, Bobek could report an increase in income for this year and still be in a position to cover its warranty costs in future years. Instructions (a) What is earnings management? (b) Assume income before warranty expense is $43,000 for both 2014 and 2015 and that total warranty expense over the 2-year period is $10,000. What is the effect of the proposed accounting in 2014? In 2015? (c) What is the appropriate accounting in this situation?

Oregon Bank has branches overseas that concentrate on short-term deposits in dollars and floating-rate loans in British pounds. Because it maintains rate-sensitive assets and liabilities of equal amounts, the bank believes it has essentially eliminated its interest rate risk. Do you agree? Explain. (LO3)

Structuring a compensation plan   Required Describe the factors that need to be considered when structuring a compensation plan for executives. (LO2 and 4)

Virginia Corporation is a calendar-year corporation.  At the beginning of 2024, its election to be taxed as an S corporation became effective.  Virginia Corp.’s balance sheet at the end of 2023 reflected the following assets (it did not have any earnings and profits from its prior years as a C corporation). Asset Adjusted basis FMV Cash $20,000 $20,000 Accounts receivable 40,000 40,000 Inventory 90,000 200,000 Land 150,000 175,000   Totals $300,000 $435,000   In 2024, Virginia Corp. reported business income of $50,000 (this would have been its taxable income if it were still a C corporation). What is Virginia’s built-in gains tax in each of the following alternative scenarios?

On January 1, 2014, Wetzel Company sold property for $250,000. The note will be collected as follows: $120,000 in 2014, $90,000 in 2015, and $40,000 in 2016. The property had cost Wetzel $150,000 when it was purchased in 2012. Instructions (a) Compute the amount of gross profit realized each year, assuming Wetzel uses the cost-recovery method. (b) Compute the amount of gross profit realized each year, assuming Wetzel uses the installment-sales method.

Relative performance evaluation Relative performance evaluation at the company level often results in using a market index like the ASX100 as the peer group.   Required Outline the potential advantages and disadvantages of this practice.             (LO2, 3 and 5)

What is the relationship between current assets and current liabilities?

Recent financial statements of General Mills, Inc. report net sales of $12,442,000,000. Accounts receivable are $912,000,000 at the beginning of the year and $953,000,000 at the end of the year. Compute General Mills’ accounts receivable turnover. Compute General Mills’ average collection period for accounts receivable in days.

What is the purpose of a statement of cash flows? How does it differ from a balance sheet and an income statement?