Question & Answer

Recently, a group of university students decided to incorporate for the purposes of selling a process to recycle the waste product from manufacturing cheese. Some of the initial costs involved were legal fees and office expenses incurred in starting the business, state incorporation fees, and stamp taxes. One student wishes to charge these costs against revenue in the current period. Another wishes to defer these costs and amortize them in the future. Which student is correct?

Kleckner Company started operations in 2010. Although it has grown steadily, the company reported accumulated operating losses of $450,000 in its first four years in business. In the most recent year (2014), Kleckner appears to have turned the corner and reported modest taxable income of $30,000. In addition to a deferred tax asset related to its net operating loss, Kleckner has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerated depreciation. Given its past operating results, Kleckner has established a full valuation allowance for its deferred tax assets. However, given its improved performance, Kleckner management wonders whether the company can now reduce or eliminate the valuation allowance. They would like you to conduct some research on the accounting for its valuation allowance. 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) Briefly explain to Kleckner management the importance of future taxable income as it relates to the valuation allowance for deferred tax assets. (b) What are the sources of income that may be relied upon to remove the need for a valuation allowance? (c) What are tax-planning strategies? From the information provided, does it appear that Kleckner could employ a tax-planning strategy to support reducing its valuation allowance?

Rayburn Corporation has a building that it bought during year 0 for $850,000. It sold the building in year 5. During the time it held the building, Rayburn depreciated it by $100,000. What are the amount and character of the gain or loss Rayburn will recognize on the sale in each of the following alternative situations?    a. Rayburn receives $840,000.  b. Rayburn receives $900,000. c. Rayburn receives $700,000.

Explain why some finance companies are associated with automobile manufacturers. Why do some of these finance companies offer below-market rates on loans? (LO2)

Justine would like to clarify her understanding of a code section recently enacted by Congress.  What tax law sources are available to assist Justine?

Ben Sisko Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment. Abstract company’s fee for title search $ 520 Architect’s fees 3,170 Cash paid for land and dilapidated building thereon 87,000 Removal of old building $20,000 Less: Salvage 5,500 14,500 Interest on short-term loans during construction 7,400 Excavation before construction for basement 19,000 Machinery purchased (subject to 2% cash discount, which was not taken) 55,000 Freight on machinery purchased 1,340 Storage charges on machinery, necessitated by noncompletion of building when machinery was delivered 2,180 New building constructed (building construction took 6 months from date of purchase of land and old building) 485,000 Assessment by city for drainage project 1,600 Hauling charges for delivery of machinery from storage to new building 620 Installation of machinery 2,000 Trees, shrubs, and other landscaping after completion of building (permanent in nature) 5,400 Instructions Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment. Assume the benefits of capitalizing interest during construction exceed the cost of implementation. Indicatehow any costs not debited to these accounts should be recorded.

The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/ Marks-and-Spencer-Annual-report-and-financial-statements-2012.pdf. Instructions Refer to M&S’s financial statements and the accompanying notes to answer the following questions. (a) What was M&S’s 2012 short-term debt and related weighted-average interest rate on this debt? (b) What was M&S’s 2012 working capital, acid-test ratio, and current ratio? Comment on M&S’s liquidity. (c) What types of commitments and contingencies has M&S reported in its financial statements?

Compare the recognition lag and the implementation lag. (LO2)

A specimen with 6.0 in starting gage length is subjected to a tensile test in which the grips holding the end of the test specimen are moved with a relative velocity = 1.0 in/sec. Construct a plot of the strain rate as a function of length as the specimen is pulled to a length = 8.0 in

Gershwin Corporation obtained a franchise from Sonic Hedgehog Inc. for a cash payment of $120,000 on April 1, 2014. The franchise grants Gershwin the right to sell certain products and services for a period of 8 years. Prepare Gershwin’s April 1 journal entry and December 31 adjusting entry.

