Question & Answer

Conan O’Brien Logging and Lumber Company owns 3,000 acres of timberland on the north side of Mount Leno, which was purchased in 2002 at a cost of $550 per acre. In 2014, O’Brien began selectively logging this timber tract. In May 2014, Mount Leno erupted, burying the timberland of O’Brien under a foot of ash. All of the timber on the O’Brien tract was downed. In addition, the logging roads, built at a cost of $150,000, were destroyed, as well as the logging equipment, with a net book value of $300,000. At the time of the eruption, O’Brien had logged 20% of the estimated 500,000 board feet of timber. Prior to the eruption, O’Brien estimated the land to have a value of $200 per acre after the timber was harvested. O’Brien includes the logging roads in the depletion base. O’Brien estimates it will take 3 years to salvage the downed timber at a cost of $700,000. The timber can be sold for pulp wood at an estimated price of $3 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties. Instructions (a) Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount Leno. (b) Prepare the journal entry to record the depletion prior to the eruption. (c) If this tract represents approximately half of the timber holdings of O’Brien, determine the amount of the extraordinary loss due to the eruption of Mount Leno for the year ended December 31, 2014.

Why cannot a direct conversion be made between the ductility measures of elongation and reduction in area using the assumption of constant volume?

Linus Paper Company decided to close two small pulp mills in Conway, New Hampshire, and Corvallis, Oregon. Would these closings be reported in a separate section entitled “Discontinued operations after income from continuing operations”? Discuss.

1. What does this analysis assume about the price elasticity of demand for the new entrant (a) above PL; (b) below PL? 2. Can you think of any limitations with the limit price model?

Midwest Enterprises made the following entry on December 31, 2014. Interest Expense 10,000 Interest Payable 10,000 (To record interest expense due on loan from Anaheim National Bank) What entry would Anaheim National Bank make regarding its outstanding loan to Midwest Enterprises? Explain why this must be the case.

What is a carryover basis as it relates to property received by a corporation in a §351 transaction?  What is the purpose of attaching a carryover basis to property received in a §351 transaction?

What is a flexible manufacturing system?

Explain how the credit crisis that began in 2008 affected the default rates of junk bonds and the risk premiums offered on newly issued junk bonds. (LO2)

What is the fair value option? Where do companies that elect the fair value option report unrealized holding gains and losses?

Compare actual and normal cost systems. Discuss the ways in which they are similar and the ways they differ.

The state of Georgia recently increased its tax on a pack of cigarettes by $2.00.  What type of tax is this?  Why might Georgia choose this type of tax?

On May 3, 2014, Eisler Company consigned 80 freezers, costing $500 each, to Remmers Company. The cost of shipping the freezers amounted to $840 and was paid by Eisler Company. On December 30, 2014, a report was received from the consignee, indicating that 40 freezers had been sold for $750 each. Remittance was made by the consignee for the amount due, after deducting a commission of 6%, advertising of $200, and total installation costs of $320 on the freezers sold. Instructions (a) Compute the inventory value of the units unsold in the hands of the consignee. (b) Compute the profit for the consignor for the units sold. (c) Compute the amount of cash that will be remitted by the consignee.

] Haru is a self-employed cash-method, calendar-year taxpayer, who made the following cash payments related to his business this year. Calculate the after-tax cost of each payment assuming Haru has a 37 percent marginal tax rate.

Compare the entity-level tax consequences for C corporations, S corporations, and business entities taxed as partnerships for both nonliquidating and liquidating distributions of noncash property. Do the tax rules tend to favor one entity type more than the others? Explain.

Acorn Construction (calendar-year-end C corporation) has had rapid expansion during the last half of the current year due to the housing market’s recovery. The company has record income and would like to maximize its cost recovery deduction for the current year. Acorn provided the following information:

1. Why may a food shop charge higher prices than supermarkets for ‘essential items’ and yet very similar prices for delicatessen items? 2. Which of these two items is a petrol station more likely to sell at a discount: (a) oil; (b) sweets? Why?

