Question & Answer

What is the most commonly plated substrate metal?

Broussard Company reported net income of $3.5 million in 2014. Depreciation for the year was $520,000; accounts receivable increased $500,000; and accounts payable increased $300,000. Compute net cash flow from operating activities using the indirect method.

1.       : What are the characteristics of an open communication climate? Describe the organizational benefits of managers cultivating an open communication climate.

Using the integrated DAD/DAS and EAPC/LRPC framework, analyse the effect of an unexpected increase in aggregate demand assuming that markets adjust relatively rapidly. Compare the adjustment path of the economy when inflationary expectations remain anchored with that when expectations are based on actual inflation in the previous period.

Incentives and risk management Part A In the early 1980s, Bernard Hancock built a small brewery on his 150-acre property in the Macedon Ranges. The brewery, named Mountain Mist Brewery, was designed with ales in mind and Bernard introduced a number of cutting edge and innovative technologies to make the well-known, popular pale ale Misty Hop and others such as Hazy Heidi, Mountain Maid and Sunny Sherpa. The brewery’s highest selling pale ale (Misty Hop) is widely recognised as a high quality boutique beer and is sold, along with the brewery’s other ales, to clubs and restaurants around Australia. All Mountain Mist Brewery ales are distributed in kegs (large containers) and 12-bottle cartons through its Victorian and national wholesalers. The brewery has continued to expand capacity on its site to meet growing consumer demands.   Bernard’s vision for Mountain Mist Brewery is to: ·           grow profitably with incremental investment into selected markets to become one of the top six breweries in Australia ·           continuously improve perceived consumer quality by improving taste, freshness, package integrity and package appearance ·           enhance distributor service with better lead times, accurate order fills and lower product damage ·           continuously lower company costs per litre of beer so Mountain Mist can maintain resources for long-term productivity and success ·           continuously improve business performance through engaging and developing employees.                            Given recent sound performance, Bernard is pleased he had made the decision to expand Mountain Mist’s production interstate. This decision was made in line with Bernard’s key objective to be one of the top six national competitors. Mountain Mist currently holds seventh position. With its nearest competitor, Little Creatures, expanding into the eastern market from its Western Australian base, Bernard wants to ensure Mountain Mist will not only maintain market share but grow in size to take Little Creatures’ sixth position. Bernard wants to improve Mountain Mist’s brand presence in the western region, as well as reduce the transportation costs of moving beer across Australia. A local presence in Western Australia would also help reduce reliance on national retail distribution channels. A production site has been selected. A production manager from the Macedon Ranges site has been given the role of overseeing the operational set-up and staying on to manage the new operation. Others, such as microbiologists from the Mountain Mist laboratory, have also been offered the opportunity to move interstate. Thus, Bernard is moving some expertise from the Macedon Ranges and employing more staff at both sites to meet the new staffing requirements. As well as wanting a smooth manufacturing set-up, Bernard argues that it is vital for the Mountain Mist beer to be 100 per cent comparable between manufacturing sites. For Bernard, there are many issues still to contend with in relation to sourcing raw materials.   Bernard also needs to employ a manager to oversee the sales side of the Western Australia venture. He has offered the role of Western Australia Sales Manager to Matt Jerome. Matt is in his late 20s and had been working for Mountain Mist for about four years in the administration area as an accounts clerk. He has recently spent time on the administrative side of the new Western Australian operations. Bernard is pleased with Matt’s work and knows he is keen to move from administration and account keeping into managing sales at the new facility. While he has not had any previous sales experience, Bernard is keen to offer Matt this personal development opportunity.   Matt’s salary comprised a base salary and an incentive based on sales performance. While Mountain Mist had the corporate balanced scorecard (described earlier), they did not link scorecard results to their sales managers’ incentive plans. Bernard was concerned that the balanced scorecard measures would not drive the innovation and risk he required of his sales team. For example, Bernard wanted his sales team to continue to have the flexibility to make last minute changes if their customers required. He thought if they were influenced by rigid balanced scorecard performance measures, they might, in fact, be demotivated. He was also worried that they would work to the measure rather than profit maximisation through meeting customers’ unique, changeable and often immediate needs. Thus, Matt was able to earn a bonus based on the sales generated in the Western Australian region. Matt was also given the autonomy to hire his own sales and administration staff to help manage this new sales division. In addition, Bernard left Matt responsible for overseeing both sales and bookkeeping roles. After all, Matt had excelled at his administrative role in the past.   Bernard has contemplated varying remuneration options for Matt. Although Matt will have assets under his control, Bernard decides to reward Matt based on the following incentive structure: ·           base salary — $120 000 per annum ·           individual bonus — based on the Western Australian division’s EBIT (capped at $50 000 per annum) ·           corporate bonus — based on Mountain Mist’s corporate performance (2 per ·           cent share of ‘above budget’ corporate profit pool) ·           other — 50 per cent of private health insurance cost, relocation expenses for Matt’s family.   Matt has moved his family from the Macedon Ranges to Western Australia and begun to promote Mountain Mist Brewery. The aim is to have manufacturing operations and sales in place for summer 2010–11.   Required (a) Discuss the benefits and limitations of Matt’s incentive scheme proposed by Bernard. (b) It is mentioned in the case that Matt has assets under his control. What performance measurement alternatives could Bernard have used? How might they improve (or otherwise) on the scheme proposed by Bernard? (LO2, 3, 4 and 6)

