Question & Answer

Johnstone Co. purchased a put option on Ewing common shares on July 7, 2014, for $240. The put option is for 200 shares, and the strike price is $70. (The market price of a share of Ewing stock on that date is $70.) The option expires on January 31, 2015. The following  data are available with respect to the put option. Date Market Price of Ewing Shares Time Value of Put Option September 30, 2014 $77 per share $125 December 31, 2014 75 per share 50 January 31, 2015 78 per share 0 Instructions Prepare the journal entries for Johnstone Co. for the following dates. (a) July 7, 2014—Investment in put option on Ewing shares. (b) September 30, 2014—Johnstone prepares financial statements. (c) December 31, 2014—Johnstone prepares financial statements. (d) January 31, 2015—Put option expires.

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

Winston Industries and Ewing Inc. enter into an agreement that requires Ewing Inc. to build three diesel-electric engines to Winston’s specifications. Upon completion of the engines, Winston has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is noncancelable, becomes effective on January 1, 2014, and requires annual rental payments of $413,971 each January 1, starting January 1, 2014. Winston’s incremental borrowing rate is 10%. The implicit interest rate used by Ewing Inc. and known to Winston is 8%. The total cost of building the three engines is $2,600,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Winston depreciates similar equipment on a straight-line basis. At the end of the lease, Winston assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs. Instructions (a) Discuss the nature of this lease transaction from the viewpoints of both lessee and lessor. (b) Prepare the journal entry or entries to record the transaction on January 1, 2014, on the books of Winston Industries. (c) Prepare the journal entry or entries to record the transaction on January 1, 2014, on the books of Ewing Inc. (d) Prepare the journal entries for both the lessee and lessor to record the first rental payment on January 1, 2014. (e) Prepare the journal entries for both the lessee and lessor to record interest expense (revenue) at December 31, 2014. (Prepare a lease amortization schedule for 2 years.) (f) Show the items and amounts that would be reported on the balance sheet (not notes) at December 31, 2014, for both the lessee and the lessor.

] Are both corporations and individuals subject to depreciation recapture when they sell depreciable real property at a gain?  Explain.

When is revenue recognized under the cost-recovery method?

If the government increases the tax on a litre of petrol by 5p, what will determine the amount by which the price of petrol will go up as a result of this tax increase?

A vertical true centrifugal casting process is used to produce bushings that are 200 mm long and 200 mm in outside diameter. If the rotational speed during solidification is 500 rev/min, determine the inside diameter at the top of the bushing if the inside diameter at the bottom is 150 mm.

Did the exchange rate difficulties experienced by countries under the ERM strengthen or weaken the arguments for progressing to a single European currency?

There are 21 correct answers in the following multiple choice questions (some questions have multiple answers that are correct). To attain a perfect score on the quiz, all correct answers must be given. Each correct answer is worth 1 point. Each omitted answer or wrong answer reduces the score by 1 point, and each additional answer beyond the correct number of answers reduces the score by 1 point. Percentage score on the quiz is based on the total number of correct answers. 20.1 Most sheet metalworking operations are performed as which one of the following: (a) cold working, (b) hot working, or (c) warm working? 20.2 In a sheet-metal-cutting operation used to produce a flat part with a hole in the center, the part itself is called a blank, and the scrap piece that was cut out to make the hole is called a slug: (a) true or (b) false? 20.3 As sheet-metal stock hardness increases in a blanking operation, the clearance between punch and die should be (a) decreased, (b) increased, or (c) remain the same? 20.4 A circular sheet-metal slug produced in a hole punching operation will have the same diameter as (a) the die opening or (b) the punch? 20.5 The cutting force in a sheet-metal blanking operation depends on which mechanical property of the metal (one correct answer): (a) compressive strength, (b) modulus of elasticity, (c) shear strength, (d) strain rate, (e) tensile strength, or (f) yield strength? 20.6 Which of the following descriptions applies to a V-bending operation as compared to an edgebending operation (two best answers): (a) costly tooling, (b) inexpensive tooling, (c) limited to 90° bends or less, (d) used for high production, (e) used for low production, and (f) uses a pressure pad to hold down the sheet metal? 20.7 Sheet-metal bending involves which of the following stresses and strains (two correct answers): (a) compressive, (b) shear, and (c) tensile? 20.8 Which one of the following is the best definition of bend allowance: (a) amount by which the die is larger than the punch, (b) amount of elastic recovery experienced by the metal after bending, (c) safety factor used in calculating bending force, or (d) length before bending of the straight sheetmetal section to be bent? 20.9 Springback in a sheet-metal-bending operation is the result of which one of the following: (a) elastic modulus of the metal, (b) elastic recovery of the metal, (c) overbending, (d) overstraining, or (e) yield strength of the metal? 20.10 Which of the following are variations of sheet-metal-bending operations (two best answers): (a) coining, (b) flanging, (c) hemming, (d) ironing, (e) notching, (f) shear spinning, (g) trimming, and (h) tube bending? 20.10 Which of the following are variations of sheet-metal-bending operations (two best answers): (a) coining, (b) flanging, (c) hemming, (d) ironing, (e) notching, (f) shear spinning, (g) trimming, and (h) tube bending? 20.12 The holding force in drawing is most likely to be (a) greater than, (b) equal to, or (c) less than the maximum drawing force? 20.13 Which one of the following stamping dies is the most complicated: (a) blanking die, (b) combination die, (c) compound die, (d) edge-bending die, (e) progressive die, or (f) V-bending die? 20.14 Which one of the following press types is usually associated with the highest production rates in sheet-metal-stamping operations: (a) adjustable bed, (b) open back inclinable, (c) press brake, (d) solid gap, or (e) straight-sided? 20.15 Which of the following processes are classified as high-energy-rate forming processes (two best answers): (a) electrochemical machining, (b) electromagnetic forming, (c) electron beam cutting, (d) explosive forming, (e) Guerin process, (f) hydroforming, (g) redrawing, and (h) shear spinning

