Question & Answer

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/Marksand- 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) Using the notes to the consolidated financial statements, determine M&S’s revenue recognition policies. (b) Give two examples of where historical cost information is reported in M&S’s financial statements and related notes. Give two examples of the use of fair value information reported in either the financial statements or related notes. (c) How can we determine that the accounting principles used by M&S are prepared on a basis consistent with those of last year? (d) What is M&S’s accounting policy related to refunds and loyalty schemes? Why does M&S include the accounting for refunds and loyalty schemes in its critical accounting estimates and judgments?

Use the information for Boyne Inc. from BE9-8. Compute ending inventory at cost using the LIFO retail method.

The income statement of Vince Gill Company is shown below. VINCE GILL COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2014 Sales revenue $6,900,000 Cost of goods sold Beginning inventory $1,900,000 Purchases 4,400,000 Goods available for sale 6,300,000 Ending inventory 1,600,000 Cost of goods sold 4,700,000 Gross profi t 2,200,000 Operating expenses Selling expenses 450,000 Administrative expenses 700,000 1,150,000 Net income $1,050,000 Additional information: 1. Accounts receivable decreased $360,000 during the year. 2. Prepaid expenses increased $170,000 during the year. 3. Accounts payable to suppliers of merchandise decreased $275,000 during the year. 4. Accrued expenses payable decreased $100,000 during the year. 5. Administrative expenses include depreciation expense of $60,000. Instructions Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2014, for Vince Gill Company, using the indirect method.

Cammie received 100 NQOs (each option provides a right to purchase 10 shares of MNL stock for $10 per share). She started working for MNL Corporation four years ago (5/1/Y1) when MNL’s stock price was $8 per share. Now( 8/15/Y5) that MNL’s stock price is $40 per share, she intends to exercise all of her options. After acquiring the 1,000 MNL shares with her stock options, she held the shares for over one year and sold (on 10/1/Y6) them at $60 per share. What are Cammie’s taxes due on the grant date (5/1/Y1), exercise date (8/15/Y5), and sale date (10/1/Y6), assuming her ordinary marginal rate is 32 percent and her long-term capital gains rate is 15 percent?

Imagine that you had £10 per month to allocate between two goods, A and B. Imagine that good A cost £2 per unit and good B cost £1 per unit. Imagine also that the utilities of the two goods are those set out in the table. (Note that the two goods are not substitutes for each other, so that the consumption of one does not affect the utility gained from the other.)                Good B   Units per month MU (utils) TU (utils) Units per month MU (utils) TU (utils) 0 –  0.0 0  –  0.0 1 11.0 11.0 1 8.0  8.0 2  8.0 19.0 2 7.0 15.0 3  6.0 25.0 3 6.5 21.5 4  4.5 29.5 4 5.0 26.5 5  3.0 32.5 5 4.5 31.0       6 4.0 35.0       7 3.5 38.5       8 3.0 41.5       9 2.6 44.1       10 2.3 46.4            (a)  What would be the marginal utility ratio (MUa/MUb) for the following combinations of the two goods: (i) 1A, 8B; (ii) 2A, 6B; (iii) 3A, 4B; (iv) 4A, 2B? (Each combination would cost £10.)          (b)  Show that where the marginal utility ratio (MUA/MUB) equals the price ratio (PA/PB) total utility is maximised.          (c)  If the two goods were substitutes for each other why would it not be possible to construct a table like the one given here?

Ferraro, Inc. established a stock-appreciation rights (SAR) program on January 1, 2014, which entitles executives to receive cash at the date of exercise for the difference between the market price of the stock and the pre-established price of $20 on 5,000 SARs. The required service period is 2 years. The fair value of the SARs are determined to be $4 on December 31, 2014, and $9 on December 31, 2015. Compute Ferraro’s compensation expense for 2014 and 2015.

Kevan, Jerry, and Dave formed Albee LLC. Jerry and Dave each contributed $245,000 in cash. Kevan contributed the following assets:  Kevan: Basis Fair Market Value Cash $ 15,000 $ 15,000 Land* 120,000 440,000 Totals $ 135,000 $ 455,000

What is the difference between the nominal interest rate and real interest rate? What is the logic behind the implied positive relationship between expected inflation and nominal interest rates? (LO2)

Campbell’s tax return was audited because she failed to report interest she earned on her tax return.  What IRS audit selection method identified her tax return?

Kano and his wife Hoshi have been married for 10 years and have two children under the age of 12.The couple has been living apart for the last two years and both children live with Kano.Kano has provided all the means necessary to support himself and his children.Kano and Hoshi do not file a joint return. What is Kano’s filing status?

Oriole Corporation, a privately held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding. The shares are owned as follows:  Larry Byrd400 Paul Byrd (Larry’s son)200 Lady Byrd (Larry’s daughter)200 Cal Rifkin (unrelated)   200   Total1,000   Larry is considering retirement and would like to have the corporation redeem all of his shares for $400,000.

