Question & Answer

The management of Utrillo Instrument Company had concluded, with the concurrence of its independent auditors, that results of operations would be more fairly presented if Utrillo changed its method of pricing inventory from last-in, first-out (LIFO) to averagecost in 2014. Given below is the 5-year summary of income under LIFO and a schedule of what the inventories would be if stated on the average-cost method. UTRILLO INSTRUMENT COMPANY STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED MAY 31 2010 2011 2012 2013 2014 Sales—net $13,964 $15,506 $16,673 $18,221 $18,898 Cost of goods sold Beginning inventory 1,000 1,100 1,000 1,115 1,237 Purchases 13,000 13,900 15,000 15,900 17,100 Ending inventory (1,100) (1,000) (1,115) (1,237) (1,369) Total 12,900 14,000 14,885 15,778 16,968 Gross profi t 1,064 1,506 1,788 2,443 1,930 Administrative expenses 700 763 832 907 989 Income before taxes 364 743 956 1,536 941 Income taxes (50%) 182 372 478 768 471 Net income 182 371 478 768 470 Retained earnings—beginning 1,206 1,388 1,759 2,237 3,005 Retained earnings—ending $ 1,388 $ 1,759 $ 2,237 $ 3,005 $ 3,475 Earnings per share $1.82 $3.71 $4.78 $7.68 $4.70 SCHEDULE OF INVENTORY BALANCES USING AVERAGE-COST METHOD FOR THE YEARS ENDED MAY 31 2009 2010 2011 2012 2013 2014 $1,010 $1,124 $1,101 $1,270 $1,500 $1,720 Instructions Prepare comparative statements for the 5 years, assuming that Utrillo changed its method of inventory pricing to average-cost. Indicate the effects on net income and earnings per share for the years involved. Utrillo Instruments started business in 2009. (All amounts except EPS are rounded up to the nearest dollar.)

DiCenta Corporation reported net income of $270,000 in 2014 and had 50,000 shares of common stock outstanding throughout the year. Also outstanding all year were 5,000 shares of cumulative preferred stock, each convertible into 2 shares of common. The preferred stock pays an annual dividend of $5 per share. DiCenta’s tax rate is 40%. Compute DiCenta’s 2014 diluted earnings per share.

Indicate the proper accounting for the following items. (a) Organization costs. (c) Operating losses. (b) Advertising costs.

Quantity requirements are to be planned for component C2 in product P1. Required deliveries for P1 are given in Table 41.1. Ordering, manufacturing, and assembly lead times are as follows: for P1 and C2, the lead time is one week; and for S1 and M2, the lead time is two weeks. Given the product structure in Figure 41.4, determine the time-phased requirements for M2, C2, and S1 to meet the master schedule for P1. Assume no common use items and all on-hand inventories and scheduled receipts are zero. Use a format similar to Table 41.2 and develop a spreadsheet calculator to solve. Ignore demand for P1 beyond period 10.

If a partner’s outside basis is less than the partnership’s inside basis in distributed assets, how does the partner determine their basis of the distributed assets in an operating distribution?

Equity mutual funds and private equity funds generate returns for their investors in different ways. Which type of fund do you think would be better able to capitalize on a weak, publicly traded firm that has ignored all forms of shareholder activism? (LO1, LO5)

Upland Company borrowed $40,000 on November 1, 2014, by signing a $40,000, 9%, 3-month note. Prepare Upland’s November 1, 2014, entry; the December 31, 2014, annual adjusting entry; and the February 1, 2015, entry

