Question & Answer

Many investors that purchased the mortgage-backed securities just before the credit crisis believed that they were misled because these securities were riskier than they thought. Who was at fault? (LO5)

Tim Legler requires an estimate of the cost of goods lost by fire on March 9. Merchandise on hand on January 1 was $38,000. Purchases since January 1 were $72,000; freight-in, $3,400; purchase returns and allowances, $2,400. Sales are made at 331/3% above cost and totaled $100,000 to March 9. Goods costing $10,900 were left undamaged by the fire; remaining goods were destroyed. Instructions (a) Compute the cost of goods destroyed. (b) Compute the cost of goods destroyed, assuming that the gross profit is 331/3% of sales.

On September 1, 2014, Sands Company sold at 104 (plus accrued interest) 4,000 of its 9%, 10-year, $1,000 face value, nonconvertible bonds with detachable stock warrants. Each bond carried two detachable warrants. Each warrant was for one share of common stock at a specified option price of $15 per share. Shortly after issuance, the warrants were quoted on the market for $3 each. No fair value can be determined for the Sands Company bonds. Interest is payable on December 1 and June 1. Bond issue costs of $30,000 were incurred. Instructions Prepare in general journal format the entry to record the issuance of the bonds.

What are the sources of pressure that change and influencethe development of GAAP?

What are the requirements for a taxpayer to make a deductible contribution to a traditional IRA? Why do the tax laws impose these restrictions?

Portman Corporation has retained earnings of $675,000 at January 1, 2014. Net income during 2014 was $1,400,000, and cash dividends declared and paid during 2014 totaled $75,000. Prepare a retained earnings statement for the year ended December 31, 2014.

1. We defined the factor of production ‘land’ to include raw materials. Does the analysis of rent that we have just been looking at apply to raw materials? 2. The supply of land in a particular area may be totally inelastic, but the supply of land in that area for a specific purpose (e.g. growing wheat) will be upward sloping: the higher the price of wheat and thus the higher the rent that wheat producers are prepared to pay, the more will be made available for wheat production. Using the concept of transfer earnings, what will determine the elasticity of supply of land for any particular purpose?

During the credit crisis of 2008, the Fed used a stimulative monetary policy. Why do you think the total amount of loans to households and businesses did not increase as much as the Fed had hoped? Are the lending institutions to blame for the relatively small increase in the total amount of loans extended to households and businesses? (LO2)

Why are particles and flakes members of the same basic class of reinforcing material?

Michelle operates several food trucks. Indicate the amount (if any) that she can deduct as an ordinary and necessary business deductions in each of the following situations and explain your solution.

How would one measure the angle of repose for a given amount of metallic powder?

What are some of the advantages of chemical vapor deposition?

Button Company has the following two temporary differences between its income tax expense and income taxes payable. 2014 2015 2016 Pretax fi nancial income $840,000 $910,000 $945,000 Excess depreciation expense on tax return (30,000) (40,000) (10,000) Excess warranty expense in fi nancial income 20,000 10,000 8,000 Taxable income $830,000 $880,000 $943,000 The income tax rate for all years is 40%. Instructions (a) Assuming there were no temporary differences prior to 2014, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, 2015, and 2016. (b) Indicate how deferred taxes will be reported on the 2016 balance sheet. Button’s product warranty is for 12 months. (c) Prepare the income tax expense section of the income statement for 2016, beginning with the line “Pretax financial income.”

What are the principal methods used to produce metallic powders?

If capital moves from developed to less developed countries, and labour moves from less developed to developed countries, what effects will these factor movements have on wage rates and the return on capital in the two types of country?

At the end of the year, Falabella Co. has pretax financial income of $550,000. Included in the $550,000 is $70,000 interest income on municipal bonds, $25,000 fine for dumping hazardous waste, and depreciation of $60,000. Depreciation for tax purposes is $45,000. Compute income taxes payable, assuming the tax rate is 30% for all periods.

1. Why are insurance companies unwilling to provide insurance against losses arising from war or ‘civil insurrection’? 2. Name some other events where it would be impossible to obtain insurance. 3. Explain why an insurance company could not pool the risk of flooding in a particular part of a country. Does your answer imply insurance against flooding is unobtainable?

Under what conditions may a seller who is exposed to continued risks of a high rate of return of the product sold recognize sales transactions as current revenue?

82. LeBron, Dennis, and Susan formed the Bar T LLC at the beginning of the current year. LeBron and Dennis each contributed $200,000 and Susan transferred several acres of agricultural land she had purchased two years earlier to the LLC. The land had a tax basis of $50,000 and was appraised at $300,000. The land was also encumbered with a $100,000 nonrecourse mortgage (i.e., qualified nonrecourse financing) for which no one was personally liable. The members plan to use the land and cash to begin a cattle-feeding operation. Susan will work full time operating the business, but LeBron and Dennis will devote less than two days per year to the operation. All three members agree to split profits and losses equally. At the end of the first year, Bar T had accumulated $40,000 of accounts payable jointly guaranteed by LeBron and Dennis and had made a $9,000 principal payment on the mortgage. None of the members have passive income from other sources or business income from other sources. LeBron and Dennis are married, while Susan is single. For the first year of operations, the partnership records disclosed the following information: Sales revenue $620,000 Cost of goods sold $380,000 Operating expenses $670,000 Dividends $1,200 Municipal bond interest $300 Salary paid as a guaranteed payment to Susan (not included in expenses) $10,000 Cash distributions split equally among the members at year-end $3,000 a. Compute the tax basis of each member’s interest immediately after the formation of the LLC. b. When does each member’s holding period for his or her LLC interests begin? c. What are Bar T’s tax basis and holding period in its land? d. What is Bar T’s required tax year-end? e. What overall methods of accounting were initially available to Bar T? f. List the separate items of partnership income, gains, losses, deductions, and other items that will be included in each member’s Schedule K-1 for the first year of operations. Use the proposed self-employment tax regulations to determine each member’s self-employment income or loss. g. What are the members’ tax bases in their LLC interests at the end of the first year of operations? h. What are the members’ at-risk amounts in their LLC interests at the end of the first year of operations? i. How much loss from Bar T, if any, will the members be able to deduct on their individual returns from the first year of operations?

Arnold and Lilly have recently had a heated discussion about whether a sales tax is a proportional tax or a regressive tax.  Arnoldargues that a sales tax is regressive.  Lillycounters that the sales tax is a flat tax.  Who is correct?

Amiras Corporation began operations on January 1, 2014, with a beginning inventory of $30,100 at cost and $50,000 at retail. The following information relates to 2014. Retail Net purchases ($108,500 at cost) $150,000 Net markups 10,000 Net markdowns 5,000 Sales revenue 126,900 Instructions (a) Assume Amiras decided to adopt the conventional retail method. Compute the ending inventory tobe reported in the balance sheet. (b) Assume instead that Amiras decides to adopt the dollar-value LIFO retail method. The appropriate price indexes are 100 at January 1 and 110 at December 31. Compute the ending inventory to be reported in the balance sheet. (c) On the basis of the information in part (b), compute cost of goods sold.

What are the factors on which the selection of feed in a machining operation should be based?

Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchange lacks commercial substance. Explain to Stan the differences in accounting for these two situations.

What policy prescriptions could be recommended for an economy experiencing a balance sheet recession?

44. Read the following letter and help Shady Slim with his tax situation. Assume that gross income is $172,900 (which consists only of salary) for purposes of this problem.