Question & Answer

How might fluctuations in aggregate demand lead to changes in output even under the assumption of continuous market clearing?

Tiny and Tim each owns half of the 100 outstanding shares of Flower Corporation. This year, Flower reported taxable income of $10,000.  In addition, Flower received $20,000 of life insurance proceeds due to the death of an employee (Flower paid $900 in life insurance premiums this year). Flower had $5,000 of accumulated E&P at the beginning of the year.

What are the reporting issues in a sale and buyback agreement?

] Describe the type of medical expenditures that qualify for the medical expense deduction. Does the cost of meals consumed while hospitalized qualify for the deduction? Do over-the-counter drugs and medicines qualify for the deduction?

In what sense is the at-risk loss limitation rule more restrictive than the tax-basis loss limitation rule?

1.       : Most companies have policies that regulate employees’ personal use of work computers during work hours. Some even monitor employee e-mails and track the Web sites that have been visited. Do you consider this type of surveillance to be an invasion of privacy? What are some advantages and disadvantages of restricting employee use of the Internet and e-mail at work?

What is a “wash sale”? What is the purpose of the wash sale tax rules?

Indicate where the following items would ordinarily appear on the financial statements of Boleyn, Inc. for the year 2014. (a) The service life of certain equipment was changed from 8 to 5 years. If a 5-year life had been used previously, additional depreciation of $425,000 would have been charged. (b) In 2014, a flood destroyed a warehouse that had a book value of $1,600,000. Floods are rare in this locality. (c) In 2014, the company wrote off $1,000,000 of inventory that was considered obsolete. (d) An income tax refund related to the 2011 tax year was received. (e) In 2011, a supply warehouse with an expected useful life of 7 years was erroneously expensed. (f) Boleyn, Inc. changed from weighted-average to FIFO inventory pricing.

As discussed in Chapter 1, the International Accounting Standards Board (IASB) develops accounting standards for many international companies. The IASB also has developed a conceptual frameworkto help guide the setting of accounting standards. While the FASB and IASB have issued converged concepts statements on the objective and qualitative characteristics, other parts of their frameworks differ. Instructions Briefly discuss the similarities and differences between the FASB and IASB conceptual frameworks as  related to elements and their definitions.

a.       Because Nikki’s 28.57% discount ($14,000 – $10,000/$14,000) is less than Shine Company’s gross profit percentage, the bargain purchase from her employer does not result in taxable income. b.     Nikki will recognize $25 of taxable income from the discounted services provided by Shine Company.  Discounts more than 20% for services are taxable. Thus, Nikki’s taxable discount is $25 ($125 Discount received – (20% x $500)=$25).

A portion of the combined statement of income and retained earnings of Seminole Inc. for the current year follows. Income before extraordinary item $15,000,000 Extraordinary loss, net of applicable income tax (Note 1) 1,340,000 Net income 13,660,000 Retained earnings at the beginning of the year 83,250,000 96,910,000 Dividends declared: On preferred stock—$6.00 per share $ 300,000 On common stock—$1.75 per share 14,875,000 15,175,000 Retained earnings at the end of the year $81,735,000 Note 1. During the year, Seminole Inc. suffered a major casualty loss of $1,340,000 after applicable income tax reduction of $1,200,000. At the end of the current year, Seminole Inc. has outstanding 8,500,000 shares of $10 par common stock and 50,000 shares of 6% preferred. On April 1 of the current year, Seminole Inc. issued 1,000,000 shares of common stock for $32 per share to help finance the casualty. Instructions Compute the earnings per share on common stock for the current year as it should be reported to stockholders.

Estate agents consistently ‘talk up’ the housing market, often predicting price rises when other commentators are more cautious. Explain why they might have a vested interest in doing so.

Why is an overvalued exchange rate likely to encourage the use of capital-intensive technology?

Russell Corporation sold a parcel of land valued at $400,000. Its basis in the land was $275,000. For the land, Russell received $50,000 in cash in year 0 and a note providing that Russell will receive $175,000 in year 1 and $175,000 in year 2 from the buyer.    a. What is Russell’s realized gain on the transaction?   b. What is Russell’s recognized gain in year 0, year 1, and year 2?

A 1-8 UNC low carbon steel bolt (diameter = 1.0 in, 8 threads/in) is currently planned for a certain application. It is to be preloaded to 75% of its proof strength, which is 33,000 lb/in2 (Table 32.2). However, this bolt is too large for the size of the components involved, and a higher strength but smaller bolt would be preferable. Determine (a) the smallest nominal size of an alloy steel bolt (proof strength = 120,000 lb/in2) that could be used to achieve the same preload from the following standard UNC sizes used by the company: 1/4-20, 5/16-18, 3/8-16, 1/2-13, 5/8-11, or 3/4-10; and (b) compare the torque required to obtain the preload for the original 1-in bolt and the alloy steel bolt selected in part (a) if the torque coefficient in both cases = 0.20.

