Question & Answer

Do theories of the long-run and short-run consumption functions help us to understand consumer reactions to a change in taxes? (See section 17.1 and Case Studies 17.1 – 17.4 on the student website.

Describe the RP technology called solid ground curing.

1.       A management professor once said that for successful management, studying the present was most important, studying the past was next most important, and studying the future should come last. Do you agree? Why?

Explain why the price of a good is no reflection of the total value that consumers put on it.

What types of contractual obligations must be disclosed in great detail in the notes to the balance sheet? Why do you think these detailed provisions should be disclosed?

At December 31, 2013, the available-for-sale equity portfolio for Steffi Graf, Inc. is as follows. Security Cost Fair Value Unrealized Gain (Loss) A $17,500 $15,000 ($2,500) B 12,500 14,000 1,500 C 23,000 25,500 2,500 Total $53,000 $54,500 1,500 Previous fair value adjustment balance—Dr. 400 Fair value adjustment—Dr. $1,100 On January 20, 2014, Steffi Graf, Inc. sold security A for $15,100. The sale proceeds are net of brokerage fees. Instructions (a) Prepare the adjusting entry at December 31, 2013, to report the portfolio at fair value. (b) Show the balance sheet presentation of the investment-related accounts at December 31, 2013. (Ignore notes presentation.) (c) Prepare the journal entry for the 2014 sale of security A.

At December 31, 2014, Indigo Girls Company has outstanding noncancelable purchase commitments for 36,000 gallons, at $3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower. Instructions (a) Assuming that the market price as of December 31, 2014, is $3.30, how would this matter be treated in the accounts and statements? Explain. (b) Assuming that the market price as of December 31, 2014, is $2.70, instead of $3.30, how would you treat this situation in the accounts and statements? (c) Give the entry in January 2015, when the 36,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2014, and that the market price in January 2015 was $2.70 per gallon. Give an explanation of your treatment.

Yesenia is a lawyer who uses the cash method of accounting. Last year Yesenia provided a client with legal services worth $55,000, but the client could not pay the fee. This year Yesenia requested that in lieu of paying Yesenia $55,000 for the services, the client could make a $45,000 gift to Yesenia’s daughter. Yesenia’s daughter received the check for $45,000 and deposited it in her bank account. How much of this income is taxed, if any, to Yesenia? Explain.

On March 1, 2014, Chance Company entered into a contract to build an apartment building. It is estimated that the building will cost $2,000,000 and will take 3 years to complete. The contract price was $3,000,000. The following information pertains to the construction period. 2014 2015 2016 Costs to date $ 600,000 $1,560,000 $2,100,000 Estimated costs to complete 1,400,000 520,000 –0– Progress billings to date 1,050,000 2,000,000 3,000,000 Cash collected to date 950,000 1,950,000 2,850,000 Instructions (a) Compute the amount of gross profit to be recognized each year, assuming the percentage ofcompletion method is used. (b) Prepare all necessary journal entries for 2016. (c) Prepare a partial balance sheet for December 31, 2015, showing the balances in the receivables and inventory accounts.

Norma Smith is the controller of Baylor Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year. (a) On December 20, 2014, a former employee filed a legal action against Baylor for $100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote. (b) Bonuses to key employees based on net income for 2014 are estimated to be $150,000. (c) On December 1, 2014, the company borrowed $600,000 at 8% per year. Interest is paid quarterly. (d) Credit sales for the year amounted to $10,000,000. Baylor’s expense provision for doubtful accounts is estimated to be 3% of credit sales. (e) On December 15, 2014, the company declared a $2.00 per share dividend on the 40,000 shares of common stock outstanding, to be paid on January 5, 2015. (f) During the year, customer advances of $160,000 were received; $50,000 of this amount was earned by December 31, 2014. Instructions For each item above, indicate the dollar amount to be reported as a current liability. If a liability is not reported, explain why.

Santo Corporation has eight expense accounts in its general ledger which could be classified as selling expenses. Should Santo report these eight expenses separately in its income statement or simply report one total amount for selling expenses?

McElroy Company has the following portfolio of investment securities at September 30, 2014, its last reporting date. Trading Securities Cost Fair Value Horton, Inc. common (5,000 shares) $215,000 $200,000 Monty, Inc. preferred (3,500 shares) 133,000 140,000 Oakwood Corp. common (1,000 shares) 180,000 179,000 On October 10, 2014, the Horton shares were sold at a price of $54 per share. In addition, 3,000 shares of Patriot common stock were acquired at $54.50 per share on November 2, 2014. The December 31, 2014, fair values were Monty $106,000, Patriot $132,000, and the Oakwood common $193,000. All the securities are classified as trading. Instructions (a) Prepare the journal entries to record the sale, purchase, and adjusting entries related to the trading securities in the last quarter of 2014. (b) How would the entries in part (a) change if the securities were classified as available-for-sale?

