Question & Answer

John Adams Company’s record of transactions for the month of April was as follows. Purchases Sales April 1 (balance on hand) 600 @ $ 6.00 April 3 500 @ $10.00 4 1,500 @ 6.08 9 1,400 @ 10.00 8 800 @ 6.40 11 600 @ 11.00 13 1,200 @ 6.50 23 1,200 @ 11.00 21 700 @ 6.60 27 900 @ 12.00 29 500 @ 6.79 4,600 5,300 Instructions (a) Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using (1) LIFO and (2) average-cost. (b) Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO. (c) Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO. (d) In an inflationary period, which inventory method—FIFO, LIFO, average-cost—will show the highest net income?

Inventory information for Part 311 of Monique Aaron Corp. discloses the following information for the month of June. June 1 Balance 300 units @ $10 June 10 Sold 200 units @ $24 11 Purchased 800 units @ $12 15 Sold 500 units @ $25 20 Purchased 500 units @ $13 27 Sold 300 units @ $27 Instructions (a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under (1) LIFO and (2) FIFO. (b) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO? (c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO? (d) Why is it stated that LIFO usually produces a lower gross profit than FIFO?

Why is the distinction between paid-in capital and retained earnings important?

Picasso Company is a wholesale distributor of professional equipment and supplies. The company’s sales have averaged about $900,000 annually for the 3-year period 2012–2014. The firm’s total assets at the end of 2014 amounted to $850,000. The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the board of directors at their next meeting. In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2012–2014. 2012 2013 2014 Current ratio 1.80 1.89 1.96 Acid-test (quick) ratio 1.04 0.99 0.87 Accounts receivable turnover 8.75 7.71 6.42 Inventory turnover 4.91 4.32 3.42 Debt to assets 51.0% 46.0% 41.0% Long-term debt to assets 31.0% 27.0% 24.0% Sales to fi xed assets (fi xed asset turnover) 1.58 1.69 1.79 Sales as a percent of 2012 sales 1.00 1.03 1.07 Gross margin percentage 36.0% 35.1% 34.6% Net income to sales 6.9% 7.0% 7.2% Return on assets 7.7% 7.7% 7.8% Return on common stock equity 13.6% 13.1% 12.7% In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period. Instructions (a) The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios provided, identify and explain the contributing factor(s) for this apparently divergent trend. (b) In terms of the ratios provided, what conclusion(s) can be drawn regarding the company’s use of financial leverage during the 2012–2014 period? (c) Using the ratios provided, what conclusion(s) can be drawn regarding the company’s net investment in plant and equipment?

Hoosier Corporation declared a stock distribution to all shareholders of record on March 25 of this year. Shareholders will receive one share of Hoosier Corporation stock for each share of stock they already own. Hoosier reported current E&P of $600,000 and accumulated E&P of $3,000,000. The total fair market value of the stock distributed was $1,500,000. Barbara owned 1,000 shares of Hoosier stock with a tax basis of $100 per share.

1. What other reasons can you think of why perfect competition is so rare? 2. Why does the market for fresh vegetables approximate to perfect competition, whereas that for aircraft does not?

Why do some financial institutions remain exposed to interest rate risk, even when they believe that the use of interest rate futures could reduce their exposure? (LO2)

Explain how the Fed uses the ample reserves framework to reduce the money supply. (LO2)

Use the information presented in BE7-4 for Wilton, Inc. (a) Instead of estimating the uncollectibles at 2% of net sales, assume that 10% of accounts receivable will prove to be uncollectible. Prepare the entry to record bad debt expense. (b) Instead of estimating uncollectibles at 2% of net sales, assume Wilton prepares an aging schedule that estimates total uncollectible accounts at $24,600. Prepare the entry to record bad debt expense.

Tony Bautista needs $25,000 in 4 years. What amount must he invest today if his investment earns 12% compounded annually? What amount must he invest if his investment earns 12% annual interest compounded quarterly?

What is a bond indenture? What is the function of a trustee with respect to the bond indenture? (LO2)

Explain the possible signal that would be transmitted to the market if a country abandoned its use of the euro. (LO1)

Some economists argue that recessions generate unemployment ‘scarring’ (i.e. various negative outcomes for the people unemployed and possibly broader society too). What might these scarring effects be and what is likely to be their longer-term impact?

Explain how the Securities and Exchange Commission attempts to prevent violations of SEC regulations. (LO4)

Explain how the credit crisis affected the credit risk premium in the commercial paper market. (LO1)

