Question & Answer

Under what circumstances would (a) contractionary and (b) expansionary policies cause no conflict between internal and external objectives?

Carole, Karmen, and Cyrus formed ABC Corporation. Carole received 60 percent of the stock in ABC Corporation in exchange for appreciated property, Karmen received 30 percent of the stock in ABC Corporation in exchange for legal services, and Cyrus received 10 percent of the stock ABC Corporation in exchange for cash.   a. Must Carole recognize the gain she realized on her transfer of the appreciated property?   b. Suppose that, instead of receiving the entire 30 percent of the ABC Corporation stock in exchange for legal services, Karmen received 10 percent of the ABC Corporation stock in exchange for her legal services and she received 20 percent of the ABC Corporation stock in exchange for cash (i.e., she transferred both services and property to ABC Corporation). Must Carole recognize gain on her transfer of appreciated property?

How could we model a credit market disruption and its impact on interest-rate differentials using the Keynesian cross (Keynesian 45° line) diagram?

Continuous tubing is produced in a plastic extrusion operation through a die orifice whose outside diameter = 2.0 in and inside diameter = 1.5 in. The extruder barrel diameter = 5.0 in and length = 12 ft. The screw rotates at 50 rev/min; it has a channel depth = 0.30 in and flight angle = 16°. The head pressure has a value of 350 lb/in2 and the viscosity of the polymer melt is 90 x 10-4 lb-sec/in2 . Under these conditions, what is the production rate in length of tube/min, given that the die swell ratio is 1.25.

Each of the following items must be considered in preparing a statement of cash flows (indirect method) for Turbulent Indigo Inc. for the year ended December 31, 2014. (a) Plant assets that had cost $20,000 6 years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $5,300. (b) During the year, 10,000 shares of common stock with a stated value of $10 a share were issued for $43 a share. (c) Uncollectible accounts receivable in the amount of $27,000 were written off against Allowance for Doubtful Accounts. (d) The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of land for $39,000 cash. (e) A 3-month U.S. Treasury bill was purchased for $100,000. The company uses a cash and cash equivalent basis for its cash flow statement. (f) Patent amortization for the year was $20,000. (g) The company exchanged common stock for a 70% interest in Tabasco Co. for $900,000. (h) During the year, treasury stock costing $47,000 was purchased. Instructions State where each item is to be shown in the statement of cash flows, if at all.

LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2014, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, LEW’s cost to produce its jewelry will increase, which would reduce its profit margins. To hedge the risk of increased gold prices, on April 1, 2014, LEW enters into a gold futures contract and designates this futures contract as a cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 500 ounces, and the terms of the contract give LEW the right and the obligation to purchase gold at a price of $300 per ounce. The price will be good until the contract expires on October 31, 2014. Assume the following data with respect to the price of the futures contract and the gold inventory purchase. Date Spot Price for October Delivery April 1, 2014 $300 per ounce June 30, 2014 310 per ounce September 30, 2014 315 per ounce Instructions Prepare the journal entries for the following transactions. (a) April 1, 2014—Inception of the futures contract, no premium paid. (b) June 30, 2014—LEW Co. prepares financial statements. (c) September 30, 2014—LEW Co. prepares financial statements. (d) October 10, 2014—LEW Co. purchases 500 ounces of gold at $315 per ounce and settles the futures contract. (e) December 20, 2014—LEW sells jewelry containing gold purchased in October 2014 for $350,000. The cost of the finished goods inventory is $200,000. (f) Indicate the amount(s) reported on the balance sheet and income statement related to the futures contract on June 30, 2014. (g) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2014.

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.

After several profitable years running her business, Ingrid decided to acquire the assets of a small competing business. On May 1 of year 1, Ingrid acquired the competing business for $300,000. Ingrid allocated $50,000 of the purchase price to goodwill. Ingrid’s business reports its taxable income on a calendar-year basis.  a. How much amortization expense on the goodwill can Ingrid deduct in year 1, year 2, and year 3? b. In lieu of the original facts, assume that Ingrid purchased only a phone list with a useful life of 5 years for $10,000. How much amortization expense on the phone list can Ingrid deduct in year 1, year 2, and year 3?

