Question & Answer

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.

Tall Tree LLC was recently formed with the following members: Name Tax Year-End Capital/Profits % Eddie Robinson December 31 40% Pitcher Lenders LLC June 30 25% Perry Homes Inc. October 31 35% What is the required taxable year-end for Tall Tree LLC?

A pin made of alloy steel is press-fitted into a hole machined in the base of a large machine. The hole has a diameter of 2.497 in. The pin has a diameter of 2.500 in. The base of the machine is 4 ft x 8 ft. The base and pin have a modulus of elasticity of 30 x 106 lb/in2, a yield strength of 85,000 lb/in2, and a tensile strength of 120,000 lb/in2. Determine (a) the radial pressure between the pin and the base and (b) the maximum effective stress in the interface

Comiskey Savings provides fixed-rate mortgages of various maturities, depending on what customers want. It obtains most of its funds from issuing certificates of deposit with maturities ranging from one month to five years. Comiskey has decided to engage in a fixed-for-floating swap to hedge its interest rate risk. Is Comiskey exposed to basis risk? (LO3)

1. Fill in the missing figures (without referring to Table 6.8 or 6.9). 2. Why are the figures for MR and MC entered in the spaces between the lines in Table 6.10?

Pueblo Co. acquires machinery by paying $10,000 cash and signing a $5,000, 2-year, zero-interest-bearing note payable. The note has a present value of $4,208, and Pueblo purchased a similar machine last month for $13,500. At what cost should the new equipment be recorded?

On January 1, 2015, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s $10 par common stock at $25 per share. The options were exercisable within a 5-year period beginning January 1, 2017, by grantees still in the employ of the company, and expiring December 31, 2021. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be $350,000. On April 1, 2016, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was $35 per share on this date. On March 31, 2017, 12,000 options were exercised when the market price of the common stock was $40 per share. Instructions Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2015, 2016, and 2017.

How can financial institutions with stock portfolios use stock options when they expect stock prices to rise substantially but do not yet have sufficient funds to purchase more stock? (LO3)

What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in a troubleddebt restructuring involving a modification of terms?

Summarise the relative benefits to consumers of (a) privatising a nationalised industry; (b) keeping it in the public sector but introducing competition.

A part is produced using six conventional machine tools consisting of three milling machines and three drill presses. The machine cycle times on these machines are 4.7 min, 2.3 min, 0.8 min, 0.9 min, 3.4 min, and 0.5 min. The average load/unload time for each of these operations is 1.25 min. The corresponding setup times for the six machines are 1.55 hr, 2.82 hr, 57 min, 45 min, 3.15 hr, and 36 min, respectively. The total material handling time to carry one part between the machines is 20 min (consisting of five moves between six machines). A CNC machining center has been installed, and all six operations will be performed on it to produce the part. The setup time for the machining center for this job is 1.0 hr. In addition, the machine must be programmed for this part (called “part programming”), which takes 3.0 hr. The machine cycle time is the sum of the machine cycle times for the six machines. Load/unload time is 1.25 min. (a) What is the total time to produce one of these parts using the six conventional machines if the total consists of all setups, machine cycle times, load/unload times, and part transfer times between machines? (b) What is the total time to produce one of these parts using the CNC machining center if the total consists of the setup time, programming time, machine cycle time, and load/unload time, and what are the percent savings in total time compared to your answer in (a)? (c) If the same part is produced in a batch of 20 pieces, what is the total time to produce them under the same conditions as in (a) except that the total material handling time to carry the 20 parts in one unit load between the machines is 40 min? (d) If the part is produced in a batch of 20 pieces on the CNC machining center, what is the total time to produce them under the same conditions as in part (b), and what are the percent savings in total time compared to your answer in (c)? (e) In future orders of 20 pieces of the same part, the programming time will not be included in the total time because the part program has already been prepared and saved. In this case, how long does it take to produce the 20 parts using the machining center, and what are the percent savings in total time compared to your answer in (c)?

If a bank is very uncertain about future interest rates, how might it insulate its future performance from future interest rate movements? (LO3)

Distinguish between common and preferred stock.

