Question & Answer

1.       : Which of the four components of emotional intelligence do you consider most important to an effective manager in today’s world? Why?

What is an operating agreement for an LLC? Are operating agreements required for limited liability companies? If not, why might it be important to have one?

Explain how a pension fund’s governance of corporations can help to enhance the performance of the pension fund. (LO2)

Explain how accountants and managers decide which cost variances to monitor.

Assume that stocks in the United Kingdom become very attractive to U.S. investors. How could this affect the value of the British pound? Explain. (LO2)

Timpanogos Inc. is an accrual-method, calendar-year corporation. For 2024, it reported financial statement income after taxes of $1,342,000. Timpanogos provided the following information relating to its 2024 activities:   Life insurance proceeds as a result of CEO’s death $200,000   Revenue from sales (for book and tax purposes) 2,000,000   Cost of goods sold for book and tax purposes   300,000   Premiums paid on the key-person life insurance policies (the policies have no cash surrender value)     21,000   Charitable contributions     180,000   Interest income on tax-exempt bonds    40,000   Interest paid on loan obtained to purchase tax-exempt bonds     45,000   Rental income payments received and earned in 2024     15,000   Rental income payments received in 2023 but earned in 2024     10,000     Rental income payments received in 2024 but not earned by year-end    30,000   Tax depreciation    55,000   Book Depreciation    25,000   Net capital loss    42,000   Federal income tax expense for books 310,000       Required:  a. Reconcile book income to taxable income for Timpanogos Inc. Be sure to start with book income and identify all of the adjustments necessary to arrive at taxable income. b. Identify each book-tax difference as either permanent or temporary. c. Complete Schedule M-1 for Timpanogos. d. Compute Timpanogos, Inc.’s tax liability.

The U.S. government intervened to resolve problems in the mortgage markets during the credit crisis. Summarize the advantages and disadvantages of the government intervention during the credit crisis. Should the government intervene when mortgage market conditions are very weak? (LO5)

The following are Sullivan Corp.’s comparative balance sheet accounts at December 31, 2014 and 2013, with a column showing the increase (decrease) from 2013 to 2014. COMPARATIVE BALANCE SHEETS Increase 2014 2013 (Decrease) Cash $ 815,000 $ 700,000 $115,000 Accounts receivable 1,128,000 1,168,000 (40,000) Inventory 1,850,000 1,715,000 135,000 Property, plant, and equipment 3,307,000 2,967,000 340,000 Accumulated depreciation (1,165,000) (1,040,000) (125,000) Investment in Myers Co. 310,000 275,000 35,000 Loan receivable 250,000 — 250,000 Total assets $6,495,000 $5,785,000 $710,000 Accounts payable $1,015,000 $ 955,000 $ 60,000 Income taxes payable 30,000 50,000 (20,000) Dividends payable 80,000 100,000 (20,000) Lease liability 400,000 — 400,000 Common stock, $1 par 500,000 500,000 — Paid-in capital in excess of par—common stock 1,500,000 1,500,000 — Retained earnings 2,970,000 2,680,000 290,000 Total liabilities and stockholders’ equity $6,495,000 $5,785,000 $710,000 Additional information: 1. On December 31, 2013, Sullivan acquired 25% of Myers Co.’s common stock for $275,000. On that date, the carrying value of Myers’s assets and liabilities, which approximated their fair values, was $1,100,000. Myers reported income of $140,000 for the year ended December 31, 2014. No dividend was paid on Myers’s common stock during the year. 2. During 2014, Sullivan loaned $300,000 to TLC Co., an unrelated company. TLC made the first semiannual principal repayment of $50,000, plus interest at 10%, on December 31, 2014. 3. On January 2, 2014, Sullivan sold equipment costing $60,000, with a carrying amount of $38,000, for $40,000 cash. 4. On December 31, 2014, Sullivan entered into a capital lease for an office building. The present value of the annual rental payments is $400,000, which equals the fair value of the building. Sullivan made the first rental payment of $60,000 when due on January 2, 2015. 5. Net income for 2014 was $370,000. 6. Sullivan declared and paid the following cash dividends for 2014 and 2013. 2014 2013 Declared December 15, 2014 December 15, 2013 Paid February 28, 2015 February 28, 2014 Amount $80,000 $100,000 Instructions Prepare a statement of cash flows for Sullivan Corp. for the year ended December 31, 2014, using the indirect method.

Compare and contrast the similarities and differences between like-kind exchanges and involuntary conversions for tax purposes.

