Question & Answer

Matt Ryan Corporation is interested in building its own soda can manufacturing plant adjacent to its existing plant in Partyville, Kansas. The objective would be to ensure a steady supply of cans at a stable price and to minimize transportation costs. However, the company has been experiencing some financial problems and has been reluctant to borrow any additional cash to fund the project. The company is not concerned with the cash flow problems of making payments, but rather with the impact of adding additional long-term debt to its balance sheet. The president of Ryan, Andy Newlin, approached the president of the Aluminum Can Company (ACC), its major supplier, to see if some agreement could be reached. ACC was anxious to work out an arrangement, since it seemed inevitable that Ryan would begin its own can production. The Aluminum Can Company could not afford to lose the account. After some discussion, a two-part plan was worked out. First, ACC was to construct the plant on Ryan’s land adjacent to the existing plant. Second, Ryan would sign a 20-year purchase agreement. Under the purchase agreement, Ryan would express its intention to buy all of its cans from ACC, paying a unit price which at normal capacity would cover labor and material, an operating management fee, and the debt service requirements on the plant. The expected unit price, if transportation costs are taken into consideration, is lower than current market. If Ryan did not take enough production in any one year and if the excess cans could not be sold at a high enough price on the open market, Ryan agrees to make up any cash shortfall so that ACC could make the payments on its debt. The bank will be willing to make a 20-year loan for the plant, taking the plant and the purchase agreement as collateral. At the end of 20 years, the plant is to become the property of Ryan. Instructions (a) What are project financing arrangements using special-purpose entities? (b) What are take-or-pay contracts? (c) Should Ryan record the plant as an asset together with the related obligation? (d) If not, should Ryan record an asset relating to the future commitment? (e) What is meant by off-balance-sheet financing?

Two or more items are omitted in each of the following tabulations of income statement data. Fill in the amounts that are missing. 2013 2014 2015 Sales revenue $290,000 $ ? $410,000 Sales returns and allowances 11,000 13,000 ? Net sales ? 347,000 ? Beginning inventory 20,000 32,000 ? Ending inventory ? ? ? Purchases ? 260,000 298,000 Purchase returns and allowances 5,000 8,000 10,000 Freight-in 8,000 9,000 12,000 Cost of goods sold 233,000 ? 293,000 Gross profi t on sales 46,000 91,000 97,000

In a production turning operation, the foreman has decreed that a single pass must be completed on the cylindrical workpiece in 5.0 min. The piece is 400 mm long and 150 mm in diameter. Using a feed = 0.30 mm/rev and a depth of cut = 4.0 mm, what cutting speed must be used to meet this machining time requirement?

] Describe the two methods that taxpayers use to prepay their taxes.

Presented below is abbreviated testimony from Troy Normand in the WorldCom case. He was a manager in the corporate reporting department and is one of five individuals who pleaded guilty. He is testifying in hopes of receiving no prison time when he is ultimately sentenced. Q. Mr. Normand, if you could just describe for the jury how the meeting started and what was said during the meeting? A. I can’t recall exactly who initiated the discussion, but right away Scott Sullivan acknowledged that he was aware we had problems with the entries, David Myers had informed him, and we were considering resigning. He said that he respected our concerns but that we weren’t being asked to do anything that he believed was wrong. He mentioned that he acknowledged that the company had lost focus quite a bit due to the preparations for the Sprint merger, and that he was putting plans in place and projects in place to try to determine where the problems were, why the costs were so high. He did say he believed that the initial statements that we produced, that the line costs in those statements could not have been as high as they were, that he believed something was wrong and there was no way that the costs were that high. I informed him that I didn’t believe the entry we were being asked to do was right, that I was scared, and I didn’t want to put myself in a position of going to jail for him or the company. He responded that he didn’t believe anything was wrong, nobody was going to be going to jail, but that if it later was found to be wrong, that he would be the person going to jail, not me. He asked that I stay, don’t jump off the plane, let him land it softly, that’s basically how he put it. And he mentioned that he had a discussion with Bernie Ebbers, asking Bernie to reduce projections going forward and that Bernie had refused. Q. Mr. Normand, you said that Mr. Sullivan said something about don’t jump out of the plane. What did you understand him to mean when he said that? A. Not to quit. Q. During this meeting, did Mr. Sullivan say anything about whether you would be asked to make entries like this in the future? A. Yes, he made a comment that from that point going forward we wouldn’t be asked to record any entries, high-level late adjustments, that the numbers would be the numbers. Q. What did you understand that to be mean, the numbers would be the numbers? A. That after the preliminary statements were issued, with the exception of any normal transaction, valid transaction, we wouldn’t be asked to be recording any more late entries. Q. I believe you testified that Mr. Sullivan said something about the line cost numbers not being accurate. Did he ask you to conduct any analysis to determine whether the line cost numbers were accurate? A. No, he did not. A. No. Q. Did you ever conduct any such analysis? A. No, I didn’t. Q. During this meeting, did Mr. Sullivan ever provide any accounting justification for the entry you were asked to make? A. No, he did not. Q. Did anything else happen during the meeting? A. I don’t recall anything else. Q. How did you feel after this meeting? A. Not much better actually. I left his office not convinced in any way that what we were asked to do was right. However, I did question myself to some degree after talking with him wondering whether I was making something more out of what was really there. Instructions Answer the following questions. (a) What appears to be the ethical issue involved in this case? (b) Is Troy Normand acting improperly or immorally?Q. Did anyone ever ask you to do that? (c) What would you do if you were Troy Normand? (d) Who are the major stakeholders in this case?

