Question & Answer

Can a bank simultaneously maximize return and minimize credit risk? If not, what can it do instead? (LO4)

Why do banks hold a range of assets of varying degrees of liquidity and profitability?

What quantitative materiality test is applied to determine whether a segment is significant enough to warrant separate disclosure?

Explain the difference between a freely floating system and a dirty float. Which type is more representative of the U.S. system? (LO1)

Planning} Todd and Margo are seeking a divorce and no longer live together.  Margo has offered to pay Todd $42,000 per year for five years if Margo receives sole title to the art collection.  This collection cost them $100,000, but is now worth $360,000.  All other property is to be divided equally. a.       If Margo’s payments cease in the event of Todd’s death, how are the payments treated for tax purposes?  b.       How much of the gain would be taxed to Todd if Margo sells the art at the end of five years? c.       Compute the tax cost (benefit) to Todd (Margo) if the payments qualify as alimony.  Assume that Todd (Margo) has a marginal tax rate of 15 percent (35 percent) and ignore the time value of money. d.       How much more over the five year period should Todd demand in order to agree to allow the payments to cease in the event of his death?  (How much more will make him indifferent between receiving $42,000 a year in non alimony payments and receiving higher payments that are considered to be alimony?)

Frozen Delight, Inc. charges an initial franchise fee of $75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount, $25,000 is collected immediately. The remainder is collected in 4 equal annual installments of $12,500 each. These installments have a present value of $41,402. There is reasonable expectation that the down payment may be refunded and substantial future services be performed by Frozen Delight, Inc. Prepare the journal entry required by Frozen Delight to record the franchise fee.

What major types of items are reported in the retained earnings statement?

Explain (using intuition instead of math) why stock prices may decrease in response to a higher risk-free rate according to the CAPM. In some periods, the risk-free rate rises in response to higher economic growth. Explain (using intuition instead of math) why stock prices may increase in this situation even though the risk-free rate increases. (LO2)

] Describe the two methods that taxpayers use to prepay their taxes.

Assume that on January 1, 2014, Elmer’s Restaurants sells a computer system to Liquidity Finance Co. for $680,000 and immediately leases the computer system back. The relevant information is as follows. 1. The computer was carried on Elmer’s books at a value of $600,000. 2. The term of the noncancelable lease is 10 years; title will transfer to Elmer. 3. The lease agreement requires equal rental payments of $110,666.81 at the end of each year. 4. The incremental borrowing rate for Elmer is 12%. Elmer is aware that Liquidity Finance Co. set the annual rental to insure a rate of return of 10%. 5. The computer has a fair value of $680,000 on January 1, 2014, and an estimated economic life of 10 years. 6. Elmer pays executory costs of $9,000 per year. Instructions Prepare the journal entries for both the lessee and the lessor for 2014 to reflect the sale and leaseback agreement. No uncertainties exist, and collectibility is reasonably certain.

Gottlieb Co. owes $199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some property and cancel the entire debt. The property has a book value of $90,000 and a fair value of $140,000. Instructions (a) Prepare the journal entry on Gottlieb’s books for debt restructure. (b) Prepare the journal entry on Ceballos’s books for debt restructure.

Adriana Co., with annual net sales of $5 million, maintains a markup of 25% based on cost. Adriana’s expenses average 15% of net sales. What is Adriana’s gross profit and net profit in dollars?

Explain why the stock price of a firm may rise when the firm announces that it is repurchasing its shares. (LO4)

Assuming Alexa receives $20,000 in gross rental receipts, answer the following questions:

a.       Because Nikki’s 28.57% discount ($14,000 – $10,000/$14,000) is less than Shine Company’s gross profit percentage, the bargain purchase from her employer does not result in taxable income. b.     Nikki will recognize $25 of taxable income from the discounted services provided by Shine Company.  Discounts more than 20% for services are taxable. Thus, Nikki’s taxable discount is $25 ($125 Discount received – (20% x $500)=$25).

Agua Linda, Inc., is a calendar-year corporation. What is the original due date for the corporate tax return? What happens if the original due date falls on a Saturday?

