Question & Answer

1.    : What personal skills do you need to keep your financial backers feeling confident in your new business? Which skills are most useful when you’re dealing with more informal financial sources, such as family and friends, versus receiving funds from stockholders, a bank, or a venture capital firm? Would these considerations affect your financing strategy?

What is sticking in a hot rolling operation?

Can a bank simultaneously maximize return and minimize credit risk? If not, what can it do instead? (LO4)

AMR Corporation (parent company of American Airlines) reported the following for 2011 (in millions). Service cost $366 Interest on P.B.O. 737 Return on plan assets 593 Amortization of prior service cost 13 Amortization of net loss 154 Compute AMR Corporation’s 2011 pension expense.

What is an integrated circuit?

The management of Petro Garcia Inc. was discussing whether certain equipment should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $900,000 with depreciation to date of $400,000 as of December 31, 2014. On December 31, 2014, management projected its future net cash flows from this equipment to be $300,000 and its fair value to be $230,000. The company intends to use this equipment in the future. Instructions (a) Prepare the journal entry (if any) to record the impairment at December 31, 2014. (b) Where should the gain or loss (if any) on the write-down be reported in the income statement? (c) At December 31, 2015, the equipment’s fair value increased to $260,000. Prepare the journal entry (if any) to record this increase in fair value. (d) What accounting issues did management face in accounting for this impairment?

In what situations do partners need to know the tax basis in their partnership interests?

The following two items appeared on the Internet concerning the GAAP requirement to expense stock options. WASHINGTON, D.C.—February 17, 2005 Congressman David Dreier (R–CA), Chairman of the House Rules Committee, and Congresswoman Anna Eshoo (D–CA) reintroduced legislation today that will preserve broad-based employee stock option plans and give investors critical information they need to understand how employee stock options impact the value of their shares.  Last year, the U.S. House of Representatives overwhelmingly voted for legislation that would have ensured the continued ability of innovative companies to offer stock options to rank-and-file employees,” Dreier stated. “Both the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) continue to ignore our calls to address legitimate concerns about the impact of FASB’s new standard on workers’ ability to have an ownership stake in the New Economy, and its failure to address the real need of shareholders: accurate and meaningful information about a company’s use of stock options.” “In December 2004, FASB issued a stock option expensing standard that will render a huge blow to the 21st century economy,” Dreier said. “Their action and the SEC’s apparent lack of concern for protecting shareholders, requires us to once again take a firm stand on the side of investors and economic growth. Giving investors the ability to understand how stock options impact the value of their shares is critical. And equally important is preserving the ability of companies to use this innovative tool to attract talented employees.” “Here We Go Again!” by Jack Ciesielski (2/21/2005, http://www.accountingobserver.com/blog/2005/02/herewe- go-again) On February 17, Congressman David Dreier (R–CA), and Congresswoman Anna Eshoo (D–CA), officially entered Silicon Valley’s bid to gum up the launch of honest reporting of stock option compensation: They co-sponsored a bill to “preserve broad-based employee stock option plans and give investors critical information they need to understand how employee stock options impact the value of their shares.” You know what “critical information” they mean: stuff like the stock compensation for the top five officers in a company, with a rigged value set as close to zero as possible. Investors crave this kind of information. Other ways the good Congresspersons want to “help” investors: The bill “also requires the SEC to study the effectiveness of those disclosures over three years, during which time, no new accounting standard related to the treatment of stock options could be recognized. Finally, the bill requires the Secretary of Commerce to conduct a study and report to Congress on the impact of broad-based employee stock option plans on expanding employee corporate ownership, skilled worker recruitment and retention, research and innovation, economic growth, and international competitiveness.” It’s the old “four corners” basketball strategy: stall, stall, stall. In the meantime, hope for regime change at your opponent, the FASB. Instructions (a) What are the major recommendations of the stock-based compensation pronouncement? (b) How do the provisions of GAAP in this area differ from the bill introduced by members of Congress (Dreier and Eshoo), which would require expensing for options issued to only the top five officers in a company? Which approach do you think would result in more useful information? (Focus on comparability.) (c) The bill in Congress urges the FASB to develop a rule that preserves “the ability of companies to use this innovative tool to attract talented employees.” Write a response to these Congress-people explaining the importance of neutrality in financial accounting and reporting.

Jack, who files married filing separately, has AGI of $45,000 and paid the following taxes this year. Calculate how much Jack can deduct for taxes as an itemized deduction this year.

