Question & Answer

Transfer price; sale to outside versus inside customer The Enviro division of Solar Sun produces electric motors, 20 per cent of which are sold to the Energy Plus division of Solar Sun and the remainder to outside customers. Solar Sun treats its divisions as profit centres and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as transfer price. Enviro division’s estimated sales and standard cost data for 2017, based on its full capacity of 100 000 units are as follows:     Enviro has an opportunity to sell the 20 000 units to an outside customer at a price of $75 per unit on a continuing basis. Energy Plus can purchase its requirements from an outside supplier for $85 per unit.   Required Assuming that Enviro division desires to maximise its gross margin, should Enviro accept the new customer and drop its sales to Energy Plus for 2019? Why?

Determine whether a taxpayer can change their election to itemize deductions once a return is filed. (Hint: Read about itemization under Reg. §1.63-1.)

Izzy Inc. purchased a patent for $350,000 which has an estimated useful life of 10 years. Its pattern of use or consumption cannot be reliably determined. Prepare the entry to record the amortization of the patent in its first year of use.

Presented below is information related to Viel Company at December 31, 2014, the end of its first year of operations. Sales revenue $310,000 Cost of goods sold 140,000 Selling and administrative expenses 50,000 Gain on sale of plant assets 30,000 Unrealized gain on non-trading equity securities 10,000 Interest expense 6,000 Loss on discontinued operations 12,000 Allocation to non-controlling interest 40,000 Dividends declared and paid 5,000 Instructions Compute the following: (a) income from operations, (b) net income, (c) net income attributable to Viel Company controlling shareholders, (d) comprehensive income, and (e) retained earnings balance at December 31, 2014. (Ignore income taxes.)

Your client took accounting a number of years ago and was unaware of comprehensive income reporting. He is not convinced that any accounting standards exist for comprehensive income. Instructions Access the IFRS authoritative literature at the IASB website (http://www.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 questions. (Provide paragraph citations.) (a) What IFRS addresses reporting in the statement of comprehensive income? When was it issued? (b) Provide the definition of total comprehensive income. (c) Explain the rationale for presenting additional line items, headings, and subtotals in the statement of comprehensive income. (d) What items of income or expense may be presented either in the statement of comprehensive income or in the notes?

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/Marks-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 type of income statement format does M&S use? Indicate why this format might be used to present income statement information. (b) What are M&S’s primary revenue sources? (c) Compute M&S’s gross profit for each of the years 2011 and 2012. Explain why gross profit increased in 2012. (d) Why does M&S make a distinction between operating and non-operating profit? (e) Does M&S report any non-GAAP measures? Explain.

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

Whether a business expense is “reasonable in amount” is often a difficult question. Explain why determining reasonableness is difficult, and describe a circumstance where reasonableness is likely to be questioned by the IRS.

As a newly enrolled accounting major, you are anxious to better understand accounting institutions and sources of accounting literature. As a first step, you decide to explore the FASB Conceptual Framework. Instructions Go to the FASB website, http://www.fasb.org, to access the FASB Concepts Statements. 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) What is the objective of financial reporting? (b) What other means are there of communicating information, besides financial statements? (c) Indicate some of the users and the information they are most directly concerned with in economic decision-making.

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 these financial statements and the accompanying notes to answer the following questions. (a) What were P&G’s total assets at June 30, 2011? At June 30, 2010? (b) How much cash (and cash equivalents) did P&G have on June 30, 2011? (c) What were P&G’s research and development costs in 2010? In 2011? (d) What were P&G’s revenues in 2010? In 2011? (e) Using P&G’s financial statements and related notes, identify items that may result in adjusting entries for deferrals and accruals. (f) What were the amounts of P&G’s depreciation and amortization expense in 2009, 2010, and 2011?

Where can authoritative IFRS be found related to the various disclosure issues discussed in the chapter?

