Question & Answer

Verify that the derivative of Eq. (24.12) results in Eq. (24.13)

Graber Corporation runs a long-haul trucking business. Graber incurs the following expenses: replacement tires, oil changes, and a transmission overhaul. Which of these expenditures may be deducted currently and which must be capitalized? Explain.

List possible sources of additional paid-in capital.

Consider the prevailing conditions that could affect the demand for stocks, including inflation, the economy, the budget deficit, and the Fed’s monetary policy, political conditions, and the general mood of investors. Based on these conditions, do you think stock prices will increase or decrease during this semester? Offer some logic to support your answer. Which factor do you think will have the biggest impact on stock prices? (LO3)

Tim Mattke Company began operations in 2012 and for simplicity reasons, adopted weighted-average pricing for inventory. In 2014, in accordance with other companies in its industry, Mattke changed its inventory pricing to FIFO. The pretax income data is reported below. Weighted- Year Average FIFO 2012 $370,000 $395,000 2013 390,000 430,000 2014 410,000 450,000 Instructions (a) What is Mattke’s net income in 2014? Assume a 35% tax rate in all years. (b) Compute the cumulative effect of the change in accounting principle from weighted-average to FIFO inventory pricing. (c) Show comparative income statements for Tim Mattke Company, beginning with income before income tax, as presented on the 2014 income statement.

Tan Chin Company purchases a building for $11,300,000 on January 2, 2014. An engineer’s report shows that of the total purchase price, $11,000,000 should be allocated to the building (with a 40-year life), $150,000 to 15-year property, and $150,000 to 5-year property. No residual (salvage) value should be considered. Compute depreciation expense for 2014 using component depreciation.

Jerry Prior, Beeler Corporation’s controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him. Prior knows that depreciation is a major expense for Beeler. The company currently uses the doubledeclining- balance method for both financial reporting and tax purposes, and he’s thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of $2,000,000 and a fair value of $2,180,000. The gain on the sale would be reported in the income statement. He doesn’t want to highlight this method of increasing income. He thinks, “Why don’t I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.” Instructions Answer the following questions. (a) Who are the stakeholders in this situation? (b) What are the ethical issues involved? (c) What should Prior do?

When we were looking at wage rates, were we talking about the price of labour or the price of labour services? Is this distinction between the price of a factor and the price of factor services a useful one in the case of labour? Was it in Roman times?

Melting furnaces for glassworking can be divided into four types. Name three of the four types.

An annual report of Crestwood Industries states, “The company and its subsidiaries have longterm leases expiring on various dates after December 31, 2014. Amounts payable under such commitments, without reduction for related rental income, are expected to average approximately $5,711,000 annually for the next 3 years. Related rental income from certain subleases to others is estimated to average $3,094,000 annually for the next 3 years.” What information is provided by this note?

Homestake Mining Company is a 120-year-old international gold mining company with substantial gold mining operations and exploration in the United States, Canada, and Australia. At year-end, Homestake reported the following items related to income taxes (thousands of dollars). Total current taxes $ 26,349 Total deferred taxes (39,436) Total income and mining taxes (the provision for taxes per its income statement) (13,087) Deferred tax liabilities $303,050 Deferred tax assets, net of valuation allowance of $207,175 95,275 Net deferred tax liability $207,775 Note 6: The classifi cation of deferred tax assets and liabilities is based on the related asset or liability creating the deferred tax. Deferred taxes not related to a specifi c asset or liability are classifi ed based on the estimated period of reversal. Tax loss carryforwards (U.S., Canada, Australia, and Chile) $71,151 Tax credit carryforwards $12,007 Instructions (a) What is the significance of Homestake’s disclosure of “Current taxes” of $26,349 and “Deferred taxes” of $(39,436)? (b) Explain the concept behind Homestake’s disclosure of gross deferred tax liabilities (future taxable amounts) and gross deferred tax assets (future deductible amounts). (c) Homestake reported tax loss carryforwards of $71,151 and tax credit carryforwards of $12,007. How do the carryback and carryforward provisions affect the reporting of deferred tax assets and deferred tax liabilities?

