Question & Answer

Illiad Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of  ne warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $152,000. Instructions (a) What entry should be made at the time of the issuance of the bonds and warrants? (b) If the warrants were nondetachable, would the entries be different? Discuss.

Venzuela Company’s net income for 2014 is $50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2013, each exercisable for one share at $6. None has been exercised, and 10,000 shares of common were outstanding during 2014. The average market price of Venzuela’s stock during 2014 was $20. Instructions (a) Compute diluted earnings per share. (Round to nearest cent.) (b) Assume the same facts as those assumed for part (a), except that the 1,000 options were issued on October 1, 2014 (rather than in 2013). The average market price during the last 3 months of 2014 was $20.

Explain the incentive for private equity funds to invest in a firm and improve its operations. (LO1)

How is unrecaptured §1250 gain for individuals similar to depreciation recapture?  How is it different?

Ekiya, who is single, has been offered a position as a city landscape consultant. The position pays $125,000 in wages. Assume Ekiya has no dependents. Ekiya deducts the standard deduction instead of itemized deductions, she is not eligible for the qualified business income deduction.   a. What is the amount of Ekiya’s after-tax compensation (ignore payroll taxes)?

Assume that oil-producing countries have agreed to reduce their oil production by 30 percent. How would bond prices be affected by this announcement? Explain. (LO2)

Calculate the MRS moving up the curve in Figure 6.5 between each of the points: e–d, d–c, c–b and b–a. Does the MRS diminish moving in this direction?

1.    : How does starting an online business differ from starting a small business such as a local auto repair shop or delicatessen? Is it really possible for businesses that operate totally in cyberspace to build close customer relationships? Discuss.

Navajo Corporation traded a used truck (cost $20,000, accumulated depreciation $18,000) for a small computer worth $3,300. Navajo also paid $500 in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

The following statement appeared in a financial magazine: “RRA—or Rah-Rah, as it’s sometimes dubbed—has kicked up quite a storm. Oil companies, for example, are convinced that the approach is misleading. Major accounting firms agree.” What is RRA? Why might oil companies believe that this approach is misleading?

Using the facts in Problem 47, what minimum tax would need to be assessed on Shameika to make the tax progressive with respect to effective tax rates?

Newton is a one-third owner of ProRite Partnership. Newton has decided to sell his interest in the business to Dunja for $50,000 cash plus the assumption of his share of ProRite’s liabilities. Assume Newton’s inside and outside basis in ProRite are equal. ProRite shows the following balance sheet as of the sale date: Assets: Tax Basis FMV Cash $ 80,000 $ 80,000 Receivables 25,000 25,000 Inventory 40,000 85,000 Land 30,000 20,000    Totals $ 175,000 $ 210,000 Liabilities and capital: Liabilities $ 60,000 Capital- Newton 38,333 - Barbara 38,334 - Liz 38,333    Totals $ 175,000 What are the amount and character of Newton’s recognized gain or loss?

The significance of financial statement data is not in the amount alone.” Discuss the meaning of this statement.

Some bank managers argue that U.S. banks’ access to capital is restricted because the capital requirements imposed by U.S. regulators are too high. Write a short essay that offers logical insights into why high capital requirements may restrict a bank’s access to capital. Also, describe why high capital requirements for all banks in the United States might actually allow the banks to have easier access to capital. Which of the arguments do you believe?

If the industry under perfect competition faces a downward-sloping demand curve, why does an individual firm face a horizontal demand curve?

Is trade diversion more likely or less likely in the following cases? (a)  European producers gain monopoly power in world trade. (b)  Modern developments in technology and communications reduce the differences in production costs associated with different locations. (c)  The development of the internal market produces substantial economies of scale in many industries.

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.

The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.   The following errors in the corporation’s accounting have been discovered: 1. January 2015 cash disbursements entered as of December 2014 included payments of accounts payable in the amount of $39,000, on which a cash discount of 2% was taken. 2. The inventory included $27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, $12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30. 3. Sales for the first four days in January 2015 in the amount of $30,000 were entered in the sales journal as of December 31, 2014. Of these, $21,500 were sales on account and the remainder were cash sales. 4. Cash, not including cash sales, collected in January 2015 and entered as of December 31, 2014, totaled $35,324. Of this amount, $23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan. Instructions (a) Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.) (b) State the net effect of your adjustments on Allessandro Scarlatti Company’s retained earnings balance.

