Question & Answer

Kelly Clarkson Corporation operates a retail computer store. To improve delivery services to customers, the company purchases four new trucks on April 1, 2014. The terms of acquisition for each truck are described below. 1. Truck #1 has a list price of $15,000 and is acquired for a cash payment of $13,900. 2. Truck #2 has a list price of $16,000 and is acquired for a down payment of $2,000 cash and a zerointerest- bearing note with a face amount of $14,000. The note is due April 1, 2015. Clarkson would normally have to pay interest at a rate of 10% for such a borrowing, and the dealership has an incremental borrowing rate of 8%. 3. Truck #3 has a list price of $16,000. It is acquired in exchange for a computer system that Clarkson carries in inventory. The computer system cost $12,000 and is normally sold by Clarkson for $15,200. Clarkson uses a perpetual inventory system. 4. Truck #4 has a list price of $14,000. It is acquired in exchange for 1,000 shares of common stock in Clarkson Corporation. The stock has a par value per share of $10 and a market price of $13 per share. Instructions Prepare the appropriate journal entries for the above transactions for Clarkson Corporation.

Ten samples of equal size are taken to prepare a p chart. The total number of parts in these ten samples was 900 and the total number of defects counted was 117. Determine the center, LCL and UCL for the p chart.

List two factors that could affect managers’ choices for the number of times and points in processing to inspect units.

Given the liquidity advantage of holding Treasury bills, why do banks hold only a relatively small portion of their assets as T-bills? (LO2)

What modifications to the conventional retail method are necessary to approximate a LIFO retail flow?

What is draft in a rolling operation?

In periods when home prices declined substantially, some homeowners blamed the Fed. In other periods when home prices increased, homeowners gave credit to the Fed. How can the Fed have such a large impact on home prices? How could news of a substantial increase in the general inflation level affect the Fed’s monetary policy and thereby affect home prices? (LO2; LO3)

Marvin Gaye Company has been having difficulty obtaining key raw materials for its manufacturing process. The company therefore signed a long-term noncancelable purchase commitment with its largest supplier of this raw material on November 30, 2014, at an agreed price of $400,000. At December 31, 2014, the raw material had declined in price to $365,000. Instructions What entry would you make on December 31, 2014, to recognize these facts?

Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.

Why cannot a direct conversion be made between the ductility measures of elongation and reduction in area using the assumption of constant volume?

A static memory device will have a two-dimensional array with 64 by 64 cells. Determine the number of input/output pins required using Rent's rule with C = 6.0 and m = 0.12.

Flexible budget and variances; reasons for variances Play Time Toys is organised into two major divisions: marketing and production. The production division is further divided into three departments: puzzles, dolls and video games. Each production department has its own manager. The company’s management believes that all costs must be covered by sales of the three product lines. Therefore, a portion of production division costs are allocated to each product line. The company’s accountant prepared the following variance report for the dolls production department.       Required (a) Is Play Time Toys using a static budget or a flexible budget to calculate variances? Explain. (b) Do you agree with this approach? Why or why not? (c) Develop a flexible budget for the actual sales of 1100 units. (d) Use the benchmark you created in part (c) to calculate variances. (e) Review the variances from part (d). Briefly describe what the variances are suggesting regarding performance.

Cost function using multiple regression (appendix 2A) Refer to the data and requirements of Problem 2.23.   Required (a)          Perform multiple regression using all three cost drivers. Compare the adjusted R-squares and cost functions for the multiple regression with the results of simple regressions for each potential cost driver. (b)          Which cost drivers do the best job of explaining manufacturing overhead costs? Explain. (c)           Select only the cost drivers that do the best job of explaining manufacturing overhead costs. Perform multiple regression analysis for those cost drivers and write the cost function. (d)          Explain why more than one cost driver is plausible for manufacturing overhead costs. (a)     Multiple regression with all three potential cost drivers:   Regression Statistics Multiple R 0.9092294 R Square 0.8266982 Adjusted R Square 0.8067018 Standard Error 4832.5558 Observations 30     Coefficients Standard Error t Stat P-value Intercept 60988.489 10361.2349 5.886218 3.3E-06 Labour Hours -0.1959303 3.333162437 -0.05878 0.953575 Machine Hours 48.778501 5.291558412 9.218173 1.12E-09 Raw Materials 82.976635 10.10654585 8.210187 1.08E-08   Comparison of simple and multiple regression results: (b)     Labour hours does not appear to be a cost driver when using either simple regression or multiple regression; its coefficient is not significantly different from zero in either regression. Also, its coefficient is negative rather than positive in the multiple regression. Thus, labour hours can be eliminated as a potential cost driver.   Both machine hours and raw materials are positive and significantly different from zero when using simple regression and also when using multiple regression. The adjusted R-Square is far higher in the multiple regression (0.806) than in either of the simple regressions (0.352 and 0.226) for these two cost drivers. A combination of cost drivers does a much better job of explaining the variation in manufacturing overhead costs than either cost driver alone.   (c)     Multiple regression using machine hours and raw materials as cost drivers:   Regression Statistics Multiple R 0.90921678 R Square 0.82667515 Adjusted R Square 0.81383627 Standard Error 4742.5348 Observations 30     Coefficients Standard Error t Stat P-value Intercept 60677.5902 8743.664851 6.939606 1.86E-07 Machine Hours 48.7422519 5.157604083 9.450561 4.71E-10 Raw Materials 82.925842 9.881964042 8.391636 5.29E-09   The cost function is: TC = $60 678 + $48.74×Machine hours + $82.93×Raw materials   (d)    Manufacturing can be a complex activity requiring a number of different tasks. Each task includes different activities. Costs for these activities are likely related to specific cost drivers. In this example, machine hours and raw materials explain different activity costs, such as machining work on units, and materials handling for the units. A better understanding of the manufacturing process improves the ability to determine the types and number of cost drivers that can be used in a more complete cost function.