From inception of operations to December 31, 2014, Fortner Corporation provided for uncollectible accounts receivable under the allowance method. Provisions were made monthly at 2% of credit sales, bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account, and no year-end adjustments to the allowance account were made. Fortner’s usual credit terms are net 30 days The balance in Allowance for Doubtful Accounts was $130,000 at January 1, 2014. During 2014, credit sales totaled $9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, $90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $15,000. Fortner installed a computer system in November 2014, and an aging of accounts receivable was prepared for the first time as of December 31, 2014. A summary of the aging is as follows. Classifi cation by Balance in Estimated % Month of Sale Each Category Uncollectible November–December 2014 $1,080,000 2% July–October 650,000 10% January–June 420,000 25% Prior to 1/1/14 150,000 80% $2,300,000 Based on the review of collectibility of the account balances in the “prior to 1/1/14” aging category, additional receivables totaling $60,000 were written off as of December 31, 2014. The 80% uncollectible estimate applies to the remaining $90,000 in the category. Effective with the year ended December 31, 2014, Fortner adopted a different method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable. Instructions (a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended December 31, 2014. Show supporting computations in good form. (Hint: In computing the 12/31/14 allowance, subtract the $60,000 write-off.) (b) Prepare the journal entry for the year-end adjustment to Allowance for Doubtful Accounts balance as of December 31, 2014.

What is meant by the term graduated measuring device?

What are the two joint types most commonly used in brazing?

Why might it present problems for a firm if managers are overconfident? Can you think of any reason why CEOs might be more inclined to optimism than the population average?

Pacific Crossburgers Inc. charges an initial franchise fee of $70,000. Upon the signing of the agreement, a payment of $28,000 is due. Thereafter, three annual payments of $14,000 are required. The credit rating of the franchisee is such that it would have to pay interest at 10% to borrow money. Instructions Prepare the entries to record the initial franchise fee on the books of the franchisor under the following assumptions. (Round to the nearest dollar.) (a) The down payment is not refundable, no future services are required by the franchisor, and collection of the note is reasonably assured. (b) The franchisor has substantial services to perform, the down payment is refundable, and the collection of the note is very uncertain. (c) The down payment is not refundable, collection of the note is reasonably certain, the franchisor has yet to perform a substantial amount of services, and the down payment represents a fair measure of the services already performed.

Agazzi Repair Shop had the following transactions during the first month of business as a proprietorship. Journalize the transactions. (Omit explanations.) Aug. 2 Invested $12,000 cash and $2,500 of equipment in the business. 7 Purchased supplies on account for $500. (Debit asset account.) 12 Performed services for clients, for which $1,300 was collected in cash and $670 was billed to the clients. 15 Paid August rent $600. 19 Counted supplies and determined that only $270 of the supplies purchased on August 7 are still on hand.

Rank the following three single taxpayers in order of the magnitude of taxable income (from lowest to highest) and explain your results. Ahmed           Baker                    Chin Gross Income                 $ 80,000               $ 80,000               $ 80,000Deductions For AGI            8,000                    4,000                           0Itemized Deductions                   0                    4,000                    8,000

] Jimmer has contributed $15,000 to his Roth IRA, and the balance in the account is $18,000. In the current year, Jimmer withdrew $17,000 from the Roth IRA to pay for a new car. If Jimmer’s marginal ordinary income tax rate is 24 percent, what amount of tax and penalty, if any, is Jimmer required to pay on the withdrawal in each of the following alternative situations? a. Jimmer opened the Roth account 44 months before he withdrew the $17,000, and Jimmer is 62 years of age. b. Jimmer opened the Roth account 44 months before he withdrew the $17,000, and Jimmer is age 53. c. Jimmer opened the Roth account 76 months before he withdrew the $17,000, and Jimmer is age 62. d. Jimmer opened the Roth account 76 months before he withdrew the $17,000, and Jimmer is age 53.

Alexander Enterprises leases property to Hamilton, Inc. Because Hamilton, Inc. is experiencing financial difficulty, Alexander agrees to receive five rents of $20,000 at the end of each year, with the rents deferred 3 years. What is the present value of the five rents discounted at 12%?

How does mechanical assembly differ from the other methods of assembly discussed in previous chapters (e.g., welding, brazing, etc.)?

Andy McDowell Co. establishes a $100 million liability at the end of 2014 for the estimated site-cleanup costs at two of its manufacturing facilities. All related closing costs will be paid and deducted on the tax return in 2015. Also, at the end of 2014, the company has $50 million of temporary differences due to excess depreciation for tax purposes, $7 million of which will reverse in 2015. The enacted tax rate for all years is 40%, and the company pays taxes of $64 million on $160 million of taxable income in 2014. McDowell expects to have taxable income in 2015. Instructions (a) Determine the deferred taxes to be reported at the end of 2015. (b) Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet. (c) Assuming that the only deferred tax account at the beginning of 2014 was a deferred tax liability of $10,000,000, draft the income tax expense portion of the income statement for 2014, beginning with the line “Income before income taxes.” (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $10,000,000 deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, and then (3) the amount of pretax financial income.)

