Question & Answer

Felipe, a single taxpayer, is a technology consultant who operates as a sole proprietorship.  Felipe’s net business income is $600,000 (net of the associated for AGI self-employment tax deduction), he pays wages of $100,000 to his employees, and he has $200,000 of qualified property (unadjusted basis).  Felipe’s taxable income before the deduction for qualified business income is $500,000. Assume he has no capital gains or qualified dividends. a. Calculate Felipe’s deduction for qualified business income.           b. How would your answer to (a) change if Felipe was an investment broker.

The strength coefficient = 550 MPa and strain-hardening exponent = 0.22 for a certain metal. During a forming operation, the final true strain that the metal experiences = 0.85. Determine the flow stress at this strain and the average flow stress that the metal experienced during the operation

Presented below is information from the annual report of Emporia Plastics, Inc. Operating income $ 532,150 Bond interest expense 135,000 397,150 Income taxes 183,432 Net income $ 213,718 Bonds payable $1,000,000 Common stock 875,000 Retained earnings 375,000 Instructions (a) Compute the return on common stock equity and the rate of interest paid on bonds. (Assume balances for debt and equity accounts approximate averages for the year.) (b) Is Emporia Plastics Inc. trading on the equity successfully? Explain.

Grayson (single) is in the 24 percent tax rate bracket and has the sold the following stocks in 2024:

What is the fair value option?

Amigos Burrito Inc. sells franchises to independent operators throughout the northwestern part of the United States. The contract with the franchisee includes the following provisions. 1. The franchisee is charged an initial fee of $120,000. Of this amount, $20,000 is payable when the agreement is signed, and a $20,000 non-interest-bearing note is payable at the end of each of the 5 subsequent years. 2  All of the initial franchise fee collected by Amigos is to be refunded and the remaining obligation canceled if, for any reason, the franchisee fails to open his or her franchise. 3. In return for the initial franchise fee, Amigos agrees to (a) assist the franchisee in selecting the location for the business, (b) negotiate the lease for the land, (c) obtain financing and assist with building design, (d) supervise construction, (e) establish accounting and tax records, and (f) provide expert advice over a 5-year period relating to such matters as employee and management training, quality control, and promotion. 4. In addition to the initial franchise fee, the franchisee is required to pay to Amigos a monthly fee of 2% of sales for menu planning, receipt innovations, and the privilege of purchasing ingredients from Amigos at or below prevailing market prices. Management of Amigos Burrito estimates that the value of the services rendered to the franchisee at the time the contract is signed amounts to at least $20,000. All franchisees to date have opened their locations at the scheduled time, and none have defaulted on any of the notes receivable. The credit ratings of all franchisees would entitle them to borrow at the current interest rate of 10%. The present value of an ordinary annuity of five annual receipts of $20,000 each discounted at 10% is $75,816. Instructions (a) Discuss the alternatives that Amigos Burrito Inc. might use to account for the initial franchise fees, evaluate each by applying generally accepted accounting principles, and give illustrative entries for each alternative. (b) Given the nature of Amigos Burrito’s agreement with its franchisees, when should revenue be recognized? Discuss the question of revenue recognition for both the initial franchise fee and the additional monthly fee of 2% of sales, and give illustrative entries for both types of revenue. (c) Assume that Amigos Burrito sells some franchises for $100,000, which includes a charge of $20,000 for the rental of equipment for its useful life of 10 years; that $50,000 of the fee is payable immediately and the balance on non-interest-bearing notes at $10,000 per year; that no portion of the $20,000 rental payment is refundable in case the franchisee goes out of business; and that title to the equipment remains with the franchisor. Under those assumptions, what would be the preferable method of accounting for the rental portion of the initial franchise fee? Explain.

Paula could not reach an agreement with the IRS at her appeals conference and has just received a 90-day letter.  If she wants to litigate the issue but does not have sufficient cash to pay the proposed deficiency, what is her best court choice?

When is a debt security considered impaired? Explain how to account for the impairment of an available-for-sale debt security.

Becker Corporation sells farm machinery on the installment plan. On July 1, 2014, Becker entered into an installment-sales contract with Valente Inc. for an 8-year period. Equal annual payments under the installment sale are $100,000 and are due on July 1. The first payment was made on July 1, 2014. Additional information: 1. The amount that would be realized on an outright sale of similar farm machinery is $586,842. 2. The cost of the farm machinery sold to Valente Inc. is $425,000. 3. The finance charges relating to the installment period are based on a stated interest rate of 10%, which is appropriate. 4. Circumstances are such that the collection of the installments due under the contract is reasonably assured. Instructions What income or loss before income taxes should Becker record for the year ended December 31, 2014, as a result of the transaction above?

Given your knowledge of how interest rates are influenced by various factors reflecting the demand for funds and the supply of funds available in the credit markets, write a short essay to explain how and why interest rates will change over the next three months.

