Question & Answer

Explain how gains or losses on impaired assets should be reported in income.

Dillons Corporation made credit sales of $30,000 which are subject to 6% sales tax. The corporation also made cash sales which totaled $20,670 including the 6% sales tax. (a) Prepare the entry to record Dillons’ credit sales. (b) Prepare the entry to record Dillons’ cash sales.

Through November, Cameron has received gross income of $120,000. For December, Cameron is considering whether to accept one more work engagement for the year. Engagement 1 will generate $7,000 of revenue at a cost to Cameron of $3,000, which is deductible for AGI. In contrast, engagement 2 will generate $5,000 of qualified business income (QBI), which is eligible for the 20 percent QBI deduction. Cameron files as a single taxpayer.

Choice of transfer price The following information relates to a new computer chip that Hand Held has developed for its new mobile phone that contains a personal organiser:       The variable costs of the mobile phone division will be incurred whether it buys from the chip division or from an outside supplier.   Required (a)        What is the highest price that the managers of the mobile phone division would want to pay the chip division for the chip? Explain. (b)        If the chip division is working at full capacity and cannot produce additional units, what transfer price for the chip would be best for the entity as a whole? Explain. (c)        If the chip division is not operating at capacity and has no prospect of reaching capacity, what is the lowest price its managers would typically be willing to sell chips to the mobile phone division?

At January 1, 2014, Eikenberry Inc. had accounts receivable of $72,000. At December 31, 2014, accounts receivable is $54,000. Sales revenue for 2014 total $420,000. Compute Eikenberry’s 2014 cash receipts from customers.

The following information is available for Wenger Corporation for 2013 (its first year of operations). 1. Excess of tax depreciation over book depreciation, $40,000. This $40,000 difference will reverse equally over the years 2014–2017. 2. Deferral, for book purposes, of $20,000 of rent received in advance. The rent will be recognized in 2014. 3. Pretax financial income, $300,000. 4. Tax rate for all years, 40%. Instructions (a) Compute taxable income for 2013. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013. (c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming taxable income of $325,000.

Trace through the effects on the foreign exchange market of a fall in the money supply.

Jack, a geologist, had been debating for years whether or not to venture out on his own and operate his own business. He had developed a lot of solid relationships with clients, and he believed that many of them would follow him if he were to leave his current employer. As part of a New Year’s resolution, Jack decided he would finally do it. Jack put his business plan together, and on January 1 of this year, Jack opened his doors for business as a C corporation called Geo-Jack (GJ). Jack is the sole shareholder. Jack reported the following financial information for the year (assume GJ reports on a calendar year, uses the accrual method of accounting, and elects to account for inventory).  a) In January, GJ rented a small business office about 12 miles from Jack’s home. GJ paid $10,000, which represented a damage deposit of $4,000 and rent for two years ($3,000 annually). b) GJ earned and collected $290,000 performing geological-related services and selling its specialized digging tool [see part (i)]. c) GJ received $50 interest from municipal bonds and $2,100 interest from other investments. d) GJ purchased some new equipment in February for $42,500. It claimed depreciation on these assets during the year in the amount of $6,540. e) GJ paid $7,000 to buy luxury season tickets for Jack’s parents for State University football games. f) GJ paid Jack’s father $10,000 for services that would have cost no more than $6,000 if Jack had hired any other local business to perform the services. While Jack’s dad was competent, he does not command such a premium from his other clients. g) In an attempt to get his name and new business recognized, GJ paid $7,000 for a one-page ad in the Geologic Survey. It also paid $15,000 in radio ads to be run through the end of December. h) GJ leased additional office space in a building downtown. GJ paid rent of $27,000 for the year. i) In November, Jack’s office was broken into, and equipment valued at $5,000 was stolen. The tax basis of the equipment was $5,500. Jack received $2,000 of insurance proceeds from the theft. j) GJ incurred a $4,000 fine from the state government for digging in an unauthorized digging zone. k) GJ contributed $3,000 to lobbyists for their help in persuading the state government to authorize certain unauthorized digging zones. l) On July 1, GJ paid $1,800 for an 18-month insurance policy for its business equipment. The policy covers the period July 1 of this year through December 31 of next year. m) GJ borrowed $20,000 to help with the company’s initial funding needs. GJ used $2,000 of the funds to invest in municipal bonds. At the end of the year, GJ paid the $1,200 of interest expense that accrued on the loan during the year. n) Jack lives 12 miles from the office. He carefully tracked his mileage and drove his truck 6,280 miles between the office and his home. He also drove an additional 7,200 miles between the office and traveling to client sites. Jack did not use the truck for any other purposes. He did not keep track of the specific expenses associated with the truck. However, while traveling to a client site, Jack received a $150 speeding ticket. GJ reimbursed Jack for business mileage and for the speeding ticket. o) GJ purchased two season tickets (20 games) to attend State University baseball games for a total of $1,100. Jack took existing and prospective clients to the games to maintain contact and find further work. This was very successful for Jack as GJ gained many new projects through substantial discussions with the clients following the games. p) GJ paid $3,500 for meals when sales employees met with prospective clients. q) GJ had a client who needed Jack to perform work in Florida. Because Jack had never been to Florida before, he booked an extra day and night for sightseeing. Jack spent $400 for airfare and booked a hotel for 3 nights ($120/night). (Jack stayed two days for business purposes and one day for personal purposes.) He also rented a car for $45 per day. The client provided Jack’s meals while Jack was doing business, but GJ paid all expenses. r) GJ paid a total of $10,000 of wages to employees during the year, and cost of goods sold was $15,000.  Required: a) What is GJ’s net business income for tax purposes for the year? b) As a C corporation, does GJ have a required tax year? If so, what would it be? c) If GJ were a sole proprietorship, would it have a required tax year-end? If so, what would it be? d) If GJ were an S corporation, would it have a required tax year-end? If so, what would it be?