In the make or buy decision, why is it that purchasing a component from a vendor may cost more than producing the component internally, even though the quoted price from the vendor is lower than the internal price?

Describe the circumstances in which an individual taxpayer with a net §1231 gain will have different portions of the gain taxed at different rates.

Suppose that David has elected to account for inventories and has adopted the last-in, first-out (LIFO) inventory-flow method for his business inventory of widgets (purchase prices below).  WidgetPurchase DateDirect CostOther CostsTotal Cost #1August 15$ 2,100$ 100$ 2,200 #2October 30$ 2,200$ 150$ 2,350 #3November 10$ 2,300$ 100$ 2,400 In late December, David sold one widget, and next year David expects to purchase three more widgets at the following estimated prices: WidgetPurchase DateEstimated Cost #4Early spring$ 2,600 #5Summer$ 2,260 #6Fall$ 2,400 a) What cost of goods sold and ending inventory would David record if he elects to use the LIFO method this year?  b) If David sells two more widgets next year, what will be his cost of goods sold and ending inventory next year under the LIFO method? c) How would you answer (a) and (b) if David had initially selected the first-in, first-out (FIFO) method instead of LIFO? d) Suppose that David initially adopted the LIFO method but wants to apply for a change to FIFO next year. What would be his §481 adjustment for this change, and in what year(s) would he make the adjustment?

What has been the trend in noninterest income in recent years? Explain. (LO2)

If the higher consumer expenditure and higher wages subsequently led to higher prices, what would happen to: (a) real wages; (b) unemployment (assuming no further response from unions)?

Who are the owners of credit unions? Explain the tax status of CUs and the reason for that status. Why are CUs typically smaller than commercial banks or savings institutions? (LO7)

Berg Company adopted a stock-option plan on November 30, 2013, that provided that 70,000 shares of $5 par value stock be designated as available for the granting of options to officers of the corporation at a price of $9 a share. The market price was $12 a share on November 30, 2014. On January 2, 2014, options to purchase 28,000 shares were granted to president Tom Winter—15,000 for services to be rendered in 2014 and 13,000 for services to be rendered in 2015. Also on that date, options to purchase 14,000 shares were granted to vice president Michelle Bennett—7,000 for services to be rendered in 2014 and 7,000 for services to be rendered in 2015. The market price of the stock was $14 a share on January 2, 2014. The options were exercisable for a period of one year following the year in which the services were rendered. The fair value of the options on the grant date was $4 per option. In 2015, neither the president nor the vice president exercised their options because the market price of the stock was below the exercise price. The market price of the stock was $8 a share on December 31, 2015, when the options for 2014 services lapsed. On December 31, 2016, both president Winter and vice president Bennett exercised their options for 13,000 and 7,000 shares, respectively, when the market price was $16 a share. Instructions Prepare the necessary journal entries in 2013 when the stock-option plan was adopted, in 2014 when options were granted, in 2015 when options lapsed, and in 2016 when options were exercised.

Two years ago, Kimberly became a 30 percent partner in the KST Partnership with a contribution of investment land with a $10,000 basis and $16,000 fair market value. On January 2 of this year, Kimberly has a $15,000 basis in her partnership interest, and none of her pre-contribution gain has been recognized. On January 2 Kimberly receives an operating distribution of a tract of land (not the contributed land) with a $12,000 basis and an $18,000 fair market value. a. What are the amount and character of Kimberly’s recognized gain or loss on the distribution? b. What is Kimberly’s remaining basis in KST after the distribution? c. What is KST’s basis in the land Kimberly contributed after Kimberly receives this distribution?

A cup-drawing operation is performed in which the inside diameter = 80 mm and the height = 50 mm. The stock thickness = 3.0 mm, and the starting blank diameter = 150 mm. Punch and die radii = 4 mm. Tensile strength = 400 MPa and yield strength = 180 MPa for this sheet metal. Determine (a) drawing ratio, (b) reduction, (c) drawing force, and (d) blankholder force.