Question & Answer

What distinguishes operating from liquidating distributions?

Employees at your company disagree about the accounting for sales returns. The sales manager believes that granting more generous return provisions and allowing customers to order items on a bill and hold basis can give the company a competitive edge and increase sales revenue. The controller cautions that, depending on the terms granted, loose return or bill and hold provisions might lead to non-IFRS revenue recognition. The company CFO would like you to research the issue to provide an authoritative answer. Instructions Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.) (a) What is the authoritative literature addressing revenue recognition when right of return exists? (b) What is meant by “right of return”? “Bill and hold”? (c) When there is a right of return, what conditions must the company meet to recognize the revenue at the time of sale? (d) What factors may impair the ability to make a reasonable estimate of future returns? (e) When goods are sold on a bill and hold basis, what conditions must be met to recognize revenue upon receipt

After securing lease commitments from several major stores, Auer Shopping Center, Inc. was organized and built a shopping center in a growing suburb. The shopping center would have opened on schedule on January 1, 2014, if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2014. All of the additional construction costs that were incurred as a result of the tornado were covered by insurance. In July 2013, in anticipation of the scheduled January opening, a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space, and manage the property. A summary of some of the costs incurred in 2013 and the first nine months of 2014 follows. January 1, 2014 through 2013 September 30, 2014 Interest on mortgage bonds $720,000 $540,000 Cost of obtaining tenants 300,000 360,000 Promotional advertising 540,000 557,000 The promotional advertising campaign was designed to familiarize shoppers with the center. Had it been known in time that the center would not open until October 2014, the 2013 expenditure for promotional advertising would not have been made. The advertising had to be repeated in 2014. All of the tenants who had leased space in the shopping center at the time of the tornado accepted the October occupancy date on condition that the monthly rental charges for the first 9 months of 2014 be canceled. Instructions Explain how each of the costs for 2013 and the first 9 months of 2014 should be treated in the accounts of the shopping center corporation. Give the reasons for each treatment.

Absent any special elections, what effect does a sale of partnership interest have on the partnership?

A fiberglass composite is composed of a matrix of vinyl ester and reinforcing fibers of E-glass. The volume fraction of E-glass is 35%. The remainder is vinyl ester. The density of the vinyl ester is 0.882 g/cm3 , and its modulus of elasticity is 3.60 GPa. The density of E-glass is 2.60 g/cm3 , and its modulus of elasticity is 76.0 GPa. A section of composite 1.00 cm by 50.00 cm by 200.00 cm is fabricated with the E-glass fibers running longitudinal along the 200-cm direction. Assume there are no voids in the composite. Determine the (a) mass of vinyl ester in the section, (b) mass of Eglass fibers in the section, and (c) the density of the composite

An investment newsletter suggests that because the prevailing stock market conditions are subject to much uncertainty, investors should purchase call options on the CBOE volatility index (VIX). Write a short essay on the logic behind how the valuation of VIX is influenced by market uncertainty. Also support or refute the advice provided by the newsletter and offer a strategy for investing in call options on the VIX based on expectations of changes in market uncertainty.

The part in Problem 33.1 is to be fabricated using fused deposition modeling instead of stereolithography. Layer thickness is to be 0.20 mm and the width of the extrudate deposited on the surface of the part = 1.25 mm. The extruder workhead moves in the x-y plane at a speed of 150 mm/s. A delay of 10 s is experienced between each layer to reposition the workhead. Compute an estimate for the time required to build the part.

Write a short essay explaining why there is so much uncertainty surrounding the valuation of a firm that is engaged in an IPO. Why do you think some investors overvalue firms at the time of their IPO?

Go through each of the determinants we have identified so far and show how the respective elasticity of demand makes the problem of traffic congestion a difficult one to tackle.

What is the normal procedure for handling the collection of accounts receivable previously written off using the direct write-off method? The allowance method?

Stock splits and stock dividends may be used by a corporation to change the number of shares of its stock outstanding. (a) What is meant by a stock split effected in the form of a dividend? (b) From an accounting viewpoint, explain how the stock split effected in the form of a dividend differs from an ordinary stock dividend. (c) How should a stock dividend that has been declared but not yet issued be classified in a balance sheet? Why?

