Question & Answer

What information is conveyed by the TTT curve?

What are the three alternative accounting methods available to a seller that is exposed to continued risks of ownership through return of the product?

Benjamin recently bought a truck in Alabama for his business in Georgia.  What different types of federal and state taxes may affect this transaction?

Machinery purchased for $60,000 by Tom Brady Co. in 2010 was originally estimated to have a life of 8 years with a salvage value of $4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2015, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation. Instructions (a) Prepare the entry to correct the prior years’ depreciation, if necessary. (b) Prepare the entry to record depreciation for 2015.

Explain the relative risk of the various types of securities in which a money market fund may invest. (LO3)

Basler Corporation, which began business on January 1, 2014, appropriately uses the installment-sales method of accounting. The following data were obtained for the years 2014 and 2015. 2014 2015 Installment sales $750,000 $840,000 Cost of installment sales 510,000 588,000 General & administrative expenses 70,000 84,000 Cash collections on sales of 2014 310,000 300,000 Cash collections on sales of 2015 –0– 400,000 Instructions (a) Compute the balance in the deferred gross profit accounts on December 31, 2014, and on December 31, 2015. (b) A 2014 sale resulted in default in 2016. At the date of default, the balance on the installment receivable was $12,000, and the repossessed merchandise had a fair value of $8,000. Prepare the entry to record the repossession.

Clarence Weatherspoon, a super salesman contemplating retirement on his fifty-fifth birthday, decides to create a fund on an 8% basis that will enable him to withdraw $20,000 per year on June 30, beginning in 2018 and continuing through 2021. To develop this fund, Clarence intends to make equal contributions on June 30 of each of the years 2014–2017. Instructions (a) How much must the balance of the fund equal on June 30, 2017, in order for Clarence Weatherspoon to satisfy his objective? (b) What are each of Clarence’s contributions to the fund?

Amy is evaluating the cash flow consequences of organizing her business entity SHO as an LLC (taxed as a sole proprietorship), an S corporation, or a C corporation. Amy used the following assumptions to make her calculations: a)      For all entity types, the business reports $22,000 of business income before deducting compensation paid to Amy and payroll taxes SHO pays on Amy’s behalf. b)      All entities would use the cash method of accounting. c)      If Amy organizes SHO as an S corporation or a C corporation, SHO will pay Amy a $5,000 annual salary (assume the salary is reasonable for purposes of this problem). For both the S and C corporations, Amy will pay 7.65% FICA tax on her salary and SHO will also pay 7.65% FICA tax on Amy’s salary (the FICA tax paid by the entity is deductible by the entity). d)     Amy’s marginal ordinary income tax rate is 35 percent and her income tax rate on qualified dividends and net capital gains is 15 percent. e)      Amy’s marginal self-employment tax rate 15.3 percent. f)       Amy pays a .9 percent additional Medicare tax on salary and net earnings from self-employment (i.e., her salary and net earnings from self-employment income are over the threshold for the tax). g)      Amy pays a 3.8 percent net investment income tax on dividends and net capital gains (i.e., AGI on joint tax return is over threshold by more than any net investment income she receives). h)      Assume that for purposes of the qualified business income deduction, the business income is not from a specified service and neither the wage-based limitation nor the taxable income limitation applies to limit the deduction. i)        If SHO is formed as an S corporation or a C corporation, SHO will distribute all of its earnings after paying entity level taxes and after deducting salary and related FICA taxes paid to Amy.   Required:   a. Fill in the cells in the table below to identify cash flows associated with the income from the business if the business is formed as an LLC (sole proprietorship), S corporation, or C corporation for tax purposes. Enter cash outflows as negative numbers.     Cash flow LLC (Sole prop) S corporation C corporation Business income $22,000 $22,000 $22,000 FICA taxes paid by Amy       FICA taxes paid by SHO       Self-employment tax paid by Amy       Federal income tax paid by SHO       Additional Medicare tax paid by Amy       Net investment income tax paid by Amy       Federal income tax paid by Amy*       Cash remaining after-taxes       *Remember to consider account flow-through income, qualified dividends, the self-employment tax deduction, and the qualified business income deduction in thecalculation.                   b. At a high level, describe the factors causing differences in the after-tax cash flows from each entity, given that the before-tax cash flows are the same (don’t use dollar amounts in explanation).

reported the following information regarding 2013–2014 inventory.     Instructions (a) Why might Robots, Inc., use two different methods for valuing inventory? (b) Comment on why Robots, Inc., might disclose how its LIFO inventories would be valued under FIFO. (c) Why does the LIFO liquidation reduce operating costs? (d) Comment on whether Robots, Inc. would report more or less income if it had been on a FIFO basis for all its inventory.

Explain why boards of directors will often employ independent             remuneration consultants to assist in developing and assessing      compensation plans.             (LO5)

What is the difference between permanent and temporary book-tax differences?

