Question & Answer

What type of information do investors rely on when determining the proper value of stocks? (LO2)

This year, Agustin’s distributive share from Eden Lakes Partnership includes $8,000 of interest income, $4,000 of net long-term capital gains, $2,000 net §1231 gain from the sale of property used in the partnership’s trade or business, and $83,000 of ordinary business income. a. Assume that Agustin materially participates in the partnership. How much of his distributive share from Eden Lakes Partnership is potentially subject to the net investment income tax? b. Assume that Agustin does not materially participate in the partnership. How much of his distributive share from the Eden Lakes partnership is potentially subject to the net investment income tax?

While completing undergraduate schoolwork in information systems, Dallin Bourne and Michael Banks decided to start a technology support company called eSys Answers. During year 1, they bought the following assets and incurred the following start-up fees:

Give some examples of stochastic shocks.

How should the disposal of a component of a business be disclosed in the income statement?

Explain the conditions under which a speculator would like to invest in a foreign currency today even when the speculator has no use for that currency in the future. (LO2, LO3)

What factors could cause a rise in the market rate of interest?

How does the current earnings and profits account differ from the accumulated earnings and profits accounts?

Andy McDowell Co. establishes a $100 million liability at the end of 2014 for the estimated site-cleanup costs at two of its manufacturing facilities. All related closing costs will be paid and deducted on the tax return in 2015. Also, at the end of 2014, the company has $50 million of temporary differences due to excess depreciation for tax purposes, $7 million of which will reverse in 2015. The enacted tax rate for all years is 40%, and the company pays taxes of $64 million on $160 million of taxable income in 2014. McDowell expects to have taxable income in 2015. Instructions (a) Determine the deferred taxes to be reported at the end of 2015. (b) Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet. (c) Assuming that the only deferred tax account at the beginning of 2014 was a deferred tax liability of $10,000,000, draft the income tax expense portion of the income statement for 2014, beginning with the line “Income before income taxes.” (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $10,000,000 deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, and then (3) the amount of pretax financial income.)

What are the general rules for measuring and recognizing gain or loss by a debt extinguishment with modification?

Provide examples of off-balance sheet activities. Why are regulators concerned about them? (LO2)

(FASB and Standard-Setting) Presented below are four statements which you are to identify as true or false. If false, explain why the statement is false. 1. GAAP is the term used to indicate the whole body of FASB authoritative literature. 2. Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements. 3. The primary governmental body that has influence over the FASB is the SEC. 4. The FASB has a government mandate and therefore does not have to follow due process in issuing a standard

A manual assembly line has 17 workstations with one operator per station. Total work content time to assemble the product = 22.2 minutes. The production rate of the line = 36 units per hour. A synchronous transfer system is used to advance the products from one station to the next, and the transfer time = 6 seconds. The workers remain seated along the line. Proportion uptime = 0.90. Determine the balance efficiency.

While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE), specializes in custom-sculpted cakes for weddings, birthdays, and other celebrations.  James and Paul formed the business at the beginning of 2024, and each contributed $50,000 in exchange for a 50 percent ownership interest.  GTE also borrowed $200,000 from a local bank.  Both James and Paul had to personally guarantee the loan.  Both owners provide significant services for the business. The following information pertains to GTE’s 2024 activities.   • GTE uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis.   • GTE received $450,000 of sales revenue and reported $210,000 of cost of goods sold (it did not have any ending inventory). • GTE paid $30,000 compensation to James, $30,000 compensation to Paul, and $40,000 of compensation to other employees (assume these amounts include applicable payroll taxes, if any). • GTE paid $15,000 of rent for a building and equipment, $20,000 for advertising, $14,000 in interest expense, $4,000 for utilities, and $2,000 for supplies. • GTE contributed $5,000 to charity. • GTE received a $1,000 qualified dividend from a great stock investment (it owned 2 percent of the corporation distributing the dividend), and it recognized $1,500 in short-term capital gain when it sold some of the stock. • On December 1, 2024, GTE distributed $20,000 to James and $20,000 to Paul. • GTE has qualified property of $300,000 (unadjusted basis).   Required: a. Assume James and Paul formed GTE as an S corporation.   • Complete GTE’s Form 1120-S page 1; Form 1120-S, Schedule K; and Paul’s Form 1120-S Schedule K-1 (note that you should use 2023 tax forms).  • Compute the tax basis of Paul’s stock in GTE at the end of 2024. • What amount of Paul’s income from GTE is subject to FICA or self-employment taxes? • What amount of income, including its character, will Paul recognize on the $20,000 distribution he receives on December 1? • What amount of tax does GTE pay on the $1,000 qualified dividend it received?

When High Horizon LLC was formed, Maude contributed the following assets in exchange for a 25 percent capital and profits interest in the LLC: Maude: Basis Fair Market Value Cash $ 20,000 $ 20,000 Land* 100,000 360,000 Totals $ 120,000 $ 380,000

Explain why mortgage defaults during the credit crisis in 2008 and 2009 adversely affected financial institutions that did not originate the mortgages. What role did these institutions play in financing the mortgages? (LO4)

Figure 15.5 shows a decline in actual output in recessions. Redraw the diagram, only this time show a mere slowing down of growth in phase 4.

The trial balance before adjustment of Reba McIntyre Inc. shows the following balances Dr. Cr. Accounts Receivable $90,000 Allowance for Doubtful Accounts 1,750 Sales Revenue (all on credit) $680,000 Instructions Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 1% of net sales.

The present level of a country’s exports is £12 billion; investment is £2 billion; government expenditure is £4 billion; total consumer spending (not Cd) is £36 billion; imports are £12 billion and expenditure taxes are £2 billion. The economy is currently in equilibrium. It is estimated that an income of £50 billion is necessary to generate full employment. The mps is 0.1, the mpt is 0.05 and the mpm is 0.1 (a)  Is there an inflationary or deflationary gap in this situation? (b)  What is the size of the gap? (Don’t confuse this with the difference between Ye and YF.) (c)  What would be the appropriate government policies to close this gap?

Steve’s tentative minimum tax (TMT) for 2024 is $245,000. What is his AMT if a. His regular tax is $230,000?

What are debentures? How do they differ from subordinated debentures? (LO2)

Aram’s taxable income before considering capital gains and losses is $60,000. Determine Aram’s taxable income and how much of the income will be taxed at ordinary rates in each of the following alternative scenarios (assume Aram files as a single taxpayer).   a. Aram sold a capital asset that he owned for more than one year for a $5,000 gain, a capital asset that he owned for more than one year for a $500 loss, a capital asset that he owned for six months for a $1,200 gain, and a capital asset he owned for two months for a $900 loss.

Ralph owns a building that he is trying to lease. Ralph is a calendar-year, cash-method taxpayer and is trying to evaluate the tax consequences of three different lease arrangements. Under lease 1, the building rents for $500 per month, payable on the first of the next month, and the tenant must make a $500 security deposit that is refunded at the end of the lease. Under lease 2, the building rents for $5,500 per year, payable at the time the lease is signed, but no security deposit is required. Under lease 3, the building rents for $500 per month, payable at the beginning of each month, and the tenant must pay a security deposit of $1,000 that is to be applied toward the rent for the last two months of the lease.

(i) What do you understand by the term financialisaton? (ii) How might we assess the financial well-being of households?

Convers Corporation (calendar-year-end) acquired the following assets during the current tax year: