Question & Answer

At January 1, 2014, Beidler Company reported retained earnings of $2,000,000. In 2014, Beidler discovered that 2013 depreciation expense was understated by $400,000. In 2014, net income was $900,000 and dividends declared were $250,000. The tax rate is 40%. Prepare a 2014 retained earnings statement for Beidler Company.

Explain the general difference in the composition of pension portfolios managed by trusts versus those managed by insurance companies. Why does this difference occur? (LO6)

Jackie has just opened her copy of the Code for the first time.  She looks at the table of contents and wonders why it is organized the way it is.  She questions whether it makes sense to try and understand the Code’s organization.  What are some reasons why understanding the organization of the Internal Revenue Code may prove useful?

Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications. Upon completion of the engines, Winston has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is noncancelable, becomes effective on January 1, 2014, and requires annual rental payments of $413,971 each January 1, starting January 1, 2014. Winston’s incremental borrowing rate is 10%. The implicit interest rate used by Ewing Inc. and known to Winston is 8%. The total cost of building the three engines is $2,600,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Winston depreciates similar equipment on a straight-line basis. At the end of the lease, Winston assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs. Instructions (a) Discuss the nature of this lease transaction from the viewpoints of both lessee and lessor. (b) Prepare the journal entry or entries to record the transaction on January 1, 2014, on the books of Winston Industries. (c) Prepare the journal entry or entries to record the transaction on January 1, 2014, on the books of Ewing Inc. (d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2014. (e) Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31, 2014. (Prepare a lease amortization schedule for 2 years.) (f) Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2014, for both the lessee and the lessor.

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

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.

What other types of transport could be directly provided by the government or a local authority?

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).

(Looking at the Maths) Given the following supply schedule: P 2 4 6 8 10 0 10 20 30 40 (a)  Draw the supply curve. (b)  Using the arc method calculate price elasticity of supply (i) between P = 2 and P = 4;                      (ii) between P = 8 and P = 10 (c)  Using the point method calculate price elasticity of supply at P = 6. (d)  Does the elasticity of the supply curve increase or decrease as P and Q increase? Why? (e)  What would be the answer to (d) if the supply curve had been a straight line but intersecting the horizontal axis to the right of the origin?

In this chapter, we discussed three basic tax planning strategies. What different features of taxation does each of these strategies exploit?

Do investors in high tax brackets or those in low tax brackets benefit more from tax-exempt securities? Why? At a given point in time, which offers a higher before-tax yield: municipal bonds or corporate bonds? Why? Which has the higher after-tax yield? If taxes did not exist, would Treasury bonds offer a higher or lower yield than municipal bonds with the same maturity? Why? (LO1)

What will cause people to expect higher rates of inflation? How will expectations of inflation affect the actual rate of inflation?

This comment appeared in the annual report of MacCloud Inc.: “The Company could pay cash or property dividends on the Class A common stock without paying cash or property dividends on the Class B common stock. But if the Company pays any cash or property dividends on the Class B common stock, it would be required to pay at least the same dividend on the Class A common stock.” How is a property dividend accounted for in the financial records?

1. If there was a growth in the total number of worker hours because people worked longer hours, what would happen to GDP per hour worked and GDP per capita? 2. If people worked longer hours how would you assess whether the country was better or worse off?

How do general and limited partners treat their share of ordinary business income for self-employment tax purposes?

Saurez Company, your client, manufactures paint. The company’s president, Maria Saurez, has decided to open a retail store to sell Saurez paint as well as wallpaper and other supplies that would be purchased from other suppliers. She has asked you for information about the conventional retail method of pricing inventories at the retail store. Instructions Prepare a report to the president explaining the retail method of pricing inventories. Your report should include the following points. (a) Description and accounting features of the method. (b) The conditions that may distort the results under the method. (c) A comparison of the advantages of using the retail method with those of using cost methods of inventory pricing. (d) The accounting theory underlying the treatment of net markdowns and net markups under the method.

Gary and Lakesha were married on December 31 last year. They are now preparing their taxes for the April 15 deadline and are unsure of their filing status.

Why would a company restrict when a senior executive can exercise their         share options?             (LO2, 3 and 5)

What would be the economic effects of (a) different rates of VAT, (b) different rates of personal income tax and (c) different rates of company taxation between member states if in all other respects there were no barriers to trade or factor movements?

Part B: $187,222 computed as follows: Description Amount Explanation (1) AGI$207,000  From AGI deductions: a) and b) Medical expenses 0 Medical expenses in excess of 7.5 percent of AGI are deductible. See note A below. c) and d) State taxes 2,050 State income taxes paid last year are deductible ($1,800 withheld and $250 overpayment applied on last year’s return treated as paid last year. e) Real property taxes 3,200 Real property taxes deductible from AGI. Payment to developer is not a tax. f) Personal property taxes 200 Property tax on personal property based on value deductible from AGI g) Interest on loans secured by her home 12,300 Primary home loan and home equity loan deductible from AGI h) Charitable contributions 1,828 See note B below i) Investment expenses and tax return preparation fees 0 Nondeductible expenses j) Horse racing activities 0 Nondeductible hobby expenses k) Gambling losses 200 Gambling losses are limited to earnings from gambling deductible as a miscellaneous itemized deduction but not subject to 2% of AGI floor or phase out. (2) Total itemized deductions19,778 (3) Standard deduction 14,600 Single taxpayer (4) Greater of Itemized deductions or standard deduction 19,778 Greater of (2) or (3). Shauna should choose to itemize deductions. Taxable income $187,222 (1) − (4) Note A: $0. Medical expenses = $4,680 (medical expenses for broken ankle), + $24 (115 miles × 21¢ per mile) + 3,400 (unreimbursed health insurance premiums) + 3,000 (Lasik eye surgery) + 450 (other medical expenses) − $15,525 (AGI of 207,000 × 7.5 percent) < $0. Because 7.5 percent of Shauna’s AGI exceeds her total medical expenses, Shauna is unable to deduct any medical expenses. Note B: $1,828. Capital gain property generally in the form of stock is deductible at FMV; Thus, Shauna can deduct $1,000 for her ZYX stock donation to the Red Cross. Cash contributions of $300 are fully deductible. Religious artifacts are used by church in its normal function as a non-profit organization and thus are deductible at FMV of $500. Finally, Shauna may deduct $28 (as a cash donation) expense for her charitable mileage (200 miles × 14¢ per mile). Note that the value of services donated is not deductible. Accordingly, Shauna’s charitable contribution deduction is $1,828 (1,000 + 300 + 500 + 28). Shauna need not be concerned about the AGI-based limitations on her contributions because her AGI is relatively high and her contributions are relatively low.

Explain the difference between a market order and a limit order. (LO1)

Discuss the relationship between the yield and the liquidity of securities. (LO1)

What would be the rate of economic growth if 20 per cent of national income were saved and invested and the marginal capital/output ratio was 5/2?

When might a new partner have an upward basis adjustment following the acquisition of a partnership interest?

Explain why a credit crisis in one country may be transmitted to other countries. (LO5)