Question & Answer

In your own words, explain the path to higher-quality decisions.

Assume that Amazon.com has a stock-option plan for top management. Each stock option represents the right to purchase a share of Amazon $1 par value common stock inthe future at a price equal to the fair value of the stock at the date of the grant. Amazon has 5,000 stock options outstanding, which were granted at the beginning of 2014. The following data relate to the option grant. Exercise price for options $40 Market price at grant date (January 1, 2014) $40 Fair value of options at grant date (January 1, 2014) $6 Service period 5 years Instructions (a) Prepare the journal entry(ies) for the first year of the stock-option plan. (b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2014. (c) Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for (a) and (b). (d) Amazon would like to implement an employee stock-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Which of the following provisions must be in place for the plan to avoid recording compensation expense? (1) Substantially all employees may participate. (2) The discount from market is small (less than 5%). (3) The plan offers no substantive option feature. (4) There is no preferred stock outstanding.

What would happen to the ASL curve and the level of unemployment if unemployment benefits were increased?

What Motivates You?

Erin’s basis in her Kiybron Partnership interest is $3,300. Erin receives a distribution of $2,200 cash from Kiybron in complete liquidation of her interest. Kiybron is an equal partnership with the following balance sheet: Assets: Tax Basis FMV Cash $ 2,200 $ 2,200 Stock (investment) 1,100 2,200 Land 6,600 2,200    Totals $ 9,900 $ 6,600 Liabilities and capital: Capital- Erin 3,300 - Carl 3,300 - Grace 3,300   Totals $ 9,900 a. What are the amount and character of Erin’s recognized gain or loss? What is the effect on the partnership assets? b. If Kiybron has a §754 election in place, what is the amount of the special basis adjustment?

Felipe, a single taxpayer, is a technology consultant who operates as a sole proprietorship.  Felipe’s net business income is $600,000 (net of the associated for AGI self-employment tax deduction), he pays wages of $100,000 to his employees, and he has $200,000 of qualified property (unadjusted basis).  Felipe’s taxable income before the deduction for qualified business income is $500,000. Assume he has no capital gains or qualified dividends. a. Calculate Felipe’s deduction for qualified business income.           b. How would your answer to (a) change if Felipe was an investment broker.

Where can authoritative IFRS be found related to dilutive securities, stock-based compensation, and earnings per share?

The starting point for computing alternative minimum taxable income is regular taxable income.  What are some of the plus adjustments, plus or minus adjustments, and minus adjustments to regular taxable income to compute alternative minimum taxable income?

Explain how the Fed’s “quantitative easing” strategies differed from its traditional strategy of buying short-term Treasury securities. (LO3)

For various reasons a corporation may issue warrants to purchase shares of its common stock at specified prices that, depending on the circumstances, may be less than, equal to, or greater than the current market price. For example, warrants may be issued: 1. To existing stockholders on a pro rata basis. 2. To certain key employees under an incentive stock-option plan. 3. To purchasers of the corporation’s bonds. Instructions For each of the three examples of how stock warrants are used: (a) Explain why they are used. (b) Discuss the significance of the price (or prices) at which the warrants are issued (or granted) in relation to (1) the current market price of the company’s stock, and (2) the length of time over which they can be exercised. (c) Describe the information that should be disclosed in financial statements, or notes thereto, that are prepared when stock warrants are outstanding in the hands of the three groups listed above.

Transfer pricing Georgina Chan is the chief financial officer of Colorado Pty Ltd, which has three interdependent divisions where, on average, about 30 per cent of the output of one division is transferred to one of the other divisions. She is currently dealing with a dispute within the accounting office about the best way to treat transfer pricing within the company. The chief executive officer has advised that any change to the policy should not compromise what is best for the company overall. Senior accountant Andy Chan says ‘as we are a highly decentralised firm, the only way to go is to use market price as the key method and allow sourcing autonomy’. Meanwhile, graduate accountant Roger Singh says ‘I disagree. If we go with full cost plus a 15 per cent mark-up and no sourcing autonomy, that would be best’.   Required State one advantage and one disadvantage of each proposed policy and advise which policy you think would serve the company best. Briefly explain.

Verify that the derivative of Eq. (24.6) results in Eq. (24.7)

Indicate how unrealized holding gains and losses should be reported for investments securities classified as trading, available-for-sale, and held-to-maturity.

In examining the costs of pension plans, Helen Kaufman, CPA, encounters certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans. Instructions (a) (1) Discuss the theoretical justification for accrual recognition of pension costs. (2) Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-yougo) accounting for annual pension costs. (b) Explain the following terms as they apply to accounting for pension plans. (1) Market-related asset value. (2) Projected benefit obligation. (3) Corridor approach. (c) What information should be disclosed about a company’s pension plans in its financial statements and its notes?

Describe the business purpose, step-transaction, and substance-over-form doctrines. What types of tax planning strategies may these doctrines inhibit?

Explain the process of executing a financial transaction with bitcoins. What are the advantages and disadvantages of such a transaction? (LO3)

Jose purchased a delivery van for his business through an online auction. His winning bid for the van was $24,500. In addition, Jose incurred the following expenses before using the van: shipping costs of $650; paint to match the other fleet vehicles at a cost of $1,000; registration costs of $3,200, which included $3,000 of sales tax and an annual registration fee of $200; wash and detailing for $50; and an engine tune-up for $250. What is Jose’s cost basis for the delivery van?

The Sarbanes-Oxley Act was enacted to combat fraud andcurb poor reporting practices. What are some key provisionsof this legislation?

