Question & Answer

Explain why the medical expense and casualty loss provisions are sometimes referred to as “wherewithal” deductions and how this rationale is reflected in the limits on these deductions.

Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2014, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2015, and September 30, 2015. Another note of $6,000 is due on March 31, 2016, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a $300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years.   Instructions (a) Compute the following items for Bradburn Corporation. (1) Current ratio for fiscal years 2014 and 2015. (2) Acid-test (quick) ratio for fiscal years 2014 and 2015. (3) Inventory turnover for fiscal year 2015. (4) Return on assets for fiscal years 2014 and 2015. (Assume total assets were $1,688,500 at 3/31/13.) (5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2014 to 2015. (b) Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Brown’s request for a time extension on Bradburn’s notes. (c) Assume that the percentage changes experienced in fiscal year 2015 as compared with fiscal year 2014 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Bradburn’s desire to finance the plant expansion from internally generated funds realistic? Discuss. (d) Should Topeka National Bank grant the extension on Bradburn’s notes considering Daniel Brown’s statement about financing the plant expansion through internally generated funds? Discuss.

Do the IASB and FASB conceptual frameworks differ in terms of the role of financial reporting? Explain.

Which of the above assumptions do you think would be correct in each of the following cases?                (a)  Supermarket checkout operators.                (b)  Agricultural workers.                (c)  Crane operators.                (d)  Economics teachers.                (e)  Call-centre workers.                (f)   Professional footballers.                (g)  Bar workers.

Andrea Pafko, a fellow student, contends that the doubleentry system means that each transaction must be recorded twice. Is Andrea correct? Explain.

Jack and Jill are owners of UpAHill, an S corporation. They own 25 and 75 percent, respectively.  a. What amount of ordinary income and separately stated items are allocated to them for years 1 and 2 based on the information above?  Assume that UpAHill Corporation has $100,000 of qualified property (unadjusted basis) in both years.

Evaluating a proposal for measuring performance Benerux Industries has been in business for 30 years. The entity’s major product is a control unit for elevators. The entity has a reputation for manufacturing products of exceptionally high quality, resulting in higher prices for its units than competitors charge. Higher prices, in turn, have meant that the entity has been comfortably profitable. A major reason for the high product quality is a loyal and conscientious workforce. Production employees have been with the entity for an average of 18 years.   Recently the entity hired a cost accountant from the local university. After a few months at the entity, the new accountant proposed a performance measurement report consisting of two parts. The first part will report the actual number of units started during each month, the target number of units that should have been started, and a variance. The second part will calculate an actual cost per good unit completed during each month, the target cost per unit, and a variance.   The new accountant provided the following additional information concerning the performance report: The first part of the report concentrates on units started because many units are scrapped in the manufacturing process (to maintain high quality). Therefore, the best measure of effort expended is the number of units on which work was begun. The target number of units to be begun in a month is the number of units started in the corresponding month last year plus 5 per cent. In the second part of the report, actual costs per unit will be calculated by dividing total production cost incurred during the month by the number of good units completed during the month. The target cost per unit is the average cost for manufacturing this kind of product as determined from industry newsletters.   The proposal concluded with the following comments: ‘This report should be prepared and distributed quarterly. For maximum benefit I suggest that a bonus be awarded whenever units started exceeds target and costs are below target. This system will result in substantially improved profits for the entity. It should be implemented immediately.’   Required (a)     Is it possible to develop a perfect system for monitoring and motivating worker performance? Why? (b)     Explain what the managers might learn by monitoring each of the variances in the proposed performance measurement system. (c)     Discuss possible reasons why the entity did not previously use a variance system to monitor and motivate worker performance. (d)     Describe weaknesses in the proposed performance measurement system. (e)     If you were the CFO of Benerux Industries, how would you respond to the new cost accountant’s proposal? Discuss whether you agree with the proposal and explain how you would communicate your response.

Explain how the value of the dollar affects stock valuations. (LO3)

1. Trace through the effects in both factor and goods markets of the following:                (a) An increase in the productivity of a particular type of labour.                (b) An increase in the supply of a particular factor. 2. Show in each case how initially social efficiency will be destroyed and then how market adjustments will restore social efficiency.

Explain how you would derive a figure for households’ disposable income if you were starting from a figure for GDP?

Neither depreciation on replacement cost nor depreciation adjusted for changes in the purchasing power of the dollar has been recognized as generally accepted accounting principles for inclusion in the primary financial statements. Briefly present the accounting treatment that might be used to assist in the maintenance of the ability of a company to replace its productive capacity.

Illiad Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of  ne warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $152,000. Instructions (a) What entry should be made at the time of the issuance of the bonds and warrants? (b) If the warrants were nondetachable, would the entries be different? Discuss.