Adjusting data for use with regression; outlier Smeyer Industries is a large entity with more than 40 departments, each employing 35 to 100 persons. Recent experience suggests that the cost function used to estimate overhead in Department IP-14 is no longer appropriate. The current function was developed three years ago. Since then, a number of changes occurred in the facilities and processes used in Department IP-14. The changes happened one at a time. Each time a change was made, the cost accountant felt the change was not major enough to justify calculating a new overhead cost function. Now it is clear that the cumulative effect of the changes has been large. You have been assigned the task to develop a new cost function for overhead in Department IP-14. Initial analysis suggests that the number of direct labour hours is an appropriate cost driver. Departmental records are available for nine months. The records reveal the following information.       An assistant has analysed the data for March through July and made the appropriate adjustments except for the following items (for which the assistant was unsure of the proper treatment).                            (i)              The semi-annual property tax bill for Department IP-14 was paid on June 30. The entire amount of $3,000 was charged to overhead for June.                          (ii)              The costs to install a new piece of equipment with a life of 10 years in the department were charged to overhead in April. The installation costs were $4,300.                        (iii)              Factory depreciation is allocated to Department IP-14 every month. The department’s share, $8,000, is included in overhead.                        (iv)              A strike closed the plant for three weeks in July. Several non-union employees were kept on payroll during the strike. Their duties were general housekeeping and 'busy work' These costs were charged to overhead.   You also have the details for the overhead account for the months of August and September. They are presented in the following table. You were hired on October 1 and have been keeping the department accounts since then. Therefore, you know that the data for October and November are correct, except for any adjustments needed for the preceding items.       Required (a)          Using the information provided, adjust the monthly cost data to more accurately reflect the overhead costs incurred during each month. (b)          Discuss whether the data for July should be included in the estimate of future costs. Use a scatter plot to help you answer this question. (c)           Develop a cost function by regressing overhead costs in Department IP-14 on direct labour hours. Discuss whether your cost function would be reasonable for estimating future overhead costs. Ignore any items you will discuss in part (d). (d)          Identify and discuss any additional adjustments that might be needed to more accurately measure overhead costs for the regression in part (c). (e)           Explain why adjustments probably need to be made to information from accounting records when estimating a cost function.

A hot working operation is carried out at various speeds. The strength constant = 30,000 lb/in2 and the strain-rate sensitivity exponent = 0.15. Determine the flow stress if the strain rate is (a) 0.01/sec (b) 1.0/sec, (c) 100/sec

What may be included under the heading of “cash”?

Mr. Kyle owns stock in a local publicly traded company. Although the stock price has declined since he purchased it two years ago, he likes the long-term prospects for the company. If Kyle sells the stock to his sister because he needs some cash for a down payment on a new home, is the loss deductible? If Kyle is right and the stock price increases in the future, how is his sister’s gain computed if she sells the stock?

Reed Pentak, a finance major, has been following globalization and made the following observation concerning accounting convergence: “I do not see many obstacles concerning development of a single accounting standard for inventories.” Prepare a response to Reed to explain the main obstacle to achieving convergence in the area of inventory accounting.

Wire stock of initial diameter = 0.125 in is drawn through two dies each providing a 0.20 area reduction. The starting metal has a strength coefficient = 40,000 lb/in2 and a strain hardening exponent = 0.15. Each die has an entrance angle of 12°, and the coefficient of friction at the work-die interface is estimated to be 0.10. The motors driving the capstans at the die exits can each deliver 1.50 hp at 90% efficiency. Determine the maximum possible speed of the wire as it exits the second die.

One of the inspectors in the quality control department has frequently used the Brinell and Rockwell hardness tests, for which equipment is available in the company. He claims that all hardness tests are based on the same principle as the Brinell test, which is that hardness is always measured as the applied load divided by the area of the impressions made by an indentor. (a) Is he correct? (b) If not, what are some of the other principles involved in hardness testing, and what are the associated tests?

Braxton Inc. is considering the write-off of a limited-life intangible because of its lack of profitability. Explain to the management of Braxton how to determine whether a write-off is permitted.

A groove weld has a cross-sectional area = 0.045 in2 and is 10 inches long. (a) What quantity of heat (in Btu) is required to accomplish the weld, if the metal to be welded is medium carbon steel? (b) How much heat must be generated at the welding source, if the heat transfer factor = 0.9 and the melting factor = 0.7?

Microsoft is the leading developer of software in the world. To continue to be successful Microsoft must generate new products, which requires significant amounts of cash. The following is the current asset and current liability information from Microsoft’s current balance sheets (in millions). Following the Microsoft data is the current asset and current liability information from Oracle’s current balance sheets (in millions). Oracle is another major software developer.   Part 1 (Cash and Cash Equivalents) Instructions (a) What is the definition of a cash equivalent? Give some examples of cash equivalents. How do cash equivalents differ from other types of short-term investments? (b) Calculate (1) the current ratio and (2) working capital for each company for 2011 and discuss your results. (c) Is it possible to have too many liquid assets? Part 2 (Accounts Receivable) Microsoft provided the following disclosure related to its accounts receivable.   Instructions (a) Compute Microsoft’s accounts receivable turnover for 2011 and discuss your results. Microsoft had sales revenue of $69,943 million in 2011. (b) Reconstruct the summary journal entries for 2011 based on the information in the disclosure. (c) Briefly discuss how the accounting for bad debts affects the analysis in Part 2 (a).