You have completed the field work in connection with your audit of Alexander Corporation for the year ended December 31, 2014. The balance sheet accounts at the beginning and end of the year are shown below. Increase Dec. 31, Dec. 31, or 2014 2013 (Decrease) Cash $ 277,900 $ 298,000 ($20,100) Accounts receivable 469,424 353,000 116,424 Inventory 741,700 610,000 131,700 Prepaid expenses 12,000 8,000 4,000 Investment in subsidiary 110,500 –0– 110,500 Cash surrender value of life insurance 2,304 1,800 504 Machinery 207,000 190,000 17,000 Buildings 535,200 407,900 127,300 Land 52,500 52,500 –0– Patents 69,000 64,000 5,000 Copyrights 40,000 50,000 (10,000) Bond discount and issue costs 4,502 –0– 4,502 $2,522,030 $2,035,200 $486,830 Income taxes payable $ 90,250 $ 79,600 $ 10,650 Accounts payable 299,280 280,000 19,280 Dividends payable 70,000 –0– 70,000 Bonds payable—8% 125,000 –0– 125,000 Bonds payable—12% –0– 100,000 (100,000) Allowance for doubtful accounts 35,300 40,000 (4,700) Accumulated depreciation—buildings 424,000 400,000 24,000 Accumulated depreciation—machinery 173,000 130,000 43,000 Premium on bonds payable –0– 2,400 (2,400) Common stock—no par 1,176,200 1,453,200 (277,000) Paid-in capital in excess of par—common stock 109,000 –0– 109,000 Retained earnings—unappropriated 20,000 (450,000) 470,000 $2,522,030 $2,035,200 $486,830 STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2014 January 1, 2014 Balance (defi cit) $(450,000) March 31, 2014 Net income for fi rst quarter of 2014 25,000 April 1, 2014 Transfer from paid-in capital 425,000 Balance –0– December 31, 2014 Net income for last three quarters of 2014 90,000 Dividend declared—payable January 21, 2015 (70,000) Balance $ 20,000 Your working papers from the audit contain the following information: 1. On April 1, 2014, the existing deficit was written off against paid-in capital created by reducing the stated value of the no-par stock. 2. On November 1, 2014, 29,600 shares of no-par stock were sold for $257,000. The board of directors voted to regard $5 per share as stated capital. 3. A patent was purchased for $15,000. 4. During the year, machinery that had a cost basis of $16,400 and on which there was accumulated depreciation of $5,200 was sold for $9,000. No other plant assets were sold during the year. 5. The 12%, 20-year bonds were dated and issued on January 2, 2002. Interest was payable on June 30 and December 31. They were sold originally at 106. These bonds were redeemed at 100.9 plus accrued interest on March 31, 2014. 6. The 8%, 40-year bonds were dated January 1, 2014, and were sold on March 31 at 97 plus accrued interest. Interest is payable semiannually on June 30 and December 31. Expense of issuance was $839. 7. Alexander Corporation acquired 70% control in Crimson Company on January 2, 2014, for $100,000. The income statement of Crimson Company for 2014 shows a net income of $15,000. 8. Extraordinary repairs to buildings of $7,200 were charged to Accumulated Depreciation—Buildings. 9. Interest paid in 2014 was $10,500 and income taxes paid were $34,000. Instructions From the information given, prepare a statement of cash flows using the indirect method. A worksheet is not necessary, but the principal computations should be supported by schedules or general ledger accounts. The company uses straight-line amortization for bond interest.

Why do firms engage in IPOs? What is the amount of the fees that the lead underwriter and its syndicate charge a firm that is going public? Why are there many IPOs in some periods and few IPOs in other periods? (LO3)

Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2013, had the following balances. Land $ 300,000 Land improvements 140,000 Buildings 1,100,000 Equipment 960,000 During 2014, the following transactions occurred. 1. A tract of land was acquired for $150,000 as a potential future building site. 2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo’s common stock. On the acquisition date, Lobo’s stock had a closing market price of $37 per share on a national stock exchange. The plant facility was carried on Mendota’s books at $110,000 for land and $320,000 for the building at the exchange date. Current appraised values for the land and building, respectively, are $230,000 and $690,000. 3. Items of machinery and equipment were purchased at a total cost of $400,000. Additional costs were incurred as follows. Freight and unloading $13,000 Sales taxes 20,000 Installation 26,000 4. Expenditures totaling $95,000 were made for new parking lots, streets, and sidewalks at the corporation’s various plant locations. These expenditures had an estimated useful life of 15 years. 5. A machine costing $80,000 on January 1, 2006, was scrapped on June 30, 2014. Double-decliningbalance depreciation has been recorded on the basis of a 10-year life. 6. A machine was sold for $20,000 on July 1, 2014. Original cost of the machine was $44,000 on January 1, 2011, and it was depreciated on the straight-line basis over an estimated useful life of 7 years and a salvage value of $2,000. Instructions (Round to the nearest dollar.) (a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2014. Land Buildings Land Improvements Equipment (Hint: Disregard the related accumulated depreciation accounts.) (b) List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo’s financial statements.

