Question & Answer

Risk classification framework Harley–Davidson, Inc. has found itself having to confront a number of risk-related issues. These have mainly related to: (a) the need to increase the number of recalls due to faults (b) surging costs of making the repairs to faulty motorbikes (c) increasing pressure on market share.   Required Classify each of the three events above according to the risk classification framework (strategic, operational, legal and regulatory, and financial). (LO6)

The following information is available for the pension plan of Radcliffe Company for the year 2014. Actual and expected return on plan assets $ 15,000 Benefi ts paid to retirees 40,000 Contributions (funding) 90,000 Interest/discount rate 10% Prior service cost amortization 8,000 Projected benefi t obligation, January 1, 2014 500,000 Service cost 60,000 Instructions (a) Compute pension expense for the year 2014. (b) Prepare the journal entry to record pension expense and the employer’s contribution to the pension plan in 2014.

Teri Hatcher Inc., in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 2013. Book Basis Tax Basis Equipment (net) $400,000 $340,000 Estimated warranty liability $200,000 $ –0– It is estimated that the warranty liability will be settled in 2014. The difference in equipment (net) will result in taxable amounts of $20,000 in 2014, $30,000 in 2015, and $10,000 in 2016. The company has taxable income of $520,000 in 2013. As of the beginning of 2013, the enacted tax rate is 34% for 2013–2015, and 30% for 2016. Hatcher expects to report taxable income through 2016. Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013. (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2013.

Hendrickson Corporation reported net income of $50,000 in 2014. Depreciation expense was $17,000. The following working capital accounts changed. Accounts receivable $11,000 increase Available-for-sale securities 16,000 increase Inventory 7,400 increase Nontrade note payable 15,000 decrease Accounts payable 12,300 increase Compute net cash provided by operating activities.

Trace through the short-run and long-run internal and external effects (under a fixed exchange rate) of (a) a fall in domestic saving; (b) a rise in the demand for exports.

1.       : What is an organization’s workflow technology? How do an organization’s strategy and workflow technology influence the type of structure that will be most effective?

Indicate the effect—Understate, Overstate, No Effect—that each of the following errors has on 2014 net income and 2015 net income. 2014 2015 (a) Equipment purchased in 2012 was expensed. (b) Wages payable were not recorded at 12/31/14. (c) Equipment purchased in 2014 was expensed. (d) 2014 ending inventory was overstated. (e) Patent amortization was not recorded in 2015.

Explain how multiple-deliverable arrangements are measured and reported.

Hanson Company (see BE10-2) borrowed $1,000,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, $2,000,000 note payable and an 11%, 4-year, $3,500,000 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.

Thinken Technology recently merged with College Electronix (CE), a computer graphics manufacturing firm. In performing a comprehensive audit of CE’s accounting system, Gerald Ott, internal audit manager for Thinken Technology, discovered that the new subsidiary did not record pension assets and liabilities, subject to GAAP. The net present value of CE’s pension assets was $15.5 million, the vested benefit obligation was $12.9 million, and the projected benefit obligation was $17.4 million. Ott reported this audit finding to Julie Habbe, the newly appointed controller of CE. A few days later, Habbe called Ott for his advice on what to do. Habbe started her conversation by asking, “Can’t we eliminate the negative income effect of our pension dilemma simply by terminating the employment of nonvested employees before the end of our fiscal year?” Instructions How should Ott respond to Habbe’s remark about firing nonvested employees?

What kinds of questions about future cash flows do investors and creditors attempt to answer with information in the income statement?

Copy Figures 6.17 and 6.18 (which are based on Table 6.8). Now assume that incomes have risen and that as a result two more units per time period can be sold at each price. Draw a new table and plot the resulting new AR, MR and TR curves on your diagrams. Are the new curves parallel to the old ones? Explain.

Explain how and why high-frequency trading affects spreads. (LO3)

For what reasons may the natural rate of unemployment increase?

Lindsey Hunter Corporation is authorized to issue 50,000 shares of $5 par value common stock. During 2014, Lindsey Hunter took part in the following selected transactions. 1. Issued 5,000 shares of stock at $45 per share, less costs related to the issuance of the stock totaling $7,000. 2. Issued 1,000 shares of stock for land appraised at $50,000. The stock was actively traded on a national stock exchange at approximately $46 per share on the date of issuance. 3. Purchased 500 shares of treasury stock at $43 per share. The treasury shares purchased were issued in 2010 at $40 per share. Instructions (a) Prepare the journal entry to record item 1. (b) Prepare the journal entry to record item 2. (c) Prepare the journal entry to record item 3 using the cost method.

