Question & Answer

Explain the use of a prospectus developed before an IPO. Why does a firm do a road show before its IPO? What factors influence the offer price of stock at the time of the IPO? (LO3)

Presented below are four independent situations. (a) On December 31, 2014, Zarle Inc. sold computer equipment to Daniell Co. and immediately leased it back for 10 years. The sales price of the equipment was $520,000, its carrying amount is $400,000, and its estimated remaining economic life is 12 years. Determine the amount of deferred revenue to be reported from the sale of the computer equipment on December 31, 2014. (b) On December 31, 2014, Wasicsko Co. sold a machine to Cross Co. and simultaneously leased it back for one year. The sale price of the machine was $480,000, the carrying amount is $420,000, and it had an estimated remaining useful life of 14 years. The present value of the rental payments for the one  year is $35,000. At December 31, 2014, how much should Wasicsko report as deferred revenue from the sale of the machine? (c) On January 1, 2014, McKane Corp. sold an airplane with an estimated useful life of 10 years. At the same time, McKane leased back the plane for 10 years. The sales price of the airplane was $500,000, the carrying amount $379,000, and the annual rental $73,975.22. McKane Corp. intends to depreciate the leased asset using the sum-of-the-years’-digits depreciation method. Discuss how the gain on the sale should be reported at the end of 2014 in the financial statements. (d) On January 1, 2014, Sondgeroth Co. sold equipment with an estimated useful life of 5 years. At the same time, Sondgeroth leased back the equipment for 2 years under a lease classified as an operating lease. The sales price (fair value) of the equipment was $212,700, the carrying amount is $300,000, the monthly rental under the lease is $6,000, and the present value of the rental payments is $115,753. For the year ended December 31, 2014, determine which items would be reported on its income statement for the sale-leaseback transaction.

To what extent is Article 102 consistent with both these points of view?

Wally is employed as an executive with Pay More Incorporated. To entice Wally to work for Pay More, the corporation loaned him $20,000 at the beginning of the year at a simple interest rate of 1 percent. Wally would have paid interest of $2,400 this year if the interest rate on the loan had been set at the prevailing federal interest rate.

Adam Fleeman, a skilled carpenter, started a home improvement business with Tom Collins, a master plumber.  Adam and Tom are concerned about the payroll taxes they will have to pay.  Assume they form an S corporation, and each earns a salary of $80,000 from the corporation; in addition, they expect their share of business profits to be $60,000 each.  How much Social Security tax and Medicare tax (or self-employment tax) will Adam, Tom, and their corporation have to pay on their salary and profits?

XYZ declared a $1 per share dividend on August 15. The date of record for the dividend was September 1 (the stock began selling ex-dividend on September 2). The dividend was paid on September 10. Ellis is a cash-method taxpayer. Determine the economic income and the amount he must include in gross income under the following independent circumstances.

Phil owns a ranch business and uses four-wheelers to do much of his work. Occasionally, though, he and his boys will go for a ride together as a family activity. During year 1, Phil put 765 miles on the four-wheeler that he bought on January 15 for $6,500. Of the miles driven, only 175 miles were for personal use. Assume four-wheelers qualify to be depreciated according to the five-year MACRS schedule and the four-wheeler was the only asset Phil purchased this year.  a. Calculate the allowable depreciation for year 1 (ignore the §179 expense and bonus depreciation). b. Calculate the allowable depreciation for year 2 if total miles were 930 and personal-use miles were 400 (ignore the §179 expense and bonus depreciation).

Discuss the importance of selecting an appropriate cost driver for cost allocation.

Select a European country other than the UK and compare its regional and urban policy with that of the UK.

The positioning table for a component insertion machine uses a stepping motor and leadscrew mechanism. The design specifications require a table speed of 40 in/min and an accuracy = 0.0008 in. The pitch of the leadscrew = 0.2 in, and the gear ratio = 2:1 (2 turns of the motor for each turn of the leadscrew). The mechanical errors in the motor, gear box, leadscrew, and table connection are characterized by a normal distribution with standard deviation = 0.0001 in. Determine (a) the minimum number of step angles in the stepping motor, and (b) the frequency of the pulse train required to drive the table at the desired maximum speed.

Assume that countries A and B are of similar size, that they have similar economies, and that the government debt levels of both countries are within reasonable limits. Assume that the regulations in country A require complete disclosure of financial reporting by issuers of debt in that country, whereas regulations in country B do not require much disclosure of financial reporting. Explain why the government of country A is able to issue debt at a lower cost than the government of country B. (LO3)

Why is it the case that a – b = e – f, and c – d = g – h?

Compare and contrast a retail CD and a negotiable CD. (LO2)

Explain how convertible securities are determined to be potentially dilutive common shares and how those convertible securities that are not considered to be potentially dilutive common shares enter into the determination of earnings per share data.

