Question & Answer

Jones Co. is in a technology-intensive industry. Recently, one of its competitors introduced a new product with technology that might render obsolete some of Jones’s inventory. The accounting staff wants to follow the appropriate authoritative literature in determining the accounting for this significant market event. 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) Identify the authoritative literature addressing inventory pricing. (b) List three types of goods that are classified as inventory. What characteristic will automatically exclude an item from being classified as inventory? (c) Define “net realizable value” as used in the phrase “lower-of-cost-or-net realizable value.” (d) Explain when it is acceptable to state inventory above cost and which industries allow this practice.

The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/ Marks-and-Spencer-Annual-report-and-financial-statements-2012.pdf. Instructions Refer to M&S’s financial statements and the accompanying notes to answer the following questions. (a) How does M&S value its inventories? Which inventory costing method does M&S use as a basis for reporting its inventories? (b) How does M&S report its inventories in the statement of financial position? In the notes to its financial statements, what three descriptions are used to classify its inventories? (c) What costs does M&S include in Inventory and Cost of Sales? (d) What was M&S’s inventory turnover in 2012? What is its gross profit percentage? Evaluate M&S’s inventory turnover and its gross profit percentage.

A continuous hot rolling mill has eight stands. The dimensions of the starting slab are: thickness = 3.0 in, width = 15.0 in, and length = 10 ft. The final thickness is to be 0.3 in. Roll diameter at each stand = 36 in, and rotational speed at stand number 1 = 30 rev/min. It is observed that the speed of the slab entering stand 1 = 240 ft/min. Assume that no widening of the slab occurs during the rolling sequence. Percent reduction in thickness is to be equal at all stands, and it is assumed that the forward slip will be equal at each stand. Determine (a) percent reduction at each stand, (b) rotational speed of the rolls at stands 2 through 8, and (c) forward slip. (d) What is the draft at stands 1 and 8? (e) What is the length and exit speed of the final strip exiting stand 8?

Anne purchased an annuity from an insurance company that promised to pay her $20,000 per year for the next 10years.  Anne paid $145,000 for the annuity, and in exchange she will receive $200,000 over the term of the annuity.            a.  How much of the first $20,000 payment should Anne include in gross income? b.  How much income will Anne recognize over the term of the annuity?

On December 31, 2013, Main Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures related to this building: March 1, $360,000; June 1, $600,000; July 1, $1,500,000; December 1, $1,500,000. The building was completed in February 2015. Additional information is provided as follows. 1. Other debt outstanding 10-year, 13% bond, December 31, 2007, interest payable annually $4,000,000 6-year, 10% note, dated December 31, 2011, interest payable annually $1,600,000 2. March 1, 2014, expenditure included land costs of $150,000 3. Interest revenue earned in 2014 $49,000 Instructions (a) Determine the amount of interest to be capitalized in 2014 in relation to the construction of the building. (b) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2014.

How good are you at making probabilistic judgements? Here is an interesting example. Suppose that one out of every hundred people in the population has a genetic medical condition. There is a test for this medical condition that is 99 per cent accurate. This means that if a person has the condition, the test returns a positive result with a 99 per cent probability; and if a person does not have the condition, it returns a negative result with 99 per cent probability. If a person’s test comes back positive (and you know nothing else about that person), what is the probability that s/he has the medical condition?

Assume the facts in E13-5 except that Matt Broderick Company has chosen not to accrue paid sick leave until used, and has chosen to accrue vacation time at expected future rates of pay without discounting. The company used the following projected rates to accrue vacation time. Year in Which Vacation Projected Future Pay Rates Time Was Earned Used to Accrue Vacation Pay 2013 $10.75 2014 11.60 Instructions (a) Prepare journal entries to record transactions related to compensated absences during 2013 and 2014. (b) Compute the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2013, and 2014.

Describe cross-wire welding.

Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2014. Harrisburg expected to complete the building by December 31, 2014. Harrisburg has the following debt obligations outstanding during the construction period. Construction loan—12% interest, payable semiannually, issued December 31, 2013 $2,000,000Short-term loan—10% interest, payable monthly, and principal payable at maturity on May 30, 2015 1,400,000Long-term loan—11% interest, payable on January 1 of each year. Principal payable on January 1, 2018 1,000,000 Instructions (Carry all computations to two decimal places.) (a) Assume that Harrisburg completed the office and warehouse building on December 31, 2014, as planned at a total cost of $5,200,000, and the weighted-average amount of accumulated expenditures was $3,600,000. Compute the avoidable interest on this project. (b) Compute the depreciation expense for the year ended December 31, 2015. Harrisburg elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000.

Static and flexible budgets, variances, information quality The photocopying department in the local polytechnic college has budgeted monthly costs at $40 000 per month plus $7 per student. Normally 800 students are enrolled. During March there were 730 students (which is within the relevant range). At the end of the month, actual fixed costs were $42 000 and variable costs were $3650.   Required (a) Develop a static budget for photocopying costs based on 800 students. (b) Calculate the March static budget variance for fixed and variable photocopying costs. (c) Develop a flexible budget for the actual volume of students in March. (d) Calculate the March flexible budget variance for fixed and variable photocopying costs. (e) Which variance information — part (b) or (c) — is of higher quality? Explain.

Which of the following are positive statements and which are normative? (a)  Cutting the higher rates of income tax will redistribute incomes from the poor to the rich. (b)  It is wrong that inflation should be reduced if this means that there will be higher unemployment. (c)  It is incorrect to state that putting up interest rates will reduce inflation. (d)  The government should introduce road pricing to address the issue of congestion. (e)  Current government policies should be aimed at reducing the deficit rather than stimulating growth.