Jeraldine believes that when the §1231 look-back rule applies, the taxpayer deducts a §1231 loss in a previous year against §1231 gains in the current year. Explain whether Jeraldine’s description is correct.

Taxable income and pretax financial income would be identical for Huber Co. except for its treatments of gross profit on installment sales and estimated costs of warranties. The income computations shown on page 1164 have been prepared. Taxable income 2013 2014 2015 Excess of revenues over expenses  excluding two temporary differences) $160,000 $210,000 $90,000 Installment gross profi t collected 8,000 8,000 8,000 Expenditures for warranties (5,000) (5,000) (5,000) Taxable income $163,000 $213,000 $93,000 Pretax fi nancial income 2013 2014 2015 Excess of revenues over expenses (excluding two temporary differences) $160,000 $210,000 $90,000 Installment gross profi t earned 24,000 –0– –0– Estimated cost of warranties (15,000) –0– –0– Income before taxes $169,000 $210,000 $90,000 The tax rates in effect are 2013, 40%; 2014 and 2015, 45%. All tax rates were enacted into law on January 1, 2013. No deferred income taxes existed at the beginning of 2013. Taxable income is expected in all future years. Instructions Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013, 2014, and 2015.

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.

Twenty-five jewelry pieces, each with a surface area = 0.5 in2 are to be gold plated in a batch plating operation. (a) What average plating thickness will result if 8 amps are applied for 10 min in a cyanide bath? (b) What is the value of the gold that will be plated onto each piece if one ounce of gold is valued at $900? The density of gold = 0.698 lb/in3

Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material. (a) Legal fees paid in connection with the purchase of land are $1,500. (b) Eduardo, Inc. paves the driveway leading to the office building at a cost of $21,000. (c) A meat market purchases a meat-grinding machine at a cost of $3,500. (d) On June 30, Monroe and Meno, medical doctors, pay 6 months’ office rent to cover the month of July and the next 5 months. (e) Smith’s Hardware Company pays $9,000 in wages to laborers for construction on a building to be used in the business. (f) Alvarez’s Florists pays wages of $2,100 for the month an employee who serves as driver of their delivery truck.

Hannah Tywin owns 100 shares of MM Inc. stock. She sells the stock on December 11 for $25 per share. She received the stock as a gift from her Aunt Pam on March 20 of this year when the fair market value of the stock was $18 per share. Aunt Pam originally purchased the stock seven years ago at a price of $12 per share. What are the amount and character of Hannah’s recognized gain or loss on the stock?

What is the purpose of a cash flow hedge?

Assume a calendar-year corporation has positive current E&P of $120 and a deficit in accumulated E&P of ($200). Under this circumstance, a cash distribution of $100 to the corporation’s sole shareholder at year-end will not be treated as a dividend because total E&P is negative. True or false? Explain.

What is an operating segment, and when can information about two operating segments be aggregated?

After securing lease commitments from several major stores, Auer Shopping Center, Inc. was organized and built a shopping center in a growing suburb. The shopping center would have opened on schedule on January 1, 2014, if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2014. All of the additional construction costs that were incurred as a result of the tornado were covered by insurance. In July 2013, in anticipation of the scheduled January opening, a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space, and manage the property. A summary of some of the costs incurred in 2013 and the first nine months of 2014 follows. January 1, 2014 through 2013 September 30, 2014 Interest on mortgage bonds $720,000 $540,000 Cost of obtaining tenants 300,000 360,000 Promotional advertising 540,000 557,000 The promotional advertising campaign was designed to familiarize shoppers with the center. Had it been known in time that the center would not open until October 2014, the 2013 expenditure for promotional advertising would not have been made. The advertising had to be repeated in 2014. All of the tenants who had leased space in the shopping center at the time of the tornado accepted the October occupancy date on condition that the monthly rental charges for the first 9 months of 2014 be canceled. Instructions Explain how each of the costs for 2013 and the first 9 months of 2014 should be treated in the accounts of the shopping center corporation. Give the reasons for each treatment.

An extruder has diameter = 80 mm and length = 2.0 m. Its screw has a channel depth = 5 mm, flight angle = 18 degrees, and it rotates at 1 rev/sec. The plastic melt has a shear viscosity = 150 Pa-s. Determine the extruder characteristic by computing Qmax and pmax and then finding the equation of the straight line between them.

Supply tends to be more elastic in the long run than in the short run. Assume that a tax is imposed on a good that was previously untaxed. How will the incidence of this tax change as time passes? How will the incidence be affected if demand too becomes more elastic over time?

Identify which basic principle of accounting is best described in each item below. (a) Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected. (b) Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue. (c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements. (d) Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.