Why does the tax code allow taxpayers to defer gains on like-kind exchanges?  How do the tax laws ensure that the gains (or losses) are deferred and not permanently excluded from a taxpayer’s income?

A vertical boring mill is used to bore the inside diameter of a large batch of tube-shaped parts. The diameter = 28.0 in and the length of the bore = 14.0 in. Current cutting conditions are: speed = 200 ft/min, feed = 0.015 in/rev, and depth = 0.125 in. The parameters of the Taylor equation for the cutting tool in the operation are: n = 0.23 and C = 850 (ft/min). Tool change time = 3.0 min, and tooling cost = $3.50 per cutting edge. The time required to load and unload the parts = 12.0 min, and the cost of machine time on this boring mill = $42.00/hr. Management has decreed that the production rate must be increased by 25%. Is that possible? Assume that feed must remain unchanged in order to achieve the required surface finish. What is the current production rate and the maximum possible production rate for this job?

As audit partner for Grupo and Rijo, you are in charge of reviewing the classification of unusual items that have occurred during the current year. The following material items have come to your attention. 1. A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all other periods is correctly computed. 2. An automobile dealer sells for $137,000 an extremely rare 1930 S type Invicta which it purchased for $21,000 10 years ago. The Invicta is the only such display item the dealer owns. 3. A drilling company during the current year extended the estimated useful life of certain drilling equipment from 9 to 15 years. As a result, depreciation for the current year was materially lowered. 4. A retail outlet changed its computation for bad debt expense from 1% to ½ of 1% of sales because of changes in its customer clientele. 5. A mining concern sells a foreign subsidiary engaged in uranium mining, although it (the seller) continues to engage in uranium mining in other countries. 6. A steel company changes from the average-cost method to the FIFO method for inventory costing purposes. 7. A construction company, at great expense, prepared a major proposal for a government loan. The loan is not approved. 8. A water pump manufacturer has had large losses resulting from a strike by its employees early in the year. 9. Depreciation for a prior period was incorrectly understated by $950,000. The error was discovered in the current year. 10. A large sheep rancher suffered a major loss because the state required that all sheep in the state be killed to halt the spread of a rare disease. Such a situation has not occurred in the state for 20 years. 11. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to one of the two classes of customers. Instructions From the foregoing information, indicate in what section of the income statement or retained earnings statement these items should be classified. Provide a brief rationale for your position.

Are exports likely to continue growing faster than GDP indefinitely? What will determine the outcome?

Explain how cost data is sourced in a costing framework.

Direct and indirect costs; and cost driver selection         LO2,3 Venture Buses operates throughout the south-eastern suburbs of Melbourne, with its depot located in Cheltenham. Every day, fuel is delivered and stored in tanks located in the depot. This fuel is used by all the buses and administration vehicles. The accountant has been requested to develop a system to assign the cost to the different vehicles in the depot. He has asked your assistance in coming up with a way to identify the fuel costs. Required (a) From the perspective of the depot, is the cost of fuel a direct or indirect cost? (b) From the perspective of the vehicles attached to the depot, can the cost be classified as either direct or indirect?  Briefly explain. (c) What system would be required to have the cost classified as direct?  (d) If the accountant decided to go with an indirect cost classification, how could the cost be allocated? (e) Identify some factors that would determine which method would be the best for the assignment of fuel costs to the vehicles.

In a book named Treasure, the reader has to figure out where a 2.2 pound, 24 kt gold horse has been buried. If the horse is found, a prize of $25,000 a year for 20 years is provided. The actual cost to the publisher to purchase an annuity to pay for the prize is $245,000. What interest rate (to the nearest percent) was used to determine the amount of the annuity? (Assume end-of-year payments.)

If we were trying to get a ‘true’ measure of national production, which of the following activities would you include: (a) washing-up; (b) planting flowers in the garden; (c) playing an educational game with children in the family; (d) playing any game with children in the family; (e) cooking your own supper; (f) cooking the supper for the whole family; (g) reading a novel for pleasure; (h) reading a textbook as part of studying; (i) studying holiday brochures?       Is there a measurement problem if you get pleasure from the do-it-yourself activity itself as well as from its outcome?

Bowling Green Savings & Loan uses shortterm deposits to fund fixed-rate mortgages. Explain how Bowling Green can use interest rate swaps to hedge its interest rate risk. (LO1)

An organisation experiences a 20 per cent increase in pre-tax profits when revenues increase 20 per cent. Assuming linearity, what do you know about the organisation’s cost function?

Marlon and Latoya recently started building a house.  They had to pay $300 to the county government for a building permit.  Is the $300 payment a tax?  Why or why not?