During the credit crisis of 2008 and 2009, U.S. interest rates were extremely low, which enabled businesses to borrow at a low cost. Holding other factors constant, this should have resulted in a higher number of feasible projects, which should have encouraged businesses to borrow more money and expand. Yet, many businesses that had access to loanable funds were unwilling to borrow during the credit crisis. What other factor changed during this period that more than offset the potentially favorable effect of the low interest rates on project feasibility, therefore discouraging businesses from expanding? (LO2)

North Pier Company entered into a two-year swap agreement, which would provide fixed-rate payments for floating-rate payments. Over the next two years, interest rates declined. Based on these conditions, did North Pier Company benefit from the swap? (LO1)

Fields Laboratories holds a valuable patent (No. 758-6002-1A) on a precipitator that prevents certain types of air pollution. Fields does not manufacture or sell the products and processes it develops. Instead, it conducts research and develops products and processes which it patents, and then assigns the patents to manufacturers on a royalty basis. Occasionally it sells a patent. The history of Fields patent number 758-6002-1A is as follows. Date Activity Cost 2005–2006 Research conducted to develop precipitator $384,000 Jan. 2007 Design and construction of a prototype 87,600 March 2007 Testing of models 42,000 Jan. 2008 Fees paid engineers and lawyers to prepare patent application; patent granted June 30, 2008 59,500 Nov. 2009 Engineering activity necessary to advance the design of the precipitator to the manufacturing stage 81,500 Dec. 2010 Legal fees paid to successfully defend precipitator patent 42,000 April 2011 Research aimed at modifying the design of the patented precipitator 43,000 July 2015 Legal fees paid in unsuccessful patent infringement suit against a competitor 34,000 Fields assumed a useful life of 17 years when it received the initial precipitator patent. On January 1, 2013, it revised its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the cost is incurred prior to July 1, and no amortization for the year if the cost is incurred after June 30. The company’s year ends December 31. Instructions Compute the carrying value of patent No. 758-6002-1A on each of the following dates: (a) December 31, 2008. (b) December 31, 2012. (c) December 31, 2015.

Consider the data in Problem 21.10 except that rake angle is a variable, and its effect on the forces in parts (b), (c), and (d) is to be evaluated. (a) Using a spreadsheet calculator, compute the values of shear force, cutting force, thrust force, and friction force as a function of rake angle over a range of rake angles between the high value of 20° in Problem 21.10 and a low value of -10°. Use intervals of 5° between these limits. The chip thickness ratio decreases as rake angle is reduced and can be approximated by the following relationship: r = 0.38 + 0.006 , where r = chip thickness and = rake angle. (b) What observations can be made from the computed results?

Explain the use of circuit breakers. (LO3)

During the current year, Marshall Construction trades an old crane that has a book value of $90,000 (original cost $140,000 less accumulated depreciation $50,000) for a new crane from Brigham Manufacturing Co. The new crane cost Brigham $165,000 to manufacture and is classified as inventory. The following information is also available. Marshall Const. Brigham Mfg. Co. Fair value of old crane $ 82,000 Fair value of new crane $200,000 Cash paid 118,000 Cash received 118,000 Instructions (a) Assuming that this exchange is considered to have commercial substance, prepare the journal entries on the books of (1) Marshall Construction and (2) Brigham Manufacturing. (b) Assuming that this exchange lacks commercial substance for Marshall, prepare the journal entries on the books of Marshall Construction. (c) Assuming the same facts as those in (a), except that the fair value of the old crane is $98,000 and the cash paid is $102,000, prepare the journal entries on the books of (1) Marshall Construction and (2) Brigham Manufacturing. (d) Assuming the same facts as those in (b), except that the fair value of the old crane is $97,000 and the cash paid $103,000, prepare the journal entries on the books of (1) Marshall Construction and (2) Brigham Manufacturing.