Presented below and on page 740 are three independent situations. 1. Hairston Stamp Company records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Hairston’s past experience indicates that only 80% of thestamps sold to licensees will be redeemed. Hairston’s liability for stamp redemptions was $13,000,000 at December 31, 2013. Additional information for 2014 is as follows. Stamp service revenue from stamps sold to licensees $9,500,000 Cost of redemptions (stamps sold prior to 1/1/14) 6,000,000 If all the stamps sold in 2014 were presented for redemption in 2015, the redemption cost would be $5,200,000. What amount should Hairston report as a liability for stamp redemptions at December 31, 2014? 2. In packages of its products, Burnitz Inc. includes coupons that may be presented at retail stores to obtain discounts on other Burnitz products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Burnitz honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Burnitz estimates that 60% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Burnitz during 2014 is as follows. Consumer expiration date 12/31/14 Total face amount of coupons issued $800,000 Total payments to retailers as of 12/31/14 330,000 What amount should Burnitz report as a liability for unredeemed coupons at December 31, 2014? 3. Roland Company sold 700,000 boxes of pie mix under a new sales promotional program. Each box contains one coupon, which submitted with $4.00, entitles the customer to a baking pan. Roland pays $6.00 per pan and $0.50 for handling and shipping. Roland estimates that 70% of the coupons will be redeemed, even though only 250,000 coupons had been processed during 2014. What amount should Roland report as a liability for unredeemed coupons at December 31, 2014?

Nancy operates a business that uses the accrual method of accounting. In December, Nancy asked her brother, Hank, to provide her business with consulting advice. Hank billed Nancy for $5,000 of consulting services in year 0 (a reasonable amount), but Nancy was only able to pay $3,000 of the bill by the end of this year. However, Nancy paid the remainder of the bill in the following year.  a) How much of the $5,000 consulting services will Hank include in his income this year if he uses the cash method of accounting? What amount can Nancy deduct this year for the consulting services?  b) How much of the $5,000 consulting services will Hank include in his income this year if he uses the accrual method of accounting? What amount can Nancy deduct this year for the consulting services?

Can a shareholder’s basis in S corporation stock ever be adjusted to a negative number? Why or why not?

A 2.0-in-long billet with diameter = 1.25 in is direct extruded to a diameter of 0.50 in. The extrusion die angle = 90°. For the work metal, K = 45,000 lb/in2 , and n = 0.20. In the Johnson extrusion strain equation, a = 0.8 and b = 1.5. Determine (a) extrusion ratio, (b) true strain (homogeneous deformation), (c) extrusion strain, and (d) ram pressure at L = 2.0, 1.5, 1.0, 0.5 and zero in. Use of a spreadsheet calculator is recommended for part (d).

Describe agency costs and give several examples of them.

Kumar Inc. uses a perpetual inventory system. At January 1, 2014, inventory was $214,000 at both cost and market value. At December 31, 2014, the inventory was $286,000 at cost and $265,000 at market value. Prepare the necessary December 31 entry under (a) the cost-of-goods-sold method and (b) the loss method.