Kohlbeck Corporation, a manufacturer of steel products, began operations on October 1, 2013. The accounting department of Kohlbeck has started the fixed-asset and depreciation schedule presented on page 632. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company’s records and personnel. 1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition. 2. Land A and Building A were acquired from a predecessor corporation. Kohlbeck paid $800,000 for the land and building together. At the time of acquisition, the land had an appraised value of $90,000, and the building had an appraised value of $810,000. 3. Land B was acquired on October 2, 2013, in exchange for 2,500 newly issued shares of Kohlbeck’s common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $30 per share. During October 2013, Kohlbeck paid $16,000 to demolish an existing building on this land so it could construct a new building. 4. Construction of Building B on the newly acquired land began on October 1, 2014. By September 30, 2015, Kohlbeck had paid $320,000 of the estimated total construction costs of $450,000. It is estimated that the building will be completed and occupied by July 2016. 5. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair value at $40,000 and the salvage value at $3,000. 6. Machinery A’s total cost of $182,900 includes installation expense of $600 and normal repairs and maintenance of $14,900. Salvage value is estimated at $6,000. Machinery A was sold on February 1, 2015. 7. On October 1, 2014, Machinery B was acquired with a down payment of $5,740 and the remaining payments to be made in 11 annual installments of $6,000 each beginning October 1, 2014. The prevailing interest rate was 8%. The following data were abstracted from present value tables (rounded). Present value of $1.00 at 8% Present value of an ordinary annuity of $1.00 at 8% 10 years .463 10 years 6.710 11 years .429 11 years 7.139 15 years .315 15 years 8.559   Instructions For each numbered item on the schedule above, supply the correct amount. (Round each answer to the nearest

Capulet Company establishes a stock-appreciation rights program that entitles its new president Ben Davis to receive cash for the difference between the market price of the stock and a pre-established price of $30 (also market price) on December 31, 2010, on 30,000 SARs. The date of grant is December 31, 2010, and the required employment (service) period is 4 years. President Davis exercises all of the SARs in 2016. The fair value of the SARs is estimated to be $6 per SAR on December 31, 2011; $9 on December 31, 2012; $15 on December 31, 2013; $6 on December 31, 2014; and $18 on December 31, 2015. Instructions (a) Prepare a 5-year (2011–2015) schedule of compensation expense pertaining to the 30,000 SARs granted president Davis. (b) Prepare the journal entry for compensation expense in 2011, 2014, and 2015 relative to the 30,000 SARs.

Using the data shown on the pie charts in Figure 11.1, construct two Lorenz curves (on the same diagram), corresponding to the before- and after-tax income figures. Interpret and comment on the diagram you have drawn.

The transactions below took place during the year 2014. 1. Convertible bonds payable with a par value of $300,000 were exchanged for unissued common stock with a par value of $300,000. The market price of both types of securities was par. 2. The net income for the year was $410,000. 3. Depreciation expense for the building was $90,000. 4. Some old office equipment was traded in on the purchase of some dissimilar office equipment, and the following entry was made. Equipment 50,000 Accum. Depreciation—Equipment 30,000 Equipment 40,000 Cash 34,000 Gain on Disposal of Plant Assets 6,000 The Gain on Disposal of Plant Assets was credited to current operations as ordinary income. 5. Dividends in the amount of $123,000 were declared. They are payable in January of next year. Instructions Show by journal entries the adjustments that would be made on a worksheet for a statement of cash flows.

If everyone’s incomes rose in line with inflation, would it matter if inflation were 100 per cent or even 1000 per cent per annum?

Tedesco Company changed depreciation methods in 2014 from double-declining-balance to straight-line. Depreciation prior to 2014 under double-declining-balance was $90,000, whereas straight-line depreciation prior to 2014 would have been $50,000. Tedesco’s depreciable assets had a cost of $250,000 with a $40,000 salvage value, and an 8-year remaining useful life at the beginning of 2014. Prepare the 2014 journal entries, if any, related to Tedesco’s depreciable assets.