Paolo is a 50 percent partner in the Capri Partnership and has decided to terminate his partnership interest. Paolo is considering two options as potential exit strategies. The first is to sell his partnership interest to the two remaining 25 percent partners, Giuseppe and Isabella, for $105,000 cash and the assumption of Paolo’s share of Capri’s liabilities. Under this option, Giuseppe and Isabella would each pay $52,500 for half of Paolo’s interest. The second option is to have Capri liquidate Paolo’s partnership interest with a proportionate distribution of the partnership assets. Paolo’s basis in his partnership interest is $110,000, including Paolo’s share of Capri’s liabilities. Capri reports the following balance sheet as of the termination date: Assets Tax Basis FMV Cash $ 80,000 $ 80,000 Receivables 40,000 40,000 Inventory 50,000 80,000 Land 50,000 60,000    Totals $ 220,000 $ 260,000 Liabilities and capital Liabilities $ 50,000 Capital – Paolo 85,000  – Giuseppe 42,500  – Isabella 42,500       Totals $ 220,000 a. If Paolo sells his partnership interest to Giuseppe and Isabella for $105,000, what are the amount and character of Paolo’s recognized gain or loss? b. Giuseppe and Isabella each have a basis in Capri of $55,000 before any purchase of Paolo’s interest. What are Giuseppe’s and Isabella’s bases in their partnership interests following the purchase of Paolo’s interest? c. If Capri liquidates Paolo’s partnership interest with a proportionate distribution of the partnership assets ($25,000 deemed cash from debt relief, $15,000 of actual cash, and half of the remaining assets), what are the amount and character of Paolo’s recognized gain or loss? d. If Capri liquidates Paolo’s interest, what is Paolo’s basis in the distributed assets? e. Compare and contrast Paolo’s options for terminating his partnership interest. Assume that Paolo’s marginal tax rate is 35 percent and his capital gains rate is 15 percent.

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.

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 type of income statement format does P&G use? Indicate why this format might be used to present income statement information. (b) What are P&G’s primary revenue sources? (c) Compute P&G’s gross profit for each of the years 2009–2011. Explain why gross profit decreased in 2011. (d) Why does P&G make a distinction between operating and nonoperating revenue? (e) What financial ratios did P&G choose to report in its “Financial Summary” section covering the years 2001–2011?

According to the injection molding videos, what are the four primary elements that influence the injection molding process?

Recently, a group of university students decided to incorporate for the purposes of selling a process to recycle the waste product from manufacturing cheese. Some of the initial costs involved were legal fees and office expenses incurred in starting the business, state incorporation fees, and stamp taxes. One student wishes to charge these costs against revenue in the current period. Another wishes to defer these costs and amortize them in the future. Which student is correct?

Balanced scorecard measures for financial perspective Following is financial information for last period about Curry House, a regional company with a number of fast-food stores:                                                                 Required Describe and calculate several measures that could be used for the financial perspective.

Morlan Corporation is preparing its December 31, 2014, financial statements. Two events that occurred between December 31, 2014, and March 10, 2015, when the statements were issued, are described below. 1. A liability, estimated at $160,000 at December 31, 2014, was settled on February 26, 2015, at $170,000. 2. A flood loss of $80,000 occurred on March 1, 2015. What effect do these subsequent events have on 2014 net income?

Lazaro Inc. sells goods on the installment basis and uses the installment-sales method. Due to a customer default, Lazaro repossessed merchandise that was originally sold for $800, resulting in a gross profit rate of 40%. At the time of repossession, the uncollected balance is $520, and the fair value of the repossessed merchandise is $275. Prepare Lazaro’s entry to record the repossession.

A 12-in wafer is processed over a circular area of diameter = 11.75 in. The density of point defects in the surface area is 0.018 defects/in2. The chips to be fabricated are square with an area of 0.16 in2 each. Determine an estimate of the number of good chips using the Bose-Einstein yield computation.

Distinguish between a current liability and a long-term debt.

What is an onerous contract? Give two examples of an onerous contract.

If an industry regulator adopts an RPI – X formula for price regulation, is it desirable that the value of X should be adjusted as soon as cost conditions change?

How does money aid the specialisation and division of labour?

Make a list of six possible aims a manager of a high street department store might have. Identify some conflicts that might arise between these aims?