Question & Answer

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)

On January 1, 2013, when its $30 par value common stock was selling for $80 per share, Plato Corp. issued $10,000,000 of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into five shares of the corporation’s common stock. The debentures were issued for $10,800,000. The present value of the bond payments at the time of issuance was $8,500,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2014, the corporation’s $30 par value common stock was split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2015, when the corporation’s $15 par value common stock was selling for $135 per share, holders of 30% of the convertible debentures exercised their conversion options. The corporation uses the straightline method for amortizing any bond discounts or premiums. Instructions (a) Prepare in general journal form the entry to record the original issuance of the convertible debentures. (b) Prepare in general journal form the entry to record the exercise of the conversion option, using the book value method  Show supporting computations in good form.

Incurring long-term debt with an arrangement whereby lenders receive an option to buy common stock during all or a portion of the time the debt is outstanding is a frequent corporate financing practice. In some situations, the result is achieved through the issuance of convertible bonds; in others, the debt instruments and the warrants to buy stock are separate. Instructions (a) (1) Describe the differences that exist in current accounting for original proceeds of the issuance of convertible bonds and of debt instruments with separate warrants to purchase common stock. (2) Discuss the underlying rationale for the differences described in (a)(1) above. (3) Summarize the arguments that have been presented in favor of accounting for convertible bonds in the same manner as accounting for debt with separate warrants. (b) At the start of the year, Huish Company issued $18,000,000 of 12% bonds along with detachable warrants to buy 1,200,000 shares of its $10 par value common stock at $18 per share. The bonds mature over the next 10 years, starting one year from date of issuance, with annual maturities of $1,800,000. At the time, Huish had 9,600,000 shares of common stock outstanding. The company received $20,040,000 for the bonds and the warrants. For Huish Company, 12% was a relatively low borrowing rate. If offered alone, at this time, the bonds would have sold in the market at a 22% discount. Prepare the journal entry (or entries) for the issuance of the bonds and warrants for the cash consideration received.

What are the basic problems that occur in the valuation of accounts receivable?

] Marco, Jaclyn, and Carrie formed Daxing Partnership (a calendar-year-end entity) by contributing cash 10 years ago. Each partner owns an equal interest in the partnership and has an outside basis in their partnership interest of $104,000. On January 1 of the current year, Marco sells his partnership interest to Ryan for a cash payment of $137,000. The partnership has the following assets and no liabilities as of the sale date: Tax Basis Fair Market Value Cash $ 18,000 $ 18,000 Accounts receivable -0- 12,000 Inventory 69,000 81,000 Equipment 180,000 225,000 Stock investment 45,000 75,000    Totals $ 312,000 $ 411,000 The equipment was purchased for $240,000, and the partnership has taken $60,000 of depreciation. The stock was purchased seven years ago. a. What are the hot assets [§751(a)] for this sale? b. What is Marco’s gain or loss on the sale of his partnership interest? c. What is the character of Marco’s gain or loss? d. What are Ryan’s inside and outside bases in the partnership on the date of the sale?

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.

What are the primary factors to consider when deciding whether a worker should be considered an employee or a self-employed taxpayer for tax purposes?

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?

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?

In a wire drawing operation, why must the drawing stress never exceed the yield strength of the work metal?

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

The chairman of the board of directors of the company for which you are chief accountant has told you that he has little use for accounting figures based on historical cost. He believes that replacement values are of far more significance to the board of directors than “out-of-date costs.” Present some arguments to convince him that accounting data should still be based on historical cost.

What is the nature of research and development costs?

Weisberg Corporation has 10,000 shares of $100 par value, 6%, preference shares and 50,000 ordinary shares of $10 par value outstanding at December 31, 2014. Instructions Answer the questions in each of the following independent situations. (a) If the preference shares are cumulative and dividends were last paid on the preference shares on December 31, 2011, what are the dividends in arrears that should be reported on the December 31, 2014, statement of financial position? How should these dividends be reported? (b) If the preference shares are convertible into seven shares of $10 par value ordinary shares and 3,000 shares are converted, what entry is required for the conversion, assuming the preference shares were issued at par value? (c) If the preference shares were issued at $107 per share, how should the preference shares be reported in the equity section?

Planning} Todd and Margo are seeking a divorce and no longer live together.  Margo has offered to pay Todd $42,000 per year for five years if Margo receives sole title to the art collection.  This collection cost them $100,000, but is now worth $360,000.  All other property is to be divided equally. a.       If Margo’s payments cease in the event of Todd’s death, how are the payments treated for tax purposes?  b.       How much of the gain would be taxed to Todd if Margo sells the art at the end of five years? c.       Compute the tax cost (benefit) to Todd (Margo) if the payments qualify as alimony.  Assume that Todd (Margo) has a marginal tax rate of 15 percent (35 percent) and ignore the time value of money. d.       How much more over the five year period should Todd demand in order to agree to allow the payments to cease in the event of his death?  (How much more will make him indifferent between receiving $42,000 a year in non alimony payments and receiving higher payments that are considered to be alimony?)

If the shares in a monopoly (such as a water company) were very widely distributed among the population, would the shareholders necessarily want the firm to use its monopoly power to make larger profits?

1.    : Consider the six characteristics of entrepreneurs described in this chapter. Which two traits do you think are most like those of managers in large companies? Which two are least like those of managers in large companies?

What factors could explain why some countries have a higher multiplier than others?

If Ollie were to consume more and more crisps, would his total utility ever (a) fall to zero; (b) become negative? Explain.

What are the tax advantages and disadvantages of converting a C corporation into an LLC taxed as a partnership?

War tends to cause significant reactions in financial markets. Why might a war in the Middle East place upward pressure on U.S. interest rates? Why might some investors expect a war like this to place downward pressure on U.S. interest rates? (LO2)

1.15     Relevant information Suppose you are responsible for ordering a replacement for your office photocopy machine. Part of your job is to decide whether to buy it or lease it.   Required (a)          Describe something that could be considered relevant information in this decision and explain why it is relevant. (b)          Describe something that could be considered irrelevant information in this decision and explain why it is irrelevant. (c)           Explain why it was important to distinguish between relevant and irrelevant information in this problem.

The following facts relate to Duncan Corporation. 1. Deferred tax liability, January 1, 2014, $60,000. 2. Deferred tax asset, January 1, 2014, $20,000. 3. Taxable income for 2014, $105,000. 4. Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $230,000. 5. Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $95,000. 6. Tax rate for all years, 40%. No permanent differences exist. 7. The company is expected to operate profitably in the future. Instructions (a) Compute the amount of pretax financial income for 2014. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014. (c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.” (d) Compute the effective tax rate for 2014.