Question & Answer

What are dark pools? How can they help investors accumulate shares without other investors knowing about the trades? Why are dark pools criticized by public stock exchanges? Explain the strategy used by public stock exchanges to compete with dark pools. (LO2)

Compare the relative effectiveness of fiscal and monetary policy under (a) fixed; (b) free-floating exchange rates.

Assume the same data as in P21-10 with National Airlines Co. having an incremental borrowing rate of 10%. Instructions (a) Discuss the nature of this lease in relation to the lessee, and compute the amount of the initial lease liability. (b) Prepare a 10-year lease amortization schedule. (c) Prepare all of the lessee’s journal entries for the first year.

Define pressure gas welding.

Mikaere’s basis in the Jimsoo Partnership is $53,000. In a proportionate liquidating distribution, Mikaere receives cash of $7,000 and two capital assets: (1) Land A with a fair market value of $20,000 and a basis to Jimsoo of $16,000 and (2) Land B with a fair market value of $10,000 and a basis to Jimsoo of $16,000. Jimsoo has no liabilities. a. How much gain or loss will Mikaere recognize on the distribution? What is the character of any recognized gain or loss? b. What is Mikaere’s basis in the distributed assets? c. If the two parcels of land had been inventory to Jimsoo, what are the tax consequences to Mikaere (amount and character of gain or loss and basis in distributed assets)?

Discuss at least two situations in which estimates could affect the usefulness of information in the balance sheet.

A bending operation is to be performed on 4.0 mm thick cold-rolled steel sheet that is 25 mm wide and 100 mm long. The sheet is bent along the 25 mm direction, so that the bend is 25 mm long. The resulting sheet metal part has an acute angle of 30° and a bend radius of 6 mm. Determine (a) the bend allowance and (b) the length of the neutral axis of the part after the bend. (Hint: the length of the neutral axis before the bend = 100.0 mm).

Name the two basic mold types that distinguish casting processes.

The Fed’s open market operations can change the money supply, which can affect the risk-free rate offered on bonds. Why might the Fed’s policy also affect the risk premium on corporate bonds? (LO2)

If a bank shifts its loan policy to pursue more credit card loans, how will its net interest margin be affected? (LO2)

1.    : Fortune magazine and the Hay Group found that a clear, stable strategy is one of the defining characteristics of companies on the list of “The World’s Most Admired Companies.” Why might this be the case?

Using the theory of present bias, provide an economic rationale for government regulation of the payday loan market.

What is the difference between primary and secondary authorities?  Explain the role of each authority type in conducting tax research.

The cost of equipment purchased by Charleston, Inc., on June 1, 2014, is $89,000. It is estimated that the machine will have a $5,000 salvage value at the end of its service life. Its service life is estimated at 7 years, its total working hours are estimated at 42,000, and its total production is estimated at 525,000 units. During 2014, the machine was operated 6,000 hours and produced 55,000 units. During 2015, the machine was operated 5,500 hours and produced 48,000 units. Instructions Compute depreciation expense on the machine for the year ending December 31, 2014, and the year ending December 31, 2015, using the following methods. (a) Straight-line. (d) Sum-of-the-years’-digits. (b) Units-of-output. (e) Declining-balance (twice the straight-line rate). (c) Working hours.

On July 1, 2014, Torvill Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,900,000. On July 1, Torvill estimated that it would take between 2 and 3 years to complete the building. On December 31, 2016, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2014, 2015, and 2016. At At At 12/31/14 12/31/15 12/31/16 Contract costs incurred to date $ 300,000 $1,200,000 $2,100,000 Estimated costs to complete the contract 1,200,000 800,000 –0– Billings to Gumbel 300,000 1,100,000 1,850,000 Instructions (a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore income taxes.) (b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore income taxes.)

Charity Property Cost FMV Athens Academy School Cash $ 5,000 $5,000 United Way Cash 4,000 4,000 American Heart Association Antique painting 15,000 75,000 First Methodist Church Coca Cola stock 12,000 20,000 Determine the maximum amount of charitable deduction for each of these contributions ignoring the AGI ceiling on charitable contributions and assuming that the American Heart Association plans to sell the antique painting to fund its operations. Ray Ray has owned the painting and Coca-Cola stock since 1990.

How would the political business cycle be affected if governments were able to choose when to hold elections?

How does a corporation’s adjustment to earnings and profits differ based on the tax treatment of a stock redemption to the shareholder (i.e., as either a dividend or exchange)?

Imagine that a public project yields a return of 13 per cent (after taking into account all social costs and benefits), whereas a 15 per cent private return could typically be earned in the private sector. How would you justify diverting resources from the private sector to this project?

Under what circumstances would the IRS issue an acquiescence? Anonacquiescence? An action on decision?