Melton Corporation is preparing the comparative financial statements for the annual report to its shareholders for fiscal years ended May 31, 2014, and May 31, 2015. The income from operations for each year was $1,800,000 and $2,500,000, respectively. In both years, the company incurred a 10% interest expense on $2,400,000 of debt, an obligation that requires interest-only payments for 5 years. The company experienced a loss of $600,000 from a fire in its Scotsland facility in February 2015, which was determined to be an extraordinary loss. The company uses a 40% effective tax rate for income taxes. The capital structure of Melton Corporation on June 1, 2013, consisted of 1 million shares of common stock outstanding and 20,000 shares of $50 par value, 6%, cumulative preferred stock. There were no preferred dividends in arrears, and the company had not issued any convertible securities, options, or warrants. On October 1, 2013, Melton sold an additional 500,000 shares of the common stock at $20 per share. Melton distributed a 20% stock dividend on the common shares outstanding on January 1, 2014. On December 1, 2014, Melton was able to sell an additional 800,000 shares of the common stock at $22 per share. These were the only common stock transactions that occurred during the two fiscal years. Instructions (a) Identify whether the capital structure at Melton Corporation is a simple or complex capital structure, and explain why. (b) Determine the weighted-average number of shares that Melton Corporation would use in calculating earnings per share for the fiscal year ended: (1) May 31, 2014. (2) May 31, 2015. (c) Prepare, in good form, a comparative income statement, beginning with income from operations, for Melton Corporation for the fiscal years ended May 31, 2014, and May 31, 2015. This statement will be included in Melton’s annual report and should display the appropriate earnings per share presentations.

Comparative balance sheet accounts of Sharpe Company are presented below. SHARPE COMPANY COMPARATIVE BALANCE SHEET ACCOUNTS AS OF DECEMBER 31 Debit Balances 2014 2013 Cash $ 70,000 $ 51,000 Accounts Receivable 155,000 130,000 Inventory 75,000 61,000 Investments (available-for-sale) 55,000 85,000 Equipment 70,000 48,000 Buildings 145,000 145,000 Land 40,000 25,000 Totals $610,000 $545,000 Credit Balances Allowance for Doubtful Accounts $ 10,000 $ 8,000 Accumulated Depreciation—Equipment 21,000 14,000 Accumulated Depreciation—Buildings 37,000 28,000 Accounts Payable 66,000 60,000 Income Taxes Payable 12,000 10,000 Long-Term Notes Payable 62,000 70,000 Common Stock 310,000 260,000 Retained Earnings 92,000 95,000 Totals $610,000 $545,000 Additional data: 1. Equipment that cost $10,000 and was 60% depreciated was sold in 2014. 2. Cash dividends were declared and paid during the year. 3. Common stock was issued in exchange for land. 4. Investments that cost $35,000 were sold during the year. 5. There were no write-offs of uncollectible accounts during the year. Sharpe’s 2014 income statement is as follows. Sales revenue $950,000 Less: Cost of goods sold 600,000 Gross profi t 350,000 Less: Operating expenses (includes depreciation expense and bad debt expense) 250,000 Income from operations 100,000 Other revenues and expenses Gain on sale of investments $15,000 Loss on sale of equipment (3,000) 12,000 Income before taxes 112,000 Income taxes 45,000 Net income $ 67,000 Instructions (a) Compute net cash provided by operating activities under the direct method. (b) Prepare a statement of cash flows using the indirect method.

A direct extrusion operation produces the cross section shown in Figure P19.32(d) from an aluminum billet whose diameter = 150 mm and length = 900 mm. The flow curve parameters for the aluminum are K = 240 MPa and n = 0.16. In the Johnson strain equation, a = 0.8 and b = 1.5. Determine (a) the extrusion ratio, (b) the shape factor, (c) the force required to drive the ram forward during extrusion at the point in the process when the billet length remaining in the container = 850 mm, and (d) the length of the extruded section at the end of the operation if the volume of the butt left in the container is 600,000 mm3 .

Presented below is a list of items that could be included in the intangible assets section of the balance sheet. 1. Investment in a subsidiary company. 2. Timberland. 3. Cost of engineering activity required to advance the design of a product to the manufacturing stage. 4. Lease prepayment (6 months’ rent paid in advance). 5. Cost of equipment obtained. 6. Cost of searching for applications of new research findings. 7. Costs incurred in the formation of a corporation. 8. Operating losses incurred in the start-up of a business. 9. Training costs incurred in start-up of new operation. 10. Purchase cost of a franchise. 11. Goodwill generated internally. 12. Cost of testing in search for product alternatives. 13. Goodwill acquired in the purchase of a business. 14. Cost of developing a patent. 15. Cost of purchasing a patent from an inventor. 16. Legal costs incurred in securing a patent. 17. Unrecovered costs of a successful legal suit to protect the patent. 18. Cost of conceptual formulation of possible product alternatives. 19. Cost of purchasing a copyright. 20. Research and development costs. 21. Long-term receivables. 22. Cost of developing a trademark. 23. Cost of purchasing a trademark. Instructions (a) Indicate which items on the list above would generally be reported as intangible assets in the balance sheet. (b) Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements.

