Question & Answer

(a) From what sources might a corporation obtain funds through long-term debt? (b) What is a bond indenture? What does it contain? (c) What is a mortgage?

What are some of the simple measures used to assess the feasibility of a proposed cup-drawing operation?

Why is it difficult to test the assumption that firms seek to maximise long-run profits?

In recent years there have been a number of changes in planning laws to make it easier for commercial properties to be converted to housing. What would be the impact on property values?

Faith Battle operates a health food store, and she has been the only employee. Her business is growing, and she is considering hiring some additional staff to help her in the store. Explain to her the various payroll deductions that she will have to account for, including their potential impact on her financial statements, if she hires additional staff.

Presented on page 634 are three different and unrelated situations involving depreciation accounting. Answer the question(s) at the end of each situation. Situation I: Recently, Broderick Company experienced a strike that affected a number of its operating plants. The controller of this company indicated that it was not appropriate to report depreciation expense during this period because the equipment did not depreciate and an improper matching of costs and revenues would result. She based her position on the following points. 1. It is inappropriate to charge the period with costs for which there are no related revenues arising from production. 2. The basic factor of depreciation in this instance is wear and tear. Because equipment was idle, no wear and tear occurred. Instructions Comment on the appropriateness of the controller’s comments. Situation II: Etheridge Company manufactures electrical appliances, most of which are used in homes. Company engineers have designed a new type of blender which, through the use of a few attachments, will perform more functions than any blender currently on the market. Demand for the new blender can be projected with reasonable probability. In order to make the blenders, Etheridge needs a specialized machine that is not available from outside sources. It has been decided to make such a machine in Etheridge’s own plant. Instructions (a) Discuss the effect of projected demand in units for the new blenders (which may be steady, decreasing, or increasing) on the determination of a depreciation method for the machine. (b) What other matters should be considered in determining the depreciation method? (Ignore income tax considerations.) Situation III: Haley Paper Company operates a 300-ton-per-day kraft pulp mill and four sawmills in Wisconsin. The company is in the process of expanding its pulp mill facilities to a capacity of 1,000 tons per day and plans to replace three of its older, less efficient sawmills with an expanded facility. One of the mills to be replaced did not operate for most of 2014 (current year), and there are no plans to reopen it before the new sawmill facility becomes operational. In reviewing the depreciation rates and in discussing the salvage values of the sawmills that were to be replaced, it was noted that if present depreciation rates were not adjusted, substantial amounts of plant costs on these three mills would not be depreciated by the time the new mill came on stream. Instructions What is the proper accounting for the four sawmills at the end of 2014?

1.       : How might employee resource groups contribute to the advancement of women and people of color to higher-level positions in an organization?

Use the information in BE7-9 for Wood. Assume that the receivables are sold with recourse. Prepare the journal entry for Wood to record the sale, assuming that the recourse liability has a fair value of $7,500.

At December 31, 2014, Reid Company had 600,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 200,000 of which were issued on October 1, 2014. Net income for 2014 was $2,000,000, and dividends declared on preferred stock were $400,000. Compute Reid’s earnings per common share. (Round to the nearest penny.)

: Describe the major components of the classical perspective and current uses of the management science approach

On January 1, 2014, Novotna Company purchased $400,000, 8% bonds of Aguirre Co. for $369,114. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2019. Novotna Company uses the effective-interest method to amortize discount or premium. On January 1, 2016, Novotna Company sold the bonds for $370,726 after receiving interest to meet its liquidity needs. Instructions (a) Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale. (b) Prepare the amortization schedule for the bonds. (c) Prepare the journal entries to record the semiannual interest on July 1, 2014, and December 31, 2014. (d) If the fair value of Aguirre bonds is $372,726 on December 31, 2015, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on January 1, 2015, is a debit of $3,375.) (e) Prepare the journal entry to record the sale of the bonds on January 1, 2016.

: Summarize how SWOT analysis can be used to evaluate a company’s strengths, weaknesses, opportunities, and threats.

Bloom Corporation had the following 2014 income statement. Sales revenue $200,000 Cost of goods sold 120,000 Gross profi t 80,000 Operating expenses (includes depreciation of $21,000) 50,000 Net income $ 30,000 The following accounts increased during 2014: Accounts Receivable $12,000; Inventory $11,000; Accounts Payable $13,000. Prepare the cash flows from operating activities section of Bloom’s 2014 statement of cash flows using the direct method.

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 kind of pension plan does P&G provide its employees in the United States? (b) What was P&G’s pension expense for 2011, 2010, and 2009 for the United States? (c) What is the impact of P&G’s pension plans for 2011 on its financial statements? (d) What information does P&G provide on the target allocation of its pension assets? (Compare the asset allocation for “Pensions and Other Retiree Benefits.”) How do the allocations relate to the expected returns on these assets?

Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures American-made teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are personalized teddy bears delivered directly to the recipient for special occasions such as birthdays and anniversaries. The Shelburne, Vermont, company’s primary markets are New York, Boston, and Chicago. Sales have jumped dramatically in recent years. Such dramatic growth has significant implications for cash flows. Provided below are the cash flow statements for two recent years for the company. Current Year Prior Year Cash fl ows from operating activities: Net income $ 17,523 $ 838,955 Adjustments to reconcile net income to net cash provided by operating activities Deferred income taxes (69,524) (146,590) Depreciation and amortization 316,416 181,348 Changes in assets and liabilities: Accounts receivable, trade (38,267) (25,947) Inventories (1,599,014) (1,289,293) Prepaid and other current assets (444,794) (113,205) Deposits and other assets (24,240) (83,044) Accounts payable 2,017,059 (284,567) Accrued expenses 61,321 170,755 Accrued interest payable, debentures — (58,219) Other — (8,960) Income taxes payable — 117,810 Net cash provided by (used for) operating activities 236,480 (700,957) Net cash used for investing activities (2,102,892) (4,422,953) Net cash (used for) provided by fi nancing activities (315,353) 9,685,435 Net change in cash and cash equivalents (2,181,765) 4,561,525 Other information: Current liabilities $ 4,055,465 $ 1,995,600 Total liabilities 4,620,085 2,184,386 Net sales 20,560,566 17,025,856 Instructions (a) Note that net income in the current year was only $17,523 compared to prior-year income of $838,955, but net cash flow from operating activities was $236,480 in the current year and a negative $700,957 in the prior year. Explain the causes of this apparent paradox. (b) Evaluate Vermont Teddy Bear’s liquidity, solvency, and profitability for the current year using cash flow-based ratios.

What is service cost, and what is the basis of its measurement?

Why might market-orientated supply-side policies have undesirable side effects on aggregate demand?

How might a savings and loan association use Treasury bond futures to hedge its fixed-rate mortgage portfolio (assuming that its main source of funds is short-term deposits)? Explain how prepayments on mortgages can limit the effectiveness of the hedge. (LO2)

Why are Wo and Wa curves rather than straight lines?

At the balance sheet date, Clarkson Company held title to goods in transit amounting to $214,000. This amount was omitted from the purchases figure for the year and also from the ending inventory. What is the effect of this omission on the net income for the year as calculated when the books are closed? What is the effect on the company’s financial position as shown in its balance sheet? Is materiality a factor in determining whether an adjustment for this item should be made?

In 2013, Grishell Trucking Company negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were erected to the company’s specifications on land owned by the company. On January 1, 2014, Grishell Trucking Company took possession of the lease properties. On January 1, 2014 and 2015, the company made cash payments of $948,000 that were recorded as rental expenses. Although the terminals have a composite useful life of 40 years, the noncancelable lease runs for 20 years from January 1, 2014, with a bargain-purchase option available upon expiration of the lease. The 20-year lease is effective for the period January 1, 2014, through December 31, 2033. Advance rental payments of $800,000 are payable to the lessor on January 1 of each of the first 10 years of the lease term. Advance rental payments of $320,000 are due on January 1 for each of the last 10 years of the lease. The company has an option to purchase all of these leased facilities for $1 on December 31, 2033. It also must make annual payments to the lessor of $125,000 for property taxes and $23,000 for insurance. The lease was negotiated to assure the lessor a 6% rate of return. Instructions (a) Prepare a schedule to compute for Grishell Trucking Company the present value of the terminal facilities and related obligation at January 1, 2014. (b) Assuming that the present value of terminal facilities and related obligation at January 1, 2014, was $7,600,000, prepare journal entries for Grishell Trucking Company to record the: (1) Cash payment to the lessor on January 1, 2016. (2) Amortization of the cost of the leased properties for 2016 using the straight-line method and assuming a zero salvage value. (3) Accrual of interest expense at December 31, 2016. Selected present value factors are as follows. For an Ordinary Periods Annuity of $1 at 6% For $1 at 6% 1 .943396 .943396 2 1.833393 .889996 8 6.209794 .627412 9 6.801692 .591898 10 7.360087 .558395 19 11.158117 .330513 20 11.469921 .311805

Using the facts in problem 46, what interest rate does the State of New York need to offer to make Fergie indifferent between investing in the two bonds?

(Threshold Concept 14) 1. Give some examples of supply-side policy. (see Chapter 23 for some ideas if you are stuck). (Threshold Concept 14) 2. If there is an increase in aggregate supply, will this result in an increase in potential growth?

Craig Brokaw, newly appointed controller of STL, is considering ways to reduce his company’s expenditures on annual pension costs. One way to do this is to switch STL’s pension fund assets from First Security to NET Life. STL is a very well-respected computer manufacturer that recently has experienced a sharp decline in its financial performance for the first time in its 25-year history. Despite financial problems, STL still is committed to providing its employees with good pension and postretirement health benefits. Under its present plan with First Security, STL is obligated to pay $43 million to meet the expected value of future pension benefits that are payable to employees as an annuity upon their retirement from thecompany. On the other hand, NET Life requires STL to pay only $35 million for identical future pension benefits. First Security is one of the oldest and most reputable insurance companies in North America. NET Life has a much weaker reputation in the insurance industry. In pondering the significant difference in annual pension costs, Brokaw asks himself, “Is this too good to be true?” Instructions Answer the following questions. (a) Why might NET Life’s pension cost requirement be $8 million less than First Security’s requirement for the same future value? (b) What ethical issues should Craig Brokaw consider before switching STL’s pension fund assets? (c) Who are the stakeholders that could be affected by Brokaw’s decision?

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/   -and-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 kind of pension plan does M&S provide its employees? (b) What was M&S’s pension expense for 2012 and 2011? (c) What is the impact of M&S’s pension plans for 2012 on its financial statements? (d) What information does M&S provide on the target allocation of its pension assets? How do the allocations relate to the expected returns on these assets?