What effect will the discrimination by the firm have on the wages and employment of black workers in other firms in the area if (a) these other firms discriminate against black workers; (b) they do not discriminate?

Assume that on January 1, 2014, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of $72,000 beginning on January 1, 2014. 2. The fair value of the building on January 1, 2014 is $440,000. 3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,000. Kimberly-Clark depreciates similar buildings on the straight-line method. 4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. 5. Kimberly-Clark’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Kimberly-Clark. 6. The yearly rental payment includes $2,471 of executory costs related to taxes on the property. Instructions Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2014 and 2015. Kimberly-Clark’s corporate year-end is December 31.

DLW Corporation acquired and placed in service the following assets during the year:

Management decision makingLO1, 2 The Woolworths Group has a goal of having customers put the company first across all their brands. To achieve this the Group has identified five priorities.9 1.      Building a customer and store-led culture and team. 2.      Generating sustainable sales momentum in food. 3.      Evolving the drinks business to provide even more value and convenience to customers. 4.      Empowering the portfolio businesses to pursue strategies to deliver shareholder value. 5.      Becoming a lean retailer through end-to-end process and systems excellence.   Required (a)   Given the strategic priorities, what decisions could management take to influence the structural cost drivers and executional cost drivers? (b)   What type of information would management need in making decisions you have identified in (a)?

How are citators used in tax research?

Parnevik Company has the following securities in its investment portfolio on December 31, 2014 (all securities were purchased in 2014): (1) 3,000 shares of Anderson Co. common stock which cost $58,500, (2) 10,000 shares of Munter Ltd. common stock which cost $580,000, and (3) 6,000 shares of King Company preferred stock which cost $255,000. The Fair Value Adjustment account shows a credit of $10,100 at the end of 2014. In 2015, Parnevik completed the following securities transactions. 1. On January 15, sold 3,000 shares of Anderson’s common stock at $22 per share less fees of $2,150. 2. On April 17, purchased 1,000 shares of Castle’s common stock at $33.50 per share plus fees of $1,980. On December 31, 2015, the market prices per share of these securities were Munter $61, King $40, and Castle $29. In addition, the accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik will not actively trade these securities because the top management intends to hold them for more than one year. Instructions (a) Prepare the entry for the security sale on January 15, 2015. (b) Prepare the journal entry to record the security purchase on April 17, 2015. (c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2015. (d) How should the unrealized gains or losses be reported on Parnevik’s balance sheet?

Explain the lesson to be learned about the repo market based on the experience of Bear Stearns. (LO1)

