Question & Answer

1.       : Why do you think Mary Parker Follett’s ideas tended to be popular with businesspeople of her day but were ignored by management scholars? Why are her ideas appreciated more today?

In what way is the Securities and Exchange Commissionconcerned about and supportive of accounting principles and standards?

Briefly describe the fair value hierarchy

Mohave Inc. purchased land, building, and equipment from Laguna Corporation for a cash payment of $315,000. The estimated fair values of the assets are land $60,000, building $220,000, and equipment $80,000. At what amounts should each of the three assets be recorded?

Lanco Corporation, an accrual-method corporation, reported taxable income of $1,460,000 this year. Included in the computation of taxable income were the following items: • MACRS depreciation of $200,000. Depreciation for earnings and profits purposes is $120,000. • A net capital loss carryover of $10,000 from last year. • A net operating loss carryover of $25,000 from last year. • $65,000 capital gain from the distribution of land to the company’s sole shareholder (see below).   Not included in the computation of taxable income were the following items: • Tax-exempt income of $5,000. • Life insurance proceeds of $250,000. • Excess current-year charitable contribution of $2,500 (to be carried over to next year). • Tax-deferred gain of $20,000 on a like-kind exchange. • Nondeductible life insurance premium of $3,500. • Nondeductible interest expense of $1,000 on a loan used to buy tax-exempt bonds.   Lanco accrued and paid federal income taxes this year of $306,600. Lanco’s accumulated E&P at the beginning of the year was $2,400,000.  During the year, Lanco made the following distributions to its sole shareholder, Luigi Nutt:  • June 30:  $50,000 • September 30:  Parcel of land with a fair market value of $75,000. Lanco’s tax basis in the land was $10,000.  Luigi assumed an existing mortgage on the property of $15,000.

Some bank managers argue that U.S. banks’ access to capital is restricted because the capital requirements imposed by U.S. regulators are too high. Write a short essay that offers logical insights into why high capital requirements may restrict a bank’s access to capital. Also, describe why high capital requirements for all banks in the United States might actually allow the banks to have easier access to capital. Which of the arguments do you believe?

Agustina, Bobby, and Claudia are equal owners in Lafter, an S corporation that was a C corporation several years ago. While Agustina and Bobby actively participate in running the company, Claudia has a separate day job and is a passive owner. Consider the following information for 2024:    • As of January 1, 2024, Agustina, Bobby, and Claudia each have a basis in Lafter stock of $15,000 and a debt basis of $0.  On January 1, the stock basis is also the at-risk amount for each shareholder. • Bobby and Claudia also are passive owners in Aggressive LLC, which allocated business income of $14,000 to each of them in 2024. Neither has any other source of passive income (besides Lafter, for Claudia).  • On March 31, 2024, Agustina lends $5,000 of her own money to Lafter. • Anticipating the need for basis to deduct a loss, on April 4, 2024, Bobby takes out a $10,000 loan to make a $10,000 capital contribution to Lafter. Bobby uses his automobile ($12,000 fair market value) as the sole collateral for his loan (nonrecourse).  • Lafter has an accumulated adjustments account balance of $45,000 as of January 1, 2024. • Lafter has C corporation earnings and profits of $15,000 as of January 1, 2024. • During 2024, Lafter reports a business loss of $75,000, computed as follows: Sales revenue $90,000 Cost of goods sold (85,000) Salary to Agustina (40,000) Salary to Bobby (40,000) Business (loss)($75,000) • Lafter also reported $12,000 of tax-exempt interest income.     a. What amount of Lafter’s 2024 business loss of $75,000 are Agustina, Bobby, and Claudia allowed to deduct on their individual tax returns?  What are each owner’s stock basis and debt basis (if applicable) and each owner’s at-risk amount with respect to the investment in Lafter at the end of 2024?

