Question & Answer

Explain why a partnership might not want to make a §754 election to allow special basis adjustments.

What is the key factor in shifting income from a business to its owners? What are some methods of shifting income in this context?

Kathleen Cole Inc. acquired the following assets in January of 2012. Equipment, estimated service life, 5 years; salvage value, $15,000 $525,000 Building, estimated service life, 30 years; no salvage value $693,000 The equipment has been depreciated using the sum-of-the-years’-digits method for the first 3 years for financial reporting purposes. In 2015, the company decided to change the method of computing depreciation to the straight-line method for the equipment, but no change was made in the estimated service life or salvage value. It was also decided to change the total estimated service life of the building from 30 years to 40 years, with no change in the estimated salvage value. The building is depreciated on the straight-line method. Instructions (a) Prepare the general journal entry to record depreciation expense for the equipment in 2015. (b) Prepare the journal entry to record depreciation expense for the building in 2015. (Round all computations to two decimal places.)

In Figures 2.21 and 2.22, the initial change in price was caused by a shift in the demand curve. Redraw these two diagrams to illustrate the situation where the initial change in price was caused by a shift in the supply curve (as would be the case in the wheat market that we have just considered).

Joblonsky Inc. has recently hired a new independent auditor, Karen Ogleby, who says she wants “to get everything straightened out.” Consequently, she has proposed the following accounting changes in connection with Joblonsky Inc.’s 2014 financial statements. 1. At December 31, 2013, the client had a receivable of $820,000 from Hendricks Inc. on its statement of financial position. Hendricks Inc. has gone bankrupt, and no recovery is expected. The client proposes to write off the receivable as a prior period item. 2. The client proposes the following changes in depreciation policies. (a) For office furniture and fixtures, it proposes to change from a 10-year useful life to an 8-year life. If this change had been made in prior years, retained earnings at December 31, 2013, would have been $250,000 less. The effect of the change on 2014 income alone is a reduction of $60,000. (b) For its new equipment in the leasing division, the client proposes to adopt the sum-of-the-years’- digits depreciation method. The client had never used SYD before. The first year the client operated a leasing division was 2014. If straight-line depreciation were used, 2014 income would be $110,000 greater. 3. In preparing its 2013 statements, one of the client’s bookkeepers overstated ending inventory by $235,000 because of a mathematical error. The client proposes to treat this item as a prior period adjustment. 4. In the past, the client has spread preproduction costs in its furniture division over 5 years. Because its latest furniture is of the “fad” type, it appears that the largest volume of sales will occur during the first 2 years after introduction. Consequently, the client proposes to amortize preproduction costs on a per-unit basis, which will result in expensing most of such costs during the first 2 years after the furniture’s introduction. If the new accounting method had been used prior to 2014, retained earnings at December 31, 2013, would have been $375,000 less. 5. For the nursery division, the client proposes to switch from FIFO to average-cost inventories because it believes that average-cost will provide a better income measure. The effect of making this change on 2014 earnings will be an increase of $320,000. The client says that the effect of the change on December 31, 2013, retained earnings cannot be determined. 6. To achieve an appropriate recognition of revenues and expenses in its building construction division, the client proposes to switch from the cost-recovery method of accounting to the percentageof- completion method. Had the percentage-of-completion method been employed in all prior years, retained earnings at December 31, 2013, would have been $1,075,000 greater. Instructions (a) For each of the changes described above, decide whether: (1) The change involves an accounting policy, accounting estimate, or correction of an error. (2) Restatement of opening retained earnings is required. (b) What would be the proper adjustment to the December 31, 2013, retained earnings?

Outline the accounting procedures involved in applying the operating method by a lessee.

If a firm faces a shortage of workers with very specific skills, it may decide to undertake the necessary training itself. If on the other hand it faces a shortage of unskilled workers it may well offer a small wage increase in order to obtain the extra labour. In the first case it is responding to an increase in demand for labour by attempting to shift the supply curve. In the second case it is merely allowing a movement along the supply curve. Use a demand and supply diagram to illustrate each case. Given that elasticity of supply is different in each case, do you think that these are the best policies for the firm to follow? What would happen to wages and economic rent if it used the second policy in the first case?

What are the various forms of extruded shapes and corresponding dies?

Solve Problem 20.24 except use a punch radius = 0.375 in

Solve Problem 20.15 except that the operation is performed using a wiping die with die opening dimension = 0.75 in.

