Question & Answer

According to rational choice theory, the money you’ve already spent – known as ‘sunk costs’ (see page 161) – should be excluded from decision making. However, there is considerable evidence that it does affect consumer behaviour. Using loss aversion, can you explain why this might be the case.

Using one or more diagrams like Figures 19.2, 19.7, 19.8, 19.9 and 19.10, illustrate the following: (a)  The effect of a contraction in the money supply on national income. Refer to both the interest-rate and the exchange-rate transmission mechanisms and show how the shapes of the curves affect the outcome. (b)  The effect of a fall in investment on national income. Again show how the shapes of the curves affect the outcome. Specify your assumptions about the effects on the supply of money.

What items will decrease a partner’s basis in the partnership interest?

Presented below are three independent situations. Answer the question at the end of each situation. 1. During 2014, Salt-n-Pepa Inc. became involved in a tax dispute with the IRS. Salt-n-Pepa’s attorneys have indicated that they believe it is probable that Salt-n-Pepa will lose this dispute. They also believe that Salt-n-Pepa will have to pay the IRS between $900,000 and $1,400,000. After the 2014 financial statements were issued, the case was settled with the IRS for $1,200,000. What amount, if any, should be reported as a liability for this contingency as of December 31, 2014? 2. On October 1, 2014, Alan Jackson Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Jackson’s management along with its counsel have concluded that it is probable that Jackson will be responsible for damages, and a reasonable estimate of these damages is $5,000,000. Jackson’s insurance policy of $9,000,000 has a deductible clause of $500,000. How should Alan Jackson Chemical report this information in its financial statements at December 31, 2014? 3. Melissa Etheridge Inc. had a manufacturing plant in Sudan, which was destroyed in the civil war. It is not certain who will compensate Etheridge for this destruction, but Etheridge has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant, but more than its book value. How should the contingency be reported in the financial statements of Etheridge Inc.?

What is the difference between a CPA’s unqualified opinion or “clean” opinion and a qualified one?

In addition to surface cleaning, what is the main function performed by shot peening?

Describe a direct placement of bonds. What is an advantage of a private placement? What is a disadvantage? (LO1)

Mike Devereaux Company shows the following entries in its Equipment account for 2015. All amounts are based on historical cost. Equipment 2015 2015 Jan. 1 Balance 134,750 June 30 Cost of equipment sold Aug. 10 Purchases 32,000 (purchased prior 12 Freight on equipment to 2015) 23,000 purchased 700 25 Installation costs 2,700 Nov. 10 Repairs 500 Instructions (a) Prepare any correcting entries necessary. (b) Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2015 under each of the methods listed below. Assume an estimated life of 10 years, with no salvage value. The machinery included in the January 1, 2015, balance was purchased in 2013. (1) Straight-line. (2) Sum-of-the-years’-digits.

Hobbs Co. has the following defined benefit pension plan balances on January 1, 2014. Projected benefi t obligation $4,600,000 Fair value of plan assets 4,600,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2015, the company amends its  agreement so that prior service costs of $600,000 are created. Other data related to the pension plan are: 2014 2015 Service cost $150,000 $170,000 Prior service cost amortization –0– 90,000 Contributions (funding) to the plan 200,000 184,658 Benefi ts paid 220,000 280,000 Actual return on plan assets 252,000 350,000 Expected rate of return on assets 6% 8% Instructions (a) Prepare a pension worksheet for the pension plan in 2014. (b) Prepare any journal entries related to the pension plan that would be needed at December 31, 2014. (c) Prepare a pension worksheet for 2015 and any journal entries related to the pension plan as of December 31, 2015. (d) Indicate the pension-related amounts reported in the 2015 financial statements.

The welding power generated in a particular arc-welding operation = 3000 W. This is transferred to the work surface with a heat transfer factor = 0.9. The metal to be welded is copper whose melting point is given in Table 29.2. Assume that the melting factor = 0.25. A continuous fillet weld is to be made with a cross-sectional area = 15.0 mm2. Determine the travel speed at which the welding operation can be accomplished.

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for dilutive securities, stock-based compensation, and earnings per share.

The assets of Fonzarelli Corporation are presented below (000s omitted).   Instructions Indicate the deficiencies, if any, in the foregoing presentation of Fonzarelli Corporation’s assets.

