Question & Answer

Your client, Keith Moreland Leasing Company, is preparing a contract to lease a machine to Souvenirs Corporation for a period of 25 years. Moreland has an investment cost of $365,755 in the machine, which has a useful life of 25 years and no salvage value at the end of that time. Your client is interested in earning an 11% return on its investment and has agreed to accept 25 equal rental payments at the end of each of the next 25 years. Instructions You are requested to provide Moreland with the amount of each of the 25 rental payments that will yield an 11% return on investment.

Prepare the following adjusting entries at August 31 for Walgreens. (a) Interest on notes payable of $300 is accrued. (b) Services performed but unbilled total $1,400. (c) Salaries and wages earned by employees of $700 have not been recorded. (d) Bad debt expense for year is $900. Use the following account titles: Service Revenue, Accounts Receivable, Interest Expense, Interest Payable,Salaries and Wages Expense, Salaries and Wages Payable, Allowance for Doubtful Accounts, and Bad Debt Expense.

Under what circumstances would a higher rate of investment lead to a higher rate of economic growth?

If this is true, why do people not increase their rate of saving?

Part 1: Capital leases and operating leases are the two classifications of leases described in FASB pronouncements from the standpoint of the lessee. Instructions (a) Describe how a capital lease would be accounted for by the lessee both at the inception of the lease and during the first year of the lease, assuming the lease transfers ownership of the property to the lessee by the end of the lease. (b) Describe how an operating lease would be accounted for by the lessee both at the inception of the lease and during the first year of the lease, assuming equal monthly payments are made by the lessee at the beginning of each month of the lease. Describe the change in accounting, if any, when rental payments are not made on a straight-line basis. Do not discuss the criteria for distinguishing between capital leases and operating leases. Part 2: Sales-type leases and direct-financing leases are two of the classifications of leases described in FASB pronouncements from the standpoint of the lessor. Instructions Compare and contrast a sales-type lease with a direct-financing lease as follows. (a) Lease receivable. (b) Recognition of interest revenue. (c) Manufacturer’s or dealer’s profit. Do not discuss the criteria for distinguishing between the leases described above and operating leases.

A torque wrench is used on a 3/4-10 UNC bolt in an automobile final assembly plant. A torque of 70 ft-lb is generated by the wrench. If the torque coefficient = 0.17, determine the tensile stress in the bolt.

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

The following note appears in the “Summary of Significant Accounting Policies” section of the Annual Report of Westinghouse Electric Corporation. Note 1 (in part): Revenue Recognition. Sales are primarily recorded as products are shipped and services are rendered. The percentage-of-completion method of accounting is used for nuclear steam supply system orders with delivery schedules generally in excess of five years and for certain construction projects where this method of accounting is consistent with industry practice. WFSI revenues are generally recognized on the accrual method. When accounts become delinquent for more than two payment periods, usually 60 days, income is recognized only as payments are received. Such delinquent accounts for which no payments are received in the current month, and other accounts on which income is not being recognized because the receipt of either principal or interest is questionable, are classified as nonearning receivables. Instructions (a) Identify the revenue recognition methods used by Westinghouse Electric as discussed in its note on significant accounting policies. (b) Under what conditions are the revenue recognition methods identified in the first paragraph of Westinghouse’s note above acceptable? (c) From the information provided in the second paragraph of Westinghouse’s note, identify the type of operation being described and defend the acceptability of the revenue recognition method.

Is it easier to describe what a capital asset is or what it is not?Explain

Interest on municipal bonds is referred to as a permanent difference when determining the proper amount to report for deferred taxes. Explain the meaning of permanent differences, and give two other examples.

What are the different processes that can be used to apply decorations to plastic parts according to the plastics finishing video?

What are the tax advantages and disadvantages of converting a C corporation into an LLC taxed as a partnership?

Explain the current environment regarding revenue recognition.

