Question & Answer

Outline the accounting procedures involved in applying the operating method by a lessee.

How does money aid the specialisation and division of labour?

Ballard Co. reported $145,000 of net income for 2014. The accountant, in preparing the statement of cash flows, noted the following items occurring during 2014 that might affect cash flows from operating activities. 1. Ballard purchased 100 shares of treasury stock at a cost of $20 per share. These shares were then resold at $25 per share. 2. Ballard sold 100 shares of IBM common at $200 per share. The acquisition cost of these shares was $145 per share. This investment was shown on Ballard’s December 31, 2013, balance sheet as an available-for-sale security. 3. Ballard revised its estimate for bad debts. Before 2014, Ballard’s bad debt expense was 1% of its net sales. In 2014, this percentage was increased to 2%. Net sales for 2014 were $500,000, and net accounts receivable decreased by $12,000 during 2014. 4. Ballard issued 500 shares of its $10 par common stock for a patent. The market price of the shares on the date of the transaction was $23 per share. 5. Depreciation expense is $39,000. 6. Ballard Co. holds 40% of the Nirvana Company’s common stock as a long-term investment. Nirvana Company reported $27,000 of net income for 2014. 7. Nirvana Company paid a total of $2,000 of cash dividends to all investees in 2014. 8. Ballard declared a 10% stock dividend. One thousand shares of $10 par common stock were distributed. The market price at date of issuance was $20 per share. Instructions Prepare a schedule that shows the net cash flow from operating activities using the indirect method. Assume no items other than those listed above affected the computation of 2014 net cash flow from operating activities.

1. Why does the LRMC curve cross the MRL curve directly below the tangency point of the LRAC and ARL curves?   2. Assuming that supernormal profits can be made in the short run, will there be any difference in the long-run and short-run elasticity of demand? Explain.

Describe the Fed’s monetary policy response to the credit crisis that began in 2008. (LO2)

On January 1, 2014, Richards Inc. had cash and common stock of $60,000. At that date, the company had no other asset, liability, or equity balances. On January 2, 2014, it purchased for cash $20,000 of equity securities that it classified as available-for-sale. It received cash dividends of $3,000 during the year on these securities. In addition, it has an unrealized holding gain on these securities of $4,000 net of tax. Determine the following amounts for 2014: (a) net income, (b) comprehensive income, (c) other comprehensive income, and (d) accumulated other comprehensive income (end of 2014).

Describe the practice of cross hedging and explain when this strategy might be used. (LO2)

Joblonsky Inc. has recently hired a new independent auditor, Karen Ogleby, who says she wants “to get everything straightened out.” Consequently, she has proposed the following accounting changes in connection with Joblonsky Inc.’s 2014 financial statements. 1. At December 31, 2013, the client had a receivable of $820,000 from Hendricks Inc. on its statement of financial position. Hendricks Inc. has gone bankrupt, and no recovery is expected. The client proposes to write off the receivable as a prior period item. 2. The client proposes the following changes in depreciation policies. (a) For office furniture and fixtures, it proposes to change from a 10-year useful life to an 8-year life. If this change had been made in prior years, retained earnings at December 31, 2013, would have been $250,000 less. The effect of the change on 2014 income alone is a reduction of $60,000. (b) For its new equipment in the leasing division, the client proposes to adopt the sum-of-the-years’- digits depreciation method. The client had never used SYD before. The first year the client operated a leasing division was 2014. If straight-line depreciation were used, 2014 income would be $110,000 greater. 3. In preparing its 2013 statements, one of the client’s bookkeepers overstated ending inventory by $235,000 because of a mathematical error. The client proposes to treat this item as a prior period adjustment. 4. In the past, the client has spread preproduction costs in its furniture division over 5 years. Because its latest furniture is of the “fad” type, it appears that the largest volume of sales will occur during the first 2 years after introduction. Consequently, the client proposes to amortize preproduction costs on a per-unit basis, which will result in expensing most of such costs during the first 2 years after the furniture’s introduction. If the new accounting method had been used prior to 2014, retained earnings at December 31, 2013, would have been $375,000 less. 5. For the nursery division, the client proposes to switch from FIFO to average-cost inventories because it believes that average-cost will provide a better income measure. The effect of making this change on 2014 earnings will be an increase of $320,000. The client says that the effect of the change on December 31, 2013, retained earnings cannot be determined. 6. To achieve an appropriate recognition of revenues and expenses in its building construction division, the client proposes to switch from the cost-recovery method of accounting to the percentageof- completion method. Had the percentage-of-completion method been employed in all prior years, retained earnings at December 31, 2013, would have been $1,075,000 greater. Instructions (a) For each of the changes described above, decide whether: (1) The change involves an accounting policy, accounting estimate, or correction of an error. (2) Restatement of opening retained earnings is required. (b) What would be the proper adjustment to the December 31, 2013, retained earnings?

