Question & Answer

Stephanie Delaney, CPA, is the newly hired director of corporate taxation for Acme Incorporated, which is a publicly traded corporation. Ms. Delaney’s first job with Acme was the review of the company’s accounting practices on deferred income taxes. In doing her review, she noted differences between tax and book depreciation methods that permitted Acme to realize a sizable deferred tax liability on its balance sheet. As a result, Acme paid very little in income taxes at that time. Delaney also discovered that Acme has an explicit policy of selling off plant assets before they reversed in the deferred tax liability account. This policy, coupled with the rapid expansion of its plant asset base, allowed Acme to “defer” all income taxes payable for several years, even though it always has reported positive earnings and an increasing EPS. Delaney checked with the legal department and found the policy to be legal, but she’s uncomfortable with the ethics of it. Instructions Answer the following questions. (a) Why would Acme have an explicit policy of selling plant assets before the temporary differences reversed in the deferred tax liability account? (b) What are the ethical implications of Acme’s “deferral” of income taxes? (c) Who could be harmed by Acme’s ability to “defer” income taxes payable for several years, despite positive earnings? (d) In a situation such as this, what are Ms. Delaney’s professional responsibilities as a CPA?

The key components of a market interest rate are the risk-free rate and the credit risk premium. During a credit crisis, these two components may change substantially, but in different ways. Write a short essay that describes how the risk-free rate and the risk premium may change during a credit crisis. Explain why the financial markets can become paralyzed during a crisis. Is it because of changes in the risk-free rate or changes in the risk premium?

Presented below are four independent situations. (a) On December 31, 2014, Zarle Inc. sold computer equipment to Daniell Co. and immediately leased it back for 10 years. The sales price of the equipment was $520,000, its carrying amount is $400,000, and its estimated remaining economic life is 12 years. Determine the amount of deferred revenue to be reported from the sale of the computer equipment on December 31, 2014. (b) On December 31, 2014, Wasicsko Co. sold a machine to Cross Co. and simultaneously leased it back for one year. The sale price of the machine was $480,000, the carrying amount is $420,000, and it had an estimated remaining useful life of 14 years. The present value of the rental payments for the one  year is $35,000. At December 31, 2014, how much should Wasicsko report as deferred revenue from the sale of the machine? (c) On January 1, 2014, McKane Corp. sold an airplane with an estimated useful life of 10 years. At the same time, McKane leased back the plane for 10 years. The sales price of the airplane was $500,000, the carrying amount $379,000, and the annual rental $73,975.22. McKane Corp. intends to depreciate the leased asset using the sum-of-the-years’-digits depreciation method. Discuss how the gain on the sale should be reported at the end of 2014 in the financial statements. (d) On January 1, 2014, Sondgeroth Co. sold equipment with an estimated useful life of 5 years. At the same time, Sondgeroth leased back the equipment for 2 years under a lease classified as an operating lease. The sales price (fair value) of the equipment was $212,700, the carrying amount is $300,000, the monthly rental under the lease is $6,000, and the present value of the rental payments is $115,753. For the year ended December 31, 2014, determine which items would be reported on its income statement for the sale-leaseback transaction.

What controversy relates to the accounting for net operating loss carryforwards?

Identify a series of possible frictions which could affect the speed with which markets adjust or which affect the nature of market equilibria.

: Discuss the use of financial statements and financial analysis as management controls.

Describe the ideal mutual fund for investors who wish to generate tax-free income but also maintain a low degree of interest rate risk. (LO2)

What is the role of an actuary relative to pension plans? What are actuarial assumptions?

How are the interest rate, the required rate of return on a stock, and the valuation of a stock related? (LO3)

Is there any truth in the saying that the price of a good is a reflection of its quality?

Ludwick Steel Company as lessee signed a lease agreement for equipment for 5 years, beginning December 31, 2014. Annual rental payments of $40,000 are to be made at the beginning of each lease year (December 31). The taxes, insurance, and the maintenance costs are the obligation of the lessee. The interest rate used by the lessor in settingthe payment schedule is 9%; Ludwick’s incremental borrowing rate is 10%. Ludwick is unaware of the rate being used by the lessor. At the end of the lease, Ludwick has the option to buy the equipment for $1, considerably below its estimated fair value at that time. The equipment has an estimated useful life of 7 years, with no salvage value. Ludwick uses the straight-line method of depreciation on similar ownedequipment. Instructions (a) Prepare the journal entry or entries, with explanations, that should be recorded on December 31, 2014, by Ludwick. (b) Prepare the journal entry or entries, with explanations, that should be recorded on December 31, 2015, by Ludwick. (Prepare the lease amortization schedule for all five payments.) (c) Prepare the journal entry or entries, with explanations, that should be recorded on December 31, 2016, by Ludwick. (d) What amounts would appear on Ludwick’s December 31, 2016, balance sheet relative to the lease arrangement?