Compare and contrast the basis of property acquired via purchase, conversion from personal use to business or rental use, tax-deferred exchange, gift, and inheritance.

Kathleen Battle says, “Retained earnings should be reported as an asset, since it is earnings which are reinvested in the business.” How would you respond to Battle?

Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc. Instructions In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles. (a) The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made. Miscellaneous Expense 29,000 Cash 29,000 (b) Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value. Inventory 70,000 Sales Revenue 70,000 (c) The company is being sued for $500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry. Loss from Lawsuit 500,000 Liability for Lawsuit 500,000 (d) Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a $16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made. Depreciation Expense 16,000 Accumulated Depreciation—Equipment 16,000 (e) Gonzales, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at $800,000 was written off as follows. Retained Earnings 800,000 Goodwill 800,000 (f) Because of a “fire sale,” equipment obviously worth $200,000 was acquired at a cost of $155,000. The following entry was made. Equipment 200,000 Cash 155,000 Sales Revenue 45,000

What requirements do an abandoned spouse and qualifying widow or widower have in common?

1.    : What strategic plans could the college or university at which you are taking this management course adopt to compete for students in the marketplace? Would these plans depend on the school’s goals?

Dagwood Inc. recently noted that its 4% preferred stock and 4% participating preferred stock, which are both cumulative, have priority as to dividends up to 4% of their par value. Its participating preferred stock participates equally with the common stock in any dividends in excess of 4%. What is meant by the term participating? Cumulative?

How do legal corporations protect shareholders from liability? If you formed a small corporation, would you be able to avoid repaying a bank loan from your community bank if the corporation went bankrupt? Explain.

Ace Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems. In connection with her examination of Ace’s financial statements for the year ended December 31, 2015, Gloria Rodd, CPA, completed field work 2 weeks ago. Ms. Rodd now is evaluating the significance of the following items prior to preparing her auditor’s report. Except as noted, none of these items have been disclosed in the financial statements or notes. Item 1: A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained earnings at the date of the loan agreement was $420,000. From that date through December 31, 2015, net income after taxes has totaled $570,000 and cash dividends have totaled $320,000. On the basis of these data, the staff auditor assigned to this review concluded that there was no retained earnings restriction at December 31, 2015. Item 2: Recently Ace interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were paid regularly through 2014, discontinued for all of 2015 to finance purchase of equipment for the company’s new plant, and resumed in the first quarter of 2016. In the annual report, dividend policy is to be discussed in the president’s letter to stockholders. Item 3: A major electronics firm has introduced a line of products that will compete directly with Ace’s primary line, now being produced in the specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Ace’s line. The competitor announced its new line during the week following completion of field work. Ms. Rodd read the announcement in the newspaper and discussed the situation by telephone with Ace executives. Ace will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but will permit recovery of only a portion of fixed costs. Item 4: The company’s new manufacturing plant building, which cost $2,400,000 and has an estimated life of 25 years, is leased from Wichita National Bank at an annual rental of $600,000. The company is obligated to pay property taxes, insurance, and maintenance. At the conclusion of its 10-year noncancelable lease, the company has the option of purchasing the property for $1. In Ace’s income statement, the rental payment is reported on a separate line. Instructions For each of the above items, discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client. (The cumulative effect of the four items should not be considered.)

1.       : How does relational coordination differ from teams and task forces? Explain your answer.

Sustainability and classification Using the following table, classify each sustainability cost according to their appropriate category (level 1–5).         (LO3 and 4)

Explain a principal-agent relationship and its significance to revenue recognition.

1. What price would the same piece of land sell for if it still earned £1000 rent per year, but if the rate of interest were now (a) 5 per cent; (b) 20 per cent? 2. What does this tell us about the relationship between the price of an asset (like land) and the rate of interest?

A building that was purchased on December 31, 2000, for $2,500,000 was originally estimated to have a life of 50 years with no salvage value at the end of that time. Depreciation has been recorded through 2014. During 2015, an examination of the building by an engineering firm discloses that its estimated useful life is 15 years after 2014. What should be the amount of depreciation for 2015?