Question & Answer

On June 30, 2014, your client, Ferry Company, was granted two patents covering plastic cartons that it had been producing and marketing profitably for the past 3 years. One patent covers the manufacturing process, and the other covers the related products. Ferry executives tell you that these patents represent the most significant breakthrough in the industry in the past 30 years. The products have been marketed under the registered trademarks Evertight, Duratainer, and Sealrite. Licenses under the patents have already been granted by your client to other manufacturers in the United States and abroad, and are producing substantial royalties. On July 1, Ferry commenced patent infringement actions against several companies whose names you recognize as those of substantial and prominent competitors. Ferry’s management is optimistic that these suits will result in a permanent injunction against the manufacture and sale of the infringing products as well as collection of damages for loss of profits caused by the alleged infringement. The financial vice president has suggested that the patents be recorded at the discounted value of expected net royalty receipts. Instructions (a) What is the meaning of “discounted value of expected net receipts”? Explain. (b) How would such a value be calculated for net royalty receipts? (c) What basis of valuation for Ferry’s patents would be generally accepted in accounting? Give supporting reasons for this basis. (d) Assuming no practical problems of implementation, and ignoring generally accepted accounting principles, what is the preferable basis of valuation for patents? Explain. (e) What would be the preferable theoretical basis of amortization? Explain. (f) What recognition, if any, should be made of the infringement litigation in the financial statements for the year ending September 30, 2014? Discuss.

If we would all like more money, why does the government not print a lot more? Could it not thereby solve the problem of scarcity ‘at a stroke’?

One of the more closely watched ratios by investors is the price/earnings (P/E) ratio. By dividing price per share by earnings per share, analysts get insight into the value the market attaches to a company’s earnings. More specifically, a high P/E ratio (in comparison to companies in the same industry) may suggest the stock is overpriced. Also, there is some evidence that companies with low P/E ratios are underpriced and tend to outperform the market. However, the ratio can be misleading. P/E ratios are sometimes misleading because the E (earnings) is subject to a number of assumptions and estimates that could result in overstated earnings and a lower P/E. Some analysts conduct “revenue analysis” to evaluate the quality of an earnings number. Revenues are less subject to management estimates and all earnings must begin with revenues. These analysts also compute the price-to-sales ratio (PSR 5 price per share 4 sales per share) to assess whether a company is performing well compared to similar companies. If a company has a price-to-sales ratio significantly higher than its competitors, investors may be betting on a stock that has yet to prove itself. [Source: Janice Revell, “Beyond P/E,” Fortune (May 28, 2001), p. 174.] Instructions (a) Identify some of the estimates or assumptions that could result in overstated earnings. (b) Compute the P/E ratio and the PSR for Tootsie Roll and Hershey for 2011. (c) Use these data to compare the quality of each company’s earnings.

Comparative balance sheet accounts of Marcus Inc. are presented below. MARCUS INC. COMPARATIVE BALANCE SHEET ACCOUNTS AS OF DECEMBER 31, 2014 AND 2013 December 31 Debit Accounts 2014 2013 Cash $ 42,000 $ 33,750 Accounts Receivable 70,500 60,000 Inventory 30,000 24,000 Investments (available-for-sale) 22,250 38,500 Machinery 30,000 18,750 Buildings 67,500 56,250 Land 7,500 7,500 $269,750 $238,750 Credit Accounts Allowance for Doubtful Accounts $ 2,250 $ 1,500 Accumulated Depreciation—Machinery 5,625 2,250 Accumulated Depreciation—Buildings 13,500 9,000 Accounts Payable 35,000 24,750 Accrued Payables 3,375 2,625 Long-Term Notes Payable 21,000 31,000 Common Stock, no-par 150,000 125,000 Retained Earnings 39,000 42,625 $269,750 $238,750 Additional data (ignoring taxes): 1. Net income for the year was $42,500. 2. Cash dividends declared and paid during the year were $21,125. 3. A 20% stock dividend was declared during the year. $25,000 of retained earnings was capitalized. 4. Investments that cost $25,000 were sold during the year for $28,750. 5. Machinery that cost $3,750, on which $750 of depreciation had accumulated, was sold for $2,200. Marcus’s 2014 income statement follows (ignoring taxes). Sales revenue $540,000 Less: Cost of goods sold 380,000 Gross margin 160,000 Less: Operating expenses (includes $8,625 depreciation and $5,400 bad debts) 120,450 Income from operations 39,550 Other: Gain on sale of investments $3,750 Loss on sale of machinery (800) 2,950 Net income $ 42,500 Instructions (a) Compute net cash flow from operating activities using the direct method. (b) Prepare a statement of cash flows using the indirect method.

Why don’t farmers benefit from a high income elasticity of demand for convenience foods?