On December 31 of the current year, a taxpayer prepays an advertising company to provide advertising services for the next 10 months. Using the 12-month rule and the economic performance rules, contrast when the taxpayer would be able to deduct the expenditure if the taxpayer uses the cash method of accounting versus if the taxpayer uses the accrual method of accounting.

In a continuous processing situation (such as an oil refinery), the beginning and ending WIP inventories are frequently the same. How does this simplify determination of equivalent units completed?

Carolyn Keene, Inc. decided to establish a petty cash fund to help ensure internal control over its small cash expenditures. The following information is available for the month of April. 1. On April 1, it established a petty cash fund in the amount of $200. 2. A summary of the petty cash expenditures made by the petty cash custodian as of April 10 is as follows. Delivery charges paid on merchandise purchased $60.00 Supplies purchased and used 25.00 Postage expense 33.00 I.O.U. from employees 17.00 Miscellaneous expense 36.00 The petty cash fund was replenished on April 10. The balance in the fund was $27. 3. The petty cash fund balance was increased $100 to $300 on April 20. Instructions Prepare the journal entries to record transactions related to petty cash for the month of April.

Chantal Stores sells merchandise on open account as well as on installment terms. 2014 2015 2016 Sales on account $385,000 $426,000 $525,000 Installment sales 320,000 275,000 380,000 Collections on installment sales Made in 2014 100,000 90,000 40,000 Made in 2015 110,000 140,000 Made in 2016 125,000 Cost of sales Sold on account 270,000 277,000 341,000 Sold on installment 214,400 176,000 228,000 Selling expenses 77,000 87,000 92,000 Administrative expenses 50,000 51,000 52,000 Instructions From the data above, which cover the 3 years since Chantal Stores commenced operations, determine the net income for each year, applying the installment-sales method of accounting. (Ignore interest charges.)

What is a DIP?

Washington Company has the following stockholders’ equity accounts at December 31, 2014. Common Stock ($100 par value, authorized 8,000 shares) $480,000 Retained Earnings 294,000 Instructions (a) Prepare entries in journal form to record the following transactions, which took place during 2015. (1) 280 shares of outstanding stock were purchased at $97 per share. (These are to be accounted for using the cost method.) (2) A $20 per share cash dividend was declared. (3) The dividend declared in (2) above was paid. (4) The treasury shares purchased in (1) above were resold at $102 per share. (5) 500 shares of outstanding stock were purchased at $105 per share. (6) 350 of the shares purchased in (5) above were resold at $96 per share. (b) Prepare the stockholders’ equity section of Washington Company’s balance sheet after giving effect to these transactions, assuming that the net income for 2015 was $94,000. State law requires restriction of retained earnings for the amount of treasury stock.

Question: The U.S. Constitution is the highest tax authority but provides very little in the way of tax laws.  What are the next highest tax authorities beneath the U.S. Constitution?

Presented below and on page 740 are three independent situations. 1. Hairston Stamp Company records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Hairston’s past experience indicates that only 80% of thestamps sold to licensees will be redeemed. Hairston’s liability for stamp redemptions was $13,000,000 at December 31, 2013. Additional information for 2014 is as follows. Stamp service revenue from stamps sold to licensees $9,500,000 Cost of redemptions (stamps sold prior to 1/1/14) 6,000,000 If all the stamps sold in 2014 were presented for redemption in 2015, the redemption cost would be $5,200,000. What amount should Hairston report as a liability for stamp redemptions at December 31, 2014? 2. In packages of its products, Burnitz Inc. includes coupons that may be presented at retail stores to obtain discounts on other Burnitz products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Burnitz honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Burnitz estimates that 60% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Burnitz during 2014 is as follows. Consumer expiration date 12/31/14 Total face amount of coupons issued $800,000 Total payments to retailers as of 12/31/14 330,000 What amount should Burnitz report as a liability for unredeemed coupons at December 31, 2014? 3. Roland Company sold 700,000 boxes of pie mix under a new sales promotional program. Each box contains one coupon, which submitted with $4.00, entitles the customer to a baking pan. Roland pays $6.00 per pan and $0.50 for handling and shipping. Roland estimates that 70% of the coupons will be redeemed, even though only 250,000 coupons had been processed during 2014. What amount should Roland report as a liability for unredeemed coupons at December 31, 2014?

What is meant by the terms elements and items as they relate to the income statement? Why might items have to be disclosed in the income statement?

In terms of the UK economy, are the following net injections, net withdrawals or neither? If there is uncertainty, explain your assumptions. (a)  Firms are forced to take a cut in profits in order to give a pay rise. (b)  Firms spend money on research. (c)  The government increases personal tax allowances. (d)  The general public invests more money in banks and building societies. (e)  UK investors earn higher dividends on overseas investments. (f)   The government purchases US military aircraft. (g)  People draw on their savings to finance holidays abroad. (h)  People draw on their savings to finance holidays in the UK. (i)   The government runs a budget deficit (spends more than it receives in tax revenues) and finances it by borrowing from the general public. (j)   The government runs a budget deficit and finances it through new money created by the central bank.