Question & Answer

Holtzman Company is in the process of preparing its financial statements for 2014. Assume that no entries for depreciation have been recorded in 2014. The following information related to depreciation of fixed assets is provided to you. 1. Holtzman purchased equipment on January 2, 2011, for $85,000. At that time, the equipment had an estimated useful life of 10 years with a $5,000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2014, as a result of additional information, the company determined that the equipment has a remaining useful life of 4 years with a $3,000 salvage value. 2. During 2014, Holtzman changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $300,000. It had a useful life of 10 years and a salvage value of $30,000. The following computations present depreciation on both bases for 2012 and 2013. 2013 2012 Straight-line $27,000 $27,000 Declining-balance 48,000 60,000 2012 2013 2014 2015 Net income unadjusted—LIFO basis $140,000 $160,000 $205,000 $276,000 Net income unadjusted—FIFO basis 155,000 165,000 215,000 260,000 $ 15,000 $ 5,000 $ 10,000 $ (16,000) 3. In 2015, the auditor discovered that: (a) The company incorrectly overstated the ending inventory (under both LIFO and FIFO) by $14,000 in 2014. (b) A dispute developed in 2013 with the Internal Revenue Service over the deductibility of entertainment expenses. In 2012, the company was not permitted these deductions, but a tax settlement was reached in 2015 that allowed these expenses. As a result of the court’s finding, tax expenses in 2015 were reduced by $60,000. Instructions (a) Indicate how each of these changes or corrections should be handled in the accounting records. (Ignore income tax considerations.) (b) Present comparative income statements for the years 2012 to 2015, starting with income before extraordinary items. (Ignore income tax considerations.)

What will determine the elasticity of this curve?

Gottschalk Company sponsors a defined benefit plan for its 100 employees. On January 1, 2014, the company’s actuary provided the following information. Accumulated other comprehensive loss (PSC) $150,000 Pension plan assets (fair value and market-related asset value) 200,000 Accumulated benefi t obligation 260,000 Projected benefi t obligation 380,000 The average remaining service period for the participating employees is 10 years. All employees are expected to receive benefits under the plan. On December 31, 2014, the actuary calculated that the present value of future benefits earned for employee services rendered in the current year amounted to $52,000; the projected benefit obligation was $490,000; fair value of pension assets was $276,000; the accumulated benefit obligation amounted to $365,000. The expected return on plan assets and the discount rate on the projected benefit obligation were both 10%. The actual return on plan assets is $11,000. The company’s current year’s contribution to the pension plan amounted to $65,000. No benefits were paid during the year. Instructions (a) Determine the components of pension expense that the company would recognize in 2014. (With only one year involved, you need not prepare a worksheet.) (b) Prepare the journal entry to record the pension expense and the company’s funding of the pension plan in 2014. (c) Compute the amount of the 2014 increase/decrease in gains or losses and the amount to be amortized in 2014 and 2015. (d) Indicate the pension amounts reported in the financial statement as of December 31, 2014.

(Threshold Concept 6) 1. What would you understand by the ‘wage elasticity of demand for labour’? How would the magnitude of this elasticity affect the working of the market for (a) plumbers and (b) footballers? (Threshold Concept 6) 2. How can income elasticity of demand help explain how the structure of economies changes over the years.

Paul Dobson Stores sell appliances for cash and also on the installment plan. Entries to record cost of sales are made monthly. PAUL DOBSON STORES TRIAL BALANCE DECEMBER 31, 2015 Dr. Cr. Cash $153,000 Installment Accounts Receivable, 2014 56,000 Installment Accounts Receivable, 2015 91,000 Inventory—New Merchandise 123,200 Inventory—Repossessed Merchandise 24,000 Accounts Payable $ 98,500 Deferred Gross Profi t, 2014 45,600 Capital Stock 170,000 Retained Earnings 93,900 Sales Revenue 343,000 Installment Sales 200,000 Cost of Goods Sold 255,000 Cost of Installment Sales 120,000 Loss on Repossession 800 Operating Expenses 128,000 $951,000 $951,000 The accounting department has prepared the following analysis of cash receipts for the year. Cash sales (including repossessed merchandise) $424,000 Installment accounts receivable, 2014 96,000 Installment accounts receivable, 2015 109,000 Other 36,000 Total $665,000 Repossessions recorded during the year are summarized as follows. 2014 Uncollected balance $8,000 Loss on repossession 800 Repossessed merchandise 4,800 Instructions From the trial balance and accompanying information: (a) Compute the rate of gross profit on installment sales for 2014 and 2015. (b) Prepare closing entries as of December 31, 2015, under the installment-sales method of accounting. (c) Prepare an income statement for the year ended December 31, 2015. Include only the realized gross profit in the income statement.