In general, how are unincorporated business entities classified for tax purposes?

The processable area on a 156-mm-diameter wafer is a 150-mm-diameter circle. How many square IC chips can be processed within this area, if each chip is 7.5 mm on a side? Assume the cut lines (streets) between chips are of negligible width.

Define machinability.

Bill Jovi is reviewing the cash accounting for Nottleman, Inc., a local mailing service. Jovi’s review will focus on the petty cash account and the bank reconciliation for the month ended May 31, 2014. He has collected the following information from Nottleman’s bookkeeper for this task. Petty Cash 1. The petty cash fund was established on May 10, 2014, in the amount of $250. 2. Expenditures from the fund by the custodian as of May 31, 2014, were evidenced by approved receipts for the following. Postage expense $33.00 Mailing labels and other supplies 65.00 I.O.U. from employees 30.00 Shipping charges (to customer) 57.45 Newspaper advertising 22.80 Miscellaneous expense 15.35 On May 31, 2014, the petty cash fund was replenished and increased to $300; currency and coin in the fund at that time totaled $26.40. Problems 399 Bank Reconciliation   Nottleman’s Cash Account Balance, May 1, 2014 $ 8,850 Deposits during May 2014 31,000 Checks written during May 2014 (31,835) Deposits in transit are determined to be $3,000, and checks outstanding at May 31 total $850. Cash on hand (besides petty cash) at May 31, 2014, is $246. Instructions (a) Prepare the journal entries to record the transactions related to the petty cash fund for May. (b) Prepare a bank reconciliation dated May 31, 2014, proceeding to a correct cash balance, and prepare the journal entries necessary to make the books correct and complete. (c) What amount of cash should be reported in the May 31, 2014, balance sheet?

At December 31, 2014, Cascade Company had a net deferred tax liability of $450,000. An explanation of the items that compose this balance is as follows. Temporary Differences in Deferred Taxes Resulting Balances 1. Excess of tax depreciation over book depreciation. $200,000 2. Accrual, for book purposes, of estimated loss contingency from pending lawsuit that is expected to be settled in 2015. The loss will be deducted on the tax return when paid. $ (50,000) 3. Accrual method used for book purposes and installment method used for tax purposes for an isolated installment sale of an investment. $300,000 In analyzing the temporary differences, you find that $30,000 of the depreciation temporary difference will reverse in 2015, and $120,000 of the temporary difference due to the installment sale will reverse in 2015. The tax rate for all years is 40%. Instructions Indicate the manner in which deferred taxes should be presented on Cascade Company’s December 31, 2014, statement of financial position.

What is the difference between engineering stress and true stress in a tensile test?

You have been assigned to examine the financial statements of Zarle Company for the year ended December 31, 2014. You discover the following situations. 1. Depreciation of $3,200 for 2014 on delivery vehicles was not recorded. 2. The physical inventory count on December 31, 2013, improperly excluded merchandise costing $19,000 that had been temporarily stored in a public warehouse. Zarle uses a periodic inventory system. 3. A collection of $5,600 on account from a customer received on December 31, 2014, was not recorded until January 2, 2015. 4. In 2014, the company sold for $3,700 fully depreciated equipment that originally cost $25,000. The company credited the proceeds from the sale to the Equipment account. 5. During November 2014, a competitor company filed a patent-infringement suit against Zarle claiming damages of $220,000. The company’s legal counsel has indicated that an unfavorable verdict is probable and a reasonable estimate of the court’s award to the competitor is $125,000. The company has not reflected or disclosed this situation in the financial statements. 6. Zarle has a portfolio of trading securities. No entry has been made to adjust to market. Information on cost and fair value is as follows. Cost Fair Value December 31, 2013 $95,000 $95,000 December 31, 2014 $84,000 $82,000 7. At December 31, 2014, an analysis of payroll information shows accrued salaries of $12,200. The Salaries and Wages Payable account had a balance of $16,000 at December 31, 2014, which was unchanged from its balance at December 31, 2013. 8. A large piece of equipment was purchased on January 3, 2014, for $40,000 and was charged to Maintenance and Repairs Expense. The equipment is estimated to have a service life of 8 years and no residual value. Zarle normally uses the straight-line depreciation method for this type of equipment. 9. A $12,000 insurance premium paid on July 1, 2013, for a policy that expires on June 30, 2016, was charged to insurance expense. 10. A trademark was acquired at the beginning of 2013 for $50,000. No amortization has been recorded since its acquisition. The maximum allowable amortization period is 10 years. Instructions Assume the trial balance has been prepared but the books have not been closed for 2014. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. (Ignore income tax considerations.)

Jurassic Company owns machinery that cost $900,000 and has accumulated depreciation of $380,000.The present value of expected future net cash flows from the use of the asset are expected to be $500,000. The fair value less cost of disposal of the equipment is $400,000. Prepare the journal entry, if any, to record the impairment loss.

