Question & Answer

In computing the interest component of pension expense, what interest rates may be used?

For what reasons should the percentage-of-completion method be used over the completed-contract method whenever possible?

(a) In a troubled-debt situation, why might the creditor grant concessions to the debtor? (b) What type of concessions might a creditor grant the debtor in a troubled-debt situation?

Distinguish between FHA and conventional mortgages. (LO1)

How did the repayment of subprime mortgages compare to the repayment of prime mortgages during the credit crisis? (LO5)

Why is it important to be able to determine whether a particular book-tax difference is permanent or temporary?

Juanita is the sole shareholder of Belize Corporation (a calendar-year S corporation).  She is considering revoking the S election.  It is February 1, year 1.  What options does Juanita have for timing the effective date of the S election revocation?

How might expectations of higher prices in the United States affect the demand for loanable funds, the supply of loanable funds, and interest rates in the United States? Offer a logical explanation of why such an impact on interest rates in the United States might spread to other countries. (LO1, LO2)

During the past year, Stacy McGill planted a new vineyard on 150 acres of land that she leases for $30,000 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation. The vineyard will bear no grapes for the first 5 years (1–5). In the next 5 years (6–10), Stacy estimates that the vines will bear grapes that can be sold for $60,000 each year. For the next 20 years (11–30), she expects the harvest will provide annual revenues of $110,000. But during the last 10 years (31–40) of the vineyard’s life, she estimates that revenues will decline to $80,000 per year. During the first 5 years, the annual cost of pruning, fertilizing, and caring for the vineyard is estimated at $9,000; during the years of production, 6–40, these costs will rise to $12,000 per year. The relevant market rate of interest for the entire period is 12%. Assume that all receipts and payments are made at the end of each year. Instructions Dick Button has offered to buy Stacy’s vineyard business by assuming the 40-year lease. On the basis of the current value of the business, what is the minimum price Stacy should accept?

Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program. After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved, answer these questions: (a) What might be the advantages of leasing the assets instead of owning them? (b) What might be the disadvantages of leasing the assets instead of owning them? (c) In what way will the balance sheet be differently affected by leasing the assets as opposed to issuing bonds and purchasing the assets?

How does a turret lathe differ from an engine lathe?

Explain how the value of the dollar affects stock valuations. (LO3)

Under what circumstances will managers want sensitivity analysis results relating to a CVP analysis?

The trial balance of Bellemy Fashion Center contained the following accounts at November 30, the end of the company’s fiscal year.   Adjustment data: 1. Supplies on hand totaled $1,500. 2. Depreciation is $15,000 on the equipment. 3. Interest of $11,000 is accrued on notes payable at November 30. Other data: 1. Salaries expense is 70% selling and 30% administrative. 2. Rent expense and utilities expenses are 80% selling and 20% administrative. 3. $30,000 of notes payable are due for payment next year. 4. Maintenance and repairs expense is 100% administrative. Instructions (a) Journalize the adjusting entries. (b) Prepare an adjusted trial balance. (c) Prepare a multiple-step income statement and retained earnings statement for the year and a classified balance sheet as of November 30, 2014. (d) Journalize the closing entries. (e) Prepare a post-closing trial balance.

(Threshold Concept 2) 1. Would you ever swap things with friends if both of you did not gain? Explain your answer. (Threshold Concept 2) 2. Give one or two examples of involuntary (i.e. compulsory) economic interaction where one side gains but the other loses. (Threshold Concept 3) 1. If global warming affects all of us adversely, why in a purely market economy would individuals and firms continue with activities that contribute towards global warming? (Threshold Concept 3) 2. In what ways do your own consumption patterns adversely affect other people?

What are some of the common examples of the conversion strategy?

How do securities firms facilitate leveraged buyouts? Why are securities firms that are better able to raise funds in the capital markets preferred by corporations that need advice on proposed acquisitions? (LO1)

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.)

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.)

How do shaping and planing differ?

EG Corporation redeemed 200 shares of stock from one of its shareholders in exchange for $200,000. The redemption represented 20 percent of the corporation’s outstanding stock. The redemption was treated as an exchange by the shareholder. By what amount does EG reduce its E&P as a result of the redemption under the following E&P assumptions?

As part of the year-end audit, you are discussing the disclosure checklist with your client. The checklist identifies the items that must be disclosed in a set of GAAP financial statements. The client is surprised by the disclosure item related to accounting policies. Specifically, since the audit report will attest to the statements being prepared in accordance with GAAP, the client questions the accounting policy checklist item. The client has asked you to conduct some research to verify the accounting policy disclosures. 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) In general, what should disclosures of accounting policies encompass? (b) List some examples of the most commonly required disclosures.

The following independent situations relate to inventory accounting. 1. Kim Co. purchased goods with a list price of $175,000, subject to trade discounts of 20% and 10%, with no cash discounts allowable. How much should Kim Co. record as the cost of these goods? 2. Keillor Company’s inventory of $1,100,000 at December 31, 2014, was based on a physical count of goods priced at cost and before any year-end adjustments relating to the following items. (a) Goods shipped from a vendor f.o.b. shipping point on December 24, 2014, at an invoice cost of $69,000 to Keillor Company were received on January 4, 2015. (b) The physical count included $29,000 of goods billed to Sakic Corp. f.o.b. shipping point on December 31, 2014. The carrier picked up these goods on January 3, 2015. What amount should Keillor report as inventory on its balance sheet? 3. Zimmerman Corp. had 1,500 units of part M.O. on hand May 1, 2014, costing $21 each. Purchases of part M.O. during May were as follows. Units Unit Cost May 9 2,000 $22.00 17 3,500 23.00 26 1,000 24.00 4 5 8A physical count on May 31, 2014, shows 2,000 units of part M.O. on hand. Using the FIFO method, what is the cost of part M.O. inventory at May 31, 2014? Using the LIFO method, what is the inventory cost? Using the average-cost method, what is the inventory cost? 4. Ashbrook Company adopted the dollar-value LIFO method on January 1, 2014 (using internal price indexes and multiple pools). The following data are available for inventory pool A for the 2 years following adoption of LIFO. At Base- At Current- Inventory Year Cost Year Cost 1/1/14 $200,000 $200,000 12/31/14 240,000 264,000 12/31/15 256,000 286,720 Computing an internal price index and using the dollar-value LIFO method, at what amount should the inventory be reported at December 31, 2015? 5. Donovan Inc., a retail store chain, had the following information in its general ledger for the year 2015. Merchandise purchased for resale $909,400 Interest on notes payable to vendors 8,700 Purchase returns 16,500 Freight-in 22,000 Freight-out (delivery expense) 17,100 Cash discounts on purchases 6,800 What is Donovan’s inventoriable cost for 2015? Instructions Answer each of the preceding questions about inventories, and explain your answers.ROBLEMS

For each of the following jobs, check through the above list of determinants (excluding the last), and try to decide whether demand would be relatively elastic or inelastic: firefighters; telesales operators; app developers; bus drivers; accountants; farm workers; car workers.

Describe the January effect. (LO3)