Question & Answer

What is an ad valorem tax?  Name an example of this type of tax.

When we calculate average and effective tax rates, do we consider implicit taxes?  What effect does this have on taxpayers’ perception of equity?

Beyoncé Corporation factors $175,000 of accounts receivable with Kathleen Battle Financing, Inc. on a with recourse basis. Kathleen Battle Financing will collect the receivables. The receivables records are transferred to Kathleen Battle Financing on August 15, 2014. Kathleen Battle Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments. Instructions (a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale? (b) Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2014, for Beyoncé to record the sale of receivables, assuming the recourse obligation has a fair value of $2,000.

Would an intensification of government regulation constitute a positive or negative economic shock in RBC models?

At the end of the current year, Joshua Co. has a defined benefit obligation of $335,000 and pension plan assets with a fair value of $345,000. The amount of the vested benefits for the plan is $225,000. Joshua has a liability gain of $8,300 (beginning accumulated OCI is zero). What amount and account(s) related to its pension plan will be reported on the company’s statement of financial position?

Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months. Organic Growth sells these seeds on account for $1,500,000 on January 2, 2014. Companies are required to pay the full amount due by March 15, 2014. Instructions (a) Prepare the journal entry for Organic Growth at January 2, 2014, assuming Organic Growth estimates returns of 20% based on prior experience. (Ignore cost of goods sold.) (b) Assume that one customer returns the seeds on March 1, 2014, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased $100,000 of seeds from Organic Growth. (c) Briefly describe the accounting for these sales, if Organic Growth is unable to reliably estimate returns.

What is the difference between the income and substitution effects?  For which types of taxpayers is the income effect more likely descriptive?  For which types of taxpayers is the substitution effect more likely descriptive?

What is the difference between horizontal and vertical equity?  How do tax preferences affect people’s view of horizontal equity?

Question: The following information relates to the Jimmy Johnson Company. Ending Inventory Price Date (End-of-Year Prices) Index December 31, 2010 $ 70,000 100 December 31, 2011 90,300 105 December 31, 2012 95,120 116 December 31, 2013 105,600 120 December 31, 2014 100,000 125 Instructions Use the dollar-value LIFO method to compute the ending inventory for Johnson Company for 2010 through 2014.

On February 20, 2014, Barbara Brent Inc., purchased a machine for $1,500,000 for the purpose of leasing it. The machine is expected to have a 10-year life, no residual value, and will be depreciated on the straight-line basis. The machine was leased to Rudy Company on March 1, 2014, for a 4-year period at a monthly rental of $19,500. There is no provision for the renewal of the lease or purchase of the machine by the lessee at the expiration of the lease term. Brent paid $30,000 of commissions associated with negotiating the lease in February 2014. Instructions (a) What expense should Rudy Company record as a result of the facts above for the year ended December 31, 2014? Show supporting computations in good form. (b) What income or loss before income taxes should Brent record as a result of the facts above for the year ended December 31, 2014? (Hint: Amortize commissions over the life of the lease.)

What are postretirement benefits other than pensions?

Cost driver; cost categories; appropriateness of regression; relevant information Susan looked at her long-distance telephone bill with dismay. After leaving her job last year to become a self-employed consultant, her long-distance charges had grown considerably. She had not changed long-distance plans for years, partly because she hated taking the time to review the range of service providers and plans. However, the size of her long-distance bill made it clear that it was time to make a change. She had recently seen numerous advertisements by telephone companies offering much lower rates than she was currently paying, but she was sure that at least some of those plans offered low rates only for night and weekend calls. Susan called her current long-distance service provider and asked how she could obtain a lower rate. She mentioned hearing that a competitor was currently offering long distance at 5c per minute. In responding to the service representative’s questions, Susan verified that most of her long-distance calls are weekday and out of state. She also agreed that her activity over the past two months—approximately 500 minutes of long distance per month—was her best estimate for future calling activity. Given this information, the service representative suggested that Susan buy the following long-distance service plan:                                (i)                             Up to 500 minutes of long distance for a flat fee of $20 per month.                              (ii)                             No refunds would be provided for usage less than 500 minutes per month.                            (iii)                             Any minutes over 500 per month would be billed at 10c per minute.                            (iv)                             No service change fee or cancellation fee would apply.                                                                                 Required (a)          What is the cost driver for Susan’s long-distance telephone costs, assuming that the cost object is her consulting business? (b)          In the proposed service plan, which of the costs are fixed and which are variable? Explain. (c)           Would regression analysis be an appropriate tool for Susan to use in deciding whether to buy the new service plan? Why? (d)          Is the cost of Susan’s current long-distance service plan relevant to this decision? Why? (e)           Explain why Susan cannot be certain whether the new service plan will reduce her long-distance costs. (f)           List additional information that might be relevant to Susan in deciding whether to buy the new service plan. (g)          Are Susan’s long-distance services most likely a discretionary cost? Explain. (h)          Are Susan’s long-distance services most likely a direct or indirect cost, assuming that the cost object is an individual consulting job? Explain. (i)            Describe the pros and cons of the new service plan.

