Question & Answer

Compare and contrast realization of income with recognition of income.

Presented below is information taken from a bond investment amortization schedule with related fair values provided. These bonds are classified as available-for-sale. 12/31/14 12/31/15 12/31/16 Amortized cost $491,150 $519,442 $550,000 Fair value $497,000 $509,000 $550,000 Instructions (a) Indicate whether the bonds were purchased at a discount or at a premium. (b) Prepare the adjusting entry to record the bonds at fair value at December 31, 2014. The Fair Value Adjustment account has a debit balance of $1,000 prior to adjustment. (c) Prepare the adjusting entry to record the bonds at fair value at December 31, 2015.

What issue precipitated the return of capital principle?  Explain.

Compare how the return of capital principle applies when (1) a taxpayer sells an asset and collects the sale proceeds all immediately and (2) a taxpayer sells an asset and collects the sale proceeds over several periods (installment sales).  If Congress wanted to maximize revenue from installment sales, how would they have applied the return of capital principle for installment sales?

What was the level of unemployment mid-way between quarter 2 and quarter 3 of 2020?

1. Assume that there is both internal and narrow external balance. Now assume that as a result of inflation being below target, the central bank cuts interest rates. Into which of the four quadrants in Figure 25.2 will the economy move? 2. Imagine that there is an inflationary gap, but a balance of payments equilibrium. Describe what will happen if the government raises interest rates in order to close the inflationary gap. Assume first that there is a fixed exchange rate and then that there is a floating exchange rate.

Explain the exchange rate system that existed during the 1950s and 1960s. How did the Smithsonian Agreement in 1971 revise it? How does today’s exchange rate system differ from the earlier system? (LO1)

The cash method of accounting means that taxpayers don’t recognize income unless they receive cash or cash equivalents.  True or false?  Explain.

Contrast the constructive receipt doctrine with the claim of right doctrine.

Simon lost $5,000 gambling this year on a trip to Las Vegas. In addition, he paid $2,000 to his broker for managing his $200,000 portfolio, and $1,500 to his accountant for preparing his tax return. In addition, Simon incurred $2,500 in transportation costs commuting back and forth from his home to his employer’s office, which were not reimbursed. Calculate the amount of these expenses that Simon is able to deduct (assuming he itemizes his deductions).

What is the mechanism by which carbon strengthens steel during heat treatment?

Shane has never filed a tax return despite earning excessive sums of money as a gambler.  When does the statute of limitations expire for the years in which Shane has not filed a tax return?

Assume that a bank expects to attract most of its funds through short-term CDs and would prefer to use most of its funds to provide long-term loans. How could it follow this strategy and still reduce interest rate risk? (LO3)

Lenexa State Bank has followed the practice of capitalizing certain marketing costs and amortizing these costs over their expected life. In the current year, the bank determined that the future benefits from these costs were doubtful.Consequently, the bank adopted the policy of expensing these costs as incurred. How should the bank report this accounting change in the comparative financial statements?

For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose. ______ 1. Settlement of federal tax case at a cost considerably in excess of the amount expected at year-end. ______ 2. Introduction of a new product line. ______ 3. Loss of assembly plant due to fire. ______ 4. Sale of a significant portion of the company’s assets. ______ 5. Retirement of the company president. ______ 6. Prolonged employee strike. ______ 7. Loss of a significant customer. ______ 8. Issuance of a significant number of shares of common stock. ______ 9. Material loss on a year-end receivable because of a customer’s bankruptcy. ______ 10. Hiring of a new president. ______ 11. Settlement of prior year’s litigation against the company (no loss was accrued). ______ 12. Merger with another company of comparable size.

If the government reduces the size of its public-sector net cash requirement, why might the money supply nevertheless increase more rapidly?

Zhang incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market values and adjusted tax bases.       FMV       Adjusted Tax Basis Inventory$    20,000$        10,000 Building    150,000        100,000 Land    230,000        300,000 Total$  400,000$      410,000   The corporation also assumed a mortgage (liability) of $100,000 attached to the building and land. The fair market value of the corporation’s stock received in the exchange was $300,000. The transaction met the requirements to be tax-deferred under §351.

Occidental Petroleum Corporation reported the following information in a recent annual report.   Instructions (a) What items other than coin and currency may be included in “cash”? (b) What items may be included in “cash equivalents”? (c) What are compensating balance arrangements, and how should they be reported in financial statements? (d) What are the possible differences between cash equivalents and short-term (temporary) investments? (e) Assuming that the sale agreement meets the criteria for sale accounting, cash proceeds were $345 million, the carrying value of the receivables sold was $360 million, and the fair value of the recourse liability was $15 million, what was the effect on income from the sale of receivables? (f) Briefly discuss the impact of the transaction in (e) on Occidental’s liquidity.

This year, Amy purchased $2,000 of equipment for use in her business. However, the machine was damaged in a traffic accident while Amy was transporting the equipment to her business. Note that because Amy did not place the equipment into service during the year, she does not claim any depreciation or cost recovery expense for the equipment.

What is the fair value option? Explain how use of the fair value option reflects application of the fair value principle.

: Describe the management changes brought about by a technology-driven workplace and those that facilitate a people-driven workplace.

Margaret Avery Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2012, the company expends $325,000 on a research project, but by the end of 2012, it is impossible to determine whether any benefit will be derived from it. (a) What account should be charged for the $325,000, and how should it be shown in the financial statements? (b) The project is completed in 2013, and a successful patent is obtained. The R&D costs to complete the project are $130,000 ($36,000 of these costs were incurred after achieving economic viability). The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2013 total $24,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also,record patent amortization (full year) in 2013. (c) In 2014, the company successfully defends the patent in extended litigation at a cost of $47,200, thereby extending the patent life to December 31, 2021. What is the proper way to account for thiscost?Also, record patent amortization (full year) in 2014. (d) Additional engineering and consulting costs incurred in 2014 required to advance the design of a new version of the product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably, but it is highly uncertain if there will be a market for the new version of the product. Discuss the proper accounting treatment for this cost.

What is the difference between fixed routing and variable routing in material transport systems?

Barrick Gold Corporation, with headquarters in Toronto, Canada, is the world’s most profitable and largest gold mining company outside South Africa. Part of the key to Barrick’s success has been due to its ability to maintain cash flow while improving production and increasing its reserves of goldcontaining property. In the most recent year, Barrick achieved record growth in cash flow, production, and reserves. The company maintains an aggressive policy of developing previously identified target areas that have the possibility of a large amount of gold ore, and that have not been previously developed. Barrick limits the riskiness of this development by choosing only properties that are located in politically stable regions, and by the company’s use of internally generated funds, rather than debt, to finance growth. Barrick’s inventories are as follows.   Instructions (a) Why do you think that there are no finished goods inventories? Why do you think the raw material, ore in stockpiles, is considered to be a non-current asset? (b) Consider that Barrick has no finished goods inventories. What journal entries are made to record a sale? (c) Suppose that gold bullion that cost $1.8 million to produce was sold for $2.4 million. The journal entry was made to record the sale, but no entry was made to remove the gold from the gold in process inventory. How would this error affect the following? Balance Sheet Income Statement Inventory ? Cost of goods sold ? Retained earnings ? Net income ? Accounts payable ? Working capital ? Current ratio ?

What are the advantages and disadvantages to a firm that issues low- or zero-coupon bonds? (LO2)