How would the shifts in the SRAS curve be affected if, in response to rising output levels, firms increased their investment expenditures?

What is the danger of issuing too much stock? What is the role of the securities firm that serves as the underwriter, and how can it ensure that the firm does not issue too much stock? (LO2, LO4)

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

A single-pass rolling operation reduces a 20 mm thick plate to 18 mm. The starting plate is 200 mm wide. Roll radius = 250 mm and rotational speed = 12 rev/min. The work material has a strength coefficient = 600 MPa and a strength coefficient = 0.22. Determine (a) roll force, (b) roll torque, and (c) power required for this operation.

On January 1, 2013, Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Nichols’ $5 par value common stock at a price of $20 per share. The options were exercisable within a 2-year period beginning January 1, 2015, if the grantee is still employed by the company at the time of the exercise. On the grant date, Nichols’ stock was trading at $25 per share, and a fair value option-pricing model determines total compensation to be $400,000. On May 1, 2015, 8,000 options were exercised when the market price of Nichols’ stock was $30 per share. The remaining options lapsed in 2017 because executives decided not to exercise their options. Instructions Prepare the necessary journal entries related to the stock option plan for the years 2013 through 2017.

Cardinals Corporation purchased a computer on December 31, 2013, for $105,000, paying $30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2014. An assumed interest rate of 10% is implicit in the purchase price. Instructions (Round to two decimal places.) (a) Prepare the journal entry(ies) at the date of purchase. (b) Prepare the journal entry(ies) at December 31, 2014, to record the payment and interest (effectiveinterest method employed). (c) Prepare the journal entry(ies) at December 31, 2015, to record the payment and interest (effectiveinterest method employed). E10-16 (Asset Acquisition) Hayes Industries purchased the following assets and constructed a building as well. All this was done during the current year. Assets 1 and 2: These assets were purchased as a lump sum for $100,000 cash. The following informationwas gathered. Depreciation to Initial Cost on Date on Seller’s Book Value on Description Seller’s Books Books Seller’s Books Appraised Value Machinery $100,000 $50,000 $50,000 $90,000 Equipment 60,000 10,000 50,000 30,000 Asset 3: This machine was acquired by making a $10,000 down payment and issuing a $30,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $15,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $35,900. Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.) Facts concerning the trade-in are as follows. Cost of machinery traded $100,000 Accumulated depreciation to date of sale 40,000 Fair value of machinery traded 80,000 Cash received 10,000 Fair value of machinery acquired 70,000 Asset 5: Equipment was acquired by issuing 100 shares of $8 par value common stock. The stock had a market price of $11 per share. Construction of Building: A building was constructed on land purchased last year at a cost of $150,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows. Date Payment 2/1 $120,000 6/1 360,000 9/1 480,000 11/1 100,000 To finance construction of the building, a $600,000, 12% construction loan was taken out on February 1. The loan was repaid on November 1. The firm had $200,000 of other outstanding debt during the year at a borrowing rate of 8%. Instructions Record the acquisition of each of these assets.

Franklin, Jefferson, and Washington formed the Independence Partnership (a calendar-year-end entity) by contributing cash 10 years ago. Each partner owns an equal interest in the partnership and has an outside basis in their partnership interest of $104,000. On January 1 of the current year, Franklin sells their partnership interest to Adams for a cash payment of $122,000. The partnership has the following assets and no liabilities as of the sale date: Tax Basis Fair Market Value Cash $ 18,000 $ 18,000 Accounts receivable -0- 12,000 Inventory 69,000 81,000 Equipment 180,000 225,000 Stock investment 45,000 30,000    Totals $ 312,000 $ 366,000 The equipment was purchased for $240,000, and the partnership has taken $60,000 of depreciation. The stock was purchased seven years ago. a. What is Franklin’s overall gain or loss on the sale of their partnership interest? b. What is the character of Franklin’s gain or loss?

Danica Patrick, Inc. includes the following account among its trade receivables.   Instructions Age the balance and specify any items that apparently require particular attention at year-end.

How could long-term monetary growth come about if the government persistently ran a public-sector surplus?