Question & Answer

Included in Outkast Company’s December 31, 2014, trial balance are the following accounts: Prepaid Rent $5,200; Debt Investments (trading) $56,000; Unearned Fees $17,000; Land (held for investment) $39,000; Notes Receivable (long-term) $42,000. Prepare the long-term investments section of the balance sheet.

Remmers Company manufactures desks. Most of the company’s desks are standard models and are sold on the basis of catalog prices. At December 31, 2014, the following finished desks appear in the company’s inventory. Finished Desks A B C D 2014 catalog selling price $450 $480 $900 $1,050 FIFO cost per inventory list 12/31/14 470 450 830 960 Estimated current cost to manufacture (at December 31, 2014, and early 2015) 460 430 610 1,000 Sales commissions and estimated other costs of disposal 50 60 80 130 2015 catalog selling price 500 540 900 1,200 The 2014 catalog was in effect through November 2014, and the 2015 catalog is effective as of December 1, 2014. All catalog prices are net of the usual discounts. Generally, the company attempts to obtain a 20% gross profit on selling price and has usually been successful in doing so. Instructions At what amount should each of the four desks appear in the company’s December 31, 2014, inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-market approach for valuation of inventories on an individual-item basis?

Why will the price elasticity of demand for holidays in Crete be greater than that for holidays in general? Is this difference the result of a difference in the size of the income effect or the substitution effect? Is there anything the suppliers of holidays in Crete can do to reduce this higher price elasticity?

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

} Orie and Jane, husband and wife, operate a sole proprietorship. They expect their taxable income next year to be $450,000, of which $250,000 is attributed to the sole proprietorship. Orie and Jane are contemplating incorporating their sole proprietorship. Using the married-joint tax brackets and the corporate tax rate in Appendix C, find out how much current tax this strategy could save Orie and Jane. How much income should be left in the corporation?

For a firm to be able to implement a strategy of price discrimination it must be able to prevent re-sale amongst its customers. What factors would tend to make it more difficult for a consumer to resell a good?

At the beginning of the year, Poplock began a calendar-year, dog-boarding business called Griff’s Palace. Poplock bought and placed in service the following assets during the year:

Distinguish between ratio analysis and percentage analysis relative to the interpretation of financial statements. What is the value of these two types of analyses?

Ottawa Corporation owns machinery that cost $20,000 when purchased on July 1, 2011. Depreciation has been recorded at a rate of $2,400 per year, resulting in a balance in accumulated depreciation of $8,400 at December 31, 2014. The machinery is sold on September 1, 2015, for $10,500. Prepare journal entries to (a) update depreciation for 2015 and (b) record the sale.

Shea Savings negotiates a fixed-for-floating swap with a reputable firm in South America that has an exceptional credit rating. Shea is very confident that there will not be a default on inflow payments because of the very low credit risk of the South American firm. Do you agree? Explain. (LO3)

A corporation commissioned an accounting firm to recalculate the way it accounted for leasing transactions.  With the new calculations, the corporation was able to file amended tax returns for the past few years that increased the corporation’s net operating loss carryover from $3,000,000 to $5,000,000. Was the corporation wise to pay the accountants for their work that led to the increase in the NOL carryover? What factors should be considered in making this determination?

Scot and Vidia, married taxpayers, earn $240,000 in taxable income and $5,000 in interest from an investment in City of Tampa bonds.  Using the U.S. tax rate schedule for married filing jointly (see Example 1-3), how much federal tax will they owe?  What is their average tax rate?  What is their effective tax rate?  What is their current marginal tax rate?

Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling $4,200,000. Jana Kingston Co. Mary Ann Benson Co. Current liabilities $ 300,000 Current liabilities $ 600,000 Long-term debt, 10% 1,200,000 Common stock ($20 par) 2,900,000 Common stock ($20 par) 2,000,000 Retained earnings (Cash Retained earnings (Cash dividends, $328,000) 700,000 dividends, $220,000) 700,000 $4,200,000 $4,200,000 For the year, each company has earned the same income before interest and taxes. Jana Kingston Co. Mary Ann Benson Co. Income before interest and taxes $1,200,000 $1,200,000 Interest expense 120,000 –0– 1,080,000 1,200,000 Income taxes (45%) 486,000 540,000 Net income $ 594,000 $ 660,000 At year end, the market price of Kingston’s stock was $101 per share, and Benson’s was $63.50. Instructions (a) Which company is more profitable in terms of return on total assets? (b) Which company is more profitable in terms of return on common stock equity? (c) Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year. (d) From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why? (e) What is the book value per share for each company?