Based on what you know about repurchase agreements, would you expect them to have a lower or higher annualized yield than commercial paper? Why? (LO1)

: Explain the dividends of a diverse workforce and how the definition of diversity has grown to recognize a broad spectrum of differences among employees.

Colin Davis Machine Company maintains a general ledger account for each class of inventory, debiting such accounts for increases during the period and crediting them for decreases. The transactions below relate to the Raw Materials inventory account, which is debited for materials purchased and credited for materials requisitioned for use. 1. An invoice for $8,100, terms f.o.b. destination, was received and entered January 2, 2014. The receiving report shows that the materials were received December 28, 2013. 2. Materials costing $28,000, shipped f.o.b. destination, were not entered by December 31, 2013, “because they were in a railroad car on the company’s siding on that date and had not been unloaded.” 3. Materials costing $7,300 were returned to the supplier on December 29, 2013, and were shipped f.o.b. shipping point. The return was entered on that date, even though the materials are not expected to reach the supplier’s place of business until January 6, 2014. 4. An invoice for $7,500, terms f.o.b. shipping point, was received and entered December 30, 2013. The receiving report shows that the materials were received January 4, 2014, and the bill of lading shows that they were shipped January 2, 2014. 5. Materials costing $19,800 were received December 30, 2013, but no entry was made for them because “they were ordered with a specified delivery of no earlier than January 10, 2014.” Instructions Prepare correcting general journal entries required at December 31, 2013, assuming that the books have not been closed.

Wood Incorporated factored $150,000 of accounts receivable with Engram Factors Inc. on a withoutrecourse basis. Engram assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entry for Wood Incorporated and Engram Factors to record the factoring of the accounts receivable to Engram.

Use the loanable funds framework to explain how European economic conditions might affect U.S. interest rates. (LO1, LO2)

Teri Hatcher Inc., in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 2013. Book Basis Tax Basis Equipment (net) $400,000 $340,000 Estimated warranty liability $200,000 $ –0– It is estimated that the warranty liability will be settled in 2014. The difference in equipment (net) will result in taxable amounts of $20,000 in 2014, $30,000 in 2015, and $10,000 in 2016. The company has taxable income of $520,000 in 2013. As of the beginning of 2013, the enacted tax rate is 34% for 2013–2015, and 30% for 2016. Hatcher expects to report taxable income through 2016. Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013. (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2013.

Consider the prevailing conditions for inflation (including oil prices), the economy, the budget deficit, and other conditions that could affect the values of futures contracts. Based on these conditions, would you prefer to buy or sell Treasury bond futures at this time? Would you prefer to buy or sell stock index futures at this time? Assume that you would close out your position at the end of this semester. Offer some logic to support your answers. Which factor is most influential for your decision regarding Treasury bond futures and for your decision regarding stock index futures? (LO2, LO3)

What is the difference between control charts for variables and control charts for attributes?

] Discuss why Congress has instructed taxpayers to depreciate real property using the mid-month convention as opposed to the half-year convention used for tangible personal property.

