Question & Answer

Why is austenitic stainless steel called by that name?

Sabonis Cosmetics Co. purchased machinery on December 31, 2013, paying $50,000 down and agreeing to pay the balance in four equal installments of $40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price. Instructions Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates. (Round answers to the nearest cent.) (a) December 31, 2013. (d) December 31, 2016. (b) December 31, 2014. (e) December 31, 2017. (c) December 31, 2015.

The Z-score bankruptcy prediction model uses balance sheet and income information to arrive at a Z Score, which can be used to predict financial distress: Z 5 Working capital Total assets 3 1.2 1 Retained earnings Total assets 3 1.4 1 EBIT Total assets 3 3.3 1 Sales Total assets 3 .99 1 MV equity Total liabilities 3 0.6 EBIT is earnings before interest and taxes. MV equity is the market value of common equity, which can be determined by multiplying stock price by shares outstanding. Following extensive testing, it has been shown that companies with Z-scores above 3.0 are unlikely to fail; those with Z-scores below 1.81 are very likely to fail. While the original model was developed for publicly held manufacturing companies, the model has been modified to apply to companies in various industries, emerging companies, and companies not traded in public markets. Instructions (a) Use information in the financial statements of a company like Walgreens or Deere & Co. to compute the Z-score for the past 2 years. (b) Interpret your result. Where does the company fall in the financial distress range? (c) The Z-score uses EBIT as one of its elements. Why do you think this income measure is used?

Why do you consider that taxation authorities require an international             transfer price to be set based on an arm’s length transaction?

Estimate the real interest rate over the last year. If financial market participants overestimate inflation in a particular period, will real interest rates be relatively high or low? Explain. (LO2)

Crosley Corp. sold an investment on an installment basis. The total gain of $60,000 was reported for financial reporting purposes in the period of sale. The company qualifies to use the installment-sales method for tax purposes. The installment period is 3 years; one-third of the sale price is collected in the period of sale. The tax rate was 40% in 2014, and 35% in 2015 and 2016. The 35% tax rate was not enacted in law until 2015. The accounting and tax data for the 3 years is shown below. 2015 2016 2017 2018 2019 Taxable amounts $300 $300 $300 $ 300 $300 Deductible amount — — — (1,600) — 2015 2016 2017 2018 Taxable amounts $300 $300 $ 300 $300 Deductible amount — — (2,300) — Financial Tax Accounting Return 2014 (40% tax rate) Income before temporary difference $ 70,000 $70,000 Temporary difference 60,000 20,000 Income $130,000 $90,000 2015 (35% tax rate) Income before temporary difference $ 70,000 $70,000 Temporary difference –0– 20,000 Income $ 70,000 $90,000 2016 (35% tax rate) Income before temporary difference $ 70,000 $70,000 Temporary difference –0– 20,000 Income $ 70,000 $90,000 Instructions (a) Prepare the journal entries to record the income tax expense, deferred income taxes, and the income taxes payable at the end of each year. No deferred income taxes existed at the beginning of 2014. (b) Explain how the deferred taxes will appear on the balance sheet at the end of each year. (Assume Installment Accounts Receivable is classified as a current asset.) (c) Draft the income tax expense section of the income statement for each year, beginning with “Income before income taxes.”

What is the most important engineering property of copper that determines most of its applications?

Assume that the expected inflation rate has just been revised upward by the market. Would that change affect the return required by investors who invest in the stocks? Explain. (LO3)

Briefly describe the convergence efforts related to financial statement presentation.

Jim recently joined the Austin Barter Club, an organization that facilitates the exchange of services between its members. This year Jim provided lawn-mowing services to other club members. Jim received the following from the barter club. Determine the amount, if any, Jim should include in his gross income in each of the following situations:

On January 1, 2014, Aumont Company sold 12% bonds having a maturity value of $500,000 for $537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2014, and mature January 1, 2019, with interest payable December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis. Instructions (Round answers to the nearest cent.) (a) Prepare the journal entry at the date of the bond issuance. (b) Prepare a schedule of interest expense and bond amortization for 2014–2016. (c) Prepare the journal entry to record the interest payment and the amortization for 2014. (d) Prepare the journal entry to record the interest payment and the amortization for 2016.

The following information relates to the debt securities investments of Wildcat Company. 1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of $300,000 at 100 plus accrued interest. Interest is payable April 1 and October 1. 2. On April 1, semiannual interest is received. 3. On July 1, 9% bonds of Sampson, Inc. were purchased. These bonds with a par value of $200,000 were purchased at 100 plus accrued interest. Interest dates are June 1 and December 1. 4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest. 5. On October 1, semiannual interest is received. 6. On December 1, semiannual interest is received. 7. On December 31, the fair value of the bonds purchased February 1 and July 1 are 95 and 93, respectively. Instructions (a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are available-for-sale securities. (b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).

Why is it difficult to predict the size of the accelerator?

Ferreri Company received the following selected information from its pension plan trustee concerning the operation of the company’s defined benefit pension plan for the year ended December 31, 2014. January 1, December 31, 2014 2014 Projected benefi t obligation $1,500,000 $1,527,000 Market-related and fair value of plan assets 800,000 1,130,000 Accumulated benefi t obligation 1,600,000 1,720,000 Accumulated OCI (G/L)—Net gain –0– (200,000) The service cost component of pension expense for employee services rendered in the current year amounted to $77,000 and the amortization of prior service cost was $120,000. The company’s actual funding (contributions) of the plan in 2014 amounted to $250,000. The expected return on plan assets and the actual rate were both 10%; the interest/discount (settlement) rate was 10%. Accumulated other comprehensive income (PSC) had a balance of $1,200,000 on January 1, 2014. Assume no benefits paid in 2014. Instructions (a) Determine the amounts of the components of pension expense that should be recognized by the company in 2014. (b) Prepare the journal entry to record pension expense and the employer’s contribution to the pension plan in 2014. (c) Indicate the pension-related amounts that would be reported on the income statement and the balance sheet for Ferreri Company for the year 2014.