Albertsen Corporation is considering proposals for either leasing or purchasing aircraft. The proposed lease agreement involves a twin-engine turboprop Viking that has a fair value of $1,000,000. This plane would be leased for a period of 10 years beginning January 1, 2014. The lease agreement is cancelable only upon accidental destruction of the plane. An annual lease payment of $141,780 is due on January 1 of each year; the first payment is to be made on January 1, 2014. Maintenance operations are strictly scheduled by the lessor, and Albertsen Corporation will pay for these services as they are performed. Estimated annual maintenance costs are $6,900. The lessor will pay all insurance premiums and local property taxes, which amount to a combined total of $4,000 annually and are included in the annual lease payment of $141,780. Upon expiration of the 10-year lease, Albertsen Corporation can purchase the Viking for $44,440. The estimated useful life of the plane is 15 years, and its salvage value in the used plane market is estimated to be $100,000 after 10 years. The salvage value probably will never be less than $75,000 if the engines are overhauled and maintained as prescribed by the manufacturer. If the purchase option is not exercised, possession of the plane will revert to the lessor, and there is no provision for renewing the lease agreement beyond its termination on December 31, 2023. Albertsen Corporation can borrow $1,000,000 under a 10-year term loan agreement at an annual interest rate of 12%. The lessor’s implicit interest rate is not expressly stated in the lease agreement, but this rate appears to be approximately 8% based on 10 net rental payments of $137,780 per year and the initial fair value of $1,000,000 for the plane. On January 1, 2014, the present value of all net rental payments and the purchase option of $44,440 is $888,890 using the 12% interest rate. The present value of all net rental payments and the $44,440 purchase option on January 1, 2014, is $1,022,226 using the 8% interest rate implicit in the lease agreement. The financial vice president of Albertsen Corporation has established that this lease agreement is a capital lease as defined in GAAP. Instructions (a) What is the appropriate amount that Albertsen Corporation should recognize for the leased aircraft on its balance sheet after the lease is signed? (b) Without prejudice to your answer in part (a), assume that the annual lease payment is $141,780 as stated in the question, that the appropriate capitalized amount for the leased aircraft is $1,000,000 on January 1, 2014, and that the interest rate is 9%. How will the lease be reported in the December 31, 2014, balance sheet and related income statement? (Ignore any income tax implications.)

Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner, Michelle Wie, and cash flows from operations. However, current expansion plans will require some borrowing to expand the company’s production line. As part of the expansion plan, Wie will acquire some used equipment by signing a zero-interestbearing note. The note has a maturity value of $50,000 and matures in 5 years. A reliable fair value measure for the equipment is not available, given the age and specialty nature of the equipment. As a result, Wie’s accounting staff is unable to determine an established exchange price for recording the equipment (nor the interest rate to be used to record interest expense on the long-term note). They have asked you to conduct some accounting research on this topic. Instructions If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses. (a) Identify the authoritative literature that provides guidance on the zero-interest-bearing note. Use some of the examples to explain how the standard applies in this setting. (b) How is present value determined when an established exchange price is not determinable and a note has no ready market? What is the resulting interest rate often called? (c) Where should a discount or premium appear in the financial statements? What about issue costs?

Elroy, who is single, has taken over the care of his mother Irene in her old age. Elroy pays the bills relating to Irene’s home. He also buys all her groceries and provides the rest of her support. Irene has no gross income.

Samuels Co. appropriately uses the installment-sales method of accounting. On December 31, 2016, the books show balances as follows. Installment Receivables Deferred Gross Profit Gross Profit on Sales 2014 $12,000 2014 $ 7,000 2014 35% 2015 40,000 2015 26,000 2015 33% 2016 80,000 2016 95,000 2016 32% Instructions (a) Prepare the adjusting entry or entries required on December 31, 2016 to recognize 2016 realized gross profit. (Installment receivables have already been credited for cash receipts during 2016.) (b) Compute the amount of cash collected in 2016 on accounts receivable from each year.

Peterson Industries has three operating divisions— Farber Mining, Enyart Paperbacks, and Glesen Protection Devices. Each division maintains its own accounting system and method of revenue recognition. Farber Mining Farber Mining specializes in the extraction of precious metals such as silver, gold, and platinum. During the fiscal year ended November 30, 2014, Farber entered into contracts worth $2,250,000 and shipped metals worth $2,000,000. A quarter of the shipments were made from inventories on hand at the beginning of the fiscal year, and the remainder were made from metals that were mined during the year. Mining totals for the year, valued at market prices, were silver at $750,000, gold at $1,400,000, and platinum at $490,000.Farber uses the completion-of-production method to recognize revenue because its operations meet the specified criteria, i.e., reasonably assured sales prices, interchangeable units, and insignificant distribution costs. Enyart Paperbacks Enyart Paperbacks sells large quantities of novels to a few book distributors that in turn sell to several national chains of bookstores. Enyart allows distributors to return up to 30% of sales, and distributors give the same terms to bookstores. While returns from individual titles fluctuate greatly, the returns from distributors have averaged 20% in each of the past 5 years. A total of $7,000,000 of paperback novel sales were made to distributors during the fiscal year. On November 30, 2014, $2,200,000 of fiscal 2014 sales were still subject to return privileges over the next 6 months. The remaining $4,800,000 of fiscal 2014 sales had actual returns of 21%. Sales from fiscal 2013 totaling $2,500,000 were collected in fiscal 2014, with less than 18% of sales returned. Enyart records revenue according to the method referred to as revenue recognition when the right of return exits, because all applicable criteria for use of this method are met by Enyart’s operations. Glesen Protection Devices Glesen Protection Devices works through manufacturers’ agents in various cities. Orders for alarm systems and down payments are forwarded from agents, and Glesen ships the goods f.o.b. shipping point. Customers are billed for the balance due plus actual shipping costs. The firm received orders for $6,000,000 of goods during the fiscal year ended November 30, 2014. Down payments of $600,000 were received, and $5,000,000 of goods were billed and shipped. Actual freight costs of $100,000 were also billed. Commissions of 10% on product price were paid to manufacturers’ agents after the goods were shipped to customers. Such goods are warranted for 90 days after shipment, and warranty returns have been about 1% of sales. Revenue is recognized at the point of sale by Glesen. Instructions (a) There are a variety of methods for revenue recognition. Define and describe each of the following methods of revenue recognition, and indicate whether each is in accordance with generally accepted accounting principles. (1) Completion-of-production method. (2) Percentage-of-completion method. (3) Installment-sales method. (b) Compute the revenue to be recognized in the fiscal year ended November 30, 2014, for (1) Farber Mining. (2) Enyart Paperbacks. (3) Glesen Protection Devices.