Mehta Company traded a used welding machine (cost $9,000, accumulated depreciation $3,000)for office equipment with an estimated fair value of $5,000. Mehta also paid $3,000 cash in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

Goring Dairy leases its milking equipment from King Finance Company under the following lease terms. 1. The lease term is 10 years, noncancelable, and requires equal rental payments of $30,300 due at the beginning of each year starting January 1, 2014. 2. The equipment has a fair value and cost at the inception of the lease (January 1, 2014) of $220,404, an estimated economic life of 10 years, and a residual value (which is guaranteed by Goring Dairy) of $20,000. 3. The lease contains no renewable options, and the equipment reverts to King Finance Company upon termination of the lease. 4. Goring Dairy’s incremental borrowing rate is 9% per year. The implicit rate is also 9%. 5. Goring Dairy depreciates similar equipment that it owns on a straight-line basis. 6. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Instructions (a) Evaluate the criteria for classification of the lease, and describe the nature of the lease. In general, discuss how the lessee and lessor should account for the lease transaction. (b) Prepare the journal entries for the lessee and lessor at January 1, 2014, and December 31, 2014 (the lessee’s and lessor’s year-end). Assume no reversing entries. (c) What would have been the amount capitalized by the lessee upon the inception of the lease if: (1) The residual value of $20,000 had been guaranteed by a third party, not the lessee? (2) The residual value of $20,000 had not been guaranteed at all? (d) On the lessor’s books, what would be the amount recorded as the Net Investment (Lease Receivable) at the inception of the lease, assuming: (1) The residual value of $20,000 had been guaranteed by a third party? (2) The residual value of $20,000 had not been guaranteed at all? (e) Suppose the useful life of the milking equipment is 20 years. How large would the residual value have to be at the end of 10 years in order for the lessee to qualify for the operating method? (Assume that the residual value would be guaranteed by a third party.) (Hint: The lessee’s annual payments will be appropriately reduced as the residual value increases.)

Suppose you asked your favorite AI query tool the following question: “Who Cares about taxes and why?”  The AI tool provided the following response:

Gottschalk Company sponsors a defined benefit plan for its 100 employees. On January 1, 2014, the company’s actuary provided the following information. Accumulated other comprehensive loss (PSC) $150,000 Pension plan assets (fair value and market-related asset value) 200,000 Accumulated benefi t obligation 260,000 Projected benefi t obligation 380,000 The average remaining service period for the participating employees is 10 years. All employees are expected to receive benefits under the plan. On December 31, 2014, the actuary calculated that the present value of future benefits earned for employee services rendered in the current year amounted to $52,000; the projected benefit obligation was $490,000; fair value of pension assets was $276,000; the accumulated benefit obligation amounted to $365,000. The expected return on plan assets and the discount rate on the projected benefit obligation were both 10%. The actual return on plan assets is $11,000. The company’s current year’s contribution to the pension plan amounted to $65,000. No benefits were paid during the year. Instructions (a) Determine the components of pension expense that the company would recognize in 2014. (With only one year involved, you need not prepare a worksheet.) (b) Prepare the journal entry to record the pension expense and the company’s funding of the pension plan in 2014. (c) Compute the amount of the 2014 increase/decrease in gains or losses and the amount to be amortized in 2014 and 2015. (d) Indicate the pension amounts reported in the financial statement as of December 31, 2014.

Determine the direction of bond prices over the last year and explain the reason for it. (LO1, LO2)

On December 31, 2013, Main Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures related to this building: March 1, $360,000; June 1, $600,000; July 1, $1,500,000; December 1, $1,500,000. The building was completed in February 2015. Additional information is provided as follows. 1. Other debt outstanding 10-year, 13% bond, December 31, 2007, interest payable annually $4,000,000 6-year, 10% note, dated December 31, 2011, interest payable annually $1,600,000 2. March 1, 2014, expenditure included land costs of $150,000 3. Interest revenue earned in 2014 $49,000 Instructions (a) Determine the amount of interest to be capitalized in 2014 in relation to the construction of the building. (b) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2014.

Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of $10,000. Presented below are three independent cases related to the equipment. (Round to the nearest dollar.) (a) Geddes paid cash for the equipment 8 days after the purchase. The vendor’s credit terms are 2/10, n/30. Assume that equipment purchases are initially recorded gross. (b) Geddes traded in equipment with a book value of $2,000 (initial cost $8,000), and paid $9,500 in cash one month after the purchase. The old equipment could have been sold for $400 at the date of trade. (The exchange has commercial substance.) (c) Geddes gave the vendor a $10,800 zero-interest-bearing note for the equipment on the date of purchase. The note was due in one year and was paid on time. Assume that the effective-interest rate in the market was 9%. Instructions Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.

What is the difference between earned and unearned income?