Presented below is information related to Cramer, Inc. Instructions Comment on the appropriateness of the accounting procedures followed by Cramer, Inc. (a) Depreciation expense on the building for the year was $60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded. Retained Earnings 60,000 Accumulated Depreciation—Buildings 60,000 (b) Materials were purchased on January 1, 2014, for $120,000 and this amount was entered in the Materials account. On December 31, 2014, the materials would have cost $141,000, so the following entry is made. Inventory 21,000 Gain on Inventories 21,000 (c) During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of $135,000 and a fair value of $450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows. Equipment 135,000 Common Stock 135,000 (d) During the year, the company sold certain equipment for $285,000, recognizing a gain of $69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased. (e) An order for $61,500 has been received from a customer for products on hand. This order was shipped on January 9, 2015. The company made the following entry in 2014. Accounts Receivable 61,500 Sales Revenue 61,500

Looking at the Maths) 1. If P was originally measured in £s, what would happen to the value of the d term if P were now measured in pence? (Looking at the Maths) 2. Draw the schedule (table) and graph for equation (2) for prices from £1 to £10. What is it in the equation that determines the slope of the supply ‘curve’? (Looking at the Maths) 3.  Explain why the P and j terms have a positive sign, whereas the a1 and a2 terms have a negative sign.

Geraldo recently won a lottery and chose to receive $100,000 today instead of an equivalent amount in ten years, computed using an 8 percent rate of return.  Today, he learned that interest rates are expected to increase in the future.  Is this good news for Geraldo given his decision?

: Describe how ethical behavior relates to behavior governed by law or free choice.

Using the data shown on the pie charts in Figure 11.1, construct two Lorenz curves (on the same diagram), corresponding to the before- and after-tax income figures. Interpret and comment on the diagram you have drawn.

Scorcese Inc. is involved in a lawsuit at December 31, 2014. (a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for $900,000 as a result of this suit. (b) Prepare the December 31 entry, if any, assuming it is not probable that Scorcese will be liable for any payment as a result of this suit.

Assume that IBM leased equipment that was carried at a cost of $150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2014, with equal rental payments of $30,044 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $150,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain-purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM. Prepare IBM’s January 1, 2014, journal entries at the inception of the lease.

Describe stock index futures. How could they be used by a financial institution that is anticipating a jump in stock prices but does not yet have sufficient funds to purchase large amounts of stock? Explain why stock index futures may reflect investor expectations about the market more quickly than stock prices. (LO3)

Kreter Co. provides the following information about its postretirement benefit plan for the year 2014. Service cost $ 45,000 Contribution to the plan 10,000 Actual and expected return on plan assets 11,000 Benefi ts paid 20,000 Plan assets at January 1, 2014 110,000 Accumulated postretirement benefi t obligation at January 1, 2014 330,000 Discount rate 8% Instructions Compute the postretirement benefit expense for 2014.

Hart Golf Co. uses titanium in the production of its specialty drivers. Hart anticipates that it will need to purchase 200 ounces of titanium in November 2014, for clubs that will be shipped in the spring and summer of 2015. However, if the price of titanium increases, this will increase the cost to produce the clubs, which will result in lower profit margins. To hedge the risk of increased titanium prices, on May 1, 2014, Hart enters into a titanium futures contract and designates this futures contract as a cash flow hedge of the anticipated titanium purchase. The notional amount of the contract is 200 ounces, and the terms of the contract give Hart the option to purchase titanium at a price of $500 per ounce. The price will be good until the contract expires on November 30, 2014. Assume the following data with respect to the price of the call options and the titanium inventory purchase Spot Price for Date November Delivery May 1, 2014 $500 per ounce June 30, 2014 520 per ounce September 30, 2014 525 per ounce Instructions Present the journal entries for the following dates/transactions. (a) May 1, 2014—Inception of futures contract, no premium paid. (b) June 30, 2014—Hart prepares financial statements. (c) September 30, 2014—Hart prepares financial statements. (d) October 5, 2014—Hart purchases 200 ounces of titanium at $525 per ounce and settles the futures contract. (e) December 15, 2014—Hart sells clubs containing titanium purchased in October 2014 for $250,000. The cost of the finished goods inventory is $140,000. (f) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2014.

Assume that there is a fall in aggregate demand (for goods). Trace through the short-run and long-run effect on employment.

Jayhawk Corporation reports current E&P of $300,000 and a deficit in accumulated E&P of ($200,000). Jayhawk distributed $400,000 to its sole shareholder, Christine, on the last day of the year. Christine’s tax basis in her Jayhawk stock before the distribution is $75,000.

Reciprocal method. Paul’s Valley Protection Service has three support departments (S1, S2 and S3) and three operating departments (P1, P2, and P3). The direct costs of each department are $30 000 for S1, $20 000 for S2, and $40 000 for S3. The proportions of service provided by each support department to the others are given in the following table. Required Using the reciprocal method, allocate the support department costs to the operating departments.

The trial balance before adjustment of Reba McIntyre Inc. shows the following balances Dr. Cr. Accounts Receivable $90,000 Allowance for Doubtful Accounts 1,750 Sales Revenue (all on credit) $680,000 Instructions Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 1% of net sales.