Davenport Department Store converted from the conventional retail method to the LIFO retail method on January 1, 2014, and is now considering converting to the dollar-value LIFO inventory method. During your examination of the financial statements for the year ended December 31, 2015, management requested that you furnish a summary showing certain computations of inventory cost for the past 3 years. Here is the available information. 1. The inventory at January 1, 2013, had a retail value of $56,000 and cost of $29,800 based on the conventional retail method. 2. Transactions during 2013 were as follows. Cost Retail Purchases $311,000 $554,000 Purchase returns 5,200 10,000 Purchase discounts 6,000 Gross sales revenue (after employee discounts) 551,000 Sales returns 9,000 Employee discounts 3,000 Freight-in 17,600 Net markups 20,000 Net markdowns 12,000 3. The retail value of the December 31, 2014, inventory was $75,600, the cost ratio for 2014 under the LIFO retail method was 61%, and the regional price index was 105% of the January 1, 2014, price level. 4. The retail value of the December 31, 2015, inventory was $62,640, the cost ratio for 2015 under the LIFO retail method was 60%, and the regional price index was 108% of the January 1, 2014, price level. Instructions (a) Prepare a schedule showing the computation of the cost of inventory on hand at December 31, 2013, based on the conventional retail method. (b) Prepare a schedule showing the recomputation of the inventory to be reported on December 31, 2013, in accordance with procedures necessary to convert from the conventional retail method to the LIFO retail method beginning January 1, 2014. Assume that the retail value of the December 31, 2013, inventory was $60,000. (c) Without prejudice to your solution to part (b), assume that you computed the December 31, 2013, inventory (retail value $60,000) under the LIFO retail method at a cost of $33,300. Prepare a schedule showing the computations of the cost of the store’s 2014 and 2015 year-end inventories under the dollar-value LIFO method.

Carolina Corporation, an S corporation, has no corporate E&P from its years as a C corporation.  At the end of the year, it distributes a small parcel of land to its sole shareholder Shadiya. The fair market value of the parcel is $70,000, and its tax basis is $40,000. Shadiya’s basis in her stock is $14,000.  Assume Carolina Corporation reported $0 taxable income before considering the tax consequences of the distribution.

For what is the bend allowance intended to compensate?

Value chain in the public sector Traditionally, government organisations have tended to operate in silos, focusing on their own objectives and managing and protecting their own budgets. Recently, however, faced with seemingly intractable economic, social and environmental problems, many government organisations have sought to develop new ways of working. In particular, they have sought to explore how their objectives overlap and depend on other organisations and how they might share information and resources. One example is provided by attempts to reduce crime and enhance public safety in the criminal justice sector.   In New Zealand the Ministry of Justice is the lead agency in the justice sector. The sector includes the New Zealand Police, the Serious Fraud Office, Child Youth and Family, the Department of Corrections and the Crown Law Office.   The organisations in the criminal justice system can be thought of as being involved in a ‘pipeline’ that begins with crime prevention and the investigation of crime and proceeds all the way through to rehabilitation (see the figure below). Looking at the sector as a pipeline, we can see that policies and actions in any part of the system will affect other parts of the system. By working as a coordinated ‘justice sector’, changes can be made that result in the best outcomes for the sector as a whole.   Within this pipeline, the operations within one agency, Public Prisons, can be further analysed to show the links between its key activities and between the department and other organisations in the sector.   Key activities follow this path: • offenders are convicted in the courts • offenders are sentenced and sent to prison • prisoners undergo an initial assessment • the serving of the sentence is planned • the offender’s sentence is managed, including provision of relevant rehabilitation programs • the offender’s release is planned and managed.   Required (a) With reference to the information provided, distinguish between the structural and executional cost drivers in this value chain. (b) Is there an ability for governments to outsource any of these value chain activities?

Reward systems for different levels of employees Freshwater is an entity that processes and distributes bottled water throughout Australia and New Zealand. You have been employed as a remuneration consultant to develop a new reward system for the entity.   Required Explain how you would develop an incentive plan for the CEO, the divisional manager of the process division, and the sales manager who arranges customer sales. How are the reward systems similar? How are the reward systems different? (LO2 and 4)