Question & Answer

Explain how the credit crisis adversely affected many other people and institutions beyond homeowners and mortgage companies. (LO5)

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.

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?

Describe the RP technology called solid ground curing.

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

Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program. After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved, answer these questions: (a) What might be the advantages of leasing the assets instead of owning them? (b) What might be the disadvantages of leasing the assets instead of owning them? (c) In what way will the balance sheet be differently affected by leasing the assets as opposed to issuing bonds and purchasing the assets?

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.

During 2014, Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2016. The following information is available. 2014 2015 2016 Costs incurred to date $400,000 $825,000 $1,070,000 Estimated costs to complete 600,000 275,000 –0– Billings to date 300,000 900,000 1,600,000 Collections to date 270,000 810,000 1,425,000 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 2015. (c) Compute the amount of gross profit to be recognized each year, assuming the completed-contract method is used.

The shear strength of a certain work material = 50,000 lb/in2 . An orthogonal cutting operation is performed using a tool with a rake angle = 20° at the following cutting conditions: cutting speed = 100 ft/min, chip thickness before the cut = 0.015 in, and width of cut = 0.150 in. The resulting chip thickness ratio = 0.50. Determine (a) the shear plane angle, (b) shear force, (c) cutting force and thrust force, and (d) friction force.

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.

At a recent management meeting at Skyward Industries, the Transport Division manager was heard to say “this transfer pricing is a waste of time – at the end of the year all the internal transactions are eliminated on consolidation in the financial reports”.  Comment on this statement.

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?

What is the time value of money? Why should accountants have an understanding of compound interest, annuities, and present value concepts?

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.

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.

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.

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

Identify some of the advantages of adhesive bonding compared to alternative joining methods.

On January 5, 2014, Phelps Corporation received a charter granting the right to issue 5,000 shares of $100 par value, 8% cumulative and nonparticipating preferred stock, and 50,000 shares of $10 par value common stock. It then completed these transactions. Jan. 11 Issued 20,000 shares of common stock at $16 per share. Feb. 1 Issued to Sanchez Corp. 4,000 shares of preferred stock for the following assets: equipment with a fair value of $50,000; a factory building with a fair value of $160,000; and land with an appraised value of $270,000. July 29 Purchased 1,800 shares of common stock at $17 per share. (Use cost method.) Aug. 10 Sold the 1,800 treasury shares at $14 per share. Dec. 31 Declared a $0.25 per share cash dividend on the common stock and declared the preferred dividend. Dec. 31 Closed the Income Summary account. There was a $175,700 net income. Instructions (a) Record the journal entries for the transactions listed above. (b) Prepare the stockholders’ equity section of Phelps Corporation’s balance sheet as of December 31, 2014.

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?

Is the assumption of rational expectations on its own sufficient for anticipated demand shocks to have no impact on economic activity even in the short run?

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?

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?