Question & Answer

In the absence of restrictive provisions, what are the basic rights of stockholders of a corporation?

Discuss the appropriate treatment in the financial statements of each of the following. (a) An amount of $113,000 realized in excess of the cash surrender value of an insurance policy on the life of one of the founders of the company who died during the year. (b) A profit-sharing bonus to employees computed as a percentage of net income. (c) Additional depreciation on factory machinery because of an error in computing depreciation for the previous year. (d) Rent received from subletting a portion of the office space. (e) A patent infringement suit, brought 2 years ago against the company by another company, was settled this year by a cash payment of $725,000. (f) A reduction in the Allowance for Doubtful Accounts balance because the account appears to be considerably in excess of the probable loss from uncollectible receivables.

Besides the starting material, what other feature distinguishes the rapid prototyping technologies?

Chippewas Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2014, to expand its production capacity to meet customers’ demand for its product. Chippewas issues an $800,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $160,000 installments due at the end of each year over the life of the note. Instructions (Round to nearest dollar in all computations.) (a) Prepare the journal entry(ies) at the date of purchase. (b) Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method. (c) Prepare the journal entry(ies) at the end of the second year to record the payment and interest. (d) Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry Anecessary to record depreciation in the first year. (Straight-line depreciation is employed.)

Why does the USA not specialise as much as General Motors or Texaco? Why does the UK not specialise as much as Tesco? Is the answer to these questions similar to the answer to the questions, ‘Why does the USA not specialise as much as Luxembourg?’, and ‘Why does Tesco or Unilever not specialise as much as the local butcher?’