Journal entries for job costing At the beginning of the accounting period, the accountant for ABC Industries estimated that total overhead would be $80 000. Overhead is allocated to jobs on the basis of direct labour cost. Direct labour was budgeted to cost $200 000 this period. During the period only three jobs were worked on. The following summarises the direct materials and labour costs for each:       Job 1231 was finished and sold; job 1232 was finished but is waiting to be sold; and job 1233 is still in process. Actual overhead for the period was $82 000.   Required Prepare the following journal entries. (a)          Cost recorded during production (b)          Cost of jobs completed (c)           Cost of sales (d)          Allocation of overapplied or underapplied overhead allocated on a pro rata basis to the ending balances in work in process, finished goods, and cost of sales

1. How will the length of the short run for the airline depend on the state of the aircraft industry? 2. Up to roughly how long is the short run in the following cases? (a) A firm supplying DJs for clubs and parties. (b) Nuclear power generation. (c) A street food wagon. (d) Superstore Hypermarkets Ltd. In each case specify your assumptions.

Why are the US and UK current balances approximately a ‘mirror image’ of the Japanese and German current balances?

What are the three basic methods by which metals can be strengthened?

Why are held-to-maturity investments applicable only to debt securities?

1. It is sometimes claimed that the market for various stocks and shares is perfectly competitive, or nearly so. Take the case of the market for shares in a large company like Apple. Go through each of the four assumptions above and see if they apply in this case. (Don’t be misled by assumption (1). The ‘firm’ in this case is not Apple itself.) 2. Is the market for gold perfectly competitive?

In 2024, Sven is single and has $120,000 of regular taxable income.  He itemizes his deductions as follows: real property tax of $2,000, state income tax of $4,000, mortgage interest expense of $15,000 (acquisition debt of $300,000).  He also has a positive AMT depreciation adjustment of $500.  What is Sven’s alternative minimum taxable income (AMTI)? Complete Form 6251 (through line 4) for Sven.

What three characteristics must a strategic move have if it is to be successful in altering the behaviour of a competitor later in the game.

What types of tax cuts are likely to create the greatest (a) incentives; (b) disincentives to effort?

Dickinson Inc. owns the following assets. Asset Cost Salvage Estimated Useful Life A $70,000 $7,000 10 years B 50,000 5,000 5 years C 82,000 4,000 12 years Compute the composite depreciation rate and the composite life of Dickinson’s assets.

List the four general categories of adjustments that a corporation makes to taxable income or net loss to compute current E&P.  What is the rationale for making these adjustments?

Wood Incorporated factored $150,000 of accounts receivable with Engram Factors Inc. on a withoutrecourse basis. Engram assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entry for Wood Incorporated and Engram Factors to record the factoring of the accounts receivable to Engram.

Compare the federal income tax to sales taxes using the “certainty” criterion.

Scot and Vidia, married taxpayers, earn $240,000 in taxable income and $5,000 in interest from an investment in City of Tampa bonds.  Using the U.S. tax rate schedule for married filing jointly, how much federal tax will they owe?  What is their average tax rate?  What is their effective tax rate?  What is their current marginal tax rate?

Many years ago a famous member of Congress proposed eliminating federal income tax withholding.  What criterion for evaluating tax systems did this proposal violate?  What would likely have been the result of eliminating withholding?

What is the difference between adaptive expectations and rational expectations?

Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds.  Using the U.S. tax rate schedule, how much federal tax will he owe?  What is his average tax rate?  What is his effective tax rate?  What is his current marginal tax rate?