Question & Answer

Explain the difference between calculating a loss deduction for a business asset that was partially damaged in an accident and calculating a loss deduction for a business asset that was stolen or completely destroyed in an accident.

You have just started work for Warren Co. as part of the controller’s group involved in current financial reporting problems. Jane Henshaw, controller for Warren, is interested in your accounting background because the company has experienced a series of financial reporting surprises over the last few years. Recently, the controller has learned from the company’s auditors that there is authoritative literature that may apply to its investment in securities. She assumes that you are familiar with this pronouncement and asks how the following situations should be reported in the financial statements. Situation 1: Trading securities in the current assets section have a fair value that is $4,200 lower than cost. Situation 2: A trading security whose fair value is currently less than cost is transferred to the availablefor- sale category. Situation 3: An available-for-sale security whose fair value is currently less than cost is classified as noncurrent but is to be reclassified as current. Situation 4: A company’s portfolio of available-for-sale securities consists of the common stock of one company. At the end of the prior year, the fair value of the security was 50% of original cost, and this reduction in fair value was reported as an other than temporary impairment. However, at the end of the current year, the fair value of the security had appreciated to twice the original cost. Situation 5: The company has purchased some convertible debentures that it plans to hold for less than a year. The fair value of the convertible debentures is $7,700 below its cost. Instructions What is the effect upon carrying value and earnings for each of the situations above? Assume that these situations are unrelated.

Shlee Corporation issued a 4-year, $60,000, zero-interest-bearing note to Garcia Company on January 1, 2014, and received cash of $60,000. In addition, Shlee agreed to sell merchandise to Garcia at an amount less than regular selling price over the 4-year period. The market rate of interest for similar notes is 12%. Prepare Shlee Corporation’s January 1 journal entry.

Keyser’s Fleece Inc. holds a drove of sheep. Keyser shears the sheep on a semiannual basis and then sells the harvested wool into the specialty knitting market. Keyser has the following information related to the shearing sheep at January 1, 2014, and during the first six months of 2014 Shearing Sheep Carrying value (equal to net realizable value), January 1, 2014 $74,000 Change in fair value due to growth and price changes 4,700 Change in fair value due to harvest (575) Wool harvested during the fi rst 6 months (at NRV) 9,000 Prepare the journal entry(ies) for Keyser’s biological asset (shearing sheep) for the first six months of 2014.

Why, under oligopoly, might a particular industry be collusive at one time and yet highly price competitive at another?

What is the role of an actuary relative to pension plans? What are actuarial assumptions?

(LO1)

Helen Keller Company began operations on January 1, 2013, adopting the conventional retail inventory system. None of the company’s merchandise was marked down in 2013 and, because there was no beginning inventory, its ending inventory for 2013 of $38,100 would have been the same under either the conventional retail system or the LIFO retail system. On December 31, 2014, the store management considers adopting the LIFO retail system and desires to know how the December 31, 2014, inventory would appear under both systems. All pertinent data regarding purchases, sales, markups, and markdowns are shown below. There has been no change in the price level. Cost Retail Inventory, Jan. 1, 2014 $ 38,100 $ 60,000 Markdowns (net) 13,000 Markups (net) 22,000 Purchases (net) 130,900 178,000 Sales (net) 167,000 Instructions Determine the cost of the 2014 ending inventory under both (a) the conventional retail method and (b) the LIFO retail method.

Stock market conditions serve as a leading economic indicator. Assuming the U.S. economy is in a recession, what are the implications of this indicator? Why might this indicator be inaccurate? (LO1)

What are some of the benefits usually cited for NC compared to using manual alternative methods?

How does the tax treatment of employee fringe benefits reflect the hybrid nature of the S corporation?

There are several ways of shaping plate or sheet glass. Name and briefly describe one of them

What implicit and explicit costs would a firm avoid if it decided not to expand production?

Aminata is a tax expert, whereas Rob is a tax novice.  Explain how their process in identifying tax issues may differ.

Describe the melting characteristics of a noncrystalline material such as glass.

As part of the year-end accounting process and review of operating policies, Cullen Co. is considering a change in the accounting for its equipment from the straight-line method to an accelerated method. Your supervisor wonders how the company will report this change in principle. He read in a newspaper article that the FASB has issued a standard in this area and has changed GAAP for a “change in estimate that is effected by a change in accounting principle.” (Thus, the accounting may be different from what he learned in intermediate accounting.) Your supervisor wants you to research the authoritative guidance on a change in accounting principle related to depreciation methods. 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) What are the accounting and reporting guidelines for a change in accounting principle related to depreciation methods? (b) What are the conditions that justify a change in depreciation method, as contemplated by Cullen Co.? (c) What guidance does the SEC provide concerning the impact that recently issued accounting standards will have on the financial statements in a future period?

What is the indirect effect of a change in accounting policy? Briefly describe the approach to reporting the indirect effects of a change in accounting policy under IFRS.

Petoskey Stone Quarry Inc. (PSQ), a calendar-year, accrual-method C corporation, provides landscaping supplies to local builders in northern Michigan. PSQ has always been a family-owned business and has a single class of voting common stock outstanding.  The 500 outstanding shares are owned as follows:  Number of shares Nick Adams 150 Amy Adams (Sandler’s sister) 150 Abigail Adams (Nick’s daughter) 50 Charlie Adams (Nick’s son) 50 Sandler Adams (Nick’s father) 100    Total shares 500   Nick Adams serves as president of PSQ, and his father Sandler serves as chair of the board. Amy is the company’s CFO, and Abigail and Charlie work as employees of the company.  Sandler would like to retire and sell his shares back to the company. The fair market value of the shares is $500,000. Sandler’s tax basis in his PSQ shares is $10,000.  The redemption is tentatively scheduled to take place on December 31 of this year.  At the beginning of the year, PSQ had accumulated earnings and profits of $2,500,000.  The company projects current E&P of $200,000.  The company intends to pay a pro rata cash distribution of $300 per share to its shareholders on December 1 of this year.

What is the difference between the nominal interest rate and real interest rate? What is the logic behind the implied positive relationship between expected inflation and nominal interest rates? (LO2)

1. Explain the shape of the LRMC curve in diagram (d) in Figure 6.12. 2. What would the LRMC curve look like if the LRAC curve were ‘flat bottomed’ as in Figure 6.11?

How is the distinction between nominal and real relevant to misperceptions theory?

Under what circumstances would making a product illegal (a) cause a fall in its price; (b) cause the quantity sold to fall to zero?

Referring to Problem 38.1, the mechanical inaccuracies in the open-loop positioning system can be described by a normal distribution whose standard deviation = 0.005 mm. The range of the worktable axis is 500 mm, and there are 12 bits in the binary register used by the digital controller to store the programmed position. For the positioning system, determine (a) control resolution, (b) accuracy, and (c) repeatability. (d) What is the minimum number of bits that the binary register should have so that the mechanical drive system becomes the limiting component on control resolution?

The Colson Company issued $300,000 of 10% bonds on January 1, 2014. The bonds are due January 1, 2020, with interest payable each July 1 and January 1. The bonds are issued at face value. Prepare Colson’s journal entries for (a) the January issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

Hugh has the choice between investing in a City of Heflin bond at 6 percent or a Surething bond at 9 percent.  Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, in which bond should he invest?