Incentives and risk management Part B Once the Western Australian operation has settled and sales are going well, Bernard considers further expansion opportunities. Given the mature life cycle status of the brewery industry, declining consumption, strong competition from leading producers and competition from substitute products, Bernard wants to expand his business in other value-adding ways. He calls on his management team for ideas. One potential idea worth pursuing comes from Damien Poulsen, a long-term employee.   Damien Poulsen has been Bernard’s one and only production manager in charge of Mountain Mist’s spring water. Bernard has great respect for Damien’s work ethic and long-standing commitment to Mountain Mist. Damien is also a qualified microbiologist and employs a team of experts to extract and process the Mountain Mist spring water for the brewing department. A large portion of the Spring Water department’s (SWD) activities relates to the quality control (QC) function for Mountain Mist Brewery. Their main requirement is to ensure the spring water continually meets Mountain Mist’s strict specifications. The mix of sulphates, calcium, phosphorous and magnesium must be correct as excessive amounts of any ingredient can result in poor tasting ales. It can also lead to residue forming on the ale containers.   As the spring water from Mountain Mist’s Macedon Ranges spring provides beautifully tasting spring water (free of excessive mineral content) and more than enough spring water for the beer manufacture, Damien Poulsen suggested to Bernard that they expand production into bottled water sales. He points out that spring water is the fastest growing beverage type in Australia and Mountain Mist would be foolish not to take advantage of the opportunity to participate in this market. Australians spent more than $500 million on bottled water last year, a 1.6 per cent increase on the previous year. The current key competitors in the bottled water market include Coca-Cola Amatil Limited (42.0 per cent), P&N Beverages Australia Pty Ltd (22.0 per cent) and others (36.0 per cent). These key competitors own prominent brands including Mount Franklin, Peats Ridge and Cool Ridge. Damien suggest to Bernard that a niche marketing opportunity exists and that they should compete with the higher-priced sparkling and still water brands, which include European imports such as San Pellegrino and Perrier.   Damien is also aware of exploiting the growing market sensitivities towards increased water consumption. For instance, climate change has increased demand for bottled water (because of the extended hot summers). However, the demand remains high throughout the cooler seasons of the year for other sports and health-related reasons. The factors that significantly contribute to increasing demand for bottled water include general health awareness and greater knowledge of the benefits of adequate water consumption, concerns about the microbiological condition and taste of tap water in some regions, and that fact that many consumers are beginning to acknowledge bottled water as a healthy alternative to high-sugar soft drinks.   In Damien’s proposal, he outlines the cost structure required for the bottled spring water proposal. He builds his figures from the 2009 industry data. He bases his figures on the average retail price for 1-litre of bottled water ($2.53). Damien outlines the purchases that are most significant to this industry. They include containers, labels and other packaging materials. He explains how the costs for water extraction, such as pumping equipment, have been included in the depreciation cost (but mentions that these costs are currently paid for in full by the brewery). Water costs are relatively minor. That is, they pay the Macedon Ranges Shire Council fees for ground water extraction; however, the fees are insignificant.   In the proposal, Damien also mentions that he could draw on existing labour for the production processes, but will need a small number of additional staff to handle the clerical, sales and marketing functions. The total labour costs are equivalent to 14.7 per cent of revenue. In this machine-intensive industry, approximately 53 per cent of total labour is required for managerial, clerical, sales, marketing and other functions. The remaining 47 per cent of total labour is involved in the bottled water production. Damien includes asset acquisitions and associated depreciation costs in his proposal. To begin, he includes full depreciation costs on existing equipment required for the filtration, UV sterilisation and zonation processes that remove undesirable compounds and organic elements from the spring water. Damien also includes the purchase of new assets such as computers and automated bottle production lines in his depreciation costs. In addition, he includes the purchase and depreciation on two trucks required to transport the bottled water to distributors from the Mountain Mist source. In Damien’s list of acquisitions required, he makes mention of new legislative requirements associated with environmental emissions. With this impending legislation, Damien allocates funds to the newly implemented carbon pollution reduction scheme (CPRS) that will measure, monitor and report on the Mountain Mist carbon emissions. To meet the legislative requirements, Damien needs to allocate a percentage of staff resources (15 per cent of one full-time employee’s wages) and equipment to correctly measure their carbon emissions. He notes that this additional cost will be incurred regardless of the decision to invest in the bottled spring water project.   Damien also includes accounting, auditing, repair, maintenance, market research and advertising as components of ‘other’ costs. Marketing is a significant cost to the bottled water industry given the need to differentiate a largely homogeneous product. He explains that, in Europe, for water to be designated ‘natural’ it must be bottled at the spring. This could be an important marketing feature for Mountain Mist bottled spring water, even though Australia does not have such a labelling requirement. He mentions how competitor water that has been transported in holding tanks to bottlers can risk contamination. As such, water that is not bottled on site may require chlorination which in turn affects the taste. Mountain Mist water, as it is bottled onsite, can truly offer the ‘natural’ European equivalent marketing feature. Damien explains how they would pitch this style of marketing in the up-market hospitality channel representing pubs, restaurants, cafes, cinemas and arenas. They will also focus on marketing to supermarkets and convenience stores as sales through these major outlets comprise 67 per cent of total bottled water sales, but, in this setting, they will not compete on price. He points out that while price is important (that is, they will compete with house brands and generics), the image, particularly from the large brands, remains the most important factor in establishing market share. The niche market could bear additional costs for perceived additional quality and image created by the brewery arm.   The main thrust of Damien’s argument is for Mountain Mist to exploit its economies of scope by expanding its beverage offerings. He explains that while materials and packaging are the main cost pressures, he hopes to achieve up to 60 per cent gross profit margin on the Mountain Mist private-label bottle water sales. He argues that he can reduce many of the costs. For example, input costs will be reduced as Mountain Mist has the spring water onsite. Rent is not applicable as Mountain Mist owns the Macedon Ranges facilities. In addition, wages, much of the depreciation and other costs can be allocated to the brewing division as it is currently paying for them anyway.   As Bernard evaluates Damien’s $30 million bottled water proposal, he also considers the key success factors in the bottled water manufacturing industry. ·           Control of distribution arrangements — arrangement of distribution ensures timely delivery, low costs and maximised product reach. ·           Economies of scope — economies of scope refers to the efficiencies in distribution, marketing and administration when a firm produces a wide range of beverage brands. ·           Having a good reputation — first movers have an advantage in this industry in that they can establish strong reputations, which new competitors need to spend heavily on marketing to match. ·           Market research and understanding — market research into consumer profiles, attitudes and preferences are important for informing both brand promotion and bottle and label design. ·           Marketing of differentiated products — product innovation and differentiation (including packaging) contributes significantly to selling the industry’s products. ·           Economies of scale — scale economies are very important to a low value product since high volumes must be produced and sold to achieve reasonable profits. ·           Establishment of brand names — strong brand names contribute to the appeal of bottled water as an accessory, as well as building a product’s reputation of quality. This allows bottlers to both win market share within particular consumer segments, and to charge premium prices. ·           Attractive product presentation — the design of the bottle is of importance in winning market share and justifying higher pricing in this competitive industry. ·           Effective product promotion — use of in-store merchandising can have a strong influence on consumer choice.   This all sounds quite interesting to Bernard, but he does wonder at the affect of the carbon pollution reduction scheme and the more recent negative publicity bottled water is receiving. This negative publicity surrounds the view that bottled water is not environmentally friendly as it produces significant greenhouse gas emissions and plastic bottles commonly end up in landfill.   Bernard wonders at the viability of Damien’s $30 million proposal.   Required (a)          Advise Bernard on the types of strategic risks you might associate with Mountain Mist. In your discussion, include the risks associated with the expansion of Mountain Mist’s brewing to Western Australia and into the spring water market. You may also wish to discuss the beverage industry in general. (b)          What do you consider the level of risk exposure for Mountain Mist? Justify using the risk profile discussion in this chapter. (c)           What suggestions do you have for Bernard to overcome these risks? (LO2, 3, 4 and 6)