Mackenzie is considering conducting her business, Mac561, as either a single member LLC or an S corporation. Assume her marginal ordinary income tax rate is 37 percent, her marginal FICA rate on employee compensation is 1.45 percent, her marginal self-employment tax rate is 2.9 percent (her other self-employment income and/or salary exceeds the wage base limit for the 12.4 percent Social Security tax portion of the self-employment tax), and any employee compensation or self-employment income she receives is subject to the .9 percent additional Medicare tax. Also, assume Mac561 generated $200,000 of business income before considering the deduction for compensation Mac561 pays to Mackenzie and Mackenzie can claim the full qualified business income deduction on Mac561’s business income allocated to her. Determine Mackenzie’s after-tax cash flow from the entity’s business income and any compensation she receives from the business under the following assumptions:   a. Mackenzie conducted Mac561 as a single-member LLC.       Amount Description (1) Business income $200,000   (1)   Deduction for 50% of S.E. taxes (2,678) (6)   × 50% (3) QBI deduction (39,464) [(1) + (2)] × 20% (4) Net income taxable business income 157,858 (1) + (2) + (3) (5) Income tax paid by owner 58,407 (4) × .37 (6) Self-employment tax 5,356 (1) × .9235 × .029 (7) Additional Medicare tax 1,662 (1) × .9235 × .009 additional Medicare tax (8) Total tax $65,425 (5) + (6) + (7) After-tax cash flow $134,575 (1)   – (8)     b.      Mackenzie conducted Mac561 as an S corporation and she received a salary of $100,000. All business income allocated to her is also distributed to her.     Amount Description (1) Business income before comp. $200,000   (2) Salary (100,000)   (3) FICA deduction (1,450) (2) × .0145 employer’s portion (4) Business income allocation and distribution to owner 98,550 (1) + (2) + (3) (5) QBI deduction (19,710) (4) × 20% (6) Net taxable business income 78,840 (4) + (5) (7) Income tax on net business income (29,171) (6) × .37 (8) Salary received 100,000 (2) (9) Income tax on salary (37,000) (8) × .37 (10) Additional Medicare tax on salary (900) (8) × .009 (11) FICA tax paid (1,450) (2) × .0145 employee’s portion After-tax cash flow $130,029 (4) + (7) + (8) + (9) + (10) + (11)     c.       Mackenzie conducted Mac561 as an S corporation and she received a salary of $20,000. All business income allocated to her is also distributed to her.       Amount Description (1) Business income before comp. $200,000   (2) Salary (20,000)   (3) FICA deduction (290) (2) × .0145 employer’s portion (4) Business income allocation and distribution to owner 179,710 (1) + (2) + (3) (5) QBI deduction (35,942) (4) × 20% (6) Net taxable business income 143,768 (4) + (5) (7) Income tax on net business income (53,194) (6) × .37 (8) Salary received 20,000 (2) (9) Income tax on salary (7,400) (8) × .37 (10) Additional Medicare tax on salary (180) (8) × .009 (11) FICA tax paid (290) (2) × .0145 employee’s portion After-tax cash flow $138,646 (4) + (7) + (8) + (9) + (10) + (11)     d.  Which entity/compensation combination generated the most after-tax cash flow for Mackenzie? What are the primary contributing factors favoring this combination?

A peripheral milling operation is performed on the top surface of a rectangular workpart which is 400 mm long by 60 mm wide. The milling cutter, which is 80 mm in diameter and has five teeth, overhangs the width of the part on both sides. Cutting speed = 70 m/min, chip load = 0.25 mm/tooth, and depth of cut = 5.0 mm. Determine (a) the actual machining time to make one pass across the surface and (b) the maximum material removal rate during the cut

Solve Problem 24.15 except that in part (a), determine cutting speed for minimum cost.

On June 1, 2012, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis. On April 1, 2014, the company issued an additional 400,000 shares of stock for cash. All 1,200,000 shares were outstanding on December 31, 2014. Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2014. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date. Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2014. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,540,000. (The tax rate is 40%.) Instructions Determine the following for 2014. (a) The number of shares to be used for calculating: (1) Basic earnings per share. (2) Diluted earnings per share. (b) The earnings figures to be used for calculating: (1) Basic earnings per share. (2) Diluted earnings per share.

(Looking at the Maths) How long would it take an economy, like China, growing at an annual rate of close to 10 per cent to (a) double in size; (b) triple in size?

A face milling operation removes 0.32 in depth of cut from the end of a cylinder that has a diameter of 3.90 in. The cutter has a 4-in diameter with 4 teeth, and its feed trajectory is centered over the circular face of the work. The cutting speed is 375 ft/min and the chip load is 0.006 in/tooth. Determine (a) the time to machine, (b) the average metal removal rate (considering the entire machining time), and (c) the maximum metal removal rate.

How does carburizing work?

Describe the procedures involved in segregating various deferred tax amounts into current and noncurrent categories.

Suppose you asked your favorite AI query tool the following question: “Are property taxes that refunded included in gross income for federal income tax purposes?”  The AI tool provided the following response:

This year Jorge received a refund of property taxes that he deducted on his tax return last year.  Jorge is not sure whether he should include the refund in his gross income.  What would you tell him?

Oscar, Felix, and Marv are all one-third partners in the capital and profits of Eastside General Partnership. In addition to their normal share of the partnership’s annual income, Oscar and Felix receive annual guaranteed payments of $7,000 to compensate them for additional services they provide. Eastside’s income statement for the current year reflects the following revenues and expenses: Sales revenue $ 420,000 Dividend income 5,700 Short-term capital gains 2,800 Cost of goods sold (210,000) Employee wages (115,000) Depreciation expense (28,000) Guaranteed payments (14,000) Miscellaneous expenses (9,500) Overall net income $ 52,000 In addition, Eastside owed creditors $120,000 at the beginning of the year but managed to pay down its liabilities to $90,000 by the end of the year. All partnership liabilities are allocated equally among the partners. Finally, Oscar, Felix and Marv had a tax basis of $80,000 in their interests at the beginning of the year. a. What tax basis do the partners have in their partnership interests at the end of the year? b. Assume the partners began the year with a tax basis of $10,000 and all the liabilities were paid off on the last day of the year. How much gain will the partners recognize when the liabilities are paid off? What tax basis do the partners have in their partnership interests at the end of the year?