Dustin has a contract to provide services to Dado Enterprises. In November of this year, Dustin billed Dado $10,000 for the services he rendered during the year. Dado is an accrual-method proprietorship that is owned and operated by Dustin’s father.  a) What amount of revenue must Dustin recognize this year if Dustin uses the cash method and Dado remits payment and Dustin receives payment for the services in December of this year? What amount can Dado deduct this year? b) What amount of revenue must Dustin recognize this year if Dustin uses the accrual method, and Dado remits payment for the services in December of this year? What amount can Dado deduct this year? c) What amount of revenue must Dustin recognize this year if Dustin uses the cash method and Dado remits payment for the services in January of next year? What amount can Dado deduct this year? d) What amount of revenue must Dustin recognize this year if Dustin uses the accrual method and Dado remits payment for the services in January of next year? What amount can Dado deduct this year?

How are CVP analysis and breakeven analysis related?

In 2024, Lisa and Fred, a married couple, have taxable income of $400,000.  If they were to file separate tax returns, Lisa would have reported taxable income of $225,000 and Fred would have reported taxable income of $175,000.  What is the couple’s marriage penalty or benefit?

Name the accounts debited and credited for each of the following transactions. (a) Billing a customer for work done. (b) Receipt of cash from customer on account. (c) Purchase of office supplies on account. (d) Purchase of 15 gallons of gasoline for the delivery truck.

On November 24, 2014, 26 passengers on Windsor Airlines Flight No. 901 were injured upon landing when the plane skidded off the runway. Personal injury suits for damages totaling $9,000,000 were filed on January 11, 2015, against the airline by 18 injured passengers. The airline carries no insurance. Legal counsel has studied each suit and advised Windsor that it can reasonably expect to pay 60% of the damages claimed. The financial statements for the year ended December 31, 2014, were issued February 27, 2015. Instructions (a) Prepare any disclosures and journal entries required by the airline in preparation of the December 31, 2014, financial statements. (b) Ignoring the November 24, 2014, accident, what liability due to the risk of loss from lack of insurance coverage should Windsor Airlines record or disclose? During the past decade, the company has experienced at least one accident per year and incurred average damages of $3,200,000. Discuss fully.

Shanahan Construction Company has entered into a contract beginning January 1, 2014, to build a parking complex. It has been estimated that the complex will cost $600,000 and will take 3 years to construct. The complex will be billed to the purchasing company at $900,000. The following data pertain to the construction period. 2014 2015 2016 Costs to date $270,000 $450,000 $610,000 Estimated costs to complete 330,000 150,000 –0– Progress billings to date 270,000 550,000 900,000 Cash collected to date 240,000 500,000 900,000 Instructions (a) Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each year of the construction period. (b) Using the completed-contract method, compute the estimated gross profit that would be recognized during each year of the construction period.

Explain the meaning of the following terms: (a) commonsize analysis, (b) vertical analysis, (c) horizontal analysis, and (d) percentage analysis.

Why were bank regulators concerned about credit default swaps during the credit crisis? (LO2)

Describe the major constraint inherent in the presentation of accounting information.

How have growth rates varied over the decades? Does the answer vary by country?

What type of disclosure or accounting do you believe is necessary for the following items? (a) Because of a general increase in the number of labor disputes and strikes, both within and outside the industry, there is an increased likelihood that a company will suffer a costly strike in the near future. (b) A company reports an extraordinary item (net of tax) correctly on the income statement. No other mention is made of this item in the annual report. (c) A company expects to recover a substantial amount in connection with a pending refund claim for a prior year’s taxes. Although the claim is being contested, counsel for the company has confirmed the client’s expectation of recovery.

Why does Congress provide the dividends-received deduction for corporations receiving dividends?

Briefly explain the accounting requirements for stock compensation plans under GAAP.

The cone-shaped part in Problem 33.5 is to be built using laminated-object manufacturing. Layer thickness = 0.20 mm. The laser beam can cut the sheet stock at a velocity of 500 mm/s. Compute an estimate for the time required to build the part, if 10 s are lost each layer to lower the height of the platform that holds the part and advance the sheet stock in preparation for the next layer. Ignore cutting of the cross-hatched areas outside of the part since the cone should readily drop out of the stack owing to its geometry.