Question & Answer

It is possible that as people get richer they will spend a smaller and smaller fraction of each rise in income (and save a larger fraction). Why might this be so? What effect will it have on the shape of the consumption function?

Lease versus buy decision; ROI; residual income; EVA; manager          incentives Refer to the information in Problem 18.21. The manager of Sandy Point Construction is considering a new project. She can buy or lease equipment that will reprocess tailings from old mines to remove any traces of gold left behind by the original separating processes. The purchase price of the equipment is $150 000. The cost to lease is $2000 per month. She estimates the return (incremental revenues minus incremental expenses, including lease cost) to be $40 000 per year. She knows that purchasing the equipment will increase the value of average operating assets. If she leases the equipment, expenses will increase, but not assets. (In other words, the lease will be accounted for as an operating lease.) Although it is more cost effective to purchase the equipment, she has decided to lease it.   Required (a)     Calculate the new ROI if the equipment is (i) purchased or (ii) leased. (b)     Calculate the new residual income if the equipment is (i) purchased, or (ii) leased. (c)     One of the adjustments that can be made using EVA is to treat all operating lease costs as if they were purchases — in other words, to capitalise the lease. If Sandy Point Construction used EVA with this adjustment, how might the manager’s incentives and behaviour change? Explain.

You are the vice president of finance of Sandy Alomar Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2014. These schedules appear below. Sales Cost of Gross ($5 per unit) Goods Sold Margin Schedule 1 $150,000 $124,900 $25,100 Schedule 2 150,000 129,400 20,600 The computation of cost of goods sold in each schedule is based on the following data. Cost Total Units per Unit Cost Beginning inventory, January 1 10,000 $4.00 $40,000 Purchase, January 10 8,000 4.20 33,600 Purchase, January 30 6,000 4.25 25,500 Purchase, February 11 9,000 4.30 38,700 Purchase, March 17 11,000 4.40 48,400 Jane Torville, the president of the corporation, cannot understand how two different gross margins can be computed from the same set of data. As the vice president of finance, you have explained to Ms. Torville that the two schedules are based on different assumptions concerning the flow of inventory costs, i.e., FIFO and LIFO. Schedules 1 and 2 were not necessarily prepared in this sequence of cost flow assumptions. Instructions Prepare two separate schedules computing cost of goods sold and supporting schedules showing the composition of the ending inventory under both cost flow assumptions.

Rainmaker Company prepares its financial statements in accordance with IFRS. In 2014, Rainmaker recorded the following revaluation adjustments related to its buildings and land: The company’s building increased in value by $200,000; its land declined by $35,000. How will these revaluation adjustments affect Rainmaker’s balance sheet? Will the reporting differ under GAAP? Explain.

A leadscrew connected directly to a DC servomotor is the drive system for a positioning table. The leadscrew pitch = 4 mm. The optical encoder attached to the leadscrew emits 250 pulses/rev of the leadscrew. Determine (a) the control resolution of the system, expressed in linear travel distance of the table axis, (b) the frequency of the pulse train emitted by the optical encoder when the servomotor operates at 14 rev/s, and (c) the travel speed of the table at the operating speed of the motor.

Which countries’ merchandise trade had fallen as a percentage of GDP between the 2000s and the 2010s? Explain why.

Campbell’s tax return was audited because they failed to report on their tax return interest they earned.  What IRS audit selection method identified their tax return?

Willow Corp. (a calendar-year C corporation) reported taxable income before the net operating loss deduction (NOL) in the amount of $100,000 in 2024. Willow had an NOL carryover of $90,000 to 2024 How much tax will Willow Corp. pay for 2024, what is its NOL carryover to 2025, and when will the NOL expire under the following assumptions?

Describe the procedures involved in segregating various deferred tax amounts into current and noncurrent categories.

A steel collar is press fitted onto a steel shaft. The modulus of elasticity of steel is 30 x 106 lb/in2. The collar has an internal diameter of 2.498 in and the shaft has an outside diameter = 2.500 in. The outside diameter of the collar is 4.000 in. Determine the radial (interference) pressure on the assembly, and (b) the maximum effective stress in the collar at its inside diameter

How does a corporation determine the percentage for its dividends-received deduction?  Explain.

What are the general rules for measuring and recognizing gain or loss by a debt extinguishment with modification?

What is the name of the process most commonly used to grow single crystal ingots of silicon for semiconductor processing?