Explain why the stock price of a firm may rise when the firm announces that it is repurchasing its shares. (LO4)

Crocker Corp. owes D. Yaeger Corp. a 10-year, 10% note in the amount of $330,000 plus $33,000 of accrued interest. The note is due today, December 31, 2014. Because Crocker Corp. is in financial trouble, D. Yaeger Corp. agrees to forgive the accrued interest, $30,000 of the principal, and to extend the maturity date to December 31, 2017. Interest at 10% of revised principal will continue to be due on 12/31 each year. Assume the following present value factors for 3 periods. 21/4% 23/8% 21/2% 25/8% 23/4% 3% Single sum .93543 .93201 .92859 .92521 .92184 .91514 Ordinary annuity of 1 2.86989 2.86295 2.85602 2.84913 2.84226 2.82861 Instructions (a) Compute the new effective-interest rate for Crocker Corp. following restructure. (Hint: Find the interest rate that establishes approximately $363,000 as the present value of the total future cash flows.) (b) Prepare a schedule of debt reduction and interest expense for the years 2014 through 2017. (c) Compute the gain or loss for D. Yaeger Corp. and prepare a schedule of receivable reduction and interest revenue for the years 2014 through 2017. (d) Prepare all the necessary journal entries on the books of Crocker Corp. for the years 2014, 2015, and 2016. (e) Prepare all the necessary journal entries on the books of D. Yaeger Corp. for the years 2014, 2015, and 2016.

Identify the five components that comprise pension expense. Briefly explain the nature of each component.

{Research} Ralph owns a building that he is trying to lease.  Ralph is a calendar-year, cash method taxpayer and is trying to evaluate the tax consequences of three different lease arrangements.  Under lease 1, the building rents for $500 per month, payable on the first of the next month, and the tenant must make a $500 security deposit that is refunded at the end of the lease.  Under lease 2, the building rents for $5,500 per year, payable at the time the lease is signed, but no security deposit is required.  Under lease 3, the building rents for $500 per month, payable at the beginning of each month, and the tenant must pay a security deposit of $1,000 that is to be applied toward the rent for the last two months of the lease.  a.       What amounts are included in Ralph’s gross income this year if a tenant signs lease 1 on December 1 and makes timely payments under that lease?  b.       What amounts are included in Ralph’s gross income this year if the tenant signs lease 2 on December 31 and makes timely payments under that lease?   c.       What amounts are included in Ralph’s gross income this year if the tenant signs lease 3 on November 30 and makes timely payments under that lease?

Simpson, age 45, is a single individual who is employed full time by Duff Corporation. This year Simpson reports AGI of $50,000 and has incurred the following medical expenses:

For what types of parts are VTLs (vertical turret lathes) used?

An entry to record Purchases and related Accounts Payable of $13,000 for merchandise purchased on December 23, 2015, was recorded in January 2016. This merchandise was not included in inventory at December 31, 2015. What effect does this error have on reported net income for 2015? What entry should be made to correct for this error, assuming that the books are not closed for 2015?

LEW Company purchased a machine at a price of $100,000 by signing a note payable, which requires a single payment of $123,210 in 2 years. Assuming annual compounding of interest, what rate of interest is being paid on the loan?

Halle just acquired a vacation home. She plans on spending several months each year vacationing in the home and renting out the property for the rest of the year. She is projecting tax losses on the rental portion of the property for the year. She is not too concerned about the losses because she is confident she will be able to use the losses to offset her income from other sources. Is her confidence misplaced? Explain.

What are the three main goals in total quality management (TQM)?

Name three common types of income shifting.

