Question & Answer

What are the two ways in which a bank should diversify its loans? Why? Is international diversification of loans a viable strategy for dealing with credit risk? Defend your answer. (LO4)

An experimental power source for spot welding is designed to deliver current as a ramp function of time: I = 100,000 t, where I = amp and t = sec. At the end of the power-on time, the current is stopped abruptly. The sheet metal being spot welded is low carbon steel whose unit melting energy = 10 J/mm3. The resistance R = 85 micro-ohms. The desired weld nugget diameter = 4 mm and thickness = 2 mm (assume a disc-shaped nugget). It is assumed that 1/4 of the energy generated from the power source will be used to form the weld nugget. Determine the power-on time the current must be applied in order to perform this spot-welding operation.

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?

Using the facts from problem 50, what will happen to the government’s tax revenues if Song chooses to spend more time pursuing her other passions besides work in response to the tax rate change and earns only $75,000 in taxable income?  What is the term that describes this type of reaction to a tax rate increase?  What types of taxpayers are likely to respond in this manner?

Financial and non-financial measures Managers increasingly use a mixture of financial and non-financial measures for organisational performance.         Required In the following list of performance measures, identify those that are financial (F) and those that are non-financial (N).   (a)     Customer satisfaction ratings (b)     Market share (c)     Operating margin (d)     Return on sales (e)     Annual average purchase amount per customer (f)      Defect rate (g)     Normal spoilage (h)     Labour efficiency variance (i)      Number of new products developed annually (j)      Revenues from new products introduced this year

A cylindrical part is warm upset forged in an open die. The initial diameter is 45 mm and the initial height is 40 mm. The height after forging is 25 mm. The coefficient of friction at the die-work interface is 0.20. The yield strength of the work material is 285 MPa, and its flow curve is defined by a strength coefficient of 600 MPa and a strain-hardening exponent of 0.12. Determine the force in the operation (a) just as the yield point is reached (yield at strain = 0.002), (b) at a height of 35 mm, (c) at a height of 30 mm, and (d) at a height of 25 mm. Use of a spreadsheet calculator is recommended

On May 1, 2014, Friendly Company issued 2,000 $1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the fair value of the warrants cannot be determined. Instructions (a) Prepare the entry to record the issuance of the bonds and warrants. (b) Assume the same facts as part (a), except that the warrants had a fair value of $30. Prepare the entry to record the issuance of the bonds and warrants.

What is the function of a mutual fund? Why are mutual funds popular among investors? How does a money market mutual fund differ from a stock or bond mutual fund? (LO3)

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?

Merrito Inc. is a large U.S. firm that issued bonds several years ago. Its bond ratings declined over time and, about a year ago, the bonds were rated in the junk bond classification. Nevertheless, investors continued to buy the bonds in the secondary market because of the attractive yield they offered. Last week, Merrito defaulted on its bonds, and the prices of most other junk bonds declined abruptly on the same day. Explain why news of Meritto’s financial problems could cause the prices of junk bonds issued by other firms to decrease, even when those firms had no business relationships with Merrito. Explain why the prices of those junk bonds with less liquidity declined more than those with a high degree of liquidity. (LO2)

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)

Choose two industries that you believe are very different. Identify factors used in those industries that in the short run are (i) fixed; (ii) variable.

provided the following disclosure in a recent annual report. New accounting pronouncement (partial) . . . the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101—“Revenue Recognition in Financial Statements” (SAB 101). This SAB deals with various revenue recognition issues, several of which are common within the retail industry. As a result of the issuance of this SAB . . . the Company is currently evaluating the effects of the SAB on its method of recognizing revenues related to layaway sales and will make any accounting method changes necessary during the first quarter of [next year]. In response to SAB 101, Wal-Mart changed its revenue recognition policy for layaway transactions, in which Wal-Mart sets aside merchandise for customers who make partial payment. Before the change, Wal-Mart recognized all revenue on the sale at the time of the layaway. After the change, Wal-Mart does not recognize revenue until customers satisfy all payment obligations and take possession of the merchandise. Instructions (a) Discuss the expected effect on income (1) in the year that Wal-Mart makes the changes in its revenue recognition policy, and (2) in the years following the change. (b) Evaluate the extent to which Wal-Mart’s previous revenue policy was consistent with the revenue recognition principle. (c) If all retailers had used a revenue recognition policy similar to Wal-Mart’s before the change, are there any concerns with respect to the qualitative characteristic of comparability? Explain.

Rolanda Marshall Company, organized in 2013, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2014. 1/2/14 Purchased patent (8-year life) $ 350,000 4/1/14 Purchase goodwill (indefi nite life) 360,000 7/1/14 Purchased franchise with 10-year life; expiration date 7/1/24 450,000 8/1/14 Payment of copyright (5-year life) 156,000 9/1/14 Research and development costs 215,000 $1,531,000 Instructions Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2014, recording any necessary amortization and reflecting all balances accurately as of that date. (Use straight-line amortization.)

Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.

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

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 is off-balance-sheet financing? Why might a company be interested in using off-balance-sheet financing?

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?

Petrenko Corporation has outstanding 2,000 $1,000 bonds, each convertible into 50 shares of $10 par value common stock. The bonds are converted on December 31, 2014, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Record the conversion using the book value approach.

Neville Enterprises has a number of fully depreciated assets that are still being used in the main operations of the business. Because the assets are fully depreciated, the president of the company decides not to show them on the balance sheet or disclose this information in the notes. Evaluate this procedure.

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.

Why does a partner’s tax basis in a partnership interest need to be adjusted annually?