Explain why some financial institutions prefer to sell the mortgages they originate. (LO4)

Jackson Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2013, with the following beginning balances: plan assets $200,000; projected benefit obligation $250,000. Other data relating to 3 years’ operation of the plan are as follows. 2013 2014 2015 Annual service cost $16,000 $ 19,000 $ 26,000 Settlement rate and expected rate of return 10% 10% 10% Actual return on plan assets 18,000 22,000 24,000 Annual funding (contributions) 16,000 40,000 48,000 Benefi ts paid 14,000 16,400 21,000 Prior service cost (plan amended, 1/1/14) 160,000 Amortization of prior service cost 54,400 41,600 Change in actuarial assumptions establishes a December 31, 2015, projected benefi t obligation of: 520,000 Instructions (a) Prepare a pension worksheet presenting all 3 years’ pension balances and activities. (b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31 of each year. (c) Indicate the pension-related amounts reported in the financial statements for 2015.

Explain the argument that the deductions for charitable contributions and home mortgage interest represent indirect subsidies for these activities.

Mike Crane is an audit senior of a large public accounting firm who has just been assigned to the Frost Corporation’s annual audit engagement. Frost has been a client of Crane’s firm for many years. Frost is a fast-growing business in the commercial construction industry. In reviewing the fixed asset ledger, Crane discovered a series of unusual accounting changes, in which the useful lives of assets, depreciated using the straight-line method, were substantially lowered near the midpoint of the original estimate. For example, the useful life of one dump truck was changed from 10 to 6 years during its fifth year of service. Upon further investigation, Mike was told by Kevin James, Frost’s accounting manager, “I don’t really  your problem. After all, it’s perfectly legal to change an accounting estimate. Besides, our CEO likes to see big earnings!” Instructions Answer the following questions. (a) What are the ethical issues concerning Frost’s practice of changing the useful lives of fixed assets? (b) Who could be harmed by Frost’s unusual accounting changes? (c) What should Crane do in this situation?

Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be $15,000. The hospital will pay rents of $60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of $250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%. Instructions (a) Discuss the nature of this lease in relation to the lessor and compute the amount of each of the following items. (1) Lease receivable at inception of the lease. (2) Sales price. (3) Cost of sales. (b) Prepare a 10-year lease amortization schedule. (c) Prepare all of the lessor’s journal entries for the first year.

What is the difference between primary and secondary bonding in the structure of materials?

In what order are the loss limitation rules applied to limit partners’ losses from partnerships?

Explain each of the following terms: authorized capital stock, unissued capital stock, issued capital stock, outstanding capital stock, and treasury stock.

Ferraro, Inc. established a stock-appreciation rights (SAR) program on January 1, 2014, which entitles executives to receive cash at the date of exercise for the difference between the market price of the stock and the pre-established price of $20 on 5,000 SARs. The required service period is 2 years. The fair value of the SARs are determined to be $4 on December 31, 2014, and $9 on December 31, 2015. Compute Ferraro’s compensation expense for 2014 and 2015.

Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of $400,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of $800,000. The fair value of the division is estimated to be $1,000,000. Prepare Waters’ journal entry, if necessary, to record impairment of the goodwill.

Assume the bonds in BE14-6 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

Aston Corporation performs year-end planning in November of each year before its calendar year ends in December. The preliminary estimated net income is $3 million. The CFO, Rita Warren, meets with the company president, J. B. Aston, to review the projected numbers. She presents the following projected information. Pretax Income Percentage-of-Completion Completed-Contract Prior to 2014 $150,000 $105,000 2014 60,000 20,000 ASTON CORPORATION PROJECTED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2014 Sales $29,000,000 Cost of goods sold $14,000,000 Depreciation 2,600,000 Operating expenses 6,400,000 23,000,000 Income before income tax 6,000,000 Income tax 3,000,000 Net income $ 3,000,000 ASTON CORPORATION SELECTED BALANCE SHEET INFORMATION AT DECEMBER 31, 2014 Estimated cash balance $ 5,000,000 Available-for-sale securities (at cost) 10,000,000 Fair value adjustment (1/1/14) —0— Estimated fair value at December 31, 2014: Security Cost Estimated Fair Value A $ 2,000,000 $ 2,200,000 B 4,000,000 3,900,000 C 3,000,000 3,100,000 D 1,000,000 1,800,000 Total $10,000,000 $11,000,000 Other information at December 31, 2014: Equipment $3,000,000 Accumulated depreciation (5-year SL) 1,200,000 New robotic equipment (purchased 1/1/14) 5,000,000 Accumulated depreciation (5-year DDB) 2,000,000 The corporation has never used robotic equipment before, and Warren assumed an accelerated method because of the rapidly changing technology in robotic equipment. The company normally uses straightline depreciation for production equipment. Aston explains to Warren that it is important for the corporation to show a $7,000,000 income before taxes because Aston receives a $1,000,000 bonus if the income before taxes and bonus reaches $7,000,000. Aston also does not want the company to pay more than $3,000,000 in income taxes to the government. Instructions (a) What can Warren do within GAAP to accommodate the president’s wishes to achieve $7,000,000 in income before taxes and bonus? Present the revised income statement based on your decision. (b) Are the actions ethical? Who are the stakeholders in this decision, and what effect do Warren’s actions have on their interests?

What is the technical difference between a screw and a bolt?

On January 1, 2014, Henderson Corporation redeemed $500,000 of bonds at 99. At the time of redemption, the unamortized premium was $15,000 and unamortized bond issue costs were $5,250. Prepare the corporation’s journal entry to record the reacquisition of the bonds.