A particular metal has a flow curve with strength coefficient = 35,000 lb/in2 and strain-hardening exponent = 0.26. A tensile specimen of the metal with gage length = 2.0 in is stretched to a length = 3.3 in. Determine the flow stress at this new length and the average flow stress that the metal has been subjected to during deformation.

Teresa Ramirez and Lenny Traylor are examining the following statement of cash flows for Pacific Clothing Store’s first year of operations. PACIFIC CLOTHING STORE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 2014 Sources of cash From sales of merchandise $ 382,000 From sale of capital stock 380,000 From sale of investment 120,000 From depreciation 80,000 From issuance of note for truck 30,000 From interest on investments 8,000 Total sources of cash 1,000,000 PACIFIC CLOTHING STORE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 2014 (CONTINUED) Uses of cash For purchase of fi xtures and equipment 330,000 For merchandise purchased for resale 253,000 For operating expenses (including depreciation) 170,000 For purchase of investment 95,000 For purchase of truck by issuance of note 30,000 For purchase of treasury stock 10,000 For interest on note 3,000 Total uses of cash 891,000 Net increase in cash $ 109,000 Teresa claims that Pacific’s statement of cash flows is an excellent portrayal of a superb first year, with cash increasing $109,000. Lenny replies that it was not a superb first year—that the year was an operating failure, the statement was incorrectly presented, and $109,000 is not the actual increase in cash. Instructions (a) With whom do you agree, Teresa or Lenny? Explain your position. (b) Using the data provided, prepare a statement of cash flows in proper indirect method form. The only noncash items in income are depreciation and the gain from the sale of the investment  purchase and sale are related).

Balanced scorecard measures Curry House owns a number of stores that sell fast food. As part of its compensation packages, Curry House provides employees with bonuses based on customer satisfaction surveys. Recent analysis of the data shows a positive correlation between survey ratings and sales; that is, as customer satisfaction increases, sales increase. However, at a certain point in this trend, sales plateau even though the ratings continue to increase. In addition, increasing customer satisfaction causes costs to also increase because more time is spent with each customer and more employees are on hand to help with food preparation and cashiering to reduce the time that customers wait for their food to be prepared. Other factors that appear to affect customer satisfaction are the general cleanliness of the store and the attitudes of the cashiers as they provide customer service. A factor that strongly affects sales at each store is its health rating from the local council. These ratings are published in the local daily newspaper. When a store has a low rating, sales at that outlet drop off until publication of an improved rating occurs. The owner wants to add one or more financial performance measures to the bonus package so that employees will earn more money when customer satisfaction increases at the same time that financial performance is also increasing.   Required                         (a)     Describe advantages and disadvantages of using a combination of performance measures reflecting the customer and financial perspectives. (b)     Management would like to add other customer-related measures and is considering replacing survey satisfaction with some other measure. List one potential measure and list at least one advantage and one disadvantage for it. (c)     List one additional performance measure that could be included in the compensation package. Explain what it is and what it would contribute. (d)     Explain how the scorecard measures (particularly the customer perspective) are being used in part as a boundary system.

In a chemical milling operation on a flat mild steel plate, it is desired to cut an ellipse-shaped pocket to a depth of 0.4 in. The semiaxes of the ellipse are a = 9.0 in and b = 6.0 in. A solution of hydrochloric and nitric acids will be used as the etchant. Determine (a) metal removal rate in in3/hr, (b) time required to etch to depth, and (c) required dimensions of the opening in the cut and peel maskant required to achieve the desired pocket size on the part.

In each of the following independent cases, indicate the amount (1) deductible for AGI, (2) deductible from AGI, and (3) neither deductible for nor deductible from AGI before considering income limitations or the standard deduction.

Does the use of floating-rate loans eliminate interest rate risk? Explain. (LO3)

On March 1, 2014, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of $8,400,000. The building was completed by October 31, 2016. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2014, 2015, and 2016 are given below. 2014 2015 2016 Contract costs incurred during the year $2,880,000 $2,230,000 $2,190,000 Estimated costs to complete the contract at 12/31 3,520,000 2,190,000 –0– Billings to Fabrik during the year 3,200,000 3,500,000 1,700,000 Instructions (a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore income taxes.) (b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore incomes taxes.)

Explain a multiple-deliverable arrangement. What is the major accounting issue related to these arrangements?