Question & Answer

Explain why Congress sometimes mandates that businesses use specific accounting methods while other times Congress is content to require businesses to use the same accounting methods for tax purposes that they use for financial accounting purposes.

Arna, Inc. uses the dollar-value LIFO method of computing its inventory. Data for the past 3 years follow. Year Ended December 31 Inventory at Current-Year Cost Price Index 2013 $19,750 100 2014 22,140 108 2015 25,935 114 Instructions Compute the value of the 2014 and 2015 inventories using the dollar-value LIFO method.

There are 16 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, and each additional answer beyond the correct number of answers reduces the score by 1 point. Percentage on the quiz is based on the total number of correct answers. 34.1 How many electronic devices would be contained in an IC chip in order for it to be classified in the VLSI category: (a) 1000, (b) 10,000, (c) 1 million, or (d) 100 million? 34.2 An alternative name for chip in semiconductor processing is which one of the following (one best answer): (a) component, (b) device, (c) die, (d) package, or (e) wafer? 34.3 Which one of the following is the source of silicon for semiconductor processing: (a) pure Si in nature, (b) SiC, (c) Si3N4, or (d) SiO2? 34.4 Which one of the following is the most common form of radiation used in photolithography: (a) electronic beam radiation, (b) incandescent light, (c) infrared light, (d) ultraviolet light, or (e) X-ray? 34.5 After exposure to light, a positive resist becomes (a) less soluble or (b) more soluble to the chemical developing fluid? 34.6 Which of the following processes are used to add layers of various materials in IC fabrication (three best answers): (a) chemical vapor deposition, (b) diffusion, (c) ion implantation, (d) physical vapor deposition, (e) plasma etching, (f) thermal oxidation, and (g) wet etching? 34.7 Which of the following are doping processes in IC fabrication (two best answers): (a) chemical vapor deposition, (b) diffusion, (c) ion implantation, (d) physical vapor deposition, (e) plasma etching, (f) thermal oxidation, and (g) wet etching? 34.8 Which one of the following is the most common metal for intraconnection of devices in a silicon integrated circuit: (a) aluminum, (b) copper, (c) gold, (d) nickel, (e) silicon, or (f) silver? 34.9 Which etching process produces the more anisotropic etch in IC fabrication: (a) plasma etching or (b) wet chemical etching? 34.10 Which of the following are the two principal packaging materials used in IC packaging: (a) aluminum, (b) aluminum oxide, (c) copper, (d) epoxies, and (e) silicon dioxide? 34.11 Which of the following metals are commonly used for wire bonding of chip pads to the lead frame (two best answers): (a) aluminum, (b) copper, (c) gold, (d) nickel, (e) silicon, and (f) silver?

Various types of accounting changes can affect the financial statements of a business enterprise differently. Assume that the following list describes changes that have a material effect on the financial statements for the current year of your business enterprise. 1. A change from the completed-contract method to the percentage-of-completion method of accounting for long-term construction-type contracts. 2. A change in the estimated useful life of previously recorded fixed assets as a result of newly acquired information. 3. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits. 4. A change from including the employer share of FICA taxes with payroll tax expenses to including it with “Retirement benefits” on the income statement. 5. Correction of a mathematical error in inventory pricing made in a prior period. 6. A change from presentation of statements of individual companies to presentation of consolidated statements. 7. A change in the method of accounting for leases for tax purposes to conform with the financial accounting method. As a result, both deferred and current taxes payable changed substantially. 8. A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing. Instructions Identify the type of change that is described in each item above and indicate whether the prior year’s financial statements should be recast when presented in comparative form with the current year’s financial statements.