Tones Industries has the following patents on its December 31, 2013, balance sheet. Patent Item Initial Cost Date Acquired Useful Life at Date Acquired Patent A $30,600 3/1/10 17 years Patent B $15,000 7/1/11 10 years Patent C $14,400 9/1/12 4 years The following events occurred during the year ended December 31, 2014. 1. Research and development costs of $245,700 were incurred during the year. 2. Patent D was purchased on July 1 for $36,480. This patent has a useful life of 9½ years. 3. As a result of reduced demands for certain products protected by Patent B, a possible impairment of Patent B’s value may have occurred at December 31, 2014. The controller for Tones estimates the expected future cash flows from Patent B will be as follows. Year Expected Future Cash Flows 2015 $2,000 2016 2,000 2017 2,000 The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.) Instructions (a) Compute the total carrying amount of Tones’ patents on its December 31, 2013, balance sheet. (b) Compute the total carrying amount of Tones’ patents on its December 31, 2014, balance sheet.

Jim Carrie Company shows a balance of $181,140 in the Accounts Receivable account on December 31, 2013. The balance consists of the following. Installment accounts due in 2014 $23,000 Installment accounts due after 2014 34,000 Overpayments to vendors 2,640 Due from regular customers, of which $40,000 represents accounts pledged as security for a bank loan 79,000 Advances to employees 1,500 Advance to subsidiary company (due in 2015) 81,000 Instructions Illustrate how the information above should be shown on the balance sheet of Jim Carrie Company on December 31, 2013.

What book-tax differences in year 1 and year 2 associated with its capital gains and losses would ABD Inc. report in the following alternative scenarios? Identify each book-tax difference as favorable or unfavorable and as permanent or temporary.

Does a taxpayer apply the §1231 look-back rule in a year when the taxpayer recognizes a net §1231 loss?  Explain.

For Problem 13.11, assume the material is acrylic. (a) Using Figure 13.2, determine the temperature of the polymer melt. (b) If the temperature is lowered 20°C, estimate the resulting viscosity of the polymer melt. (Hint: the y-axis of Figure 13.2 is a log scale, not linear)

On July 1, 2014, Brigham Corporation purchased Young Company by paying $250,000 cash and issuing a $100,000 note payable to Steve Young. At July 1, 2014, the balance sheet of Young Company was as follows. Cash $ 50,000 Accounts payable $200,000 Accounts receivable 90,000 Stockholders’ equity 235,000 Inventory 100,000 $435,000 Land 40,000 Buildings (net) 75,000 Equipment (net) 70,000 Trademarks 10,000 $435,000 The recorded amounts all approximate current values except for land (fair value of $60,000), inventory (fair value of $125,000), and trademarks (fair value of $15,000). Instructions (a) Prepare the July 1 entry for Brigham Corporation to record the purchase. (b) Prepare the December 31 entry for Brigham Corporation to record amortization of intangibles. The trademark has an estimated useful life of 4 years with a residual value of $3,000.