A blanking operation is to be performed on 2.0 mm thick cold-rolled steel (half hard). The part is circular with diameter = 75.0 mm. Determine the appropriate punch and die sizes for this operation

Presented below is the balance sheet for Tomkins plc, a British company.     Instructions (a) Identify at least three differences in balance sheet reporting between British and U.S. firms, as shown in Tomkins’ balance sheet. (b) Review Tomkins’ balance sheet and identify how the format of this financial statement provides useful information, as illustrated in the chapter.

Carrie D’Lake, Reed A. Green, and Doug A. Divot share a passion for golf and decide to go into the golf club manufacturing business together. On January 2, 2024, D’Lake, Green, and Divot form the Slicenhook Partnership, a general partnership. Slicenhook’s main product will be a perimeter-weighted titanium driver with a patented graphite shaft. All three partners plan to actively participate in the business. The partners contribute the following property to form Slicenhook: Partner Contribution Carrie D’Lake Land, FMV $460,000 Basis $460,000, Mortgage $60,000 Reed A. Green $400,000 Doug A. Divot $400,000 Carrie had recently acquired the land with the idea that she would contribute it to the newly formed partnership. The partners agree to share in profits and losses equally. Slicenhook elects a calendar year-end and the accrual method of accounting. In addition, Slicenhook received a $1,500,000 recourse loan from Big Bank at the time the contributions were made. Slicenhook uses the proceeds from the loan and the cash contributions to build a state-of-the-art manufacturing facility ($1,200,000), purchase equipment ($600,000), and produce inventory ($400,000). With the remaining cash, Slicenhook invests $45,000 in the stock of a privately owned graphite research company and retains $55,000 as working cash. Slicenhook operates on a just-in-time inventory system, so it sells all inventory and collects all sales immediately. That means that at the end of the year, Slicenhook does not carry any inventory or accounts receivable balances. During 2024, Slicenhook has the following operating results: Sales $ 1,126,000 Cost of goods sold 400,000 Interest income from tax-exempt bonds 900 Qualified dividend income from stock 1,500 Operating expenses 126,000 Depreciation (tax) §179 on equipment $39,000 Equipment 81,000 Building 24,000 144,000 Interest expense on debt 120,000 The partnership is very successful in its first year. The success allows Slicenhook to use excess cash from operations to purchase $15,000 of tax-exempt bonds (you can see the interest income already reflected in the operating results). The partnership also makes a principal payment on its loan from Big Bank in the amount of $300,000 and a distribution of $100,000 to each of the partners on December 31, 2024. The partnership continues its success in 2025 with the following operating results: Sales $ 1,200,000 Cost of goods sold 420,000 Interest income from tax-exempt bonds 900 Qualified dividend income from stock 1,500 Operating expenses 132,000 Depreciation (tax) Equipment $147,000 Building 30,000 177,000 Interest expense on debt 96,000 The operating expenses include a $1,800 trucking fine that one of their drivers incurred for reckless driving and speeding and meals expense of $6,000. By the end of 2025, Reed has had a falling out with Carrie and Doug and has decided to leave the partnership. He has located a potential buyer for his partnership interest, Indie Ruff. Indie has agreed to purchase Reed’s interest in Slicenhook for $730,000 in cash and the assumption of Reed’s share of Slicenhook’s debt. Carrie and Doug, however, are not certain that admitting Indie to the partnership is such a good idea. They want to consider having Slicenhook liquidate Reed’s interest on January 1, 2026. As of January 1, 2026, Slicenhook has the following assets: Tax Basis FMV   Cash $ 876,800 $ 876,800  Investment - tax Exempts 15,000 18,000  Investment Stock 45,000 45,000  Equipment - net of dep. 333,000 600,000  Building - net of dep. 1,146,000 1,440,000  Land 460,000 510,000    Total $ 2,875,800 $ 3,489,800   Carrie and Doug propose that Slicenhook distribute the following to Reed in complete liquidation of his partnership interest: Tax Basis FMV   Cash $ 485,000 $ 485,000  Investment Stock 45,000 45,000  Equipment - $200,000 cost, net of dep. 111,000 200,000     Total $ 641,000 $ 730,000 Slicenhook has not purchased or sold any equipment since its original purchase just after formation. a. Determine each partner’s recognized gain or loss upon formation of Slicenhook. b. What is each partner’s initial tax basis in Slicenhook on January 2, 2024? c. Prepare Slicenhook’s opening tax basis balance sheet as of January 2, 2024. d. Using the operating results, what are Slicenhook’s ordinary income and separately stated items for 2024 and 2025? What amount of Slicenhook’s income for each period would each of the partners report? e. Using the information provided, prepare Slicenhook’s page 1 and Schedule K to be included with its Form 1065 for 2024. Also, prepare a Schedule K-1 for Carrie. f. What are Carrie’s, Reed’s, and Doug’s outside bases in their partnership interest at the end of 2024 and 2025? g. If Reed sells his interest in Slicenhook to Indie Ruff, what are the amount and character of his recognized gain or loss? What is Indie’s outside basis in the partnership interest? h. What is Indie’s inside basis in Slicenhook? What effect would a §754 election have on Indie’s inside basis? i. If Slicenhook distributes the assets proposed by Carrie and Doug in complete liquidation of Reed’s partnership interest, what are the amount and character of Reed’s recognized gain or loss? What is Reed’s basis in the distributed assets? j. Compare and contrast Reed’s options for terminating his partnership interest. Assume that Reed’s marginal tax rate is 35 percent and his capital gains rate is 15 percent.