Is it easier to describe what a capital asset is or what it is not?Explain

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.

William is a single writer (age 35) who recently decided that he needs to save more for retirement. His current year AGI before the IRA contribution deduction is $80,000 (all earned income). a. If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution William can make for the current year? b. If he does participate in an employer-sponsored plan, what is the maximum deductible IRA contribution William can make for the current year? c. Assume the same facts as in part (b), except William’s AGI before the IRA contribution deduction is $89,000. What is the maximum deductible IRA contribution William can make for the current year?

Describe the three hurdles a taxpayer must pass if they want to deduct a loss from their share in an S corporation. What other loss limitation rule may impact the deductibility of losses from an S corporation?

Takemoto Corporation borrowed $60,000 on November 1, 2014, by signing a $61,350, 3-month, zero-interest-bearing note. Prepare Takemoto’s November 1, 2014, entry; the December 31, 2014, annual adjusting entry; and the February 1, 2015, entry.

What is the feature that distinguishes glass from the traditional and new ceramics?

Refer to the data in IFRS9-8 for Keyser’s Fleece Inc. Prepare the journal entries for (a) the wool harvested in the first six months of 2014, and (b) the wool harvested that is sold for $10,500 in July 2014.

Information concerning Sandro Corporation’s intangible assets is as follows. 1. On January 1, 2014, Sandro signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of $75,000. Of this amount, $15,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $15,000 each, beginning January 1, 2015. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2014, of the 4 annual payments discounted at 14% (the implicit rate for a loan of this type) is $43,700. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Sandro’s revenue from the franchise for 2014 was $900,000. Sandro estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Chapter 18 to determine the proper accounting treatment for the franchise fee and payments.) 2. Sandro incurred $65,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2014. Legal fees and other costs associated with registration of the patent totaled $17,600. Sandro estimates that the useful life of the patent will be 8 years. 3. A trademark was purchased from Shanghai Company for $36,000 on July 1, 2011. Expenditures for successful litigation in defense of the trademark totaling $10,200 were paid on July 1, 2014. Sandro estimates that the useful life of the trademark will be 20 years from the date of acquisition. Instructions (a) Prepare a schedule showing the intangible assets section of Sandro’s balance sheet at December 31, 2014. Show supporting computations in good form. (b) Prepare a schedule showing all expenses resulting from the transactions that would appear on Sandro’s income statement for the year ended December 31, 2014. Show supporting computations in good form.

At December 31, 2013, certain accounts included in the property, plant, and equipment section of Reagan Company’s balance sheet had the following balances. Land $230,000 Buildings 890,000 Leasehold improvements 660,000 Equipment 875,000 During 2014, the following transactions occurred. 1. Land site number 621 was acquired for $850,000. In addition, to acquire the land Reagan paid a $51,000 commission to a real estate agent. Costs of $35,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for $13,000. 2. A second tract of land (site number 622) with a building was acquired for $420,000. The closing statement indicated that the land value was $300,000 and the building value was $120,000. Shortly after acquisition, the building was demolished at a cost of $41,000. A new building was constructed for $330,000 plus the following costs. Excavation fees $38,000 Architectural design fees 11,000 Building permit fee 2,500 Imputed interest on funds used during construction (stock fi nancing) 8,500 The building was completed and occupied on September 30, 2014. 3. A third tract of land (site number 623) was acquired for $650,000 and was put on the market for resale. 4. During December 2014, costs of $89,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2016, and is not expected to be renewed. (Hint: Leasehold improvements should be handled in the same manner as land improvements.) 5. A group of new machines was purchased under a royalty agreement that provides for payment of royalties based on units of production for the machines. The invoice price of the machines was $87,000, freight costs were $3,300, installation costs were $2,400, and royalty payments for 2014 were $17,500. Instructions (a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2014. Land Leasehold Improvements Buildings Equipment Disregard the related accumulated depreciation accounts. (b) List the items in the situation that were not used to determine the answer to (a) above, and indicate where, or if, these items should be included in Reagan’s financial statements.

Assume that Sonic Foundry Corporation has a contractual debt outstanding. Sonic has available two means of settlement. It can either make immediate payment of $2,600,000, or it can make annual payments of $300,000 for 15 years, each payment due on the last day of the year. Instructions Which method of payment do you recommend, assuming an expected effective interest rate of 8% during the future period?

Explain how ADRs enable U.S. investors to become part owners of foreign companies. (LO7)

At the end of the current period, Agler Inc. had a projected benefit obligation of $400,000 and pension plan assets (at fair value) of $350,000. What are the accounts and amounts that will be reported on the company’s balance sheet as pension assets or pension liabilities?