How can the market distortions argument be used to justify putting excise duties on specific goods such as petrol, alcohol and tobacco? Is this the only reason why excise duties are put on these particular products?

What is the most commonly plated substrate metal?

Why might a company become involved in an interest rate swap contract to receive fixed interest payments and pay variable?

Briefly explain why corporations issue convertible securities.

Write a short essay explaining why there is so much uncertainty surrounding the valuation of a firm that is engaged in an IPO. Why do you think some investors overvalue firms at the time of their IPO?

Diamond Mountain was originally thought to be one of the few places in North America to contain diamonds, so Diamond Mountain Inc. (DM) purchased the land for $1,000,000. Later, DM discovered that the only diamonds on the mountain had been planted there and the land was worthless for mining. DM engineers discovered a new survey technology and discovered a silver deposit estimated at 5,000 pounds on Diamond Mountain. DM immediately bought new drilling equipment and began mining the silver.  In years 1-3 following the opening of the mine, DM had net (gross) income of $200,000 ($700,000), $400,000 ($1,100,000), and $600,000 ($1,450,000), respectively. Mining amounts for each year were as follows: 750 pounds (year 1), 1,450 pounds (year 2), and 1,800 pounds (year 3). At the end of year 2, engineers used the new technology (which had been improving over time) and estimated there were still an estimated 6,000 pounds of silver deposits. DM also began a research and experimentation project with the hopes of gaining a patent for its new survey technology. Diamond Mountain Inc. chose to capitalize research and experimentation expenditures and to amortize the costs over 60 months or until it obtained a patent on its technology. In March of year 1, DM spent $95,000 on research and experimentation. DM spent another $75,000 in February of year 2 for research and experimentation. DM realizes benefits from the research and experimentation expenditures when the costs are incurred. In September of year 2, DM paid $20,000 of legal fees and was granted the patent in October of year 2 (the entire process of obtaining a patent was unusually fast). The patent's life is 20 years.

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.”

Tim is 45 years old and considering enrolling in an insurance program that provides for long-term care insurance. He is curious about whether the insurance premiums are deductible as a medical expense. If so, he wants to know the maximum amount that can be deducted in any year.

What are interim reports? Why are balance sheets often anot provided with interim data?

Scratch Miniature Golf and Driving Range Inc. was opened on March 1 by Scott Verplank. The following selected events and transactions occurred during March. Mar. 1 Invested $50,000 cash in the business in exchange for common stock. 3 Purchased Michelle Wie’s Golf Land for $38,000 cash. The price consists of land $10,000, building $22,000, and equipment $6,000. (Make one compound entry.) 5 Advertised the opening of the driving range and miniature golf course, paying advertising expenses of $1,600. 6 Paid cash $1,480 for a one-year insurance policy. 10 Purchased golf equipment for $2,500 from Singh Company, payable in 30 days. Mar. 18 Received golf fees of $1,200 in cash. 25 Declared and paid a $500 cash dividend. 30 Paid wages of $900. 30 Paid Singh Company in full. 31 Received $750 of fees in cash. Scratch uses the following accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Common Stock, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense. Instructions Journalize the March transactions. (Provide explanations for the journal entries.)

The financial statements of P&G are presented in Appendix 5B. The company’s complete annual report, including the notes to the financial statements, can be accessed at the book’s companion website, www. wiley.com/college/kieso. Instructions Refer to P&G’s financial statements and the accompanying notes to answer the following questions. (a) What descriptions are used by P&G in its balance sheet to classify its property, plant, and equipment? (b) What method or methods of depreciation does P&G use to depreciate its property, plant, and equipment? (c) Over what estimated useful lives does P&G depreciate its property, plant, and equipment? (d) What amounts for depreciation and amortization expense did P&G charge to its income statement in 2011, 2010, and 2009? (e) What were the capital expenditures for property, plant, and equipment made by P&G in 2011, 2010, and 2009?

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.