Question & Answer

Which of the following activities should be expensed currently as R&D costs? (a) Testing in search for or evaluation of product or process alternatives. (b) Engineering follow-through in an early phase of commercial production. (c) Legal work in connection with patent applications or litigation, and the sale or licensing of patents.

Brooks Corp. is a medium-sized corporation specializing in quarrying stone for building construction. The company has long dominated the market, at one time achieving a 70% market penetration. During prosperous years, the company’s profits, coupled with a conservative dividend policy, resulted in funds available for outside investment. Over the years, Brooks has had a policy of investing idle cash in equity securities. In particular, Brooks has made periodic investments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstanding common stock of Norton Industries, Brooks does not have significant influence over the operations of Norton Industries. Cheryl Thomas has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2014 year-end adjusting entries for the accounts that are valued by the “fair value” rule for financial reporting purposes. Thomas has gathered the following information about Brooks’ pertinent accounts. 1. Brooks has trading securities related to Delaney Motors and Patrick Electric. During this fiscal year, Brooks purchased 100,000 shares of Delaney Motors for $1,400,000; these shares currently have a fair value of $1,600,000. Brooks’ investment in Patrick Electric has not been profitable; the company acquired 50,000 shares of Patrick in April 2014 at $20 per share, a purchase that currently has a value of $720,000. 2. Prior to 2014, Brooks invested $22,500,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,500,000 on December 31, 2013. Brooks’ 12% ownership of Norton Industries has a current fair value of $22,225,000. Instructions (a) Prepare the appropriate adjusting entries for Brooks as of December 31, 2014, to reflect the application of the “fair value” rule for both classes of securities described above. (b) For both classes of securities presented above, describe how the results of the valuation adjustments made in (a) would be reflected in the body of and notes to Brooks’ 2014 financial statements. (c) Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton’s shares. Norton reported income of $500,000 in 2014 and paid cash dividends of $100,000.

In a certain centerless grinding operation, the grinding wheel diameter = 8.5 in, and the regulating wheel diameter = 5.0 in. The grinding wheel rotates at 3500 rev/min and the regulating wheel rotates at 150 rev/min. The inclination angle of the regulating wheel = 3°. Determine the throughfeed rate of cylindrical workparts that have the following dimensions: diameter = 1.25 in and length = 8.0 in

Identify the relevant characteristics of any security that can affect its yield. (LO1)

Distinguish between publicly provided goods, public goods and merit goods.

Quantity requirements are to be planned for component C2 in product P1. Required deliveries for P1 are given in Table 41.1. Ordering, manufacturing, and assembly lead times are as follows: for P1 and C2, the lead time is one week; and for S1 and M2, the lead time is two weeks. Given the product structure in Figure 41.4, determine the time-phased requirements for M2, C2, and S1 to meet the master schedule for P1. Assume no common use items and all on-hand inventories and scheduled receipts are zero. Use a format similar to Table 41.2 and develop a spreadsheet calculator to solve. Ignore demand for P1 beyond period 10.

Blue Devil Savings and Loan Association has a large number of 10-year fixed-rate mortgages and obtains most of its funds from short-term deposits. It uses the yield curve to assess the market’s anticipation of future interest rates. It believes that expectations of future interest rates are the major force in affecting the yield curve. Assume that an upward-sloping yield curve with a steep slope exists. Based on this information, should Blue Devil consider using financial futures as a hedging technique? Explain. (LO2)

Keith Bowie is trying to determine the amount to set aside so that he will have enough money on hand in 2 years to overhaul the engine on his vintage used car. While there is some uncertainty about the cost of engine overhauls in 2 years, by conducting some research online, Keith has developed the following estimates. Engine Overhaul Probability Estimated Cash Outfl ow Assessment $200 10% 450 30% 600 50% 750 10% Instructions How much should Keith Bowie deposit today in an account earning 6%, compounded annually, so that he will have enough money on hand in 2 years to pay for the overhaul?

Another example of anchoring is partial computation. Assume two different groups of people are given 5 seconds to find the product of eight numbers. The calculation is presented to the first group in ascending order (1 ´ 2 ´ 3 ´ 4 ´ 5 ´ 6 ´ 7 ´ 8) and to the second group in descending order (8 ´ 7 ´ 6 ´ 5 ´ 4 ´ 3 ´ 2 ´ 1). Which group do you think will give the most accurate answers? Explain your reasoning.

The earning of revenue by a business enterprise is recognized for accounting purposes when the transaction is recorded. In some situations, revenue is recognized approximately as it is earned in the economic sense. In other situations, however, accountants have developed guidelines for recognizing revenue by other criteria, such as at the point of sale. Instructions (Ignore income taxes.) (a) Explain and justify why revenue is often recognized as earned at time of sale. (b) Explain in what situations it would be appropriate to recognize revenue as the productive activity takes place. (c) At what times, other than those included in (a) and (b) above, may it be appropriate to recognize revenue? Explain.

