Question & Answer

For each item below, indicate to which category of elements of financial statements it belongs. (a) Retained earnings (e) Depreciation (h) Dividends (b) Sales (f) Loss on sale of equipment (i) Gain on sale of investment (c) Additional paid-in capital (g) Interest payable (j) Issuance of common stock (d) Inventory

Direct costs and overhead Job 87M had direct material costs of $400 and a total cost of $2100. Overhead is allocated at the rate of 75 per cent of prime cost (direct material and direct labour).   Required (a)     How much direct labour was used? (b)     How much overhead was allocated?

a.       Because Nikki’s 28.57% discount ($14,000 – $10,000/$14,000) is less than Shine Company’s gross profit percentage, the bargain purchase from her employer does not result in taxable income. b.     Nikki will recognize $25 of taxable income from the discounted services provided by Shine Company.  Discounts more than 20% for services are taxable. Thus, Nikki’s taxable discount is $25 ($125 Discount received – (20% x $500)=$25).

Give two examples of positive statements about the economy, and two examples of normative ones. Now give two examples that are seemingly positive, but which have normative implications or undertones.

Helen’s basis in Haywood Partnership is $270,000. Haywood distributes all the land to Helen in complete liquidation of her partnership interest. The partnership reports the following balance sheet just before the distribution: Assets: Tax Basis FMV Cash $ 220,000 $ 220,000 Stock (investment) 480,000 220,000 Land 110,000 220,000    Totals $ 810,000 $ 660,000 Liabilities and capital: Capital- Charles $ 270,000 - Esther 270,000 - Helen 270,000   Totals $ 810,000 a. What are the amount and character of Helen’s recognized gain or loss? What is the effect on the partnership assets? b. If Haywood has a §754 election in place, what is the amount of the special basis adjustment?

Howat Corporation earned $360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of $15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrant exercised. Instructions (a) Are the warrants dilutive? (b) Compute basic earnings per share. (c) Compute diluted earnings per share.

Hatch Company has two classes of capital stock outstanding: 8%, $20 par preferred and $5 par common. At December 31, 2014, the following accounts were included in stockholders’ equity. Preferred Stock, 150,000 shares $ 3,000,000 Common Stock, 2,000,000 shares 10,000,000 Paid-in Capital in Excess of Par—Preferred Stock 200,000 Paid-in Capital in Excess of Par—Common Stock 27,000,000 Retained Earnings 4,500,000 The following transactions affected stockholders’ equity during 2015. Jan. 1 30,000 shares of preferredstock issued at $22 per share. Feb. 1 50,000 shares of common stock issued at $20 per share. June 1 2-for-1 stock split (par value reduced to $2.50).July 1 30,000 shares of common treasury stock purchased at $10 per share. Hatch uses the cost method.Sept. 15 10,000 shares of treasury stock reissuedat $11 per share. Dec. 31 The preferred dividend is declared, and a common dividend of 50¢ per share is declared. Dec. 31 Net income is $2,100,000. Instructions Prepare the stockholders’ equity section for Hatch Company at December 31, 2015. Show all supporting computations.

Selection of appropriate standard Franklin Industries’ CEO was talking with the CFO about the appropriate standard to use for the new product being launched in the coming year. The CEO argued that standards based on ideal performance would enable profits to be maximised through improved efficiency. The CFO argued, however, that the standard should be based on attainable performance or recent average historical performance.   Required Briefly comment on which standard is best for Franklin Industries to use in developing the standard cost for the new product.

What is service cost, and what is the basis of its measurement?

Allocating overhead; over- and underapplied overhead; spoilage The Futons for You Company sells batches of custom-made futons to customers and uses predetermined rates for fixed overhead, based on machine hours. The following data are available for last year:     Required (a)          Calculate the estimated overhead allocation rate to be used for the year. (b)          Determine the overhead to be allocated to job 21. (c)           Determine total overapplied or underapplied overhead at the end of the year. (d)          Should cost of sales be increased or decreased at the end of the year? Why? (e)           If the amount of overapplied or underapplied overhead is material, how is it assigned? (f)           Suppose Job 21 required a special fabric cover for the futon pads. This type of fabric dulls the blades of the cutting machine, and a number of fabric covers were unusable. Should this spoilage be recorded for Job 21 or for all jobs processed this period? Explain your answer.

A machinability rating is to be determined for a new work material using the cutting speed for a 60- min tool life as the basis of comparison. For the base material (B1112 steel), test data resulted in Taylor equation parameter values of n = 0.29 and C = 500, where speed is in m/min and tool life is min. For the new material, the parameter values were n = 0.21 and C = 400. These results were obtained using cemented carbide tooling. (a) Compute a machinability rating for the new material. (b) Suppose the machinability criterion were the cutting speed for a 10-min tool life rather than the present criterion. Compute the machinability rating for this case. (c) What do the results of the two calculations show about the difficulties in machinability measurement?

A stepping motor with 100 step angles is coupled to a leadscrew through a gear reduction of 9:1 (9 rotations of the motor for each rotation of the leadscrew). The leadscrew has 5 threads/in. The worktable driven by the leadscrew must move a distance = 10.00 in at a feed rate of 30.0 in/min. Determine (a) number of pulses required to move the table, and (b) the required motor speed and pulse rate to achieve the desired table speed.

If an industry regulator adopts an RPI – X formula for price regulation, is it desirable that the value of X should be adjusted as soon as cost conditions change?