The following are selected ledger accounts of Spock Corporation at December 31, 2014. Cash $ 185,000 Salaries and wages expense (sales) $284,000 Inventory 535,000 Salaries and wages expense (offi ce) 346,000 Sales revenue 4,275,000 Purchase returns 15,000 Unearned sales revenue 117,000 Sales returns and allowances 79,000 Purchases 2,786,000 Freight-in 72,000 Sales discounts 34,000 Accounts receivable 142,500 Purchase discounts 27,000 Sales commissions 83,000 Selling expenses 69,000 Telephone and Internet expense (sales) 17,000 Accounting and legal services 33,000 Utilities expense (offi ce) 32,000 Insurance expense (offi ce) 24,000 Miscellaneous offi ce expenses 8,000 Advertising expense 54,000 Rent revenue 240,000 Delivery expense 93,000 Extraordinary loss (before tax) 70,000 Depreciation expense (offi ce equipment) 48,000 Interest expense 176,000 Depreciation expense (sales equipment) 36,000 Common stock ($10 par) 900,000 Spock’s effective tax rate on all items is 34%. A physical inventory indicates that the ending inventory is $686,000. Instructions Prepare a condensed 2014 income statement for Spock Corporation.7

What is the definition of control for purposes of §351?  Why does Congress require the shareholders to control a corporation to receive tax deferral?

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What are some of the challenges to the FASB and IASB in developing a converged conceptual framework?

How do the requirements for accruing expenses under financial accounting rules differ from the requirements for accruing deductions under tax accounting rules?

Oxford Corporation began operations in 2014 and reported pretax financial income of $225,000 for the year. Oxford’s tax depreciation exceeded its book depreciation by $40,000. Oxford’s tax rate for 2014 and years thereafter is 30%. In its December 31, 2014, balance sheet, what amount of deferred tax liability should be reported?

The following facts pertain to a noncancelable lease agreement between Faldo Leasing Company and Vance Company, a lessee. Inception date January 1, 2014 Annual lease payment due at the beginning of each year, beginning with January 1, 2014 $124,798 Residual value of equipment at end of lease term, guaranteed by the lessee $50,000 Lease term 6 years Economic life of leased equipment 6 years Fair value of asset at January 1, 2014 $600,000 Lessor’s implicit rate 12% Lessee’s incremental borrowing rate 12%The lessee assumes responsibility for all executory costs, which are expected to amount to $5,000 per year. The asset will revert to the lessor at the end of the lease term. The lessee has guaranteed the lessor a residual value of $50,000. The lessee uses the straight-line depreciation method for all equipment. Instructions (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 and reversing entries are used when appropriate.

How do banks resolve illiquidity problems? (LO2)

In a §351 exchange, how does the tax treatment differ in cases where liabilities are assumed with a tax-avoidance purpose versus where liabilities assumed exceed basis?

Compare and contrast the basis of property acquired via purchase, conversion from personal use to business or rental use, tax-deferred exchange, gift, and inheritance.

Harding Corporation has the following accounts included in its December 31, 2014, trial balance: Accounts Receivable $110,000; Inventory $290,000; Allowance for Doubtful Accounts $8,000; Patents $72,000; Prepaid Insurance $9,500; Accounts Payable $77,000; Cash $30,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.

Theodore, Alvin, and Simon are equal shareholders of Timeless Corp. (an S corporation). Simon wants to terminate the S election, but Theodore and Alvin disagree.  Can Simon unilaterally elect to have the S election terminated?  If not, what would Simon need to do to have the S election terminated?

Simmons Corporation owns stock of Armstrong, Inc. Prior to 2014, the investment was accounted for using the equity method. In early 2014, Simmons sold part of its investment in Armstrong, and began using the fair value method. In 2014, Armstrong earned net income of $80,000 and paid dividends of $95,000. Prepare Simmons’s entries related to Armstrong’s net income and dividends, assuming Simmons now owns 10% of Armstrong’s stock.

Rayburn Corporation has a building that it bought during year 0 for $850,000. It sold the building in year 5. During the time it held the building, Rayburn depreciated it by $100,000. What are the amount and character of the gain or loss Rayburn will recognize on the sale in each of the following alternative situations?    a. Rayburn receives $840,000.  b. Rayburn receives $900,000. c. Rayburn receives $700,000.

