Question & Answer

Explain the transaction approach to measuring income. Why is the transaction approach to income measurement preferable to other ways of measuring income?

The before-tax income for Lonnie Holdiman Co. for 2014 was $101,000 and $77,400 for 2015. However, the accountant noted that the following errors had been made: 1. Sales for 2014 included amounts of $38,200 which had been received in cash during 2014, but for which the related products were delivered in 2015. Title did not pass to the purchaser until 2015. 2. The inventory on December 31, 2014, was understated by $8,640. 3. The bookkeeper in recording interest expense for both 2014 and 2015 on bonds payable made the following entry on an annual basis. Interest Expense 15,000 Cash 15,000 The bonds have a face value of $250,000 and pay a stated interest rate of 6%. They were issued at a discount of $15,000 on January 1, 2014, to yield an effective-interest rate of 7%. (Assume that the effective-yield method should be used.) 4. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2014 and 2015. Repairs in the amount of $8,500 in 2014 and $9,400 in 2015 were so charged. The company applies a rate of 10% to the balance in the Equipment account at the end of the year in its determination of depreciation charges. Instructions Prepare a schedule showing the determination of corrected income before taxes for 2014 and 2015.

Compare and contrast realization of income with recognition of income.

Of what use is the statement of cash flows?

Explain the concept of bond price elasticity. Would bond price elasticity suggest a higher price sensitivity for zero-coupon bonds or high-coupon bonds that are offering the same yield to maturity? Why? What does this suggest about the market value volatility of mutual funds containing zero-coupon Treasury bonds versus high-coupon Treasury bonds? (LO1, LO3)

Recall from Chapter 13 that Hincapie Co. (a specialty bike-accessory manufacturer) is expecting growth in sales of some products targeted to the low-price market. Hincapie is contemplating a preferred stock issue to help finance this expansion in operations. The company is leaning toward participating preferred stock because ownership will not be diluted, but the investors will get an extra dividend if the company does well. The company management wants to be certain that its reporting of this transaction is transparent to its current shareholders and wants you to research the disclosure requirements related to its capital structure. Instructions If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses. (a) Identify the authoritative literature that addresses disclosure of information about capital structure. (b) Find definitions of the following: (1) Securities. (2) Participation rights. (3) Preferred stock. (c) What information about securities must companies disclose? Discuss how Hincapie should report the proposed preferred stock issue.

Can we incorporate trade effects into endogenous growth models?

During 2014, Williamson Company changed from FIFO to weighted-average inventory pricing. Pretax income in 2013 and 2012 (Williamson’s first year of operations) under FIFO was $160,000 and $180,000, respectively. Pretax income using weighted-average pricing in the prior years would have been $145,000 in 2013 and $170,000 in 2012. In 2014, Williamson Company reported pretax income (using weighted-average pricing) of $180,000. Show comparative income statements for Williamson Company, beginning with “Income before income tax,” as presented on the 2014 income statement. (The tax rate in all years is 30%.)

Describe the mechanical limitation on the deduction for interest on qualified educational loans.

Caplets are used to support a sand core inside a sand mold cavity. The design of the caplets and the manner in which they are placed in the mold cavity surface allows each caplet to sustain a force of 10 lb. Several caplets are located beneath the core to support it before pouring; and several other caplets are placed above the core to resist the buoyancy force during pouring. If the volume of the core = 325 in.3 , and the metal poured is brass, determine the minimum number of caplets that should be placed (a) beneath the core, and (b) above the co

George Hincapie Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directorshas decided to raise funds for the new plant by issuing $2,000,000 of 11% term corporate bonds on March 1, 2014, due on March 1, 2029, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%. Instructions As the controller of the company, determine the selling price of the bonds.

Use the information from BE23-4 for Bloom Corporation. Prepare the cash flows from operating activities section of Bloom’s 2014 statement of cash flows using the indirect method.

Smithers is a self-employed individual who earns $30,000 per year in self-employment income. Smithers pays $2,200 in annual health insurance premiums (not through an exchange) for his own medical care. In each of the following situations, determine the amount of the deductible health insurance premium for Smithers before any AGI floor limitation.

Button Company has the following two temporary differences between its income tax expense and income taxes payable. 2014 2015 2016 Pretax fi nancial income $840,000 $910,000 $945,000 Excess depreciation expense on tax return (30,000) (40,000) (10,000) Excess warranty expense in fi nancial income 20,000 10,000 8,000 Taxable income $830,000 $880,000 $943,000 The income tax rate for all years is 40%. Instructions (a) Assuming there were no temporary differences prior to 2014, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, 2015, and 2016. (b) Indicate how deferred taxes will be reported on the 2016 balance sheet. Button’s product warranty is for 12 months. (c) Prepare the income tax expense section of the income statement for 2016, beginning with the line “Pretax financial income.”

Assume the same information as in E17-3 except that the securities are classified as available-for-sale. The fair value of the bonds at December 31 of each year-end is as follows. 2013 $320,500 2016 $310,000 2014 $309,000 2017 $300,000 2015 $308,000 Instructions (a) Prepare the journal entry at the date of the bond purchase. (b) Prepare the journal entries to record the interest received and recognition of fair value for 2013. (c) Prepare the journal entry to record the recognition of fair value for 2014.

Briefly discuss the convergence efforts that are under way by the IASB and FASB in the area of dilutive securities and earnings per share.

Ford Motor Co. is considering alternate methods of accounting for the cash discounts it takes when paying suppliers promptly. One method suggested was to report these discounts as financial income when payments are made. Comment on the propriety of this approach.

Twinbrook Corporation needed to upgrade to a larger manufacturing facility. Twinbrook first acquired a new manufacturing facility for $2,100,000 cash and then transferred the facility it was using (building and land) to White Flint Corporation for $2,000,000 three months later. Does the exchange qualify for like-kind exchange treatment? (Hint: Examine Revenue Procedures 2000-37 and 2004-51.)  If not, can you propose a change in the transaction that will allow it to qualify?

1.       : As algorithmic control becomes more common in organizations, how might it affect the roles of managers and employees? Can you think of ways algorithmic tools might be used to decentralize control? Explain.

Carla incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market values and adjusted tax bases.     FMV    Adjusted Tax Basis Inventory$    20,000$        10,000 Building    150,000        100,000 Land    250,000        300,000 Total$  420,000$      410,000

What is meant by the terms narrow money and broad money? Does broad money fulfil all the functions of money?

Some believe that accounting depreciation measures the decline in the value of fixed assets. Do you agree? Explain.

When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?

Draw a utility/value function that illustrates the concepts of reference dependent preferences, loss aversion and diminishing marginal sensitivity to gains/losses.

Frozen Delight, Inc. charges an initial franchise fee of $75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount, $25,000 is collected immediately. The remainder is collected in 4 equal annual installments of $12,500 each. These installments have a present value of $41,402. There is reasonable expectation that the down payment may be refunded and substantial future services be performed by Frozen Delight, Inc. Prepare the journal entry required by Frozen Delight to record the franchise fee.