Timpanogos Inc. is an accrual-method, calendar-year corporation. For 2024, it reported financial statement income after taxes of $1,342,000. Timpanogos provided the following information relating to its 2024 activities:   Life insurance proceeds as a result of CEO’s death $200,000   Revenue from sales (for book and tax purposes) 2,000,000   Cost of goods sold for book and tax purposes   300,000   Premiums paid on the key-person life insurance policies (the policies have no cash surrender value)     21,000   Charitable contributions     180,000   Interest income on tax-exempt bonds    40,000   Interest paid on loan obtained to purchase tax-exempt bonds     45,000   Rental income payments received and earned in 2024     15,000   Rental income payments received in 2023 but earned in 2024     10,000     Rental income payments received in 2024 but not earned by year-end    30,000   Tax depreciation    55,000   Book Depreciation    25,000   Net capital loss    42,000   Federal income tax expense for books 310,000       Required:  a. Reconcile book income to taxable income for Timpanogos Inc. Be sure to start with book income and identify all of the adjustments necessary to arrive at taxable income. b. Identify each book-tax difference as either permanent or temporary. c. Complete Schedule M-1 for Timpanogos. d. Compute Timpanogos, Inc.’s tax liability.

What is a cost object? Give 3 examples.

If there were a gradual increase in the saving rate over time, would this lead to sustained economic growth?

It has been suggested that tax policy favors deductions for AGI compared to itemized deductions. Describe two ways in which deductions for AGI are treated more favorably than itemized deductions.

After several years of profitable operations, Javell, the sole shareholder of JBD Inc., a C corporation, sold 22 percent of her JBD stock to ZNO Inc., a C corporation in a similar industry. During the current year, JBD reports $1,000,000 of after-tax income. JBD distributes all of its after-tax earnings to its two shareholders in proportion to their shareholdings.  How much tax will ZNO pay on the dividend it receives from JBD? What is ZNO’s tax rate on the dividend income (after considering the DRD)? [Hint: see §243.]

Francis Equipment Co. closes its books regularly on December 31, but at the end of 2014 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below. 1. January cash receipts recorded in the December cash book totaled $45,640, of which $28,000 represents cash sales, and $17,640 represents collections on account for which cash discounts of $360 were given. 2. January cash disbursements recorded in the December check register liquidated accounts payable of $22,450 on which discounts of $250 were taken. 3. The ledger has not been closed for 2014. 4. The amount shown as inventory was determined by physical count on December 31, 2014. The company uses the periodic method of inventory. Instructions (a) Prepare any entries you consider necessary to correct Francis’s accounts at December 31. (b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open? (Compute working capital and the current ratio.) Assume that the balance sheet that was prepared by the company showed the following amountsZOBLEMS See the book’s companion website, at www.wiley.com/college/kieso, for an additional set of exercises.XERCISES SET B Dr. Cr. Cash $39,000 Accounts receivable 42,000 Inventory 67,000 Accounts payable $45,000 Other current liabilities 14,200

1. Why is it easier to use taxes and subsidies to tackle the problem of car exhaust pollution than to tackle the problem of peak-time traffic congestion in cities? 2. CFCs in fridges were known to cause environmental damage and their use has been banned in most countries. Why has this approach been adopted rather than the tax solution?

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)

Among the synthetic fiber materials, which are the most important?

Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1990, Maddox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Maddox’s fiscal year, November 30, 2014, are shown below. The inventories are stated at cost before any year-end adjustments. Finished goods $647,000 Work in process 112,500 Raw materials 264,000 Factory supplies 69,000 The following information relates to Maddox’s inventory and operations. 1. The finished goods inventory consists of the items analyzed below. 2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment. 3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan. 4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20% above the current market price. The market value of the rest of the raw materials is $127,400. 5. The total market value of the work in process inventory is $108,700. 6. Included in the cost of factory supplies are obsolete items with an historical cost of $4,200. The market value of the remaining factory supplies is $65,900. 7. Maddox applies the lower-of-cost-or-market method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Maddox applies the lower-of-costor- market method to the total of each inventory account. 8. Consider all amounts presented above to be material in relation to Maddox’s financial statements taken as a whole. Instructions (a) Prepare the inventory section of Maddox’s balance sheet as of November 30, 2014, including any required note(s). (b) Without prejudice to your answer to (a), assume that the market value of Maddox’s inventories is less than cost. Explain how this decline would be presented in Maddox’s income statement for the fiscal year ended November 30, 2014. Cost Market Down tube shifter Standard model $ 67,500 $ 67,000 Click adjustment model 94,500 89,000 Deluxe model 108,000 110,000 Total down tube shifters 270,000 266,000 Bar end shifter Standard model 83,000 90,050 Click adjustment model 99,000 97,550 Total bar end shifters 182,000 187,600 Head tube shifter Standard model 78,000 77,650 Click adjustment model 117,000 119,300 Total head tube shifters 195,000 196,950 Total fi nished goods $647,000 $650,550 (c) Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2014, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2014. Discuss the impact, if any, that this purchase commitment would have on Maddox’s financial statements prepared for the fiscal year ended November 30, 2014.