1. Trace through the effect of an adverse supply shock, such as a rise in oil prices. 2. What determines the amount that national income fluctuates when there is a temporary shift in the DAS curve?

Carow Corporation purchased, as a held-for-collection investment, $60,000 of the 8%, 5-year bonds of Harrison, Inc. for $65,118, which provides a 6% return. The bonds pay interest semiannually. Prepare Carow’s journal entries for (a) the purchase of the investment, and (b) the receipt of semiannual interest and premium amortization.

What is the predominant alloying element in all of the stainless steels?

The adjusted trial balance for Ed Bradley Co. is presented in the following worksheet for the month ended April 30, 2014.   Instructions Complete the worksheet and prepare a classified balance sheet.

Distinguish between the modified all-inclusive income statement and the current operating performance income statement. According to present generally accepted accounting principles, which is recommended? Explain.

Assume that Amazon.com has a stock-option plan for top management. Each stock option represents the right to purchase a share of Amazon $1 par value common stock inthe future at a price equal to the fair value of the stock at the date of the grant. Amazon has 5,000 stock options outstanding, which were granted at the beginning of 2014. The following data relate to the option grant. Exercise price for options $40 Market price at grant date (January 1, 2014) $40 Fair value of options at grant date (January 1, 2014) $6 Service period 5 years Instructions (a) Prepare the journal entry(ies) for the first year of the stock-option plan. (b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted stock were granted at the beginning of 2014. (c) Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for (a) and (b). (d) Amazon would like to implement an employee stock-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Which of the following provisions must be in place for the plan to avoid recording compensation expense? (1) Substantially all employees may participate. (2) The discount from market is small (less than 5%). (3) The plan offers no substantive option feature. (4) There is no preferred stock outstanding.

Explain why the failure of Lehman Brothers caused prices on credit default swap contracts to increase. (LO7)

Assume that Sarazan Company has a share-option plan for top management. Each share option represents the right to purchase a $1 par value ordinary share in the future at a price equal to the fair value of the shares at the date of the grant. Sarazan has 5,000 share options outstanding, which were granted at the beginning of 2014. The following data relate to the option grant. Exercise price for options $40 Market price at grant date (January 1, 2014) $40 Fair value of options at grant date (January 1, 2014) $6 Service period 5 years Instructions (a) Prepare the journal entry(ies) for the first year of the share-option plan. (b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted shares were granted at the beginning of 2014. (c) Now assume that the market price of Sarazan shares on the grant date was $45 per share. Repeat the requirements for (a) and (b). (d) Sarazan would like to implement an employee share-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Explain how employee sharepurchase plans are recorded.

Kennedy Company has the following portfolio of available-for-sale securities at December 31, 2014. Percent Per Share Security Quantity Interest Cost Price Frank, Inc. 2,000 shares 8% $11 $16 Ellis Corp. 5,000 shares 14% 23 19 Mendota Company 4,000 shares 2% 31 24 Instructions (a) What should be reported on Kennedy’s December 31, 2014, balance sheet relative to these long-term available-for-sale securities? On December 31, 2015, Kennedy’s portfolio of available-for-sale securities consisted of the following common stocks. Percent Per Share Security Quantity Interest Cost Price Ellis Corp. 5,000 shares 14% $23 $28 Mendota Company 4,000 shares 2% 31 23 Mendota Company 2,000 shares 1% 25 23 At the end of 2015, Kennedy Company changed its intent relative to its investment in Frank, Inc. and reclassified the shares to trading securities status when the shares were selling for $8 per share. (b) What should be reported on the face of Kennedy’s December 31, 2015, balance sheet relative to available-for-sale securities investments? What should be reported to reflect the transactions above in Kennedy’s 2015 income statement?

Calculation of budget variances The accountant for Moon Industries has taken unexpected leave and has not completed the end-ofperiod budget analysis. The following incomplete budget analysis was found on her desk.   Additional information: Required (a) Complete the variance analysis report. (b) Provide a brief report to management of any issues highlighted from your analysis in (a).

Distinguish between FHA and conventional mortgages. (LO1)

What stock ownership tests must be met before a shareholder receives exchange treatment under the substantially disproportionate change-in-stock-ownership test in a stock redemption?  Why is a change-in-stock-ownership test used to determine the tax status of a stock redemption?

‘It is easier to control the monetary base than broader money, but it is less relevant to do so.’ Do you agree with this statement?

List the four most common blow-molding processes according to the video on blow molding.

Suppose you asked your favorite AI query tool the following question: “Is total income on Form 1040 the same thing as gross income?”  The AI tool provided the following response:   Is the AI response to the question correct?  Explain.