Lease versus buy decision; ROI; residual income; EVA; manager          incentives Refer to the information in Problem 18.21. The manager of Sandy Point Construction is considering a new project. She can buy or lease equipment that will reprocess tailings from old mines to remove any traces of gold left behind by the original separating processes. The purchase price of the equipment is $150 000. The cost to lease is $2000 per month. She estimates the return (incremental revenues minus incremental expenses, including lease cost) to be $40 000 per year. She knows that purchasing the equipment will increase the value of average operating assets. If she leases the equipment, expenses will increase, but not assets. (In other words, the lease will be accounted for as an operating lease.) Although it is more cost effective to purchase the equipment, she has decided to lease it.   Required (a)     Calculate the new ROI if the equipment is (i) purchased or (ii) leased. (b)     Calculate the new residual income if the equipment is (i) purchased, or (ii) leased. (c)     One of the adjustments that can be made using EVA is to treat all operating lease costs as if they were purchases — in other words, to capitalise the lease. If Sandy Point Construction used EVA with this adjustment, how might the manager’s incentives and behaviour change? Explain.

Where can authoritative IFRS guidance be found related to the statement of financial position (balance sheet) and the statement of cash flows?

1.      : Accept the fact you didn’t quite make your sales goal this year. Figure out ways to work smarter next year to increase the odds of achieving your target.

Presented below is information related to Zonker Company. 1. On July 6, Zonker Company acquired the plant assets of Doonesbury Company, which had discontinued operations. The appraised value of the property is: Land $ 400,000 Buildings 1,200,000 Equipment 800,000 Total $2,400,000 Zonker Company gave 12,500 shares of its $100 par value common stock in exchange. The stock had a market price of $168 per share on the date of the purchase of the property. 2. Zonker Company expended the following amounts in cash between July 6 and December 15, the date when it first occupied the building. Repairs to building $105,000 Construction of bases for equipment to be installed later 135,000 Driveways and parking lots 122,000 Remodeling of offi ce space in building, including new partitions and walls 161,000 Special assessment by city on land 18,000 3. On December 20, the company paid cash for equipment, $260,000, subject to a 2% cash discount, and freight on equipment of $10,500. Instructions Prepare entries on the books of Zonker Company for these transactions.

Ortiz purchased a piece of equipment that cost $202,000 on January 1, 2014. The equipment has the following components. Component Cost Residual Value Estimated Useful Life A $70,000 $7,000 10 years B 50,000 5,000 5 years C 82,000 4,000 12 years Compute the depreciation expense for this equipment at December 31, 2014.

How are small and medium-sized finance companies able to issue commercial paper? Why do some well-known finance companies directly place their commercial paper? (LO2)

Sam and Devon agree to go into business together selling college-licensed clothing. According to the agreement, Sam will contribute inventory valued at $100,000 in return for 80 percent of the stock in the corporation. Sam’s tax basis in the inventory is $60,000. Devon will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualified as organizational expenditures).  The accounting services are valued at $25,000.

Cost of rework; control of scrap; accounting for scrap Dapper Dan Draperies manufactures and installs custom-ordered draperies.   Required (a)     For all drapes, occasionally the sewing equipment malfunctions and the drape must be reworked. Explain how to account for the cost of rework when it is needed. (b)     Explain how to account for the cost of rework when customers choose a fabric that is known to require rework. (c)      Explain why scrap will always arise in this business. (d)     Dapper Dan can sell scraps to quilting groups or just throw them away. List several factors that could affect this decision. (e)      If Dapper Dan decides to sell scraps, explain the accounting choices for recording the sales value.

1.       : Using Hackman and Oldham’s core job dimensions, compare and contrast the jobs of these two state employees: (1) Jared, who spends much of his time researching and debating energy policy to make recommendations that will eventually be presented to the state legislature, and (2) Anise, who spends her days planting and caring for the flower gardens and grounds surrounding the state capitol building.

Telephone Sellers Inc. sells prepaid telephone cards to customers. Telephone Sellers then pays the telecommunications company, TeleExpress, for the actual use of its telephone lines. Assume that Telephone Sellers sells $4,000 of prepaid cards in January 2014. It then pays TeleExpress based on usage, which turns out to be 50% in February, 30% in March, and 20% in April. The total payment by Telephone Sellers for TeleExpress lines over the 3 months is $3,000. Indicate how much income Telephone Sellers should recognize in January, February, March, and April.