When is revenue recognized under the cost-recovery method?

RNA Inc. manufactures a variety of consumer products. The company’s founders have run the company for 30 years and are now interested in retiring. Consequently, they are seeking a purchaser who will continue its operations, and a group of investors, Morgan Inc., is looking into the acquisition of RNA. To evaluate its financial stability and operating efficiency, RNA was requested to provide the latest financial statements and selected financial ratios. Summary information provided by RNA is as follows.     Instructions (a) Calculate a new set of ratios for the fiscal year 2015 for RNA based on the financial statements presented. (b) Explain the analytical use of each of the six ratios presented, describing what the investors can learn about RNA’s financial stability and operating efficiency. (c) Identify two limitations of ratio analysis.

Melissa recently paid $400 for round-trip airfare to San Francisco to attend a business conference for three days. Melissa also paid the following expenses: $250 fee to register for the conference, $300 per night for three nights’ lodging, $200 for meals, and $150 for cab fare.

What elements are traditionally alloyed with copper to form (a) bronze and (b) brass?

Diana and Ryan Workman were married on January 1 of last year. Ryan has an eight-year-old son, Jorge, from his previous marriage. Diana works as a computer programmer at Datafile Inc. (DI) earning a base salary of $94,000. Ryan is self-employed and runs a day care center. The Workmans reported the following financial information pertaining to their activities during the current year.

1.      : Mind your own business. Taandil hasn’t said anything about the new guidelines and you don’t want to overstep your authority. You’ve been unemployed and need this job.

You are about to start a coffee shop business. What do you understand by ‘cost behaviour’? Explain how your accountants could help you in building an understanding of cost behaviour. Identify the likely key costs and classify each as fixed or variable.

During 2012, Robin Wright Tool Company purchased a building site for its proposed research and development laboratory at a cost of $60,000. Construction of the building was started in 2012. The building was completed on December 31, 2013, at a cost of $320,000 and was placed in service on January 2, 2014. The estimated useful life of the building for depreciation purposes was 20 years. The straight-line method of depreciation was to be employed, and there was no estimated residual value. Management estimates that about 50% of the projects of the research and development group will result in long-term benefits (i.e., at least 10 years) to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2014 appears below. Salaries and Other Expenses Number Employee (excluding Building of Projects Benefits Depreciation Charges) Completed projects with long-term benefits 15 $ 90,000 $50,000 Abandoned projects or projects that benefit the current period 10 65,000 15,000 Projects in process—results indeterminate 5 40,000 12,000 Total 30 $195,000 $77,000 Upon recommendation of the research and development group, Robin Wright Tool Company acquired a patent for manufacturing rights at a cost of $88,000. The patent was acquired on April 1, 2013, and has an economic life of 10 years. Instructions If generally accepted accounting principles were followed, how would the items above relating to research and development activities be reported on the following financial statements? (a) The company’s income statement for 2014. (b) The company’s balance sheet as of December 31, 2014. Be sure to give account titles and amounts, and briefly justify your presentation.

Data for Brecker Inc. are presented in E23-13. Instructions Prepare a statement of cash flows using the indirect method.

In a tensile test on a metal specimen, true strain = 0.08 at a stress = 265 MPa. When true stress = 325 MPa, true strain = 0.27. Determine the strength coefficient and the strain-hardening exponent in the flow curve equation.

JB Corporation is a C corporation owned 80 percent by Jacob and 20 percent by Bauer.  Jacob would like JB to make an S election, but Bauer is opposed to the idea.  Can JB elect to be taxed as an S corporation without Bauer’s consent?  Explain.

1.      : Launch a full-scale investigation of employee complaints about Pate and make Pate aware that his documented history over the past ten years has put him on thin ice.

What are “liability gains and losses,” and how are they accounted for?