Hatch Company has two classes of capital stock outstanding: 8%, $20 par preferred and $5 par common. At December 31, 2014, the following accounts were included in stockholders’ equity. Preferred Stock, 150,000 shares $ 3,000,000 Common Stock, 2,000,000 shares 10,000,000 Paid-in Capital in Excess of Par—Preferred Stock 200,000 Paid-in Capital in Excess of Par—Common Stock 27,000,000 Retained Earnings 4,500,000 The following transactions affected stockholders’ equity during 2015. Jan. 1 30,000 shares of preferredstock issued at $22 per share. Feb. 1 50,000 shares of common stock issued at $20 per share. June 1 2-for-1 stock split (par value reduced to $2.50).July 1 30,000 shares of common treasury stock purchased at $10 per share. Hatch uses the cost method.Sept. 15 10,000 shares of treasury stock reissuedat $11 per share. Dec. 31 The preferred dividend is declared, and a common dividend of 50¢ per share is declared. Dec. 31 Net income is $2,100,000. Instructions Prepare the stockholders’ equity section for Hatch Company at December 31, 2015. Show all supporting computations.

Amigos Burrito Inc. sells franchises to independent operators throughout the northwestern part of the United States. The contract with the franchisee includes the following provisions. 1. The franchisee is charged an initial fee of $120,000. Of this amount, $20,000 is payable when the agreement is signed, and a $20,000 non-interest-bearing note is payable at the end of each of the 5 subsequent years. 2  All of the initial franchise fee collected by Amigos is to be refunded and the remaining obligation canceled if, for any reason, the franchisee fails to open his or her franchise. 3. In return for the initial franchise fee, Amigos agrees to (a) assist the franchisee in selecting the location for the business, (b) negotiate the lease for the land, (c) obtain financing and assist with building design, (d) supervise construction, (e) establish accounting and tax records, and (f) provide expert advice over a 5-year period relating to such matters as employee and management training, quality control, and promotion. 4. In addition to the initial franchise fee, the franchisee is required to pay to Amigos a monthly fee of 2% of sales for menu planning, receipt innovations, and the privilege of purchasing ingredients from Amigos at or below prevailing market prices. Management of Amigos Burrito estimates that the value of the services rendered to the franchisee at the time the contract is signed amounts to at least $20,000. All franchisees to date have opened their locations at the scheduled time, and none have defaulted on any of the notes receivable. The credit ratings of all franchisees would entitle them to borrow at the current interest rate of 10%. The present value of an ordinary annuity of five annual receipts of $20,000 each discounted at 10% is $75,816. Instructions (a) Discuss the alternatives that Amigos Burrito Inc. might use to account for the initial franchise fees, evaluate each by applying generally accepted accounting principles, and give illustrative entries for each alternative. (b) Given the nature of Amigos Burrito’s agreement with its franchisees, when should revenue be recognized? Discuss the question of revenue recognition for both the initial franchise fee and the additional monthly fee of 2% of sales, and give illustrative entries for both types of revenue. (c) Assume that Amigos Burrito sells some franchises for $100,000, which includes a charge of $20,000 for the rental of equipment for its useful life of 10 years; that $50,000 of the fee is payable immediately and the balance on non-interest-bearing notes at $10,000 per year; that no portion of the $20,000 rental payment is refundable in case the franchisee goes out of business; and that title to the equipment remains with the franchisor. Under those assumptions, what would be the preferable method of accounting for the rental portion of the initial franchise fee? Explain.

What are the general rules for how gains or losses on retirement of plant assets should be reported in income?

Becker Corporation sells farm machinery on the installment plan. On July 1, 2014, Becker entered into an installment-sales contract with Valente Inc. for an 8-year period. Equal annual payments under the installment sale are $100,000 and are due on July 1. The first payment was made on July 1, 2014. Additional information: 1. The amount that would be realized on an outright sale of similar farm machinery is $586,842. 2. The cost of the farm machinery sold to Valente Inc. is $425,000. 3. The finance charges relating to the installment period are based on a stated interest rate of 10%, which is appropriate. 4. Circumstances are such that the collection of the installments due under the contract is reasonably assured. Instructions What income or loss before income taxes should Becker record for the year ended December 31, 2014, as a result of the transaction above?

Gordon Company started operations on January 1, 2009, and has used the FIFO method of inventory valuation since its inception. In 2015, it decides to switch to the average-cost method. You are provided with the following information. Net Income Retained Earnings (Ending Balance) Under FIFO Under Average-Cost Under FIFO 2009 $100,000 $ 90,000 $100,000 2010 70,000 65,000 160,000 2011 90,000 80,000 235,000 2012 120,000 130,000 340,000 2013 300,000 290,000 590,000 2014 305,000 310,000 780,000 Instructions (a) What is the beginning retained earnings balance at January 1, 2011, if Gordon prepares comparative financial statements starting in 2011? (b) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014? (c) What is the beginning retained earnings balance at January 1, 2015, if Gordon prepares singleperiod financial statements for 2015? (d) What is the net income reported by Gordon in the 2014 income statement if it prepares comparative financial statements starting with 2012?