How are the tax consequences of a cash distribution different from those of a noncash property distribution to both the S corporation and the shareholders?

There are 27 correct answers in the following multiple choice questions (some questions have multiple answers that are correct). To attain a perfect score on the quiz, all correct answers must be given. Each correct answer is worth 1 point. Each omitted answer or wrong answer reduces the score by 1 point, andeach additional answer beyond the correct number of answers reduces the score by 1 point. Percentage score on the quiz is based on the total number of correct answers. 11.1 Which one of the following casting processes is the most widely used: (a) centrifugal casting, (b) die casting, (c) investment casting, (d) sand casting, or (e) shell casting? 11.2 In sand casting, the volumetric size of the pattern is (a) bigger than, (b) same size as, or (c) smaller than the cast part? 11.3 Silica sand has which one of the following compositions: (a) Al2O3, (b) SiO, (c) SiO2, or (d) SiSO4? 11.4 For which one of the following reasons is a green mold named: (a) green is the color of the mold, (b) moisture is contained in the mold, (c) mold is cured, or (d) mold is dry? 11.5 Given that Wm = weight of the molten metal displaced by a core and Wc = weight of the core, the buoyancy force is which one of the following: (a) downward force = Wm + Wc, (b) downward force = Wm - Wc, (c) upward force = Wm + Wc, or (d) upward force = Wm - Wc? 11.6 Which of the following casting processes are expendable mold operations (four correct answers): (a) centrifugal casting, (b) die casting, (c) investment casting, (d) low pressure casting, (e) sand casting, (f) shell molding, (g) slush casting, and (h) vacuum molding? 11.7 Shell molding is best described by which one of the following: (a) casting operation in which the molten metal has been poured out after a thin shell has been solidified in the mold, (b) casting process in which the mold is a thin shell of sand bonded by a thermosetting resin, (c) sand-casting operation in which the pattern is a shell rather than a solid form, or (d) casting operation used to make artificial sea shells? 11.8 Investment casting is also known by which one of the following names: (a) fast-payback molding, (b) full-mold process, (c) lost-foam process, (d) lost-pattern process, or (e) lost-wax process? 11.9 In plaster mold casting, the mold is made of which one of the following materials: (a) Al2O3, (b) CaSO4-H2O, (c) SiC, or (d) SiO2? 11.10 Which of the following qualifies as a precision-casting process (two correct answers): (a) ingot casting, (b) investment casting, (c) plaster-mold casting, (d) sand casting, and (e) shell molding? 11.11 Which of the following casting processes are permanent mold operations (three correct answers): (a) centrifugal casting, (b) die casting, (c) expanded polystyrene process, (d) sand casting, (e) shell molding, (f) slush casting, and (g) vacuum molding 11.12 Which of the following metals would typically be used in die casting (three best answers): (a) aluminum, (b) cast iron, (c) steel, (d) tin, (e) tungsten, and (f) zinc? 11.13 Which of the following are advantages of die casting over sand casting (four best answers): (a) better surface finish, (b) closer tolerances, (c) higher melting temperature metals, (d) higher production rates, (e) larger parts can be cast, and (f) mold can be reused? 11.14 Cupolas are furnaces used to melt which of the following metals (one best answer): (a) aluminum, (b) cast iron, (c) steel, or (d) zinc? 11.15 A misrun is which one of the following defects in casting: (a) globules of metal becoming entrapped in the casting, (b) metal is not properly poured into the downsprue, (c) metal solidifies before filling the cavity, (d) microporosity, and (e) \"pipe\" formation? 11.16 Which one of the following casting metals is most important commercially: (a) aluminum and its alloys, (b) bronze, (c) cast iron, (d) cast steel, or (e) zinc alloys?

What is a partnership interest, and what specific economic rights or entitlements are included with it?

Tevez Company experienced an actuarial loss of $750 in its defined benefit plan in 2014. For 2014, Tevez’s revenues are $125,000, and expenses (excluding pension expense of $14,000, which does not include the actuarial loss) are $85,000. Prepare Tevez’s statement of comprehensive income for 2014.

What are the major limitations of the balance sheet as a source of information?

What does the accumulated adjustments account represent? How is it adjusted year by year? Can it have a negative balance?

Hanson Company (see BE10-2) borrowed $1,000,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, $2,000,000 note payable and an 11%, 4-year, $3,500,000 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.

Jones Co. is in a technology-intensive industry. Recently, one of its competitors introduced a new product with technology that might render obsolete some of Jones’s inventory. The accounting staff wants to follow the appropriate authoritative literature in determining the accounting for this significant market event. Instructions If your school has a subscription to the FASB Codification, go to http://aaahg.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses. (a) Identify the primary authoritative guidance for the accounting for inventories. What is the predecessor literature? (b) List three types of goods that are classified as inventory. What characteristic will automatically exclude an item from being classified as inventory? (c) Define “market” as used in the phrase “lower-of-cost-or-market.” (d) Explain when it is acceptable to state inventory above cost and which industries allow this practice.

