Question & Answer

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.

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?

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.

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.

David and Lilly Fernandez have determined their tax liability on their joint tax return to be $1,700. They have made prepayments of $1,500 and also have a child tax credit of $1,000.What is the amount of their tax refund or taxes due?

Identify the principal components of a stamping die that performs blanking

What are the implications of treating losses as passive?

What is an autogenous weld?

What is the definition of control for purposes of §351?  Why does Congress require the shareholders to control a corporation to receive tax deferral?

What are the potential tax consequences to a shareholder who participates in a stock redemption?

Identify the factors that affect a stock portfolio’s volatility and explain their effects. (LO4)

Kelly Company had cash receipts from customers in 2014 of $142,000. Cash payments for operating expenses were $97,000. Kelly has determined that at January 1, accounts receivable was $13,000, and prepaid expenses were $17,500. At December 31, accounts receivable was $18,600, and prepaid expenses were $23,200. Compute (a) service revenue and (b) operating expenses.

Suppose that David has elected to account for inventories and has adopted the last-in, first-out (LIFO) inventory-flow method for his business inventory of widgets (purchase prices below).  WidgetPurchase DateDirect CostOther CostsTotal Cost #1August 15$ 2,100$ 100$ 2,200 #2October 30$ 2,200$ 150$ 2,350 #3November 10$ 2,300$ 100$ 2,400 In late December, David sold one widget, and next year David expects to purchase three more widgets at the following estimated prices: WidgetPurchase DateEstimated Cost #4Early spring$ 2,600 #5Summer$ 2,260 #6Fall$ 2,400 a) What cost of goods sold and ending inventory would David record if he elects to use the LIFO method this year?  b) If David sells two more widgets next year, what will be his cost of goods sold and ending inventory next year under the LIFO method? c) How would you answer (a) and (b) if David had initially selected the first-in, first-out (FIFO) method instead of LIFO? d) Suppose that David initially adopted the LIFO method but wants to apply for a change to FIFO next year. What would be his §481 adjustment for this change, and in what year(s) would he make the adjustment?

Assume the bonds in BE14-2 were issued at 103. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.

What is the fundamental difference between a fusion weld and a solid state weld?

In Problem 21.1, suppose the rake angle were changed to 0°. Assuming that the friction angle remains the same, determine (a) the shear plane angle, (b) the chip thickness, and (c) the shear strain for the operation.

The balance sheet of Kishwaukee Corporation as of December 31, 2014, is as follows.   Equities Notes payable (Note 3) $ 600,000 Common stock, authorized and issued, 1,000,000 shares, no par 1,150,000 Retained earnings 803,000 Noncontrolling interest 55,000 Appreciation capital (Note 1) 570,000 Income tax payable 75,000 Reserve for depreciation recorded to date on the building 410,000 $3,663,000 Note 1: Buildings are stated at cost, except for one building that was recorded at appraised value. The excess of appraisal value over cost was $570,000. Depreciation has been recorded based on cost. Note 2: Goodwill in the amount of $120,000 was recognized because the company believed that book value was not an accurate representation of the fair value of the company. The gain of $120,000 was credited to Retained Earnings. Note 3: Notes payable are long-term except for the current installment due of $100,000. Instructions Prepare a corrected classified balance sheet in good form. The notes above are for information only.

The following facts pertain to a non-cancelable lease agreement between Lennox Leasing Company and Gill Company, a lessee. (Round all numbers to the nearest cent.) Inception date: May 1, 2014 Annual lease payment due at the beginning of each year, beginning with May 1, 2014: $18,829.49 Bargain-purchase option price at end of lease term: $4,000.00 Lease term: 5 years Economic life of leased equipment: 10 years Lessor’s cost: $65,000.00; fair value of asset at May 1, 2014, $81,000.00 Lessor’s implicit rate: 10%; lessee’s incremental borrowing rate 10% The lessee assumes responsibility for all executory costs. Instructions (a) Discuss the nature of this lease to Gill Company. (b) Discuss the nature of this lease to Lennox Company. (c) Prepare a lease amortization schedule for Gill Company for the 5-year lease term. (d) 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. Gill’s annual accounting period ends on December 31. Reversing entries are used by Gill.

In 2014, Ghostbusters Corp. spent $420,000 for “goodwill” visits by sales personnel to key customers. The purpose of these visits was to build a solid, friendly relationship for the future and to gain insight into the problems and needs of the companies served. How should this expenditure be reported?

Norton Co. had the following amounts related to its pension plan in 2014. Actuarial liability loss for 2014 $28,000 Unexpected asset gain for 2014 18,000 Accumulated other comprehensive income (G/L) (beginning balance) 7,000 Cr. Determine for 2014: (a) Norton’s other comprehensive income (loss), and (b)N comprehensive income. Net income for 2014 is $26,000; no amortization of gain or loss is necessary in 2014.