Question & Answer

How would you interpret a large increase in the CBOE volatility index (VIX)? Explain why the VIX increased substantially during the Covid-19 pandemic in 2020. (LO5)

Last year, Wyeth Company recorded an impairment on an asset held for use. Recent appraisalsindicate that the asset has increased in value. Should Wyeth record this recovery in value?

1.    : Imagine yourself in a situation of being encouraged by colleagues to inflate your expense account. What factors do you think would influence your decision? Explain.

Troopers Medical Labs, Inc., began operations 5 years ago producing stetrics, a new type of instrument it hoped to sell to doctors, dentists, and hospitals. The demand for stetrics far exceeded initial expectations, and the company was unable to produce enough stetrics to meet demand. The company was manufacturing its product on equipment that it built at the start of its operations. To meet demand, more efficient equipment was needed. The company decided to design and build the equipment, because the equipment currently available on the market was unsuitable for producing stetrics. In 2014, a section of the plant was devoted to development of the new equipment and a special staff was hired. Within 6 months, a machine developed at a cost of $714,000 increased production dramatically and reduced labor costs substantially. Elated by the success of the new machine, the company built three more machines of the same type at a cost of $441,000 each. Instructions (a) In general, what costs should be capitalized for self-constructed equipment? (b) Discuss the propriety of including in the capitalized cost of self-constructed assets: (1) The increase in overhead caused by the self-construction of fixed assets. (2) A proportionate share of overhead on the same basis as that applied to goods manufactured for sale. (c) Discuss the proper accounting treatment of the $273,000 ($714,000 2 $441,000) by which the cost of the first machine exceeded the cost of the subsequent machines. This additional cost should not be considered research and development costs.

The surface finish specification in a turning job is 0.8 µm. The work material is cast iron. Cutting speed = 75 m/min, feed = 0.3 mm/rev, and depth of cut = 4.0 mm. The nose radius of the cutting tool must be selected. Determine the minimum nose radius that will obtain the specified finish in this operation.

For purposes of the deduction for qualified business income, what is a specified service trade or business and why is it important?

1.    : Consider the six characteristics of entrepreneurs described in this chapter. Which two traits do you think are most like those of managers in large companies? Which two are least like those of managers in large companies?

Lahey Corp. has three defined benefit pension plans as follows. Pension Assets Projected Benefi t (at Fair Value) Obligation Plan X $600,000 $500,000 Plan Y 900,000 720,000 Plan Z 550,000 700,000 How will Lahey report these multiple plans in its financial statements?

Markus Company purchases supplies from France once a year. Would Markus be favorably affected if it establishes a currency swap arrangement and the dollar strengthens? What if it establishes a currency swap arrangement and the dollar weakens? (LO8)

The starting diameter of a shaft is 25.00 mm. This shaft is to be inserted into a hole in an expansion fit assembly operation. To be readily inserted, the shaft must be reduced in diameter by cooling. Determine the temperature to which the shaft must be reduced from room temperature (20°C) in order to reduce its diameter to 24.98 mm. Refer to Table 4.1.

Arantxa Corporation has outstanding 20,000 shares of $5 par value common stock. On August 1, 2014, Arantxa reacquired 200 shares at $80 per share. On November 1, Arantxa reissued the 200 shares at $70 per share. Arantxa had no previous treasury stock transactions. Prepare Arantxa’s journal entries to record these transactions using the cost method.

Paladin Inc. reported taxable income of $1,000,000 this year and paid federal

Randy has found conflicting authorities that address a research question for one of his clients.  The majority of the authorities provide an unfavorable answer for his client.  According to Randy’s estimates, if the client takes the more favorable position on its tax return, then there is approximately a 48 percent chance that the position will be sustained upon audit or judicial proceeding.  If the client takes this position on its tax return, will Randy be subject to penalty?  Will the client potentially be subject to penalty?

Oscar, Felix, and Marv are all one-third partners in the capital and profits of Eastside General Partnership. In addition to their normal share of the partnership’s annual income, Oscar and Felix receive annual guaranteed payments of $7,000 to compensate them for additional services they provide. Eastside’s income statement for the current year reflects the following revenues and expenses: Sales revenue $ 420,000 Dividend income 5,700 Short-term capital gains 2,800 Cost of goods sold (210,000) Employee wages (115,000) Depreciation expense (28,000) Guaranteed payments (14,000) Miscellaneous expenses (9,500) Overall net income $ 52,000 In addition, Eastside owed creditors $120,000 at the beginning of the year but managed to pay down its liabilities to $90,000 by the end of the year. All partnership liabilities are allocated equally among the partners. Finally, Oscar, Felix and Marv had a tax basis of $80,000 in their interests at the beginning of the year. a. What tax basis do the partners have in their partnership interests at the end of the year? b. Assume the partners began the year with a tax basis of $10,000 and all the liabilities were paid off on the last day of the year. How much gain will the partners recognize when the liabilities are paid off? What tax basis do the partners have in their partnership interests at the end of the year?