Tiffany is unmarried and has a 15-year-old qualifying child. Tiffany has determined her tax liability to be $3,525, and her employer has withheld $1,000 of federal taxes from her paycheck. Tiffany is allowed to claim a $2,000 child tax credit for her qualifying child. What amount of taxes will Tiffany owe (or what amount will she receive as a refund) when she files her tax return?

Twelve cars were inspected after final assembly. The number of defects found ranged between 87 and 139 defect per car with an average of 116. Determine the center and upper and lower control limits for the c chart that might be used in this situation.

Go through each of the arguments for restricting trade (both those of general validity and those having some validity for specific countries) and provide a counter-argument for not restricting trade.

What is the danger of issuing too much stock? What is the role of the securities firm that serves as the underwriter, and how can it ensure that the firm does not issue too much stock? (LO2, LO4)

Pacific Crossburgers Inc. charges an initial franchise fee of $70,000. Upon the signing of the agreement, a payment of $28,000 is due. Thereafter, three annual payments of $14,000 are required. The credit rating of the franchisee is such that it would have to pay interest at 10% to borrow money. Instructions Prepare the entries to record the initial franchise fee on the books of the franchisor under the following assumptions. (Round to the nearest dollar.) (a) The down payment is not refundable, no future services are required by the franchisor, and collection of the note is reasonably assured. (b) The franchisor has substantial services to perform, the down payment is refundable, and the collection of the note is very uncertain. (c) The down payment is not refundable, collection of the note is reasonably certain, the franchisor has yet to perform a substantial amount of services, and the down payment represents a fair measure of the services already performed.

The following facts apply to the pension plan of Boudreau Inc. for the year 2014. Plan assets, January 1, 2014 $490,000 Projected benefi t obligation, January 1, 2014 490,000 Settlement rate 8% Service cost 40,000 Contributions (funding) 25,000 Actual and expected return on plan assets 49,700 Benefi ts paid to retirees 33,400 Instructions  Using the preceding data, compute pension expense for the year 2014. As part of your solution, prepare a pension worksheet that shows the journal entry for pension expense for 2014 and the year-end balances in the related pension accounts.

How do corporations account for capital gains and losses for tax purposes?  How is this different from the way individuals account for capital gains and losses?

When an S corporation shareholder has suspended losses due to the tax-basis or at-risk amount limitation, are they allowed to deduct the losses if the S corporation status is terminated? Why or why not?

You are the independent auditor engaged to audit Millay Corporation’s December 31, 2014, financial statements. Millay manufactures household appliances. During the course of your audit, you discovered the following contingent liabilities. 1. Millay began production of a new dishwasher in June 2014 and, by December 31, 2014, sold 120,000 to various retailers for $500 each. Each dishwasher is under a one-year warranty. The company estimates that its warranty expense per dishwasher will amount to $25. At year-end, the company had already paid out $1,000,000 in warranty expenses. Millay’s income statement shows warranty expenses of $1,000,000 for 2014. Millay accounts for warranty costs on the accrual basis. 2. In response to your attorney’s letter, Morgan Sondgeroth, Esq., has informed you that Millay has been cited for dumping toxic waste into the Kishwaukee River. Clean-up costs and fines amount to $2,750,000. Although the case is still being contested, Sondgeroth is certain that Millay will most probably have to pay the fine and clean-up costs. No disclosure of this situation was found in the financial statements. 3. Millay is the defendant in a patent infringement lawsuit by Megan Drabek over Millay’s use of a hydraulic compressor in several of its products. Sondgeroth claims that, if the suit goes against Millay, the loss may be as much as $5,000,000. However, Sondgeroth believes the loss of this suit to be only reasonably possible. Again, no mention of this suit is made in the financial statements. As presented, these contingencies are not reported in accordance with GAAP, which may create problems in issuing a favorable audit report. You feel the need to note these problems in the work papers. Instructions Heading each page with the name of the company, balance sheet date, and a brief description of the problem, write a brief narrative for each of the above issues in the form of a memorandum to be incorporated in the audit work papers. Explain what led to the discovery of each problem, what the problem really is, and what you advised your client to do (along with any appropriate journal entries) in order to bring thesecontingencies in accordance with GAAP.

An L-shaped structural section is direct extruded from an aluminum billet in which Lo = 500 mm and Do = 100 mm. Dimensions of the cross section are given in Figure P19.29. Die angle = 90°. Determine (a) extrusion ratio, (b) shape factor, and (c) length of the extruded section if the butt remaining in the container at the end of the ram stroke is 25 mm.

Hamderson Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume the carryback provision is used for a net operating loss.) Year Pretax Income (Loss) Tax Rate 2012 $120,000 34% 2013 90,000 34% 2014 (280,000) 38% 2015 220,000 38% The tax rates listed were all enacted by the beginning of 2012. Instructions (a) Prepare the journal entries for the years 2012–2015 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryback and carryforward, assuming that at the end of 2014 the benefits of the loss carryforward are judged more likely than not to be realized in the future. (b) Using the assumption in (a), prepare the income tax section of the 2014 income statement beginning with the line “Operating loss before income taxes.” (c) Prepare the journal entries for 2014 and 2015, assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized. (d) Using the assumption in (c), prepare the income tax section of the 2014 income statement beginning with the line “Operating loss before income taxes.”