The information shown below and on page 1170 was disclosed during the audit of Elbert Inc. 1. Amount Due Year per Tax Return 2014 $130,000 2015 104,000 2. On January 1, 2014, equipment costing $600,000 is purchased. For financial reporting purposes, the company uses straight-line depreciation over a 5-year life. For tax purposes, the company uses the elective straight-line method over a 5-year life. (Hint: For tax purposes, the half-year convention as discussed in Appendix 11A must be used.) 3. In January 2015, $225,000 is collected in advance rental of a building for a 3-year period. The entire $225,000 is reported as taxable income in 2015, but $150,000 of the $225,000 is reported as unearned revenue in 2015 for financial reporting purposes. The remaining amount of unearned revenue is to be recognized equally in 2016 and 2017. 4. The tax rate is 40% in 2014 and all subsequent periods. (Hint: To find taxable income in 2014 and 2015, the related income taxes payable amounts will have to be “grossed up.”) 5. No temporary differences existed at the end of 2013. Elbert expects to report taxable income in each of the next 5 years. Instructions (a) Determine the amount to report for deferred income taxes at the end of 2014, and indicate how it should be classified on the balance sheet. (b) Prepare the journal entry to record income taxes for 2014. (c) Draft the income tax section of the income statement for 2014, beginning with “Income before income taxes.” (Hint: You must compute taxable income and then combine that with changes in cumulative temporary differences to arrive at pretax financial income.) (d) Determine the deferred income taxes at the end of 2015, and indicate how they should be classified on the balance sheet. (e) Prepare the journal entry to record income taxes for 2015. (f) Draft the income tax section of the income statement for 2015, beginning with “Income before income taxes.”

The part shown in Figure P16.13 is to be pressed of iron powders using a compaction pressure of 75,000 lb/in2 . Dimensions are inches. Determine (a) the most appropriate pressing direction, (b) the required press tonnage to perform this operation, and (c) the final weight of the part if the porosity is 10%. Assume shrinkage during sintering can be neglected.

Samuels Co. appropriately uses the installment-sales method of accounting. On December 31, 2016, the books show balances as follows. Installment Receivables Deferred Gross Profit Gross Profit on Sales 2014 $12,000 2014 $ 7,000 2014 35% 2015 40,000 2015 26,000 2015 33% 2016 80,000 2016 95,000 2016 32% Instructions (a) Prepare the adjusting entry or entries required on December 31, 2016 to recognize 2016 realized gross profit. (Installment receivables have already been credited for cash receipts during 2016.) (b) Compute the amount of cash collected in 2016 on accounts receivable from each year.

Petrenko Corporation has outstanding 2,000 $1,000 bonds, each convertible into 50 shares of $10 par value ordinary shares. The bonds are converted on December 31, 2014. The bonds payable has a carrying value of $1,950,000 and conversion equity of $20,000. Record the conversion using the book value method.

Springsteen Co. had the following activity in its most recent year of operations. (a) Pension expense exceeds amount funded. (g) Amortization of intangible assets. (b) Redemption of bonds payable. (h) Purchase of treasury shares. (c) Sale of building at book value. (i) Issuance of bonds for land. (d) Depreciation. (j) Payment of dividends. (e) Exchange of equipment for furniture. (k) Increase in interest receivable on notes receivable. (f) Issuance of ordinary shares. (l) Purchase of equipment. Instructions Classify the items as (1) operating—add to net income, (2) operating—deduct from net income, (3) investing, (4) financing, or (5) significant non-cash investing and financing activities. Use the indirect method.

Using the appropriate interest table, compute the present values of the following periodic amounts due at the end of the designated periods. (a) $30,000 receivable at the end of each period for 8 periods compounded at 12%. (b) $30,000 payments to be made at the end of each period for 16 periods at 9%. (c) $30,000 payable at the end of the seventh, eighth, ninth, and tenth periods at 12%.

Use the information for Rode Inc. given in IFRS19-7. Assume that it is probable that the entire net operating loss carryforward will not be realized in future years. Prepare the journal entry(ies) necessary at the end of 2014.