Question & Answer

Why would banks not be prepared to offer a forward exchange rate to a firm for, say, five years’ time?

Lexington Co. has the following available-for-sale securities outstanding on December 31, 2014 (its first year of operations). Cost Fair Value Greenspan Corp. Stock $20,000 $19,000 Summerset Company Stock 9,500 8,800 Tinkers Company Stock 20,000 20,600 $49,500 $48,400 During 2015, Summerset Company stock was sold for $9,200, the difference between the $9,200 and the “fair value” of $8,800 being recorded as a “Gain on Sale of Investments.” The market price of the stock on December 31, 2015, was Greenspan Corp. stock $19,900; Tinkers Company stock $20,500. Instructions (a) What justification is there for valuing available-for-sale securities at fair value and reporting the unrealized gain or loss as part of stockholders’ equity? (b) How should Lexington Company apply this rule on December 31, 2014? Explain. (c) Did Lexington Company properly account for the sale of the Summerset Company stock? Explain. (d) Are there any additional entries necessary for Lexington Company at December 31, 2015, to reflect the facts on the financial statements in accordance with generally accepted accounting principles? Explain.

Padma needs a new truck to help her expand Padma’s Plumbing Palace. Business has been booming, and Padma would like to accelerate her tax deductions as much as possible (ignore §179 expense and bonus depreciation for this problem). On April 1, Padma purchased a new delivery van for $25,000. It is now September 26 and Padma, already in need of another vehicle, has found a deal on buying a truck for $22,000 (all fees included). The dealer tells her if she doesn’t buy the truck (Option 1), it will be gone tomorrow. There is an auction (Option 2) scheduled for October 5 where Padma believes she can get a similar truck for $21,500, but there is also a $500 auction fee. Padma makes no other asset acquisitions during the year.  a. Which option allows Padma to generate more depreciation deductions this year (the vehicles are not considered to be luxury autos)? b. Assume the original facts, except that the delivery van was placed in service one day earlier on March 31 rather than April 1. Which option generates more depreciation deduction?

Given the liquidity advantage of holding Treasury bills, why do banks hold only a relatively small portion of their assets as T-bills? (LO2)

Use the information for Navajo Corporation from BE10-8. Prepare the journal entry to record the exchange, assuming the exchange lacks commercial substance.

: Explain why communication is essential for effective management.

1.       : Why do you think empowerment increases motivation? Do you see any ways in which a manager’s empowerment efforts might contribute to demotivation among employees? Discuss.

Jaycie Phelps Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2013. The purchase price was $1,200,000 for 50,000 shares. Kulikowski Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2014. Kulikowski reported net income of $730,000 for 2014. The fair value of Kulikowski’s stock was $27 per share at December 31, 2014. Instructions (a) Prepare the journal entries for Jaycie Phelps Inc. for 2013 and 2014, assuming that Phelps cannot exercise significant influence over Kulikowski. The securities should be classified as availablefor- sale. (b) Prepare the journal entries for Jaycie Phelps Inc. for 2013 and 2014, assuming that Phelps can exercise significant influence over Kulikowski. (c) At what amount is the investment in securities reported on the balance sheet under each of these methods at December 31, 2014? What is the total net income reported in 2014 under each of these methods?

Jamareo has found a “favorable” authority directly on point for his tax question.  If the authority is an administrative authority, which specific type of authority would he prefer to answer his question?  Which administrative authority would he least prefer to answer his question?

In Figures 2.21 and 2.22, the initial change in price was caused by a shift in the demand curve. Redraw these two diagrams to illustrate the situation where the initial change in price was caused by a shift in the supply curve (as would be the case in the wheat market that we have just considered).

What is the feature that distinguishes glass from the traditional and new ceramics?

Cuevas Co. is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this new product. As of year-end (December 31, 2014), the new product has not been manufactured for resale. However, a prototype unit was built and is in operation. Throughout 2014, the new division incurred certain costs. These costs include design and engineering studies, prototype manufacturing costs, administrative expenses (including salaries of administrative personnel), and market research costs. In addition, approximately $900,000 in equipment (with an estimated useful life of 10 years) was purchased for use in developing and manufacturing the new product. Approximately $315,000 of this equipment was built specifically for the design development of the new product. The remaining $585,000 of equipment was used to manufacture the pre-production prototype and will be used to manufacture the new product once it is in commercial production. Instructions (a) How are “research” and “development” defined in the authoritative literature (GAAP)? (b) Briefly indicate the practical and conceptual reasons for the conclusion reached by the FinancialAccounting Standards Board on accounting and reporting practices for research and development costs. (c) In accordance with GAAP, how should the various costs of Cuevas described above be recorded on the financial statements for the year ended December 31, 2014?

