Question & Answer

Why is an overvalued exchange rate likely to encourage the use of capital-intensive technology?

Describe the procedure(s) involved in classifying deferred tax amounts on the statement of financial position under IFRS.

Table 6.4 illustrates five different short-run production functions: i.e. where the number of machines remains constant at one, two, three, four or five. In each case explain if there are diminishing or increasing marginal returns

Wasatch Corp. (WC) received a $200,000 dividend from Tager Corporation (TC).  WC owns 15 percent of the TC stock.  Compute WC’s deductible DRD in each of the following situations:

Consider the following letter and answer Shady’s question.

What is a part family?

Identify the five components that comprise pension expense. Briefly explain the nature of each component.

Novotna Inc.’s only temporary difference at the beginning and end of 2013 is caused by a $3 million deferred gain for tax purposes for an installment sale of a plant asset, and the related receivable (only one-half of which is classified as a current asset) is due in equal installments in 2014 and 2015. The related deferred tax liability at the beginning of the year is $1,200,000. In the third quarter of 2013, a new tax rate of 34% is enacted into law and is scheduled to become effective for 2015. Taxable income for 2013 is $5,000,000, and taxable income is expected in all future years. Instructions (a) Determine the amount reported as a deferred tax liability at the end of 2013. Indicate proper classification(s). (b) Prepare the journal entry (if any) necessary to adjust the deferred tax liability when the new tax rate is enacted into law. (c) Draft the income tax expense portion of the income statement for 2013. Begin with the line “Income before income taxes.” Assume no permanent differences exist.

Create a balance sheet for a typical bank, showing its main liabilities (sources of funds) and assets (uses of funds). (LO2, LO3)

Bob’s Lottery, Inc., has decided to offer winners a choice of $100,000 in ten years or some amount currently.  Assume that Bob’s Lottery, Inc., earns a 10 percent after-tax rate of return.  What amount should Bob offer lottery winners currently, in order for him to be indifferent between the two choices?

Juanita, a Texas resident (5th Circuit), is researching a tax question and finds a 5th Circuit case ruling that is favorable and a 9th Circuit case that is unfavorable.  Which circuit case has more “authoritative weight” and why?  How would your answer change if Juanita were a Kentucky resident (6th Circuit)?

Why are both the price elasticity of demand and the price elasticity of supply likely to be greater in the long run?

Explain why, if the firm can practise first-degree price discrimination by selling every unit at the maximum price each consumer is prepared to pay, its revenue from selling 200 units will be the sum of both the shaded areas in Figure 8.13.

On January 1, 2014, JWS Corporation issued $600,000 of 7% bonds, due in 10 years. The bonds were issued for $559,224, and pay interest each July 1 and January 1. JWS uses the effective-interest method. Prepare the company’s journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry. Assume an effective-interest rate of 8%.

Presented below are three independent situations. Situation 1: A company offers a one-year warranty for the product that it manufactures. A history of warranty claims has been compiled, and the probable amounts of claims related to sales for a given period can be determined. Situation 2: Subsequent to the date of a set of financial statements but prior to the issuance of the financial statements, a company enters into a contract that will probably result in a significant loss to the company. The amount of the loss can be reasonably estimated. Situation 3: A company has adopted a policy of recording self-insurance for any possible losses resulting from injury to others by the company’s vehicles. The premium for an insurance policy for the same risk from an independent insurance company would have an annual cost of $4,000. During the period covered by the financial statements, there were no accidents involving the company’s vehicles that resulted in injury to others. Instructions Discuss the accrual or type of disclosure necessary (if any) and the reason(s) why such disclosure is appropriate for each of the three independent sets of facts above.

Complete Table 13.3 up to 9 cars per minute, assuming that the journey time increases to 24 minutes for the eighth car and 35 minutes for the ninth car.

What is an “implicit tax,” and how does it affect a taxpayer’s decision to purchase municipal bonds?

What is the difference between adaptive expectations and rational expectations?

What are some steps taken by both the FASB and IASB to move to fair value measurement for financial instruments? In what ways have some of the approaches differed?

Pierre recently received a tax penalty for failing to file a tax return.  He was upset to receive the penalty, but he was comforted by the thought that he will get a tax deduction for paying the penalty.     a.  Use an available tax research service to determine if Pierre is correct.   b.  Write a memo communicating the results of your research.

Joe operates a business that locates and purchases specialized assets for clients, among other activities. Joe uses the accrual method of accounting, but he does not keep any significant inventories of the specialized assets that he sells. Joe reported the following financial information for his business activities during this year. Determine the effect of each of the following transactions on the taxable business income.  a) Joe has signed a contract to sell gadgets to the city. The contract provides that sales of gadgets are dependent upon a test sample of gadgets operating successfully. In December of this year, Joe delivers $12,000 worth of gadgets to the city that will be tested in March of next year. Joe purchased the gadgets especially for this contract and paid $8,500. b) Joe paid $180 in July of this year to entertain a visiting out-of-town client. The client didn’t discuss business with Joe during this visit, but Joe wants to maintain good relations to encourage additional business next year. c) On November 1 of this year, Joe paid $600 for premiums providing for $40,000 of “key employee” insurance on the life of Joe’s accountant over the next 12 months. d) At the end of this year, Joe’s business reports $9,000 of accounts receivable. Based upon experience, Joe believes that at least $2,000 of his new receivables will be uncollectible.  e) In December of this year, Joe rented equipment to complete a large job. Joe paid $3,000 in December because the rental agency required a minimum rental of three months ($1,000 per month). Joe completed the job before year-end, but he returned the equipment at the end of the lease.  f) Joe hired a new sales representative as an employee and sent them to Dallas for a week to contact prospective out-of-state clients. Joe ended up reimbursing this employee $300 for airfare, $350 for lodging, and $250 for meals (the employee provided adequate documentation to substantiate the business purpose for the meals). Joe requires the employee to account for all expenditures to be reimbursed. g) Joe uses his BMW (a personal auto) to travel to and from his residence to his factory. However, he switches to a business vehicle if he needs to travel after he reaches the factory. In September of this year, the business vehicle broke down and he was forced to use the BMW both to travel to and from the factory and to visit work sites. He drove 120 miles visiting work sites and 46 miles driving back and forth between the factory and his home. Joe uses the standard mileage rate to determine his auto-related business expenses. h) Joe paid a visit to his parents in Dallas over the Christmas holidays this year. While he was in the city, Joe spent $50 to attend a half-day business symposium. Joe paid $200 for airfare, $50 for meals provided during the symposium, and $20 on cab fare to the symposium.

Using the IS/MP framework illustrate how the financial accelerator affects the extent of the rise in output following a positive demand-side shock.

Linda Day George Company had bonds outstanding with a maturity value of $300,000. On April 30, 2014, when these bonds had an unamortized discount of $10,000, they were called in at 104. To pay for these bonds, George had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000). Issue costs related to the new bonds were $3,000. Instructions Ignoring interest, compute the gain or loss and record this refunding transaction.

Why are real wages likely to be more flexible downwards than money wages?

Andre constructs and installs cabinets in homes.  Blair sells and installs carpet in apartments.  Andre and Blair worked out an arrangement whereby Andre installed cabinets in Blair’s home and Blair installed carpet in Andre’s home.  Neither Andre nor Blair believes they are required to recognize any gross income on this exchange because neither received cash.  Do you agree with them?  Explain.