Transfer price; sale to outside versus inside customer The Enviro division of Solar Sun produces electric motors, 20 per cent of which are sold to the Energy Plus division of Solar Sun and the remainder to outside customers. Solar Sun treats its divisions as profit centres and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as transfer price. Enviro division’s estimated sales and standard cost data for 2017, based on its full capacity of 100 000 units are as follows:     Enviro has an opportunity to sell the 20 000 units to an outside customer at a price of $75 per unit on a continuing basis. Energy Plus can purchase its requirements from an outside supplier for $85 per unit.   Required Assuming that Enviro division desires to maximise its gross margin, should Enviro accept the new customer and drop its sales to Energy Plus for 2019? Why?

Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner, Michelle Wie, and cash flows from operations. However, current expansion plans will require some borrowing to expand the company’s production line. As part of the expansion plan, Wie is contemplating a borrowing on a note payable or issuance of bonds. In the past, the company has had little need for external borrowing so the management team has a number of questions concerning the accounting for these new non-current liabilities. They have asked you to conduct some research on this topic. Instructions Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.) (a) With respect to a decision of issuing notes or bonds, management is aware of certain costs (e.g., printing, marketing, selling) associated with a bond issue. How will these costs affect Wie’s reported earnings in the year of issue and while the bonds are outstanding? (b) If all goes well with the plant expansion, the financial performance of Wie Company could dramatically improve. As a result, Wie’s market rate of interest (which is currently around 12%) coulddecline. This raises the possibility of retiring or exchanging the debt, in order to get a lower borrowing  rate. How would such a debt extinguishment be accounted for?

Brazil Group purchases a vehicle at a cost of $50,000 on January 2, 2014. Individual components of the vehicle and useful lives are as follows. Cost Useful Lives Tires $ 6,000 2 years Transmission 10,000 5 years Trucks 34,000 10 years Instructions (Assume no residual (salvage) value.) (a) Compute depreciation expense for 2014, assuming Brazil depreciates the vehicle as a single unit. (b) Compute depreciation expense for 2014, assuming Brazil uses component depreciation. (c) Why might a company want to use component depreciation to depreciate its assets?

Fairbanks Corporation purchased 400 ordinary shares of Sherman Inc. as a trading investment for $13,200. During the year, Sherman paid a cash dividend of $3.25 per share. At year-end, Sherman shares were selling for $34.50 per share. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment.

What is the GAAP definition of fair value?

Distinguish between a current liability and a long-term debt.

If the regulator imposed such rules, would they cause the firm to make a loss if it faced a downward-sloping LRMSC curve? (Clues: Where would the LRAC curve be relative to the LRMC curve? What would be the effect of externalities and the addition of the Z factor on the price?)

: Compare the ideal, rational model of decision making to the political model of decision making.

Use the information for Rick Kleckner Corporation from IFRS21-7. Assume that at December 31, 2014, Kleckner made an adjusting entry to accrue interest expense of $29,530 on the lease. Prepare Kleckner’s January 1, 2015, journal entry to record the second lease payment of $53,920.

Who are the two key international players in the development of international accounting standards? Explain their role.

Matt Holmes recently joined Klax Company as a staff accountant in the controller’s office. Klax Company provides warehousing services for companies in several European cities. The location in Koblenz, Germany, has not been performing well due to increased competition and the loss of several customers that have recently gone out of business. Matt’s department manager suspects that the plant and equipment may be impaired and wonders whether those assets should be written down. Given the company’s prior success, this issue has never arisen in the past, and Matt has been asked to conduct some research on this issue. Instructions Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab andthen register for free eIFRS access if necessary.) When you have accessed the documents, you can use thesearch tool in your Internet browser to respond to the following questions. (Provide paragraph citations.) (a) What is the authoritative guidance for asset impairments? Briefly discuss the scope of the standard (i.e., explain the types of transactions to which the standard applies). (b) Give several examples of events that would cause an asset to be tested for impairment. Does it appear that Klax should perform an impairment test? Explain. (c) What is the best evidence of fair value? Describe alternate methods of estimating fair value.

Wainwright Corporation had the following activities in 2014. 1. Sale of land $180,000. 4. Purchase of equipment $415,000. 2. Purchase of inventory $845,000. 5. Issuance of common stock $320,000. 3. Purchase of treasury stock $72,000. 6. Purchase of available-for-sale securities $59,000. Compute the amount Wainwright should report as net cash provided (used) by investing activities in its 2014 statement of cash flows.

Priya works for Shine Company, a retailer of upscale jewelry. How much taxable income does Priya recognize under the following scenarios?