Employees at your company disagree about the accounting for sales returns. The sales manager believes that granting more generous return provisions can give the company a competitive edge and increase sales revenue. The controller cautions that, depending on the terms granted, loose return provisions might lead to non-GAAP revenue recognition. The company CFO would like you to research the issue to provide an authoritative answer. Instructions If your school has a subscription to the FASB Codification, go to http://aaa.hq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses. (a) What is the authoritative literature addressing revenue recognition when right of return exists? (b) What is meant by “right of return”? (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?

LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2014, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, LEW’s cost to produce its jewelry will increase, which would reduce its profit margins. To hedge the risk of increased gold prices, on April 1, 2014, LEW enters into a gold futures contract and designates this futures contract as a cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 500 ounces, and the terms of the contract give LEW the right and the obligation to purchase gold at a price of $300 per ounce. The price will be good until the contract expires on October 31, 2014. Assume the following data with respect to the price of the futures contract and the gold inventory purchase. Date Spot Price for October Delivery April 1, 2014 $300 per ounce June 30, 2014 310 per ounce September 30, 2014 315 per ounce Instructions Prepare the journal entries for the following transactions. (a) April 1, 2014—Inception of the futures contract, no premium paid. (b) June 30, 2014—LEW Co. prepares financial statements. (c) September 30, 2014—LEW Co. prepares financial statements. (d) October 10, 2014—LEW Co. purchases 500 ounces of gold at $315 per ounce and settles the futures contract. (e) December 20, 2014—LEW sells jewelry containing gold purchased in October 2014 for $350,000. The cost of the finished goods inventory is $200,000. (f) Indicate the amount(s) reported on the balance sheet and income statement related to the futures contract on June 30, 2014. (g) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2014.

Bryan followed in his father’s footsteps and entered the carpet business. He owns and operates I Do Carpet (IDC). Bryan prefers to install carpet only, but in order to earn additional revenue, he also cleans carpets and sells carpet cleaning supplies. Compute his taxable income for the current year considering the following items:  a) IDC contracted with a homebuilder in December of last year to install carpet in 10 new homes being built. The contract price of $80,000 includes $50,000 for materials (carpet). The remaining $30,000 is for IDC’s service of installing the carpet. The contract also stated that all money was to be paid up front. The homebuilder paid IDC in full on December 28 of last year. The contract required IDC to complete the work by January 31 of this year. Bryan purchased the necessary carpet on January 2 and began working on the first home January 4. He completed the last home on January 27 of this year.  b) IDC finalized several other contracts this year and completed the work before year-end. The work cost $130,000 in materials, and IDC elects to immediately deduct supplies. Bryan billed out $240,000 but only collected $220,000 by year-end. Of the $20,000 still owed to him, Bryan wrote off $3,000 he didn’t expect to collect as a bad debt from a customer experiencing extreme financial difficulties. c) IDC agreed to a three-year contract to clean the carpets of an office building. The contract specified that IDC would clean the carpets monthly from July 1 of this year through June 30 three years hence. IDC received payment in full of $8,640 ($240 a month for 36 months) on June 30 of this year.  d) IDC sold 100 bottles of carpet stain remover this year for $5 per bottle (it collected $500). IDC sold 40 bottles on June 1 and 60 bottles on November 2. IDC had the following carpet-cleaning supplies on hand for this year, and IDC has elected to use the LIFO method of accounting for inventory under a perpetual inventory system: Purchase Date Bottles Total Cost November last year 40 $120 February this year 35 $112 July this year 25 $85 August this year 40 $140 Totals 140 $457   e) On August 1 of this year, IDC needed more room for storage and paid $900 to rent a garage for 12 months.  f) On November 30 of this year, Bryan decided it was time to get his logo on the sides of his work van. IDC hired We Paint Anything Inc. (WPA) to do the job. It paid $500 down and agreed to pay the remaining $1,500 upon completion of the job. WPA indicated it would not be able to begin the job until January 15 of next year, but the job would only take one week to complete. Due to circumstances beyond its control, WPA was unable to complete the job until April 1 of next year, at which time IDC paid the remaining $1,500. g) In December, Bryan’s son, Aiden, helped him finish some carpeting jobs. IDC owed Aiden $600 (reasonable) compensation for his work. However, Aiden did not receive the payment until January of next year.  h) IDC also paid $1,000 for interest on a short-term bank loan relating to the period from November 1 of this year through March 31 of next year.

