Question & Answer

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.)

How are citators used in tax research?

Hatch Company has two classes of capital stock outstanding: 8%, $20 par preferred and $5 par common. At December 31, 2014, the following accounts were included in stockholders’ equity. Preferred Stock, 150,000 shares $ 3,000,000 Common Stock, 2,000,000 shares 10,000,000 Paid-in Capital in Excess of Par—Preferred Stock 200,000 Paid-in Capital in Excess of Par—Common Stock 27,000,000 Retained Earnings 4,500,000 The following transactions affected stockholders’ equity during 2015. Jan. 1 30,000 shares of preferredstock issued at $22 per share. Feb. 1 50,000 shares of common stock issued at $20 per share. June 1 2-for-1 stock split (par value reduced to $2.50).July 1 30,000 shares of common treasury stock purchased at $10 per share. Hatch uses the cost method.Sept. 15 10,000 shares of treasury stock reissuedat $11 per share. Dec. 31 The preferred dividend is declared, and a common dividend of 50¢ per share is declared. Dec. 31 Net income is $2,100,000. Instructions Prepare the stockholders’ equity section for Hatch Company at December 31, 2015. Show all supporting computations.

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.

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?

Larry purchased an annuity from an insurance company that promises to pay him $1,500 per month for the rest of his life.  Larry paid $170,820 for the annuity.  Larry is in good health, and he is 72 years old.  Larry received the first annuity payment of $1,500 this month.  Use the expected number of payments in Exhibit 5-1 for this problem. a.       How much of the first payment should Larry include in gross income? b.       If Larry lives more than 15 years after purchasing the annuity, how much of each additional payment should he include in gross income? c.       What are the tax consequences if Larry dies just after he receives the 100th payment?

A U-groove weld is used to butt weld 2 pieces of 7.0-mm-thick titanium plate. The U-groove is prepared using a milling cutter so the radius of the groove is 3.0 mm. During welding, the penetration of the weld causes an additional 1.5 mm of material to be melted. The final crosssectional area of the weld can be approximated by a semicircle with a radius of 4.5 mm. The length of the weld is 200 mm. The melting factor of the setup is 0.57 and the heat transfer factor is 0.86. (a) What is the quantity of heat (in Joules) required to melt the volume of metal in this weld (filler metal plus base metal)? Assume the resulting top surface of the weld bead is flush with the top surface of the plates. (b) What is the required heat generated at the welding source?

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?

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?

What is an autogenous weld?

How do corporations account for capital gains and losses for tax purposes?  How is this different from the way individuals account for capital gains and losses?

Why does a partner’s tax basis in a partnership interest need to be adjusted annually?

Stacy Corporation had income before income taxes for 2014 of $6,300,000. In addition, it suffered an unusual and infrequent pretax loss of $770,000 from a volcano eruption. The corporation’s tax rate is 30%. Prepare a partial income statement for Stacy beginning with income before income taxes. The corporation had 5,000,000 shares of common stock outstanding during 2014.

Presented below are a number of independent situations. Instructions For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported as cash, explain the rationale. 1. Checking account balance $925,000; certificate of deposit $1,400,000; cash advance to subsidiary of $980,000; utility deposit paid to gas company $180. 2. Checking account balance $600,000; an overdraft in special checking account at same bank as normal checking account of $17,000; cash held in a bond sinking fund $200,000; petty cash fund $300; coins and currency on hand $1,350. 3. Checking account balance $590,000; postdated check from customer $11,000; cash restricted due to maintaining compensating balance requirement of $100,000; certified check from customer $9,800; postage stamps on hand $620. 4. Checking account balance at bank $37,000; money market balance at mutual fund (has checking privileges) $48,000; NSF check received from customer $800. 5. Checking account balance $700,000; cash restricted for future plant expansion $500,000; short-term Treasury bills $180,000; cash advance received from customer $900 (not included in checking account balance); cash advance of $7,000 to company executive, payable on demand; refundable deposit of $26,000 paid to federal government to guarantee performance on construction contract.

A single-pass rolling operation reduces a 20 mm thick plate to 18 mm. The starting plate is 200 mm wide. Roll radius = 250 mm and rotational speed = 12 rev/min. The work material has a strength coefficient = 600 MPa and a strength coefficient = 0.22. Determine (a) roll force, (b) roll torque, and (c) power required for this operation.

Draw a supply and demand diagram with the price of labour (the wage rate) on the vertical axis and the quantity of labour (the number of workers) on the horizontal axis. What will happen to employment if the government raises wages from the equilibrium to some minimum wage above the equilibrium?

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.

Give an example of how a business can reduce variable costs by increasing fixed costs.

How good are you at making probabilistic judgements? Here is an interesting example. Suppose that one out of every hundred people in the population has a genetic medical condition. There is a test for this medical condition that is 99 per cent accurate. This means that if a person has the condition, the test returns a positive result with a 99 per cent probability; and if a person does not have the condition, it returns a negative result with 99 per cent probability. If a person’s test comes back positive (and you know nothing else about that person), what is the probability that s/he has the medical condition?

What is viewed as a major criticism of GAAP as regards revenue recognition?

What is the technical difference between a screw and a bolt?

Why might borrowing rates sometimes rise following a negative demand shock?

What is the objective of financial reporting?

On January 1, 2014, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $137,899 (including the executory costs of $6,000) at the beginning of each year, starting January 1, 2014. The taxes, the insurance, and the maintenance, estimated at $6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at $550,000. The asset is to be depreciated on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage’s incremental borrowing rate is 12%, and the implicit rate in the lease is 10%, which is known by Cage.  itle to the equipment transfers to Cage when the lease expires. The asset has an estimated useful life of 5 years and no residual value. Instructions (a) Explain the probable relationship of the $550,000 amount to the lease arrangement. (b) Prepare the journal entry or entries that should be recorded on January 1, 2014, by Cage Company. (c) Prepare the journal entry to record depreciation of the leased asset for the year 2014. (d) Prepare the journal entry to record the interest expense for the year 2014. (e) Prepare the journal entry to record the lease payment of January 1, 2015, assuming reversing entries are not made. (f) What amounts will appear on the lessee’s December 31, 2014, balance sheet relative to the lease contract?

Why are agricultural prices subject to greater fluctuations than those of manufactured products?