Demarco and Janine Jackson have been married for 20 years and have four children who qualify as their dependents (Damarcus, Jasmine, Michael, and Candice). The Jacksons file a joint tax return. The couple received salary income of $105,000 and qualified business income of $10,000 from an investment in a partnership, and they sold their home this year. They initially purchased the home three years ago for $200,000 and they sold it for $250,000. The gain on the sale qualified for the exclusion from the sale of a principal residence. The Jacksons incurred $16,500 of itemized deductions, and they had $4,000 withheld from their paychecks for federal taxes. They are also allowed to claim a child tax credit for each of their children. However, because Candice was 18 years of age at year end, the Jacksons may only claim the child tax credit for other qualifying dependents for Candice.

On January 1, 2014, Acker Inc. had the following balance sheet. ACKER INC. BALANCE SHEET AS OF JANUARY 1, 2014 Assets Equity Cash $ 50,000 Common stock $260,000 Equity investments (available-for-sale) 240,000 Accumulated other comprehensive income 30,000 Total $290,000 Total $290,000 The accumulated other comprehensive income related to unrealized holding gains on available-for-sale securities. The fair value of Acker Inc.’s available-for-sale securities at December 31, 2014, was $190,000; its cost was $140,000. No securities were purchased during the year. Acker Inc.’s income statement for 2014 was as follows. (Ignore income taxes.) ACKER INC. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2014 Dividend revenue $ 5,000 Gain on sale of investments 30,000 Net income $35,000 Instructions (Assume all transactions during the year were for cash.) (a) Prepare the journal entry to record the sale of the available-for-sale securities in 2014. (b) Prepare a statement of comprehensive income for 2014. (c) Prepare a balance sheet as of December 31, 2014.

Explain how the conversion of a securities firm to a bank holding company (BHC) structure might reduce its risk. (LO2)

The following letter was sent to the SEC and the FASB by leaders of the business community. Dear Sirs: The FASB has been struggling with accounting for derivatives and hedging for many years. The FASB has now developed, over the last few weeks, a new approach that it proposes to adopt as a final standard. We understand that the Board intends to adopt this new approach as a final standard without exposing it for public comment and debate, despite the evident complexity of the new approach, the speed with which it has been developed and the significant changes to the exposure draft since it was released more than one year ago. Instead, the Board plans to allow only a brief review by selected parties, limited to issues of operationality and clarity, and would exclude questions as to the merits of the proposed approach. As the FASB itself has said throughout this process, its mission does not permit it to consider matters that go beyond accounting and reporting considerations. Accordingly, the FASB may not have adequately considered the wide range of concerns that have been expressed about the derivatives and hedging proposal, including concerns related to the potential impact on the capital markets, the weakening of companies’ ability to manage risk, and the adverse control implications of implementing costly and complex new rules imposed at the same time as other major initiatives, including the Year 2000 issues and a single European currency. We believe that these crucial issues must be considered, if not by the FASB, then by the Securities and Exchange Commission, other regulatory agencies, or Congress. We believe it is essential that the FASB solicit all comments in order to identify and address all material issues that may exist before issuing a final standard. We understand the desire to bring this process to a prompt conclusion, but the underlying issues are so important to this nation’s businesses, the customers they serve and the economy as a whole that expediency cannot be the dominant consideration. As a result, we urge the FASB to expose its new proposal for public comment, following the established due process procedures that are essential to acceptance of its standards, and providing sufficient time to affected parties to understand and assess the new approach. We also urge the SEC to study the comments received in order to assess the impact that these proposed rules may have on the capital markets, on companies’ risk management practices, and on management and financial controls. These vital public policy matters deserve consideration as part of the Commission’s oversight responsibilities. We believe that these steps are essential if the FASB is to produce the best possible accounting standard while minimizing adverse economic effects and maintaining the competitiveness of U.S. businesses in nthe international marketplace. Very truly yours, (This letter was signed by the chairs of 22 of the largest U.S. companies.) Instructions Answer the following questions. (a) Explain the “due process” procedures followed by the FASB in developing a financial reporting standard. (b) What is meant by the term “economic consequences” in accounting standard-setting? (c) What economic consequences arguments are used in this letter? (d) What do you believe is the main point of the letter? (e) Why do you believe a copy of this letter was sent by the business community to influential members of the U.S. Congress?

Differentiate between operating activities, investing activities, and financing activities.

For each of the following independent situations, indicate the amount the taxpayer must include in gross income and explain your answer:

Differentiate between investing activities, financing activities, and operating activities.