The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building. (a) Organization and promotion expenses. (b) Architect’s fees. (c) Interest and taxes during construction. (d) Interest revenue on investments held to fund construction of a building. Do you agree with these charges? If not, how would you deal with each of the items above in the corporation’s books and in its annual financial statements?

Draw a pair of diagrams like those in Figure 8.4. Illustrate what would happen if there were a rise in market demand and no rise in the costs of either the leader or the followers. Would there be an equal percentage increase in the output of both leader and followers?

Kellogg Company is the world’s leading producer of ready-to-eat cereal products. In recent years, the company has taken numerous steps aimed at improving its profitability and earnings per share. Presented below are some basic facts for Kellogg.   Instructions (a) What are some of the reasons that management purchases its own stock? (b) Explain how earnings per share might be affected by treasury stock transactions. (c) Calculate the ratio of debt to assets for 2010 and 2011, and discuss the implications of the change.

How is a prepreg different from a molding compound?

Threshold Concept 9) 1. What risks are involved in buying the latest version of the iPhone? Compare these with the risks of buying a house. (Threshold Concept 9) 2. Give some examples of ways in which it is possible to buy better information. Your answer should suggest that there is profitable business to be made in supplying information. (Threshold Concept 9) 3. Is there a role for government intervention in the provision of information?

Presented below is selected information for Alatorre Company. 1. Alatorre purchased a patent from Vania Co. for $1,000,000 on January 1, 2012. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2022. During 2014, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2014? 2. Alatorre bought a franchise from Alexander Co. on January 1, 2013, for $400,000. The carrying amount of the franchise on Alexander’s books on January 1, 2013, was $500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2015, it is unlikely that the franchise will be retained beyond 2022. What amountshould be amortized for the year ended December 31, 2014? 3. On January 1, 2014, Alatorre incurred organization costs of $275,000. What amount of organization expense should be reported in 2014? 4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2014, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2014? Instructions Answer the questions asked about each of the factual situations.

What two assumptions are central to the IASB conceptual framework?

This year BPS billed clients for $86,700 and collected $61,000 in cash for golf lessons completed during the year. In addition, BPS collected an additional $14,500 in cash for lessons that will commence after year-end. Binu hopes to collect about half of the outstanding billings next year, but the rest will likely be written off.  Besides providing private golf lessons, BPS also contracted with the country club to staff the driving range. This year, BPS billed the country club $27,200 for the service. The club paid $17,000 of the amount but disputed the remainder. By year-end, the dispute had not been resolved, and while Binu believes BPS is entitled to the money, the remaining $10,200 has not been paid. BPS has accrued the following expenses (explained below): Advertising (in the clubhouse)$ 13,150 Pro golf teachers’ membership fees860 Supplies (golf tees, balls, etc.)4,720 Club rental6,800 Malpractice insurance2,400 Accounting fees8,820 The expenditures were all paid for this calendar year, with several exceptions. First, Binu initiated his golfer’s malpractice insurance on June 1 of this year. The $2,400 insurance bill covers the last six months of this calendar year and the first six months of next year. At year-end, Binu had only paid $600, but has assured the insurance agent the remaining $1,800 will be paid early next year. Second, the amount paid for club rental ($100 per week) represents rental charges for the last 6 weeks of the previous year, the 52 weeks in this calendar year, and the first 10 weeks of next year. Binu has also mentioned that BPS only pays for supplies that are used at the club. Although BPS could buy the supplies for half the cost elsewhere, Binu likes to “throw some business” to the golf pro shop because it is operated by his brother. Complete a draft of Parts I and II on the front page of a Schedule C for BPS.

What is a cost object?

Solve Problem 19.12 except that the operation is warm rolling and the strain-hardening exponent is 0.18. Assume the strength coefficient remains at 20,000 lb/in2 .