Imagine that two countries, Richland and Poorland, can produce just two goods, computers and coal. Assume that for a given amount of land and capital, the output of these two products requires the following constant amounts of labour:                                 Richland Poorland 1 computer 2 4 100 tonnes of coal 4 5          Assume that each country has 20 million workers. (a)  Draw the production possibility curves for the two countries (on two separate diagrams). (b)  If there is no trade, and in each country 12 million workers produce computers and 8 million workers produce coal, how many computers and tonnes of coal much will each country produce? What will be the total production of each product? (c)  What is the opportunity cost of a computer in (i) Richland; (ii) Poorland? (d)  What is the opportunity cost of 100 tonnes of coal in (i) Richland; (ii) Poorland? (e)  Which country has a comparative advantage in which product? (f)   Assuming that price equals marginal cost, which of the following would represent possible exchange ratios? (i) 1 computer for 40 tonnes of coal; (ii) 2 computers for 140 tonnes of coal; (iii) 1 computer for 100 tonnes of coal; (iv) 1 computer for 60 tonnes of coal; (v) 4 computers for 360 tonnes of coal. (g)  Assume that trade now takes place and that 1 computer exchanges for 65 tonnes of coal. Both countries specialise completely in the product in which they have a comparative advantage. How much does each country produce of its respective product? (h)  The country producing computers sells 6 million domestically. How many does it export to the other country? (i)   How much coal does the other country consume? (j)   Construct a table like Table 24.4 to show the no-trade and with-trade positions of each country?

Dexter Company appropriately uses the assetliability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year’s taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (a) What are the principles of the asset-liability approach? (b) How would Dexter account for the temporary differences? (c) How should Dexter classify the deferred tax consequences of the temporary differences on its balance sheet?

If XYZ Corporation is a shareholder of BCD Corporation, how many times will  BCD’s before-tax income potentially be taxed? Has Congress provided any tax relief for this result? Explain.

As economic conditions change, how do banks adjust their asset portfolio? (LO4)

Define machinability.

There are 17 correct answers in the following multiple choice questions (some questions have multiple answers that are correct). To attain a perfect score on the quiz, all correct answers must be given. Each correct answer is worth 1 point. Each omitted answer or wrong answer reduces the score by 1 point, and each additional answer beyond the correct number of answers reduces the score by 1 point. Percentage score on the quiz is based on the total number of correct answers. 7.1 Which one of the following is the most common element in the earth's crust: (a) aluminum, (b) calcium, (c) iron, (d) oxygen, or (e) silicon? 7.2 Glass products are based primarily on which one of the following minerals: (a) alumina, (b) corundum, (c) feldspar, (d) kaolinite, or (e) silica? 7.3 Which of the following contains significant amounts of aluminum oxide (three correct answers): (a) alumina, (b) bauxite, (c) corundum, (d) feldspar, (e) kaolinite, (f) quartz, (g) sandstone, and (h) silica? 7.4 Which of the following ceramics are commonly used as abrasives in grinding wheels (two best answers): (a) aluminum oxide, (b) calcium oxide, (c) carbon monoxide, (d) silicon carbide, and (e) silicon dioxide? 7.5 Which one of the following is generally the most porous of the clay-based pottery ware: (a) china, (b) earthenware, (c) porcelain, or (d) stoneware? 7.6 Which one of the following is fired at the highest temperatures: (a) china, (b) earthenware, (c) porcelain, or (d) stoneware? 7.7 Which one of the following comes closest to expressing the chemical composition of clay: (a) Al2O3, (b) Al2(Si2O5)(OH)4, (c) 3AL2O3-2SiO2, (d) MgO, or (e) SiO2? 7.8 Glass ceramics are polycrystalline ceramic structures that have been transformed into the glassy state: (a) true or (b) false? 7.9 Which one of the following materials is closest to diamond in hardness: (a) aluminum oxide, (b) carbon dioxide, (c) cubic boron nitride, (d) silicon dioxide, or (e) tungsten carbide? 7.10 Which of the following best characterizes the structure of glass-ceramics: (a) 95% polycrystalline, (b) 95% vitreous, or (b) 50% polycrystalline? 7.11 Properties and characteristics of the glass-ceramics include which of the following (two best answers): (a) efficiency in processing, (b) electrical conductor, (c) high thermal expansion, and (d) strong, relative to other glasses? 7.12 Diamond is the hardest material known: (a) true or (b) false? 7.13 Synthetic diamonds date to (a) ancient times, (b) 1800s, (c) 1950s, or (d) 1980.

Under the percentage-of-completion method, how are the Construction in Process and the Billings on Construction in Process accounts reported in the balance sheet?

Describe how you would determine the MACRS recovery period for an asset if you did not already know it.

Presented below is information related to Langston Hughes Corporation. Price Index LIFO Cost Retail Inventory on December 31, 2014, when dollar-value LIFO is adopted 100 $36,000 $ 74,500 Inventory, December 31, 2015 110 ? 100,100 Instructions Compute the ending inventory under the dollar-value LIFO method at December 31, 2015. The cost-toretail ratio for 2015 was 60%.

Mustafa, Mickayla, and Taylor are starting a new business (MMT). To get the business started, Mustafa is contributing $200,000 for a 40 percent ownership interest, Mickayla is contributing a building with a value of $200,000 and a tax basis of $150,000 for a 40 percent ownership interest, and Taylor is contributing legal services for a 20 percent ownership interest. What amount of gain or income is each owner required to recognize under each of the following alterative situations? [Hint: Look at §§351 and 721.] a. MMT is formed as a C corporation. b. MMT is formed as an S corporation. c. MMT is formed as an LLC (taxed as a partnership).