Berstler Construction Company began operations in 2014. Construction activity for the first year is shown below. All contracts are with different customers, and any work remaining at December 31, 2014, is expected to be completed in 2015. Cash Contract Estimated Total Billings Collections Costs Incurred Additional Contract through through through Costs to Project Price 12/31/14 12/31/14 12/31/14 Complete 1 $ 560,000 $ 360,000 $340,000 $450,000 $130,000 2 670,000 220,000 210,000 126,000 504,000 3 520,000 500,000 440,000 330,000 –0– $1,750,000 $1,080,000 $990,000 $906,000 $634,000 Instructions Prepare a partial income statement and balance sheet to indicate how the above information would be reported for financial statement purposes. Berstler Construction Company uses the completed-contract method.

The following facts pertain to a non-cancelable lease agreement between Lennox Leasing Company and Gill Company, a lessee. (Round all numbers to the nearest cent.) Inception date: May 1, 2014 Annual lease payment due at the beginning of each year, beginning with May 1, 2014: $18,829.49 Bargain-purchase option price at end of lease term: $4,000.00 Lease term: 5 years Economic life of leased equipment: 10 years Lessor’s cost: $65,000.00; fair value of asset at May 1, 2014, $81,000.00 Lessor’s implicit rate: 10%; lessee’s incremental borrowing rate 10% The lessee assumes responsibility for all executory costs. Instructions (a) Discuss the nature of this lease to Gill Company. (b) Discuss the nature of this lease to Lennox Company. (c) Prepare a lease amortization schedule for Gill Company for the 5-year lease term. (d) Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2014 and 2015. Gill’s annual accounting period ends on December 31. Reversing entries are used by Gill.

Henry Quincy wants to withdraw $30,000 each year for 10 years from a fund that earns 8% interest. How much must he invest today if the first withdrawal is at year-end? How much must he invest today if the first withdrawal takes place immediately?

A lease agreement between Lennox Leasing Company and Gill Company is described in IFRS21-10. Refer to the data in IFRS21-10 and do the following for the lessor. (Round all numbers to the nearest cent.) Instructions (a) Compute the amount of the lease receivable at the inception of the lease. (b) Prepare a lease amortization schedule for Lennox Leasing Company for the 5-year lease term. (c) Prepare the journal entries to reflect the signing of the lease agreement and to record the receipts and income related to this lease for the years 2014, 2015, and 2016. The lessor’s accounting period ends on December 31. Reversing entries are not used by Lennox.

The following are some costs incurred by a sports footwear manufacturer. Assume the manufacturer wants to increase output over a relatively short time period: i.e. in the economic short-run. Decide whether each one of the following is a fixed cost or a variable cost of expanding output in the short run or has some element of both. Clearly explain any assumptions you have made. (a) The cost of synthetic leather and mesh materials. (b) The fee paid to an advertising agency. (c) Wear and tear on machinery. (d) Business rates on the factory. (e) Electricity for heating and lighting. (f) Electricity for running the machines. (g) Basic minimum wages agreed with the union. (h) Overtime pay. (i) Depreciation of machines as a result purely of their age (irrespective of their condition).

Identify a major technical problem in tube bending?

Consider a period in which stock prices are very high, such that investors begin to think that stocks are overvalued and their valuations are very uncertain. If investors decide to move their money into much safer investments, how do you think this would affect general interest rate levels? In your answer, use the loanable funds framework to explain how the supply or demand for loanable funds would be affected by the investor actions, and how this would affect general interest rate. (LO1)

A 2.0-in-long billet with diameter = 1.25 in is direct extruded to a diameter of 0.50 in. The extrusion die angle = 90°. For the work metal, K = 45,000 lb/in2 , and n = 0.20. In the Johnson extrusion strain equation, a = 0.8 and b = 1.5. Determine (a) extrusion ratio, (b) true strain (homogeneous deformation), (c) extrusion strain, and (d) ram pressure at L = 2.0, 1.5, 1.0, 0.5 and zero in. Use of a spreadsheet calculator is recommended for part (d).

Kaymer Corporation issued 300 shares of $10 par value ordinary shares for $4,500. Prepare Kaymer’s journal entry.

Assuming adequate E&P, will the shareholder’s tax basis in noncash property received equal the amount the shareholder includes in gross income as a dividend (assuming adequate E&P)? Under what circumstances will the amounts be different, if any?

Jack and Jill are owners of UpAHill, an S corporation. They own 25 and 75 percent, respectively.  a. What amount of ordinary income and separately stated items are allocated to them for years 1 and 2 based on the information above?  Assume that UpAHill Corporation has $100,000 of qualified property (unadjusted basis) in both years.

Explain how cash-basis accounting for pension plans differs from accrual-basis accounting for pension plans. Why is cash-basis accounting generally considered unacceptable for pension plan accounting?

A bridge built with steel girders is 500 m in length and 12 m in width. Expansion joints are provided to compensate for the change in length in the support girders as the temperature fluctuates. Each expansion joint can compensate for a maximum of 40 mm of change in length. From historical records it is estimated that the minimum and maximum temperatures in the region will be -35°C and 38°C, respectively. What is the minimum number of expansion joints required?

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to income tax accounting.