Explain how the current account of the balance of payments is likely to vary with the course of the business cycle.

Name the four principal steps in chemical machining

Recently, property/casualty insurance companies have been criticized because they reserve for the total loss as much as 5 years before it may happen. The IRS has joined the debate because it says the full reserve is unfair from a taxation viewpoint. What do you believe is the IRS position?

Assume that inflation depends on two things: the level of aggregate demand, indicated by the inverse of unemployment (1/U), and the expected rate of inflation (π et). Assume that the rate of inflation (πt) is given by the equation:                              πt = (48/U – 6) + πet Assume initially (year 0) that the actual and expected rate of inflation is zero. (a)  What is the current (natural) rate of unemployment   (b)    Now assume in year 1 that the government wishes to reduce unemployment to 4 per cent and continues to expand aggregate demand by as much as is necessary to achieve this. Fill in the rows for years 0 to 4 in the following table. It is assumed for simplicity that the expected rate of inflation in a given year (πet) is equal to the actual rate of inflation in the previous year (πt–1). (c)    Now assume in year 5 that the government, worried about rising inflation, reduces aggregate demand sufficiently to reduce inflation by 3 per cent in that year. What must the rate of unemployment be raised to in that year?   (d)    Assuming that unemployment stays at this high level, continue the table for years 5 to 7.

What factors must be present for income shifting to be a viable strategy?

What is the kiddie tax?  Explain.

Explain why savings institutions may benefit when interest rates fall. (LO4)

What is the difference between true centrifugal casting and semicentrifugal casting?

Fixed, variable, and mixed costs Bridges and Roads is an entity engaged in road construction. Some selected items from its chart of accounts are listed below.   Required For each account, indicate whether the account represents a fixed, variable, or mixed cost for the operation of road construction activity. If mixed, indicate whether it is predominantly fixed or variable. Explain your answers.   (a) Staff wages (f) Office supplies (b) Clerical wages (g) Professional dues (c) Rent (h) Professinal subscriptions (d) Licences (i) Property taxes (e) Insurance (j) Advertising   (LO2)   [Note about problem complexity: These are difficult questions because students will need to first visualise the costs (with very little information) and then apply chapter concepts. The Step 2 questions (A, B, and F) are the ones requiring significant assumptions to generate an answer.]

Balanced scorecard, financial and non-financial measures Dyggur Equipment manufactures and sells heavy equipment used in construction and mining. Customers are contractors who want reliable equipment at a low cost. The entity’s strategy is to provide reliable products at a price lower than its competitors. Management wants to emphasise quick delivery and quick turnaround when equipment needs repair or service so that contractors are not without their equipment often or for long. Dyggur is considering the following performance measures for use in its balanced scorecard.   Required (a)  Categorise each of the following potential balanced scorecard measures as             follows: F    Financial C   Customer I     Internal business process L   Learning and growth   (a)   Manufacturing cycle time per product (b)   Market share (c)   Average ratings on customer satisfaction surveys (d)   Average cost per unit (e)   Economic value added (f)   Percentage of receivables collected (g)   Dollar value of warranty work (h)   Time between order and delivery (i)    Time it takes to repair returned equipment (j)    Number of focus groups for new products (k)   Number of new uses for current products (l)    Number of times new technology is applied to current products (m)  Number of product change suggestions from sales (n)   Number of engineering change orders to improve manufacturing cycle (o)   Revenue growth (p)   Employee training hours (q)   Number of quality improvement suggestions from employees (r)   Number of new customers (s)   Number of repeat customers (t)    Employee turnover rate (u)   Defect rates for manufacturing production (v)   Percentage of error free-rates in: (i)   purchasing (ii)  billing (iii) customer record keeping    (b) Explain how Dyggur would use the scorecard solely as a diagnostic tool.

Tesha works for a company that pays a year-end bonus in January of each year (instead of December of the preceding year) to allow employees to defer the bonus income. Assume Congress recently passed tax legislation that decreases individual tax rates as of next year. Does this increase or decrease the benefits of the bonus deferral this year? What if Congress passed legislation that increased tax rates next year? Should Tesha ask the company to change its policy this year? What additional information do you need to answer this question?

Name some manufacturing processes that produce very poor surface finishes.

Why might it be argued that a redistribution of consumption, while not involving a Pareto improvement, could still be desirable?

How do partners who purchase a partnership interest determine the tax basis and holding period of their partnership interests?

What are the rewards of tax avoidance? What are the rewards of tax evasion?