A partial adjusted trial balance of Piper Company at January 31, 2014, shows the following.   Instructions Answer the following questions, assuming the year begins January 1. (a) If the amount in Supplies Expense is the January 31 adjusting entry, and $850 of supplies was purchased in January, what was the balance in Supplies on January 1? (b) If the amount in Insurance Expense is the January 31 adjusting entry, and the original insurance premium was for one year, what was the total premium and when was the policy purchased? (c) If $2,500 of salaries was paid in January, what was the balance in Salaries and Wages Payable at December 31, 2013? (d) If $1,600 was received in January for services pe

Explain in general terms how savings institutions differ from commercial banks with respect to their sources of funds and uses of funds. Discuss each source of funds for SIs. Identify and discuss the main uses of funds for SIs. (LO2)

Explain the role of credit rating agencies in facilitating the flow of funds from investors into the mortgage market (through mortgage-backed securities). (LO4)

Sinise Industries acquired two copyrights during 2014. One copyright related to a textbook that was developed internally at a cost of $9,900. This textbook is estimated to have a useful life of 3 years from September 1, 2014, the date it was published. The second copyright (a history research textbook) was purchased from University Press on December 1, 2014, for $24,000. This textbook has an indefinite useful life. How should these two copyrights be reported on Sinise’s balance sheet as of December 31, 2014?

The immutability of blockchain technology, which makes it very difficult to tamper with data stored on the network, is one of its primary benefits. In light of the various issues that people and companies encounter when it comes to forging and manipulating contracts and other business papers, how do you anticipate blockchain technology developing going forward? Provide a few instances of prospective applications for blockchain technology. (LO2)

According to rational choice theory, the money you’ve already spent – known as ‘sunk costs’ (see page 161) – should be excluded from decision making. However, there is considerable evidence that it does affect consumer behaviour. Using loss aversion, can you explain why this might be the case.

Presented below is the December 31 trial balance of New York Boutique.   Instructions (a) Construct T-accounts and enter the balances shown. (b) Prepare adjusting journal entries for the following and post to the T-accounts. (Omit explanations.) Open additional T-accounts as necessary. (The books are closed yearly on December 31.) (1) Bad debt expense is estimated to be $1,400. (2) Equipment is depreciated based on a 7-year life (no salvage value). (3) Insurance expired during the year $2,550. (4) Interest accrued on notes payable $3,360. (5) Sales salaries and wages earned but not paid $2,400. (6) Advertising paid in advance $700. (7) Office supplies on hand $1,500, charged to Supplies Expense when purchased. (c) Prepare closing entries and post to the accounts.

How do taxpayers determine whether they should deduct their itemized deductions or utilize the standard deduction?

Behavioural issues associated with reward systems Fitness Forever International sells personal exercise equipment both within Australia and internationally. One division of Fitness Forever produces a product called Absaway, which is a specialised piece of equipment that focuses on exercising the abdominal region. The Absaway is manufactured with both internally sourced and purchased-in components.   The divisional performance report shows that the division made sales of 20 000 units at a price of $100 each. The variable costs were $60 per unit. Fixed costs were $200 000.   Fitness Forever calculates mangers’ bonuses based on profit. The manager of the Absaway division wants to maximize his bonus. To ensure that the divisional margin is reported at its highest possible level, the manager has been producing more units of the Absaway than required based on sales forecasts. Producing more units has the effect of increasing the ending inventory, which, in the income statement, reduces the cost of goods sold (also called cost of sales). This, in turn increases the divisional margin. The extra production of Absaway units has to be stored, thus increasing the need for warehouse space.   Required (a) Comment on the strategy of the manager to produce more units of product than are needed in order boost divisional profits. Is it in the best interest of Fitness Forever? (b) You have been asked to comment on the current reward system at the next board meeting and make recommendations about any changes you think are necessary. What will you say? (LO3, 4 and 5)

The following comment appeared in the notes of Colorado Corporation’s annual report: “Such distributions, representing proceeds from the sale of Sarazan, Inc., were paid in the form of partial liquidating dividends and were in lieu of a portion of the Company’s ordinary cash dividends.” How would a partial liquidating dividend be accounted for in the financial records?