How do merit goods differ from public goods?

What are the two ways in which a bank should diversify its loans? Why? Is international diversification of loans a viable strategy for dealing with credit risk? Defend your answer. (LO4)

Distinguish between a capital interest and a profits interest, and explain how partners and partnerships treat each when exchanging them for services provided.

Under what conditions could a process complete more units during the period than it started?

Presented below are data taken from the records of Alee Company.December 31, December 31, 2014 2013Cash $ 15,000 $ 8,000 Current assets other than cash 85,000 60,000 Long-term investments 10,000 53,000 Plant assets 335,000 215,000 $445,000 $336,000 Accumulated depreciation $ 20,000 $ 40,000 Current liabilities 40,000 22,000 Bonds payable 75,000 202 Capital stock 254,000 254,000 Retained earnings 56,000 20,000 $445,000 $336,000 Additional information: 1. Held-to-maturity securities carried at a cost of $43,000 on December 31, 2013, were sold in 2014 for $34,000. The loss (not extraordinary) was incorrectly charged directly to Retained Earnings. 2. Plant assets that cost $50,000 and were 80% depreciated were sold during 2014 for $8,000. The loss (not extraordinary) was incorrectly charged directly to Retained Earnings. 3. Net income as reported on the income statement for the year was $57,000. 4. Dividends paid amounted to $10,000. 5. Depreciation charged for the year was $20,000. Instructions Prepare a statement of cash flows for the year 2014 using the indirect method.

(a) How are the components of revenues and expenses different for a merchandising company? (b) Explain the income measurement process of a merchandising company.

Illini Corporation reported taxable income of $500,000 from operations for this year. In addition, the company distributed an automobile to its sole shareholder, Yuki. The auto’s fair market value was $30,000 and its tax basis to Illini was $0. The auto’s E&P tax basis was $15,000. Illini had accumulated E&P of $1,500,000 at the beginning of the year.

At December 31, 2014, Indigo Girls Company has outstanding noncancelable purchase commitments for 36,000 gallons, at $3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower. Instructions (a) Assuming that the market price as of December 31, 2014, is $3.30, how would this matter be treated in the accounts and statements? Explain. (b) Assuming that the market price as of December 31, 2014, is $2.70, instead of $3.30, how would you treat this situation in the accounts and statements? (c) Give the entry in January 2015, when the 36,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2014, and that the market price in January 2015 was $2.70 per gallon. Give an explanation of your treatment.

1. Assume that there is a growing demand for computer programmers. As a result more people train to become programmers. Does this represent a rightward shift in the supply curve of programmers, or merely the supply curve becoming more elastic in the long run, or both? Explain. 2. Which is likely to be more elastic, the supply of coal miners or the supply of shop assistants? Explain.

If a bank expects interest rates to decrease over time, how might it alter the rate sensitivity of its assets and liabilities? (LO3)

Hinges Corporation issued 500 shares of $100 par value preferred stock for $61,500. Prepare Hinges’s journal entry.

Presented below are two independent situations. (a) On January 1, 2014, Robin Wright Inc. purchased land that had an assessed value of $350,000 at the time of purchase. A $550,000, zero-interest-bearing note due January 1, 2017, was given in exchange. There was no established exchange price for the land, nor a ready fair value for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2014, and the interest expense to be reported in 2014 related to this transaction. (b) On January 1, 2014, Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zerointerest- bearing, Field Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2014.

Discuss the importance of ethical decision-making in a sustainability management accounting framework.