Cool Touch Cookware (CTC) has been in business for about 10 years now. Daisy and Kesha are each 50 percent owners of the business. They initially established the business with cash contributions. CTC manufactures unique cookware that remains cool to the touch when in use. CTC has been fairly profitable over the years. Daisy and Kesha have both been actively involved in managing the business. They have developed very good personal relationships with many customers (both wholesale and retail) that, Daisy and Kesha believe, keep the customers coming back.   On September 30 of the current year, CTC had all of its assets appraised. Below is CTC’s balance sheet, as of September 30, with the corresponding appraisals of the fair market value of all of its assets. Note that CTC has several depreciated assets. CTC uses the hybrid method of accounting. It accounts for its gross margin-related items under the accrual method, and it accounts for everything else using the cash method of accounting.     Assets Adjusted  Tax Basis FMV Cash $150,000 $150,000 Accounts receivable 20,000 15,000 Inventory* 90,000 300,000 Equipment 120,000 100,000 Investment in XYZ stock 40,000 120,000 Land (used in the business) 80,000 70,000 Building 200,000 180,000    Total Assets $700,000 $935,000**   Liabilities Accounts payable $ 40,000 Bank loan60,000 Mortgage on building100,000 Equity 500,000  Total liabilities and equity$700,000   *CTC uses the LIFO method for determining the adjusted basis of its inventory. Its basis in the inventory under the FIFO method would have been $110,000. **In addition, Daisy and Kesha had the entire business appraised at $1,135,000, which is $200,000 more than the value of the identifiable assets.   From January 1 of the current year through September 30, CTC reported the following income: Ordinary business income    $530,000 Dividends from XYZ stock    $12,000 Long-term capital losses $15,000 Interest income $ 3,000   Daisy and Kesha are considering changing the business form of CTC.   Required: a. Assume CTC is organized as a C corporation. Identify significant tax and nontax issues associated with converting CTC from a C corporation to an S corporation. [Hint: see §§1374 and 1363(d).] b. Assume CTC is organized as a C corporation. Identify significant tax and nontax issues associated with converting CTC from a C corporation to an LLC. Assume CTC converts to an LLC (taxed as a partnership) by distributing its assets to its shareholders, who then contribute the assets to a new LLC. [Hint: see §§331, 336, and 721(a).] c. Assume that CTC is a C corporation with a net operating loss carryforward as of the beginning of the year in the amount of $500,000 and that the NOL originated in 2019. Identify significant tax and nontax issues associated with converting CTC from a C corporation to an LLC (taxed as a partnership). Assume CTC converts to an LLC by distributing its assets to its shareholders, who then contribute the assets to a new LLC. [Hint: see §§172(a), 331, 336, and 721(a).]

How would the radical right reply to these arguments?

Recording transactions in the accounting system requires knowledge of the important characteristics of the elements of financial statements, such as assets and liabilities. In addition, accountants must understand the inherent uncertainty in accounting measures and distinctions between related accounting concepts that are important in evaluating the effects of transactions on the financial statements. Instructions Access the IASB Framework 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 can use the search tool in your Internet browser to respond to the following items. (Provide paragraph citations.) (a) Provide the definition of an asset and discuss how the economic benefits embodied in an asset might flow to a company. (b) Provide the definition of a liability and discuss how a company might satisfy a liability. (c) What is “accrual basis”? How do adjusting entries illustrate application of the accrual basis?

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 were M&S’s total assets at 31 March 2012? At 2 April 2011? (b) How much cash (and cash equivalents) did M&S have on 31 March 2012? (c) What were M&S’s selling and marketing expenses in 2012? In 2011? (d) What were M&S’s revenues in 2012? In 2011? (e) Using M&S’s financial statements and related notes, identify items that may result in adjusting entries for prepayments and accruals. (f) What were the amounts of M&S’s depreciation and amortization expense in 2011 and 2012?

On December 31, 2014, Kate Holmes Company has $7,000,000 of short-term debt in the form of notes payable to Gotham State Bank due in 2015. On January 28, 2015, Holmes enters into a refinancing agreement with Gotham that will permit it to borrow up to 60% of the gross amount of its accounts receivable. Receivables are expected to range between a low of $6,000,000 in May to a high of $8,000,000 in October during the year 2015. The interest cost of the maturing short-term debt is 15%, and the new agreement calls for a fluctuating interest at 1% above the prime rate on notes due in 2019. Holmes’s December 31, 2014, balance sheet is issued on February 15, 2015. Instructions Prepare a partial balance sheet for Holmes at December 31, 2014, showing how its $7,000,000 of short-term debt should be presented, including footnote disclosure.

Describe a lockup provision and explain why it might be required by the lead underwriter. (LO3)

How does the initial rate on adjustable-rate mortgages (ARMs) differ from the rate on fixed-rate mortgages? Why? Explain how caps on ARMs can affect a financial institution’s exposure to interest rate risk. (LO2)

How are the terms “probable,” “reasonably possible,” and “remote” related to contingent liabilities?

Volker Inc. issued $2,500,000 of convertible 10-year bonds on July 1, 2014. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Volker Inc.’s $100 par value common stock for each $1,000 of bonds. On August 1, 2015, $250,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash. Instructions Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates. (Round to the nearest dollar.) (a) August 1, 2015. (Assume the book value method is used.) (b) August 31, 2015. (c) December 31, 2015, including closing entries for end-of-year.

How are deferred tax assets and deferred tax liabilities reported on the balance sheet?

Use the information presented in BE5-8 for Adams Company to prepare the long-term liabilities section of the balance sheet.

The net income per books of Linda Patrick Company was determined without knowledge of the errors indicated. Net Income Error in Ending Year per Books Inventory 2009 $50,000 Overstated $ 3,000 2010 52,000 Overstated 9,000 2011 54,000 Understated 11,000 2012 56,000 No error 2013 58,000 Understated 2,000 2014 60,000 Overstated 8,000 Instructions Prepare a worksheet to show the adjusted net income figure for each of the 6 years after taking into account the inventory errors.