The following information relates to Starbucks for the year ended October 2, 2011: net income 1,245.7 million; unrealized holding loss of $10.9 million related to available-for-sale securities during the year; accumulated other comprehensive income of $57.2 million on October 3, 2010. Assuming no other changes in accumulated other comprehensive income, determine (a) other comprehensive income for 2011, (b) comprehensive income for 2011, and (c) accumulated other comprehensive income at October 2, 2011.

Are taxpayers allowed to deduct net capital losses (capital losses in excess of capital gains)? Explain.

What are the relative advantages of the cash and accrual methods of accounting?

What would you pay for a $50,000 debenture bond that matures in 15 years and pays $5,000 a year in interest if you wanted to earn a yield of: (a) 8%? (b) 10%? (c) 12%?

How are state-sponsored 529 educational savings plans taxed if investment returns are used for educational purposes? Are the returns taxed differently if they are not ultimately used to pay for education costs?

Presented below are two independent situations. 1. On January 1, 2014, Simon Company issued $200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and January 1. 2. On June 1, 2014, Garfunkel Company issued $100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1. Instructions For each of these two independent situations, prepare journal entries to record the following. (a) The issuance of the bonds. (b) The payment of interest on July 1. (c) The accrual of interest on December 31.

On July 1, 2014, Selig Company purchased for cash 40% of the outstanding capital stock of Spoor Corporation. Both Selig and Spoor have a December 31 year-end. Spoor Corporation, whose common stock is actively traded on the American Stock Exchange, paid a cash dividend on November 15, 2014, to Selig Company and its other stockholders. It also reported its total net income for the year of $920,000 to Selig Company. Instructions Prepare a one-page memorandum of instructions on how Selig Company should report the above facts in its December 31, 2014, balance sheet and its 2014 income statement. In your memo, identify and describe the method of valuation you recommend. Provide rationale where you can. Address your memo to the chief accountant at Selig Company.

Using the appropriate interest table, answer each of the following questions. (Each case is independent of the others.) (a) What is the future value of $7,000 at the end of 5 periods at 8% compounded interest? (b) What is the present value of $7,000 due 8 periods hence, discounted at 11%? (c) What is the future value of 15 periodic payments of $7,000 each made at the end of each period and compounded at 10%? (d) What is the present value of $7,000 to be received at the end of each of 20 periods, discounted at 5% compound interest?

1. Assume that in Table 2.1 the total market demand for potatoes increases by 20 per cent at each price – due, say, to substantial increases in the prices of bread and rice. Plot the old and the new demand curves for potatoes. Is the new curve parallel to the old one? 2. The price of strawberries rises and yet it is observed that the sales of strawberries increase. Does this mean that the demand curve for blueberries is upward sloping? Explain.

A flux-cored arc-welding operation is performed to butt weld two austenitic stainless steel plates together. The welding voltage is 21 volts and the current is 185 amps. The cross-sectional area of the weld seam = 75 mm2 and the melting factor of the stainless steel is assumed to be 0.60. Using tabular data and equations given in this and the preceding chapter, determine the likely value for travel speed v in the operation.

Contrast ceiling and floor limitations, and provide an example of each.

Morgan Leasing Company signs an agreement on January 1, 2014, to lease equipment to Cole Company. The following information relates to this agreement. 1. The term of the noncancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years. 2. The cost of the asset to the lessor is $245,000. The fair value of the asset at January 1, 2014, is $245,000. 3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $43,622, none of which is guaranteed. 4. Cole Company assumes direct responsibility for all executory costs. 5. The agreement requires equal annual rental payments, beginning on January 1, 2014. 6. Collectibility of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor. Instructions (Round all numbers to the nearest cent.) (a) Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required. (Round to the nearest dollar.) (b) Prepare an amortization schedule that would be suitable for the lessor for the lease term. (c) Prepare all of the journal entries for the lessor for 2014 and 2015 to record the lease agreement, the receipt of lease payments, and the recognition of income. Assume the lessor’s annual accounting period ends on December 31.