Dingel Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information. December 31 2014 2013 Cash $ 38,500 $13,000 Accounts receivable 12,250 10,000 Inventory 12,000 10,000 Investments –0– 3,000 Buildings –0– 29,750 Equipment 40,000 20,000 Copyrights 5,000 5,250 Totals $107,750 $91,000 Allowance for doubtful accounts $ 3,000 $ 4,500 Accumulated depreciation—equipment 2,000 4,500 Accumulated depreciation—buildings –0– 6,000 Accounts payable 5,000 4,000 Dividends payable –0– 5,000 Notes payable, short-term (nontrade) 3,000 4,000 Long-term notes payable 36,000 25,000 Common stock 38,000 33,000 Retained earnings 20,750 5,000 $107,750 $91,000 Additional data related to 2014 are as follows. 1. Equipment that had cost $11,000 and was 30% depreciated at time of disposal was sold for $2,500. 2. $5,000 of the long-term note payable was paid by issuing common stock. 3. Cash dividends paid were $5,000. 4. On January 1, 2014, the building was completely destroyed by a flood. Insurance proceeds on the building were $33,000 (net of $4,000 taxes). 5. Investments (available-for-sale) were sold at $1,500 above their cost. The company has made similar sales and investments in the past. 6. Cash and long-term note for $16,000 were given for the acquisition of equipment. 7. Interest of $2,000 and income taxes of $5,000 were paid in cash. Instructions (a) Use the indirect method to analyze the above information and prepare a statement of cash flows for Dingel. Flood damage is unusual and infrequent in that part of the country. (b) What would you expect to observe in the operating, investing, and financing sections of a statement of cash flows of: (1) A severely financially troubled firm? (2) A recently formed firm that is experiencing rapid growth?

Risk management The Dancing Goat is the name Logan Jones chose for his café. The origins of the name came from a 1600s fable of a young goat herder watching his goats dance after they ate red coffee beans. Logan wanted his customers to have the same pleasant ‘dancing’ experience when they drank his specialty coffee blends. In his Sopital Lane café in Melbourne, Logan has a central roasting room in which he roasts fresh coffee beans from around the world. He offers 12 blends of coffee and delights customers with the atmosphere of his classy, European-style café with couches and low tables. The Dancing Goat has become very successful and Logan began to expand his operations to several locations around Melbourne. He roasts the coffee at the main Sopital Lane café and transports it daily to the other cafés. Logan now has 10 cafés located around Melbourne. They offer a deliberately small, but high-quality gourmet menu. Logan is well liked by his staff and they all understand his requirement for friendly service, a pleasant atmosphere and excellent coffee. Every new staff member learns to make coffee to Logan’s strict specifications and wears The Dancing Goat uniform with pride. Logan is particularly pleased when returning customers at each of the cafés praise his friendly, well-trained staff. Nevertheless, after several years of successful operations, the profitability of the Dancing Goat has begun to decline. Logan has decided to revisit The Dancing Goat’s ‘branding’ strategy. He recently read the following article relating to the Starbucks decision to ‘unbrand’.   The idea is that the [Starbucks] chain will turn some of its premises into individually branded neighbourhood coffee shops, to find out whether it will do better by adopting a facade that’s more like an old-fashioned neighbourhood coffee shop. In its home-town of Seattle, an outlet called 15th Avenue Coffee and Tea will be the test-bed for this new non-brand, selling beer and wine as well as high end brew.   Logan is particularly interested in Starbuck’s test-bed 15th Avenue Coffee and Tea store, which courted coffee connoisseurs with the same elaborate coffee brewing machines that Logan decided to purchase for The Dancing Goat cafés.   Although Logan is a little dubious about the potential success of the Starbucks’ approach in his operations, he is aware that several café managers are dissatisfied and keen to make significant changes. Logan ponders. Why not let one of the cafés loose for a couple of years to trial a similar unbranding approach? Logan could set simple performance targets based on profitable growth and pay uncapped incentives. He will allow the manager to determine what would best suit the local clientele without too much interference from Logan. After all, Logan knows the manager of the trial café he has selected is not scared to take risks. Logan will be satisfied as long as the profitability of this café remains at an acceptable level.   Required Given your understanding of risk management, briefly provide advice to Logan on: (a) The risk profile and level of risk exposure for The Dancing Goat of the new approach. (b) How Logan might reduce this level of risk exposure. (LO6)

Jerry Prior, Beeler Corporation’s controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him. Prior knows that depreciation is a major expense for Beeler. The company currently uses the doubledeclining- balance method for both financial reporting and tax purposes, and he’s thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of $2,000,000 and a fair value of $2,180,000. The gain on the sale would be reported in the income statement. He doesn’t want to highlight this method of increasing income. He thinks, “Why don’t I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.” Instructions Answer the following questions. (a) Who are the stakeholders in this situation? (b) What are the ethical issues involved? (c) What should Prior do?

Use the information from BE17-5 but assume the stock was purchased as a trading security. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment.

What are the limitations of scanning tunneling microscope in nanofabrication that inhibit its commercial application?

Is the number of working days lost through disputes a good indication of (a) union power; (b) union militancy?

The following information is available for Barkley Company at December 31, 2014, regarding its investments. Securities Cost Fair Value 3,000 shares of Myers Corporation Common Stock $40,000 $48,000 1,000 shares of Cole Incorporated Preferred Stock 25,000 22,000 $65,000 $70,000 Instructions (a) Prepare the adjusting entry (if any) for 2014, assuming the securities are classified as trading. (b) Prepare the adjusting entry (if any) for 2014, assuming the securities are classified as availablefor- sale. (c) Discuss how the amounts reported in the financial statements are affected by the entries in (a) and (b).