How are product variety and production quantity related when comparing typical factories?

Rode Inc. incurred a net operating loss of $500,000 in 2014. Combined income for 2012 and 2013 was $350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward.

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 amounts relative to income taxes does P&G report in its: (1) 2011 income statement? (2) June 30, 2011, balance sheet? (3) 2011 statement of cash flows? (b) P&G’s income taxes in 2009, 2010, and 2011 were computed at what effective tax rates? (See the notes to the financial statements.) (c) How much of P&G’s 2011 total income taxes was current tax expense, and how much was deferred tax expense? (d) What did P&G report as the significant components (the details) of its June 30, 2011, deferred tax assets and liabilities?

Courtney recently received a speeding ticket on her way to the university.  Her fine was $200.  Is this considered a tax?  Why or why not?

If economics is the study of choices of how to use scarce resources, can these other objectives be legitimately described as ‘non-economic’?

At December 31, 2014, Hillyard Corporation has a deferred tax asset of $200,000. After a careful review of all available evidence, it is determined that it is probable that $60,000 of this deferred tax asset will not be realized. Prepare the necessary journal entry.

How does an “asset gain or loss” develop in pension accounting? How does a “liability gain or loss” develop in pension accounting?

On January 1, 2014, Cage Company contracts to lease equipment for 5 years, agreeing to make a payment of $137,899 (including the executory costs of $6,000) at the beginning of each year, starting January 1, 2014. The taxes, the insurance, and the maintenance, estimated at $6,000 a year, are the obligations of the lessee. The leased equipment is to be capitalized at $550,000. The asset is to be depreciated on a double-declining-balance basis, and the obligation is to be reduced on an effective-interest basis. Cage’s incremental borrowing rate is 12%, and the implicit rate in the lease is 10%, which is known by Cage.  itle to the equipment transfers to Cage when the lease expires. The asset has an estimated useful life of 5 years and no residual value. Instructions (a) Explain the probable relationship of the $550,000 amount to the lease arrangement. (b) Prepare the journal entry or entries that should be recorded on January 1, 2014, by Cage Company. (c) Prepare the journal entry to record depreciation of the leased asset for the year 2014. (d) Prepare the journal entry to record the interest expense for the year 2014. (e) Prepare the journal entry to record the lease payment of January 1, 2015, assuming reversing entries are not made. (f) What amounts will appear on the lessee’s December 31, 2014, balance sheet relative to the lease contract?

Is it in the interest only of workers (i.e. and not employers) to resist falls in real wage rates?

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 determined that it is not probable that it will realize any of the deferred tax assets. However, given its improved performance, Kleckner management wonders whether there are any accounting consequences for its deferred tax assets. They would like you to conduct some research on the accounting for recognition of its deferred tax asset. Instructions Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you  canuse the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.) (a) Briefly explain to Kleckner management the importance of future taxable income as it relates to the recognition of deferred tax assets. (b) What are the sources of income that may be relied upon in assessing realization of a deferred tax asset? (c) What are tax-planning strategies? From the information provided, does it appear that Kleckner could employ a tax-planning strategy in evaluating its deferred tax asset?

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 amounts relative to income taxes does M&S report in its: (1) 2012 income statement? (2) 31 March 2012 statement of financial position? (3) 2012 statement of cash flows? (b) M&S’s provision for income taxes in 2011 and 2012 was computed at what effective tax rates? (See the notes to the financial statements.) (c) How much of M&S’s 2012 total provision for income taxes was current tax expense, and how much was deferred tax expense? (d) What did M&S report as the significant components (the details) of its 31 March 2012 deferred tax assets and liabilities?

Define manufacturing capability.

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) What are the amounts of Coca-Cola’s and PepsiCo’s provision for income taxes for the year 2011? Of each company’s 2011 provision for income taxes, what portion is current expense and what portion is deferred expense? (b) What amount of cash was paid in 2011 for income taxes by Coca-Cola and by PepsiCo? (c) What was the U.S. federal statutory tax rate in 2011? What was the effective tax rate in 2011 for Coca Cola and PepsiCo? Why might their effective tax rates differ? (d) For year-end 2011, what amounts were reported by Coca-Cola and PepsiCo as (1) gross deferred tax assets and (2) gross deferred tax liabilities? (e) Do either Coca-Cola or PepsiCo disclose any net operating loss carrybacks and/or carryforwards at year-end 2011? What are the amounts, and when do the carryforwards expire?

Why are monetary surprises less likely with independent central banks pursuing an inflation target? Would monetary surprises still be possible in such circumstances?