Suppose transfer prices are set at market prices and a manager who previously purchased internally begins to purchase externally. Explain what it means to say that the outsourcing decision might have been suboptimal.

Briefly describe the types of information concerning financial position, income, and cash flows that might be provided (a) within the main body of the financial statements, (b) in the notes to the financial statements, or (c) as supplementary information.

Make a list of six possible aims a manager of a high street department store might have. Identify some conflicts that might arise between these aims?

1.      Georgio owns a 20 percent profits and capital interest in Rain Tree LLC. For the current year, Rain Tree had the following revenues, expenses, gains, and losses: Sales revenue $70,000 Gain on sale of land (§1231) $11,000 Cost of goods sold ($26,000) Depreciation - MACRS ($3,000) §179 deduction* ($10,000) Employee wages ($11,000) Nondeductible fines and penalties ($3,000) Municipal bond interest $6,000 Short-term capital gains $4,000 Guaranteed payment to Sandra ($3,000)

During 2010, George Winston Corporation spent $170,000 in research and development costs. As a result, a new product called the New Age Piano was patented. The patent was obtained on October 1, 2010, and had a legal life of 20 years and a useful life of 10 years. Legal costs of $18,000 related to the patent were incurred as of October 1, 2010. Instructions (a) Prepare all journal entries required in 2010 and 2011 as a result of the transactions above. (b) On June 1, 2012, Winston spent $9,480 to successfully prosecute a patent infringement suit. As a result, the estimate of useful life was extended to 12 years from June 1, 2012. Prepare all journal entries required in 2012 and 2013. (c) In 2014, Winston determined that a competitor’s product would make the New Age Piano obsolete and the patent worthless by December 31, 2015. Prepare all journal entries required in 2014 and 2015.

Sketch a person’s indifference map for two goods X and Y. Mark the optimum consumption point. Now illustrate the following (you might need to draw a separate diagram for each): (a)  A rise in the price of good X, but no change in the price of good Y. (b)  A shift in the person’s tastes from good Y to good X. (c)  A fall in the person’s income and a fall in the price of good Y, with the result that the consumption of Y remains constant (but that of X falls).

Bruno Corporation’s post-closing trial balance at December 31, 2014, is shown on the next page.   At December 31, 2014, Bruno had the following number of common and preferred shares. Common Preferred Authorized 600,000 60,000 Issued 200,000 10,000 Outstanding 190,000 10,000 The dividends on preferred stock are $4 cumulative. In addition, the preferred stock has a preference in liquidation of $50 per share. Instructions Prepare the stockholders’ equity section of Bruno’s balance sheet at December 31, 2014.

Prior to 2014, Heberling Inc. excluded manufacturing overhead costs from work in process and finished goods inventory. These costs have been expensed as incurred. In 2014, the company decided to change its accounting methods for manufacturing inventories to full costing by including these costs as product costs. Assuming that these costs are material, how should this change be reflected in the financial statements for 2013 and 2014?

Robert and Keisha invited Bijan to join them in forming Aero, a plane-chartering company, as a corporation. Bijan did not want to join at the time and declined their invitation. More than a year later, Bijan changed his mind and transferred appreciated property to Aero in exchange for 45 percent of Aero stock. Is Bijan required to recognize his realized gain on the transaction?

During 2014, Kate Holmes Co.’s first year of operations, the company reports pretax financial income at $250,000. Holmes’s enacted tax rate is 45% for 2014 and 40% for all later years. Holmes expects to have taxable income in each of the next 5 years. The effects on future tax returns of temporary differences existing at December 31, 2014, are summarized as follows. Future Years 2015 2016 2017 2018 2019 Total Future taxable (deductible) amounts: Installment sales $32,000 $32,000 $32,000 $ 96,000 Depreciation 6,000 6,000 6,000 $6,000 $6,000 30,000 Unearned rent (50,000) (50,000) (100,000) Instructions (a) Complete the schedule below to compute deferred taxes at December 31, 2014. (b) Compute taxable income for 2014. (c) Prepare the journal entry to record income taxes payable, deferred taxes, and income tax expense for 2014. Future Taxable December 31, 2014 (Deductible) Tax Deferred Tax Temporary Difference Amounts Rate (Asset) Liability Installment sales $ 96,000 Depreciation 30,000 Unearned rent (100,000) Totals $

Briefly describe the process of computing a corporation’s taxable income assuming the corporation must use GAAP to determine its book income.

Matt Holmes recently joined Klax Company as a staff accountant in the controller’s office. Klax Company provides warehousing services for companies in several European cities. The location in Koblenz, Germany, has not been performing well due to increased competition and the loss of several customers that have recently gone out of business. Matt’s department manager suspects that the plant and equipment may be impaired and wonders whether those assets should be written down. Given the company’s prior success, this issue has never arisen in the past, and Matt has been asked to conduct some research on this issue. Instructions Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab andthen register for free eIFRS access if necessary.) When you have accessed the documents, you can use thesearch tool in your Internet browser to respond to the following questions. (Provide paragraph citations.) (a) What is the authoritative guidance for asset impairments? Briefly discuss the scope of the standard (i.e., explain the types of transactions to which the standard applies). (b) Give several examples of events that would cause an asset to be tested for impairment. Does it appear that Klax should perform an impairment test? Explain. (c) What is the best evidence of fair value? Describe alternate methods of estimating fair value.