On January 1, 2013, Dagwood Company purchased at par 12% bonds having a maturity value of $300,000. They are dated January 1, 2013, and mature January 1, 2018, with interest receivable December 31 of each year. The bonds are classified in the held-to-maturity category. Instructions (a) Prepare the journal entry at the date of the bond purchase. (b) Prepare the journal entry to record the interest received for 2013. (c) Prepare the journal entry to record the interest received for 2014.

Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of $10,000. Presented below are three independent cases related to the equipment. (Round to the nearest dollar.) (a) Geddes paid cash for the equipment 8 days after the purchase. The vendor’s credit terms are 2/10, n/30. Assume that equipment purchases are initially recorded gross. (b) Geddes traded in equipment with a book value of $2,000 (initial cost $8,000), and paid $9,500 in cash one month after the purchase. The old equipment could have been sold for $400 at the date of trade. (The exchange has commercial substance.) (c) Geddes gave the vendor a $10,800 zero-interest-bearing note for the equipment on the date of purchase. The note was due in one year and was paid on time. Assume that the effective-interest rate in the market was 9%. Instructions Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.

Relevant information; recommendation Frank owns a caravan and loves to visit national parks with his family. However, the family only takes two one-week trips in the caravan each year. Frank’s wife would rather stay in motels than the caravan. She presented him with the following itemisation of the cost per trip, hoping that he will sell the caravan and use motels instead. Required (a)          What are the relevant costs for deciding whether the family should go on one more camping trip this year? (b)          What are the relevant costs for deciding whether Frank should sell the caravan? Assume the family will take the same vacations but stay in motels if the caravan is sold. (c)           What factors other than costs might influence the decision to sell the caravan? List as many as you can. (d)          Consider your own preferences for this problem. Do you expect Frank’s preferences to be the same as yours? How can you control for your biases and consider this problem from Frank’s point of view? (e)           Frank asks you to help him decide what to do. Do you think he should sell the caravan? Why?             (LO1, 2 and 3)

The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marksand- Spencer-Annual-report-and-financial-statements-2012.pdf. Instructions Refer to M&S’s financial statements and the accompanying notes to answer the following questions. (a) What alternative formats could M&S have adopted for its statement of financial position? Whichformat did it adopt? (b) Identify the various techniques of disclosure M&S might have used to disclose additional pertinentfinancial information. Which technique does it use in its financials? (c) In what classifications are M&S’s investments reported? What valuation basis does M&S use to report its investments? How much working capital did M&S have on 31 March 2012? On 2 April 2011? (d) What were M&S’s cash flows from its operating, investing, and financing activities for 2012? What were its trends in net cash provided by operating activities over the period 2011 to 2012? Explain why the change in accounts payable and in accrued and other liabilities is added to net income to arrive at net cash provided by operating activities. (e) Compute M&S’s (1) current cash debt coverage, (2) cash debt coverage, and (3) free cash flow for 2012. What do these ratios indicate about M&S’s financial conditions?

The common stock of Alexander Hamilton Inc. is currently selling at $120 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $70 per share. Nine million shares are issued and outstanding. Instructions Prepare the necessary journal entries assuming the following. (a) The board votes a 2-for-1 stock split. (b) The board votes a 100% stock dividend. (c) Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.

Ramirez Company has a held-for-collection investment in the 6%, 20-year bonds of Soto Company. The investment was originally purchased for $1,200,000 in 2013. Early in 2014, Ramirez recorded an impairment of $300,000 on the Soto investment, due to Soto’s financial distress. In 2015, Soto returned toprofitability and the Soto investment was no longer impaired. What entry does Ramirez make in 2015 under (a) GAAP and (b) IFRS?

Explain why the failure of Lehman Brothers caused prices on credit default swap contracts to increase. (LO7)

Is it true that a corporation recognizes all gains and losses on liquidating distributions of property to noncorporate shareholders?  Explain.