The orthogonal cutting operation described in previous Problem 21.7 involves a work material whose shear strength is 40,000 lb/in2 . Based on your answers to the previous problem, compute (a) the shear force, (b) cutting force, (c) thrust force, and (d) friction force.

Do after-tax rates of return for investments in either interest- or dividend-paying securities increase with the length of the investment? Why or why not?

The following facts pertain to a noncancelable lease agreement between Alschuler Leasing Company and McKee Electronics, a lessee, for a computer system. Inception date October 1, 2014 Lease term 6 years Economic life of leased equipment 6 years Fair value of asset at October 1, 2014 $300,383 Residual value at end of lease term –0– Lessor’s implicit rate 10% Lessee’s incremental borrowing rate 10% Annual lease payment due at the beginning of each year, beginning with October 1, 2014 $62,700 The collectibility of the lease payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes responsibility for all executor costs, which amount to $5,500 per year and are to be paid each October 1, beginning October 1, 2014. (This $5,500 is not included in the rental payment of $62,700.) The asset will revert to the lessor at the end of the lease term. The straight-line depreciation method is used for all equipment. The following amortization schedule has been prepared correctly for use by both the lessor and the lessee in accounting for this lease. The lease is to be accounted for properly as a capital lease by the lessee and as a direct-financing lease by the lessor. Annual Lease Interest (10%) Reduction Balance of Payment/ on Unpaid of Lease Lease Date Receipt Liability/Receivable Liability/Receivable Liability/Receivable 10/01/14 $300,383 10/01/14 $ 62,700 $ 62,700 237,683 10/01/15 62,700 $23,768 38,932 198,751 10/01/16 62,700 19,875 42,825 155,926 10/01/17 62,700 15,593 47,107 108,819 10/01/18 62,700 10,882 51,818 57,001 10/01/19 62,700 5,699* 57,001 –0– $376,200 $75,817 $300,383 *Rounding error is $1. Instructions (a) Assuming the lessee’s accounting period ends on September 30, answer the following questions with respect to this lease agreement. (1) What items and amounts will appear on the lessee’s income statement for the year ending September 30, 2015? (2) What items and amounts will appear on the lessee’s balance sheet at September 30, 2015? (3) What items and amounts will appear on the lessee’s income statement for the year ending September 30, 2016? (4) What items and amounts will appear on the lessee’s balance sheet at September 30, 2016? (b) Assuming the lessee’s accounting period ends on December 31, answer the following questions with respect to this lease agreement. (1) What items and amounts will appear on the lessee’s income statement for the year ending December 31, 2014? (2) What items and amounts will appear on the lessee’s balance sheet at December 31, 2014? (3) What items and amounts will appear on the lessee’s income statement for the year ending December 31, 2015? (4) What items and amounts will appear on the lessee’s balance sheet at December 31, 2015?

Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship.  In late December she received a $20,000 bill from her accountant for consulting services related to her small business.  Isabel can pay the $20,000 bill anytime before January 30 of next year without penalty.  Assume her marginal tax rate is 40 percent this year and next year, and that she can earn an after-tax rate of return of 12 percent on her investments.  When should she pay the $20,000 bill—this year or next?