As discussed in the chapter, an important consideration in evaluating current liabilities is a company’s operating cycle. The operating cycle is the average time required to go from cash to cash in generating revenue. To determine the length of the operating cycle, analysts use two measures: the average days to sell inventory (inventory days) and the average days to collect receivables (receivable days). The inventory-days computation measures the average number of days it takes to move an item from raw materials or purchase to final sale (from the day it comes in the company’s door to the point it is converted to cash or an account receivable). The receivable-days computation measures the average number of days it takes to collect an account. Most businesses must then determine how to finance the period of time when the liquid assets are tied up in inventory and accounts receivable. To determine how much to finance, companies first determine accounts payable days—how long it takes to pay creditors. Accounts payable days measures the number of days it takes to pay a supplier invoice. Consider the following operating cycle worksheet for BOP Clothing Co.   These data indicate that BOP has reduced its overall operating cycle (to 261.5 days) as well as the number of days to be financed with sources of funds other than accounts payable (from 78 to 63 days). Most businesses cannot finance the operating cycle with accounts payable financing alone, so working capital financing, usually short-term interest-bearing loans, is needed to cover the shortfall. In this case, BOP would need to borrow less money to finance its operating cycle in 2014 than in 2013. Instructions (a) Use the BOP analysis to briefly discuss how the operating cycle data relate to the amount of working capital and the current and acid-test ratios. (b) Select two other real companies that are in the same industry and complete the operating cycle worksheet, along with the working capital and ratio analysis. Briefly summarize and interpret the results. To simplify the analysis, you may use ending balances to compute turnover ratios. [Adapted from Operating Cycle Worksheet at www.entrepreneur.com]

Ethical Decision-Making — Wasted Soup83 While she was watching operations at a food processing plant, a consultant noticed a large amount of soup on the floor under a filling machine. An operator washed this soup away each day. When asked about the loss of soup, the production manager replied that no losses occurred. In this manager’s view, no problem existed because the production line operating costs were below budgeted costs. Later, a productivity team analysed the amount of soup wasted over a given time period. The team estimated the cost of the leak to be $750 000 a year. To correct the problem, the company installed a set of valves costing $50 000. The new valves eliminated the loss of soup.   Instead of measuring performance against expected budget levels, managers could compare actual profits to ideal profits that could be earned if operations were to run at their true potential. By focusing on the gap between ideal and actual profits, managers are encouraged to identify lost profit potential and to reconsider critical processes. Once gaps are identified, managers rank them according to their value to the organisation and correct them in priority order.   Required (a)     Is it an ethical problem when employees observe inefficiencies in the workplace, such as the loss of soup in this case? Why? (b)     Why is it common for employees to do nothing when they observe inefficiencies? Compare the responsibility of operation workers to the responsibility of the operating manager with respect to identifying and correcting inefficiencies. In what ways are the responsibilities the same? In what ways are they different? (c)     Is it ethical for employees to ignore inefficiencies? Why? What values did you use to arrive at the conclusion? (d)     People do not always seek to achieve their best performance. For example, students sometimes apply minimum effort to achieve a targeted grade. What does it mean for individuals to seek continuous improvement? (LO2)

Compute MV Corp.’s 2024 taxable income given the following information relating to its current-year activities. Also, compute MV’s Schedule M-1 assuming that MV’s federal income tax expense for book purposes is $100,000.   • Gross profit from inventory sales of $500,000 (no book-tax differences). • Dividends MV received from 25 percent-owned corporation of $100,000 (assume this is also MV’s pro rata share of the distributing corporation’s earnings). • Expenses other than DRD, charitable contribution (CC), and net operating loss (NOL) are $350,000 (no book-tax differences). • NOL carryforward from 2023 of $10,000. • Cash charitable contribution of $120,000.

Workman Company purchased a machine on January 2, 2014, for $800,000. The machine has an estimated useful life of 5 years and a salvage value of $100,000. Depreciation was computed by the 150% declining-balance method. What is the amount of accumulated depreciation at the end of December 31, 2015?

Explain what a favourable variance and an unfavourable variance mean in relation to revenue and costs.

Why are both the price elasticity of demand and the price elasticity of supply likely to be greater in the long run?

In countries experiencing high inflation, the annual interest rate may exceed 50 percent; in other countries such as the United States and many European countries, the annual interest rates are typically less than 10 percent. Do you think such a large difference in interest rates is due primarily to country-specific differences in the risk-free rates or in the credit risk premiums? Explain. (LO3)

When should liabilities for each of the following items be recorded on the books of an ordinary business corporation? (a) Acquisition of goods by purchase on credit. (b) Officers’ salaries. (c) Special bonus to employees. (d) Dividends. (e) Purchase commitments.

Using the appropriate interest table, compute the present values of the following periodic amounts due at the end of the designated periods. (a) $30,000 receivable at the end of each period for 8 periods compounded at 12%. (b) $30,000 payments to be made at the end of each period for 16 periods at 9%. (c) $30,000 payable at the end of the seventh, eighth, ninth, and tenth periods at 12%.