Using the facts in problem 62, could Adam and Tom lower their payroll tax exposure if they operated their business as a partnership?  Why or why not?

Busytown Corporation, which manufactures shoes, hired a recent college graduate to work in its accounting department. On the first day of work, the accountant was assigned to total a batch of invoices with the use of an adding machine. Before long, the accountant, who had never before seen such a machine, managed to break the machine. Busytown Corporation gave the machine plus $340 to Dick Tracy Business Machine Company (dealer) in exchange for a new machine. Assume the following information about the machines. Busytown Corp. Dick Tracy Co. (Old Machine) (New Machine) Machine cost $290 $270 Accumulated depreciation 140 –0– Fair value 85 425 Instructions For each company, prepare the necessary journal entry to record the exchange. (The exchange has commercial substance.)

How do the economic policies of the major political parties differ? (If it is near an election you could refer to their manifestos.) How far can an economist go in assessing these policies?

Tyrone recently read a regulation that Congress specifically requested the IRS to issue.  What type of regulation is this?  How does this regulation’s authoritative weight compare to other regulations?

On July 31, 2014, Mexico Company paid $3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition. It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2014, Conchita reports the following balance sheet information. It is determined that the fair value of the Conchita Division is $1,850,000. The recorded amount for Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value $150,000 above the carrying value. Instructions (a) Compute the amount of goodwill recognized, if any, on July 31, 2014. (b) Determine the impairment loss, if any, to be recorded on December 31, 2014. (c) Assume that fair value of the Conchita Division is $1,600,000 instead of $1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2014. (d) Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement. Salaries and Other Expenses Number Employee (excluding Building of Projects Benefits Depreciation Charges) Completed projects with long-term benefits 15 $ 90,000 $50,000 Abandoned projects or projects that benefit the current period 10 65,000 15,000 Projects in process—results indeterminate 5 40,000 12,000 Total 30 $195,000 $77,000 Current assets $ 800,000 Current liabilities $ 600,000 Noncurrent assets 2,700,000 Long-term liabilities 500,000 Total assets $3,500,000 Stockholders’ equity 2,400,000 Total liabilities and stockholders’ equity $3,500,000 Current assets $ 450,000 Noncurrent assets (including goodwill recognized in purchase) 2,400,000 Current liabilities (700,000) Long-term liabilities (500,000) Net assets $1,650,000

Benjaminrecently bought a truck in Alabama for his business in Georgia.  What different types of federal and state taxes may affect this transaction?

Presented below is financial information for two different companies. Alatorre Company Eduardo Company Sales revenue $90,000 (d) Sales returns and allowances (a) $ 5,000 Net sales 81,000 95,000 Cost of goods sold 56,000 (e) Gross profi t (b) 38,000 Operating expenses 15,000 23,000 Net income (c) Instructions Compute the missing amounts.

What are the desirable properties of a metal that would provide good weldability for resistance welding?

Using the facts in Problem 51, what is the minimum tax that Pedro should pay to make the tax structure vertically equitable with respect to the amount of tax paid?  This would result in what type of tax rate structure?

Describe the reporting of pension plans for a company with multiple plans, some of which are underfunded and some of which are overfunded.

What are some of the significant sources of contaminants in IC processing?

Assume that in an annual audit of Harlowe Inc. at December 31, 2014, you find the following transactions near the closing date. 1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shipping room on December 31, 2014. The customer was billed on that date and the machine excluded from inventory although it was shipped on January 4, 2015. 2. Merchandise costing $2,800 was received on January 3, 2015, and the related purchase invoice recorded January 5. The invoice showed the shipment was made on December 29, 2014, f.o.b. destination. 3. A packing case containing a product costing $3,400 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked “Hold for shipping instructions.” Your investigation revealed that the customer’s order was dated December 18, 2014, but that the case was shipped and the customer billed on January 10, 2015. The product was a stock item of your client. 4. Merchandise received on January 6, 2015, costing $680 was entered in the purchase journal on January 7, 2015. The invoice showed shipment was made f.o.b. supplier’s warehouse on December 31, 2014. Because it was not on hand at December 31, it was not included in inventory. 5. Merchandise costing $720 was received on December 28, 2014, and the invoice was not recorded. You located it in the hands of the purchasing agent; it was marked “on consignment.” Instructions Assuming that each of the amounts is material, state whether the merchandise should be included in theclient’s inventory, and give your reason for your decision on each item.