Alan Jackson invests $20,000 at 8% annual interest, leaving the money invested without withdrawing any of the interest for 8 years. At the end of the 8 years, Alan withdraws the accumulated amount of money. Instructions (a) Compute the amount Alan would withdraw assuming the investment earns simple interest. (b) Compute the amount Alan would withdraw assuming the investment earns interest compounded annually. (c) Compute the amount Alan would withdraw assuming the investment earns interest compounded semiannually.

On January 1, 2014, Nichols Company issued for $1,085,800 its 20-year, 11% bonds that have a maturity value of $1,000,000 and pay interest semiannually on January 1 and July 1. Bond issue costs were not material in amount. Below are three presentations of the long-term liability section of the balance sheet that might be used for these bonds at the issue date. 1. Bonds payable (maturing January 1, 2034) $1,000,000 Unamortized premium on bonds payable 85,800 Total bond liability $1,085,800 2. Bonds payable—principal (face value $1,000,000 maturing January 1, 2034) $ 142,050a Bonds payable—interest (semiannual payment $55,000) 943,750b Total bond liability $1,085,800 3. Bonds payable—principal (maturing January 1, 2034) $1,000,000 Bonds payable—interest ($55,000 per period for 40 periods) 2,200,000 Total bond liability $3,200,000 aThe present value of $1,000,000 due at the end of 40 (6-month) periods at the yield rate of 5% per period. bThe present value of $55,000 per period for 40 (6-month) periods at the yield rate of 5% per period. Instructions (a) Discuss the conceptual merit(s) of each of the date-of-issue balance sheet presentations shown above for these bonds. (b) Explain why investors would pay $1,085,800 for bonds that have a maturity value of only $1,000,000. (c) Assuming that a discount rate is needed to compute the carrying value of the obligations arising from a bond issue at any date during the life of the bonds, discuss the conceptual merit(s) of using for this purpose: (1) The coupon or nominal rate. (2) The effective or yield rate at date of issue. (d) If the obligations arising from these bonds are to be carried at their present value computed by means of the current market rate of interest, how would the bond valuation at dates subsequent to the date of issue be affected by an increase or a decrease in the market rate of interest?

Seles Corporation’s charter authorized issuance of 100,000 shares of $10 par value common stock and 50,000 shares of $50 preferred stock. The following transactions involving the issuance of shares of stock were completed. Each transaction is independent of the others. 1. Issued a $10,000, 9% bond payable at par and gave as a bonus one share of preferred stock, which at that time was selling for $106 a share. 2. Issued 500 shares of common stock for equipment. The equipment had been appraised at $7,100; the seller’s book value was $6,200. The most recent market price of the common stock is $16 a share. 3. Issued 375 shares of common and 100 shares of preferred for a lump sum amounting to $10,800. The common had been selling at $14 and the preferred at $65. 4. Issued 200 shares of common and 50 shares of preferred for equipment. The common had a fair value of $16 per share; the equipment has a fair value of $6,500. Instructions Record the transactions listed above in journal entry form.

Penn Company is in the process of adjusting and correcting its books at the end of 2014. In reviewing its records, the following information is compiled. 1. Penn has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows. December 31, 2013 $3,500 December 31, 2014 $2,500 2. In reviewing the December 31, 2014, inventory, Penn discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. December 31, 2012 Understated $16,000 December 31, 2013 Understated $19,000 December 31, 2014 Overstated $ 6,700 Penn has already made an entry that established the incorrect December 31, 2014, inventory amount. 3. At December 31, 2014, Penn decided to change the depreciation method on its office equipment from double-declining-balance to straight-line. The equipment had an original cost of $100,000 when purchased on January 1, 2012. It has a 10-year useful life and no salvage value. Depreciation expense recorded prior to 2014 under the double-declining-balance method was $36,000. Penn has already recorded 2014 depreciation expense of $12,800 using the double-declining-balance method. 4. Before 2014, Penn accounted for its income from long-term construction contracts on the completedcontract basis. Early in 2014, Penn changed to the percentage-of-completion basis for accounting purposes. It continues to use the completed-contract method for tax purposes. Income for 2014 has been recorded using the percentage-of-completion method. The following information is available. Pretax Income Percentage-of-Completion Completed-Contract Prior to 2014 $150,000 $105,000 2014 60,000 20,000 Instructions Prepare the journal entries necessary at December 31, 2014, to record the above corrections and changes. The books are still open for 2014. The income tax rate is 40%. Penn has not yet recorded its 2014 income tax expense and payable amounts so current-year tax effects may be ignored. Prior-year tax effects must be considered in item 4.