Question & Answer

Johnstone Co. purchased a put option on Ewing common shares on July 7, 2014, for $240. The put option is for 200 shares, and the strike price is $70. (The market price of a share of Ewing stock on that date is $70.) The option expires on January 31, 2015. The following  data are available with respect to the put option. Date Market Price of Ewing Shares Time Value of Put Option September 30, 2014 $77 per share $125 December 31, 2014 75 per share 50 January 31, 2015 78 per share 0 Instructions Prepare the journal entries for Johnstone Co. for the following dates. (a) July 7, 2014—Investment in put option on Ewing shares. (b) September 30, 2014—Johnstone prepares financial statements. (c) December 31, 2014—Johnstone prepares financial statements. (d) January 31, 2015—Put option expires.

Ashley Company is a young and growing producer of electronic measuring instruments and technical equipment. You have been retained by Ashley to advise it in the preparation of a statement of cash flows using the indirect method. For the fiscal year ended October 31, 2014, you have obtained the following information concerning certain events and transactions of Ashley. 1. The amount of reported earnings for the fiscal year was $700,000, which included a deduction for an extraordinary loss of $110,000 (see item 5 below). 2. Depreciation expense of $315,000 was included in the income statement. 3. Uncollectible accounts receivable of $40,000 were written off against the allowance for doubtful accounts. Also, $51,000 of bad debt expense was included in determining income for the fiscal year, and the same amount was added to the allowance for doubtful accounts. 4. A gain of $6,000 was realized on the sale of a machine. It originally cost $75,000, of which $30,000 was undepreciated on the date of sale. 5. On April 1, 2014, lightning caused an uninsured building loss of $110,000 ($180,000 loss, less reduction in income taxes of $70,000). This extraordinary loss was included in determining income as indicated in item 1 above. 6. On July 3, 2014, building and land were purchased for $700,000. Ashley gave in payment $75,000 cash, $200,000 market price of its unissued common stock, and signed a $425,000 mortgage note payable. 7. On August 3, 2014, $800,000 face value of Ashley’s 10% convertible debentures was converted into $150,000 par value of its common stock. The bonds were originally issued at face value. Instructions Explain whether each of the seven numbered items above is a cash inflow or outflow, and explain how it should be disclosed in Ashley’s statement of cash flows for the fiscal year ended October 31, 2014. If any item is neither an inflow nor an outflow of cash, explain why it is not, and indicate the disclosure, if any, that should be made of the item in Ashley’s statement of cash flows for the fiscal year ended October 31, 2014.

For tax purposes, how is the compensation paid to an S corporation shareholder similar to compensation paid to an owner of an entity taxed as a partnership?  How is it different?

What purpose does the variety in bond features (types and characteristics) serve?

On a diagram like Figure A1.8 draw the graphs for the following equations:                      y = –3 + 4x                      y = 15 – 3x

The financial statements of P&G are presented in Appendix 5B. The company’s complete annual report, including the notes to the financial statements, can be accessed at the book’s companion website, www. wiley.com/college/kieso. Instructions Refer to P&G’s financial statements and the accompanying notes to answer the following questions. (a) What investments does P&G report in 2011, and how are these investments accounted for in its financial statements? (b) How are P&G’s investments valued? How does P&G determine fair value? (c) How does P&G use derivative financial instruments?

Bandung Corporation began 2014 with a $92,000 balance in the Deferred Tax Liability account. At the end of 2014, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2014 is $525,000, the tax rate for all years is 40%, and taxable income for 2014 is $405,000. Instructions (a) Compute income taxes payable for 2014. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014. (c) Prepare the income tax expense section of the income statement for 2014 beginning with the line “Income before income taxes.”

1. The following table shows data for a monopsonist employer. Fill in the missing figures. How many workers should the firm employ if it wishes to maximise profits? 2. Will a monopsony typically also be a monopoly? Try to think of some examples of monopsonists that are not monopolists, and monopolists that are not monopsonists.

AMP Corporation (calendar-year-end) has 2024 taxable income of $1,900,000 for purposes of computing the §179 expense. During 2024, AMP acquired the following assets:

A shareholder receives appreciated noncash property in a corporate distribution and assumes a liability attached to the property. How does the assumption affect the amount of dividend the shareholder reports in gross income (assuming adequate E&P)?

If the negotiated wage rate were somewhere between W1 and W2, what would happen to employment?

What factors determine a country’s terms of trade?

How do taxpayers determine whether they should deduct their itemized deductions or utilize the standard deduction?

What is viewed as a major criticism of GAAP as regards revenue recognition?

When we were looking at wage rates, were we talking about the price of labour or the price of labour services? Is this distinction between the price of a factor and the price of factor services a useful one in the case of labour? Was it in Roman times?

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) What investments does M&S report in 2012, and where are these investments reported in its financial statements? (b) How are M&S’s investments valued? How does M&S determine fair value? (c) How does M&S use derivative financial instruments?

What are the reporting issues in a sale and buyback agreement?

Discuss some of the difficulties regulators face when attempting to provide regulatory oversight over fintech. (LO5)

Conlin Corporation had the following tax information. Year Taxable Income Tax Rate Taxes Paid 2012 $300,000 35% $105,000 2013 $325,000 30% $ 97,500 2014 $400,000 30% $120,000 In 2015, Conlin suffered a net operating loss of $480,000, which it elected to carry back. The 2015 enacted tax rate is 29%. Prepare Conlin’s entry to record the effect of the loss carryback.

Instructions Go to the book’s companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc. (a) Based on the information contained in these financial statements, determine each of the following for each company. (1) Cash used in (for) investing activities during 2011 (from the statement of cash flows). (2) Cash used for acquisitions and investments in unconsolidated affiliates (or principally bottling companies) during 2011. (3) Total investment in unconsolidated affiliates (or investments and other assets) at the end of 2011. (b) (1) Briefly identify from Coca-Cola’s December 31, 2011, balance sheet the investments it reported as being accounted for under the equity method. (2) What is the amount of investments that Coca-Cola reported in its 2011 balance sheet as “cost method investments,” and what is the nature of these investments? (c) In its Note 2 on Investments, what total amounts did Coca-Cola report at December 31, 2011, as: (1) trading securities, (2) available-for-sale securities, and (3) held-to-maturity securities?

1. What price would the same piece of land sell for if it still earned £1000 rent per year, but if the rate of interest were now (a) 5 per cent; (b) 20 per cent? 2. What does this tell us about the relationship between the price of an asset (like land) and the rate of interest?

J.C. has been a professional gambler for many years.  They love this line of work and believe the income is tax-free.     a.  Use an available tax research service to determine whether J.C.’s thinking is correct.  Is the answer to this question found in the Internal Revenue Code?  If not, what type of authority answers this question?   b.  Write a memo communicating the results of your research.

Simon lost $5,000 gambling this year on a trip to Las Vegas. In addition, he paid $2,000 to his broker for managing his $200,000 portfolio, and $1,500 to his accountant for preparing his tax return. In addition, Simon incurred $2,500 in transportation costs commuting back and forth from his home to his employer’s office, which were not reimbursed. Calculate the amount of these expenses that Simon is able to deduct (assuming he itemizes his deductions).

The residual value is the estimated fair value of the leased property at the end of the lease term. (a) Of what significance is (1) an unguaranteed and (2) a guaranteed residual value in the lessee’s accounting for a capitalized-lease transaction? (b) Of what significance is (1) an unguaranteed and (2) a guaranteed residual value in the lessor’s accounting for a direct-financing lease transaction?

What is the nature of an installment sale? How do installment sales differ from ordinary credit sales?