Berg Company adopted a stock-option plan on November 30, 2013, that provided that 70,000 shares of $5 par value stock be designated as available for the granting of options to officers of the corporation at a price of $9 a share. The market price was $12 a share on November 30, 2014. On January 2, 2014, options to purchase 28,000 shares were granted to president Tom Winter—15,000 for services to be rendered in 2014 and 13,000 for services to be rendered in 2015. Also on that date, options to purchase 14,000 shares were granted to vice president Michelle Bennett—7,000 for services to be rendered in 2014 and 7,000 for services to be rendered in 2015. The market price of the stock was $14 a share on January 2, 2014. The options were exercisable for a period of one year following the year in which the services were rendered. The fair value of the options on the grant date was $4 per option. In 2015, neither the president nor the vice president exercised their options because the market price of the stock was below the exercise price. The market price of the stock was $8 a share on December 31, 2015, when the options for 2014 services lapsed. On December 31, 2016, both president Winter and vice president Bennett exercised their options for 13,000 and 7,000 shares, respectively, when the market price was $16 a share. Instructions Prepare the necessary journal entries in 2013 when the stock-option plan was adopted, in 2014 when options were granted, in 2015 when options lapsed, and in 2016 when options were exercised.

What is an industrial robot?

Assume now that the firm has monopoly power in hiring out equipment, and thus faces a downward-sloping demand curve. Draw in two such demand curves on a diagram like Figure 10.13(b), one crossing the MC curve in the horizontal section, and one in the vertical section. How much will the firm supply in each case and at what price? (You will need to draw in MR curves too.) Is the MC curve still the supply curve?

At a recent management meeting at Skyward Industries, the Transport Division manager was heard to say “this transfer pricing is a waste of time – at the end of the year all the internal transactions are eliminated on consolidation in the financial reports”.  Comment on this statement.

What role does debt basis play in determining the taxability of operating distributions to S corporation shareholders?

1.    : From your understanding of the COVID-19 pandemic, how might a small manufacturing company use both the prevention and the preparation stages of crisis planning with respect to supply chain disruptions?

Laura Leasing Company signs an agreement on January 1, 2014, to lease equipment to Plote Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years. 2. The fair value of the asset at January 1, 2014, is $80,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $7,000, none of which is guaranteed. 4. Plote Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) $900 to Rocky Mountain Insurance Company for insurance and (2) $1,600 to Laclede County for property taxes. 5. The agreement requires equal annual rental payments of $18,142.95 to the lessor, beginning on January 1, 2014. 6. The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee. 7. Plote Company uses the straight-line depreciation method for all equipment. 8. Plote uses reversing entries when appropriate. Instructions (Round all numbers to the nearest cent.) (a) Prepare an amortization schedule that would be suitable for the lessee for the lease term. (b) Prepare all of the journal entries for the lessee for 2014 and 2015 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31.

The adjusted trial balance of Lopez Company shows the following data pertaining to sales at the end of its fiscal year, October 31, 2014: Sales Revenue $800,000, Delivery Expense $12,000, Sales Returns and Allowances $24,000, and Sales Discounts $15,000. Instructions (a) Prepare the revenues section of the income statement. (b) Prepare separate closing entries for (1) sales and (2) the contra accounts to sales.

Explain why there are such a large number and variety of tax credits.

What type of information do investors rely on when determining the proper value of stocks? (LO2)

Why are firms likely to experience economies of scale up to a certain size and then diseconomies of scale after some point beyond that?

How does the current earnings and profits account differ from the accumulated earnings and profits accounts?

How should the disposal of a component of a business be disclosed in the income statement?

JFK Corp. factors $300,000 of accounts receivable with LBJ Finance Corporation on a without recourse basis on July 1, 2014. The receivables records are transferred to LBJ Finance, which will receive the collections. LBJ Finance assesses a finance charge of 1½% of the amount of accounts receivable and retains an amount equal to 4% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale. Instructions (a) Prepare the journal entry on July 1, 2014, for JFK Corp. to record the sale of receivables without recourse. (b) Prepare the journal entry on July 1, 2014, for LBJ Finance Corporation to record the purchase of receivables without recourse.

Adani Inc. sells goods to Geo Company for $11,000 on January 2, 2014, with payment due in 12 months. The fair value of the goods at the date of sale is $10,000. Prepare the journal entry to record this transaction on January 2, 2014. How much total revenue should be recognized on this sale in 2014?

The following are selected 2014 transactions of Sean Astin Corporation. Sept. 1 Purchased inventory from Encino Company on account for $50,000. Astin records purchases gross and uses a periodic inventory system. Oct. 1 Issued a $50,000, 12-month, 8% note to Encino in payment of account. Oct. 1 Borrowed $50,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $54,000 note. Instructions (a) Prepare journal entries for the selected transactions above. (b) Prepare adjusting entries at December 31. (c) Compute the total net liability to be reported on the December 31 balance sheet for: (1) The interest-bearing note. (2) The zero-interest-bearing note.

1.       : One small business owner said that he had to teach his young employees what a “dial tone” was. Do you have phone aversion? Do you think it is possible to build a solid business relationship with customers using only text messaging, e-mail, and social media?