Contrast the cash-basis method and the accrual method of accounting for warranty costs.

Melinda invests $200,000 in a City of Heflin bond that pays 6 percent interest.  Alternatively, Melinda could have invested the $200,000 in a bond recently issued by Surething Inc. that pays 8 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond.  Assume Melinda’s marginal tax rate is 25 percent.

During some crises, investors shift their funds out of the stock market and into money market securities for safety, even if they do not fear that interest rates will rise. Explain how and why these actions by investors affect the yield curve. Is the shift best explained by expectations theory, liquidity premium theory, or segmented markets theory? (LO3)

Why is it desirable to use energy sources for welding that have high heat densities?

On January 1, 2014, Barwood Corporation granted 5,000 options to executives. Each option entitles the holder to purchase one share of Barwood’s $5 par value common stock at $50 per share at any time during the next 5 years. The market price of the stock is $65 per share on the date of grant. The fair value of the options at the grant date is $150,000. The period of benefit is 2 years. Prepare Barwood’s journal entries for January 1, 2014, and December 31, 2014 and 2015.

What is graphite?

Your friend just told you about a penny stock that they purchased, which increased in price from $0.10 to $0.50 per share. You start investigating penny stocks, and after conducting a large amount of research, you find a stock with a quoted price of $0.05. Upon further investigation, you notice that the ask price for the stock is $0.08 and that the bid price is $0.01. Discuss the possible reasons for this wide bid–ask spread. (LO2)

The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents’ home for three months of the year, and he was away at school for the rest of the year. He received $9,500 in scholarships this year for his outstanding academic performance and earned $4,800 of income working a part-time job during the year. The Samsons paid a total of $5,000 to support Jason while he was away at college. Jason used the scholarship, the earnings from the part-time job, and the money from the Samsons as his only sources of support. Can the Samsons claim Jason as their dependent?

This year, Darrel’s distributive share from Alcove Partnership includes $6,000 of interest income, $3,000 of dividend income, and $70,000 ordinary business income. a. Assume that Darrel materially participates in the partnership. How much of his distributive share from Alcove Partnership is potentially subject to the net investment income tax? b. Assume that Darrel does not materially participate in the partnership. How much of his distributive share from Alcove Partnership is potentially subject to the net investment income tax?

Kathleen Battle says, “Retained earnings should be reported as an asset, since it is earnings which are reinvested in the business.” How would you respond to Battle?

Balanced scorecard, financial and non-financial measures Dyggur Equipment manufactures and sells heavy equipment used in construction and mining. Customers are contractors who want reliable equipment at a low cost. The entity’s strategy is to provide reliable products at a price lower than its competitors. Management wants to emphasise quick delivery and quick turnaround when equipment needs repair or service so that contractors are not without their equipment often or for long. Dyggur is considering the following performance measures for use in its balanced scorecard.   Required (a)  Categorise each of the following potential balanced scorecard measures as             follows: F    Financial C   Customer I     Internal business process L   Learning and growth   (a)   Manufacturing cycle time per product (b)   Market share (c)   Average ratings on customer satisfaction surveys (d)   Average cost per unit (e)   Economic value added (f)   Percentage of receivables collected (g)   Dollar value of warranty work (h)   Time between order and delivery (i)    Time it takes to repair returned equipment (j)    Number of focus groups for new products (k)   Number of new uses for current products (l)    Number of times new technology is applied to current products (m)  Number of product change suggestions from sales (n)   Number of engineering change orders to improve manufacturing cycle (o)   Revenue growth (p)   Employee training hours (q)   Number of quality improvement suggestions from employees (r)   Number of new customers (s)   Number of repeat customers (t)    Employee turnover rate (u)   Defect rates for manufacturing production (v)   Percentage of error free-rates in: (i)   purchasing (ii)  billing (iii) customer record keeping    (b) Explain how Dyggur would use the scorecard solely as a diagnostic tool.