A part is designed to be hot forged in an impression die. The projected area of the part, including flash, is 16 in2 . After trimming, the part has a projected area of 10 in2 . Part geometry is complex. As heated the work material yields at 10,000 lb/in2 , and has no tendency to strain harden. At room temperature, the material yields at 25,000 lb/in2 Determine the maximum force required to perform the forging operation

On January 1, 2014, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer’s inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%. Instructions (a) Prepare the journal entry to record the initial transaction on January 1, 2014. (Round all computations to the nearest dollar.) (b) Prepare the journal entry to record any adjusting entries needed at December 31, 2014. Assume that the sales of Avery’s product to this customer occur evenly over the 3-year period.

How will an increased mobility of savings and other capital between institutions affect this argument?

1. In the case of buses, subsidies are often paid by local authorities to support various loss‑making routes. Is this the best way of supporting these services? 2. In the case of postal services, profitable parts of the service cross-subsidise the unprofitable parts. Should this continue if the industry were privatised?

Discuss why Congress limits the amount of depreciation deduction businesses may claim on certain automobiles.

At the end of the current period, Agler Inc. had a projected benefit obligation of $400,000 and pension plan assets (at fair value) of $350,000. What are the accounts and amounts that will be reported on the company’s balance sheet as pension assets or pension liabilities?

Betty joined Jin in forming DBJ Corp. Betty contributed appreciated land for 90 percent of the stock in DBJ. Jin received 10 percent of the DBJ stock valued at $15,000.  Determine Jin's tax consequences in each of the following alternative scenarios.  a. Jin received the stock in exchange for providing computer-related services for the corporation. What amount of income or gain does Jin recognize on the exchange?  What is Jin's basis in the stock he received in the exchange?  b. Jin contributed the rights to a patent he owned to DBJ in exchange for the DBJ stock. The patent was worth $15,000 and Jin's basis in the patent was $8,000. How much gain does Jin recognize on the exchange?  What is Jin's basis in the DBJ stock?

What is the price elasticity of demand at the point (a) where the demand curve crosses the vertical axis; (b) where it crosses the horizontal axis?

Aykroyd Inc. has sponsored a noncontributory, defined benefit pension plan for its employees since 1991. Prior to 2014, cumulative net pension expense recognized equaled cumulative contributions to the plan. Other relevant information about the pension plan on January 1, 2014, is as follows. 1. The company has 200 employees. All these employees are expected to receive benefits under the plan. The average remaining service life per employee is 12 years. 2. The projected benefit obligation amounted to $5,000,000 and the fair value of pension plan assets was $3,000,000. The market-related asset value was also $3,000,000. Unrecognized prior service cost was $2,000,000. On December 31, 2014, the projected benefit obligation and the accumulated benefit obligation were $4,850,000 and $4,025,000, respectively. The fair value of the pension plan assets amounted to $4,100,000 at the end of the year. A 10% settlement rate and a 10% expected asset return rate were used in the actuarial present value computations in the pension plan. The present value of benefits attributed by the pension benefit formula to employee service in 2014 amounted to $200,000. The employer’s contribution to the plan assets amounted to $775,000 in 2014. This problem assumes no payment of pension benefits. Instructions (Round all amounts to the nearest dollar.) (a) Prepare a schedule, based on the average remaining life per employee, showing the prior service cost that would be amortized as a component of pension expense for 2014, 2015, and 2016. (b) Compute pension expense for the year 2014. (c) Prepare the journal entries required to report the accounting for the company’s pension plan for 2014. (d) Compute the amount of the 2014 increase/decrease in net gains or losses and the amount to be amortized in 2014 and 2015.

What is the nature of research and development costs?

Elon Savings and Loan Association has a large number of 30-year mortgages with floating interest rates that adjust on an annual basis, and it obtains most of its funds by issuing five-year certificates of deposit. It uses the yield curve to assess the market’s anticipation of future interest rates. Elon believes that expectations of future interest rates are the major force affecting the yield curve. Assume that a downward-sloping yield curve with a steep slope exists. Based on this information, should Elon consider using financial futures as a hedging technique? Explain. (LO2)