What is the difference between adaptive expectations and rational expectations?

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.              : What does it mean to be "true to yourself"? Is being true to yourself more important than achieving personal career success in a male-dominated company? Is it okay to enable the continuation of an "unhealthy" work environment for women? Why do you think the way you do about this?

Explain the use of bond collateral and identify the common types of collateral for bonds. (LO2)

Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of $1,500 per month, has just purchased a new Acura. You decided to test the accuracy of the accounts receivable balance of $82,000 as shown in the ledger. The following information is available for your first year in business. (1) Collections from customers $198,000 (2) Merchandise purchased 320,000 (3) Ending merchandise inventory 90,000 (4) Goods are marked to sell at 40% above cost Instructions Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on account.

Shaun is a huge college football fan.  In the past, he has always bought football tickets on the street from ticket scalpers.  This year, he decided to join the university’s ticket program, which requires a $2,000 contribution to the university for the “right” to purchase tickets.  Shaun will then pay $400 per season ticket.  Shaun understands that the price paid for the season tickets is not tax deductible as a charitable contribution.  However, contributions to a university are typically tax deductible.  a.  Use an available tax service to determine how much, if any, of Shaun’s $2,000 contribution for the right to purchase tickets is tax deductible. b. Write a letter to Shaun communicating the results of your researc

Jimmy Carter Company has provided information on intangible assets as follows. A patent was purchased from Gerald Ford Company for $2,000,000 on January 1, 2013. Carter estimated the remaining useful life of the patent to be 10 years. The patent was carried in Ford’s accounting records at a net book value of $2,000,000 when Ford sold it to Carter. During 2014, a franchise was purchased from Ronald Reagan Company for $480,000. In addition, 5%, of revenue from the franchise must be paid to Reagan. Revenue from the franchise for 2014 was $2,500,000. Carter estimates the useful life of the franchise to be 10 years and takes a full year’s amortization in the year of purchase. Carter incurred research and development costs in 2014 as follows. Materials and equipment $142,000 Personnel 189,000 Indirect costs 102,000 $433,000 Carter estimates that these costs will be recouped by December 31, 2017. The materials and equipment purchased have no alternative uses. On January 1, 2014, because of recent events in the field, Carter estimates that the remaining life of the patent purchased on January 1, 2013, is only 5 years from January 1, 2014. Instructions (a) Prepare a schedule showing the intangibles section of Carter’s balance sheet at December 31, 2014.Show supporting computations in good form. (b) Prepare a schedule showing the income statement effect (related to expenses) for the year endedDecember 31, 2014, as a result of the facts above. Show supporting computations in good form.

The basic issue in variable and absorption costing could be said to be one of timing rather than amount. Explain.

1.       : Discuss how the dilemma of teamwork versus individual work might be intensified in a virtual team. What dilemmas do you encounter when you have to do class assignments as part of a team? Discuss.

Why does Congress provide tax deferral on the formation of a corporation?

Reichenbach Co., organized in 2013, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2014 and 2015. Intangible Assets 7/1/14 8-year franchise; expiration date 6/30/22 $ 48,000 10/1/14 Advance payment on laboratory space (2-year lease) 24,000 12/31/14 Net loss for 2013 including state incorporation fee, $1,000, and related legal fees of organizing, $5,000 (all fees incurred in 2013) 16,000 1/2/15 Patent purchased (10-year life) 84,000 3/1/15 Cost of developing a secret formula (indefinite life) 75,000 4/1/15 Goodwill purchased (indefinite life) 278,400 6/1/15 Legal fee for successful defense of patent purchased above 12,650 9/1/15 Research and development costs 160,000 Instructions Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2015, recording any necessary amortization and reflecting all balances accurately as of that date. (Ignore income tax effects.)