Ethical Decision making – inappropriate allocation of underapplied overhead82 The Australian government has contracted with alternative energy industry organisations to develop new energy technologies. These contracts are sometimes based on cost. Because these organisations are also developing technologies for non-government entities, incentives exist to shift overhead costs to the government, so that commercial operations become more competitive. Because cost allocations are private information, research provides only indirect evidence that this cost shifting occurs. The following vignette is fictional, but it illustrates potential ethical problems that arise when governments use cost-based contracts for product development.   Deep Water Hydro is an hydro-electricity energy company that focuses on innovative research and development solutions for alternative energy supply for both commercial and government agencies. Because one of its commercial contracts fell through last year, the company had fewer jobs than anticipated. Consequently, the company’s overhead costs were underapplied at the end of the year, so an adjustment was made to increase cost of goods sold (also called cost of sales).   Deep Water’s policy is to allocate production overhead as a percentage of direct labour costs for each contract. One of the government contracts completed last year was to develop a hydroelectricity generator that would supply energy from sea water entering Port Philip Bay in Melbourne. The job contract was based on cost-plus-fixed-fee for a total cost of $245 million. The hydro-electricity project was Deep Water’s only government contract last year. Commercial business completed was $105 million, so cost of goods sold (COGS) totalled $350 million.   Disagreement about underapplied overhead adjustment The government official in charge of the contract complained to the federal contract auditor that Deep Water’s underapplied overhead should not have been closed to COGS. Instead, he argued that it should have been allocated on a pro rata basis among the contracts in progress, finished goods, and COGS. The auditor asked to see the cost accounting records and financial statements for the period. Following is an analysis of the direct costs and cost allocations (in millions):   The $350 million in COGS included $245 million for the government contract. When the underapplied overhead ($100 million) was closed to COGS, the government portion of underapplied overhead was $70 million [$100 ´ ($245 ¸ $350)]. Because the contract specified that the government would pay costs plus a fixed amount, the overhead adjustment effectively increased the revenue under the contract by $70 million.   Actual direct labour costs were $150 million, and the pre-adjustment allocated overhead was $300 million. Therefore, the original allocation rate was 200 per cent ($300 ¸ $150) of direct labour cost. Total actual overhead turned out to be $400 million (the $300 million plus the $100 million underapplied). If Deep Water accountants could have perfectly estimated overhead at $400 million and direct labour cost at $150 million, they would have used 267 per cent ($400 ¸ $150) as the allocation rate.   The underapplied overhead amount was material ($100 million out of $400 million, or 25 per cent). Therefore, the government auditor decided that it should have been allocated on a pro rata basis among the three accounts that reflected work done this period: contracts in progress, finished goods, and cost of goods sold. Had this method been used, the adjustment would have been prorated as follows: The government's share of the COGS adjustment would be ($245 ¸ $350) ´ $29.4 million = $20.6 million. When the auditor compared this to the original adjustment of $70 million, she knew the government had been overcharged.   Alternative methods for allocating overapplied or underapplied overhead The auditor offered Deep Water three alternatives for allocating the overhead adjustment. Under governmental contracts, underapplied overhead could be allocated based on direct materials cost, direct labour cost, or total direct costs. If Deep Water uses direct materials, COGS is increased by $25 million, of which the government portion is $17.5 million. If direct labour cost is used, COGS is increased by $33.3 million, of which the government portion is $23.3 million. If total direct cost is used, COGS is increased by $27.3 million, of which the government portion is $20.1 million.   The government and Deep Water must now negotiate to determine the most appropriate proration method.   Required (a)     Is allocating proportionately more cost to government contracts an ethical problem for Deep Water? Why? (b)     When the government pays more than commercial customers pay for work done, does this situation pose a business problem, a social problem or both? Explain. (c)     Discuss the preferences of various stakeholders for this problem, including: ·                     Deep Water managers ·                     Deep Water shareholders ·                     Deep Water commercial customers ·                     Deep Water governmental customers ·                     Deep Water competitors ·                     Australian taxpayers (d)     Is it fair for the government to pay more for products and services than commercial customers pay? Is it fair for taxes to subsidise the overhead costs for a private business? (e)     How can an organisation monitor whether its accounting practices are ethical?             (LO2, 3 and 4)

Use the information presented in BE5-8 for Adams Company to prepare the long-term liabilities section of the balance sheet.

Discuss and illustrate how a correction of an error in previously issued financial statements should be handled.

What are the mechanics whereby the central bank raises the rate of interest?

Matt and Lori recently were divorced.  Although grief stricken, Matt was at least partially comforted by his monthly receipt of $10,000 alimony.  He was particularly excited to learn from his friend, Denzel, that the alimony was not taxable.  Use an available tax service to determine if Denzel is correct.  Would your answer change if Matt and Lori continued to live together?

Hawkeye sold farming equipment for $55,000. It bought the equipment four years ago for $75,000, and it has since claimed a total of $42,000 in depreciation deductions against the asset. Explain how to calculate Hawkeye’s adjusted basis in the farming equipment.

Under what circumstances would brazing or soldering be preferred over welding?