Danny’s Lawn Equipment sells high-quality lawn mowers and offers a 3-year warranty on all new lawn mowers sold. In 2014, Danny sold $300,000 of new specialty mowers for golf greens for which Danny’s service department does not have the equipment to do the service. Danny has entered into an agreement with Mower Mavens to provide all warranty service on the special mowers sold in 2014. Danny wishes to measure the fair value of the agreement to determine the warranty liability for sales made in 2014. The controller for Danny’s Lawn Equipment estimates the following expected warranty cash outflows associated with the mowers sold in 2014. Cash Flow Probability Year Estimate Assessment 2015 $2,500 20% 4,000 60% 5,000 20% 2016 $3,000 30% 5,000 50% 6,000 20% 2017 $4,000 30% 6,000 40% 7,000 30% Instructions Using expected cash flow and present value techniques, determine the value of the warranty liability for the 2014 sales. Use an annual discount rate of 5%. Assume all cash flows occur at the end of the year.

Use of prior year costs; quality of information Software Solutions is a family-owned business that has been in operation for more than 15 years. The board of directors is comprised of mainly family members, plus a few professionals such as an accountant and lawyer. Regina is a staff accountant who has been working on the budget for the last several weeks. The chief financial officer (CFO) needs to present the budget at the next board meeting and wants a preliminary copy in two days. Regina is certain that she will not be able to finish the budget within two days. Several department heads have not turned in their preliminary figures, and two departments have budgeted large increases in fixed costs for replacing computer equipment. Regina knows she should have alerted the CFO about these budgeted increases, but she has not had time.   One of her co-workers knows that Regina is behind and suggests that she use last year’s budgets for those departments that have not provided information and also for the departments that increased their budgets by large amounts. The co-worker says that the budget can be straightened out later because the board does not pay attention to the details.   Required (a)          Is this an ethical dilemma for Regina? Why? (b)          Why might it be important for the board of directors to have as much updated information as possible about the budget? (c)           What should Regina do, given that not enough time is available to gather high-quality information? Explain your thinking.

Distinguish between the modified all-inclusive income statement and the current operating performance income statement. According to present generally accepted accounting principles, which is recommended? Explain.

Assume Congress increases individual tax rates on ordinary income while leaving all other tax rates unchanged. How would this change affect the overall tax rate on corporate taxable income? How would this change affect overall tax rates for owners of flow-through business entities?

Murphy Mining Company recently purchased a quartz mine that it intends to work for the next 10 years. According to state environmental laws, Murphy must restore the mine site to its original natural prairie state after it ceases mining operations at the site. To properly account for the mine, Murphy must estimate the fair value of this asset retirement obligation. This amount will be recorded as a liability and added to the value of the mine on Murphy’s books. (You will learn more about these asset retirement obligations in Chapters 10 and 13.) There is no active market for retirement obligations such as these, but Murphy has developed the following cash flow estimates based on its prior experience in mining-site restoration. It will take 3 years to restore the mine site when mining operations cease in 10 years. Each estimated cash outflow reflects an annual payment at the end of each year of the 3-year restoration period. Instructions (a) What is the estimated fair value of Murphy’s asset retirement obligation? Murphy determines that the appropriate discount rate for this estimation is 5%. Round calculations to the nearest dollar. (b) Is the estimate developed for part (a) a Level 1 or Level 3 fair value estimate? Explain. Restoration Estimated Probability Cash Outflow Assessment $15,000 10% 22,000 30% 25,000 50% 30,000 10%

Under what conditions is it appropriate for a business to use the composite method of depreciation for its plant assets? What are the advantages and disadvantages of this method?

Taking the same industries, identify as many economies of scale as you can.

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

Vandross Company has recorded bad debt expense in the past at a rate of 1½% of net sales. In 2014, Vandross decides to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $380,000 instead of $285,000. In 2014, bad debt expense will be $120,000 instead of $90,000. If Vandross’s tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?

Name the four basic bulk deformation processes.

When interpreting a control chart, what does one look for to identify problems?

The following information was taken from the records of Roland Carlson Inc. for the year 2014. Income tax applicable to income from continuing operations $187,000; income tax applicable to loss on discontinued operations $25,500; income tax applicable to extraordinary gain $32,300; income tax applicable to extraordinary loss $20,400; and unrealized holding gain on availablefor- sale securities $15,000. Extraordinary gain $ 95,000 Cash dividends declared $ 150,000 Loss on discontinued operations 75,000 Retained earnings January 1, 2014 600,000 Administrative expenses 240,000 Cost of goods sold 850,000 Rent revenue 40,000 Selling expenses 300,000 Extraordinary loss 60,000 Sales revenue 1,900,000 Shares outstanding during 2014 were 100,000. Instructions (a) Prepare a single-step income statement. (b) Prepare a comprehensive income statement for 2014, using the two statement format. (c) Prepare a retained earnings statement for 2014.