You have completed the field work in connection with your audit of Alexander Corporation for the year ended December 31, 2014. The balance sheet accounts at the beginning and end of the year are shown below. Increase Dec. 31, Dec. 31, or 2014 2013 (Decrease) Cash $ 277,900 $ 298,000 ($20,100) Accounts receivable 469,424 353,000 116,424 Inventory 741,700 610,000 131,700 Prepaid expenses 12,000 8,000 4,000 Investment in subsidiary 110,500 –0– 110,500 Cash surrender value of life insurance 2,304 1,800 504 Machinery 207,000 190,000 17,000 Buildings 535,200 407,900 127,300 Land 52,500 52,500 –0– Patents 69,000 64,000 5,000 Copyrights 40,000 50,000 (10,000) Bond discount and issue costs 4,502 –0– 4,502 $2,522,030 $2,035,200 $486,830 Income taxes payable $ 90,250 $ 79,600 $ 10,650 Accounts payable 299,280 280,000 19,280 Dividends payable 70,000 –0– 70,000 Bonds payable—8% 125,000 –0– 125,000 Bonds payable—12% –0– 100,000 (100,000) Allowance for doubtful accounts 35,300 40,000 (4,700) Accumulated depreciation—buildings 424,000 400,000 24,000 Accumulated depreciation—machinery 173,000 130,000 43,000 Premium on bonds payable –0– 2,400 (2,400) Common stock—no par 1,176,200 1,453,200 (277,000) Paid-in capital in excess of par—common stock 109,000 –0– 109,000 Retained earnings—unappropriated 20,000 (450,000) 470,000 $2,522,030 $2,035,200 $486,830 STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2014 January 1, 2014 Balance (defi cit) $(450,000) March 31, 2014 Net income for fi rst quarter of 2014 25,000 April 1, 2014 Transfer from paid-in capital 425,000 Balance –0– December 31, 2014 Net income for last three quarters of 2014 90,000 Dividend declared—payable January 21, 2015 (70,000) Balance $ 20,000 Your working papers from the audit contain the following information: 1. On April 1, 2014, the existing deficit was written off against paid-in capital created by reducing the stated value of the no-par stock. 2. On November 1, 2014, 29,600 shares of no-par stock were sold for $257,000. The board of directors voted to regard $5 per share as stated capital. 3. A patent was purchased for $15,000. 4. During the year, machinery that had a cost basis of $16,400 and on which there was accumulated depreciation of $5,200 was sold for $9,000. No other plant assets were sold during the year. 5. The 12%, 20-year bonds were dated and issued on January 2, 2002. Interest was payable on June 30 and December 31. They were sold originally at 106. These bonds were redeemed at 100.9 plus accrued interest on March 31, 2014. 6. The 8%, 40-year bonds were dated January 1, 2014, and were sold on March 31 at 97 plus accrued interest. Interest is payable semiannually on June 30 and December 31. Expense of issuance was $839. 7. Alexander Corporation acquired 70% control in Crimson Company on January 2, 2014, for $100,000. The income statement of Crimson Company for 2014 shows a net income of $15,000. 8. Extraordinary repairs to buildings of $7,200 were charged to Accumulated Depreciation—Buildings. 9. Interest paid in 2014 was $10,500 and income taxes paid were $34,000. Instructions From the information given, prepare a statement of cash flows using the indirect method. A worksheet is not necessary, but the principal computations should be supported by schedules or general ledger accounts. The company uses straight-line amortization for bond interest.

Tim is a plumber who joined a barter club. This year Tim exchanges plumbing services for a new roof. The roof is properly valued at $2,500, but Tim would have billed only $2,200 for the plumbing services. What amount of income should Tim recognize on the exchange of his services for a roof? Would your answer change if Tim would have normally billed $3,000 for his services?

Maria Alvarez is investing $300,000 in a fund that earns 8% interest compounded annually. What equal amounts can Maria withdraw at the end of each of the next 20 years?

Using the facts from the previous problem, how would your answer change if, instead, Duff adopted the cash method of accounting to allow them to better control the timing of their cash receipts and disbursements?

Angela Lansbury Company deposits all receipts and makes all payments by check. The following information is available from the cash records.   Instructions (a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance. (b) Prepare the general journal entry or entries to correct the Cash account.

Presented below are a number of business transactions that occurred during the current year for Gonzales, Inc. Instructions In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles. (a) The president of Gonzales, Inc. used his expense account to purchase a new Suburban solely for personal use. The following journal entry was made. Miscellaneous Expense 29,000 Cash 29,000 (b) Merchandise inventory that cost $620,000 is reported on the balance sheet at $690,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value. Inventory 70,000 Sales Revenue 70,000 (c) The company is being sued for $500,000 by a customer who claims damages for personal injury apparently caused by a defective product. Company attorneys feel extremely confident that the company will have no liability for damages resulting from the situation. Nevertheless, the company decides to make the following entry. Loss from Lawsuit 500,000 Liability for Lawsuit 500,000 (d) Because the general level of prices increased during the current year, Gonzales, Inc. determined that there was a $16,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made. Depreciation Expense 16,000 Accumulated Depreciation—Equipment 16,000 (e) Gonzales, Inc. has been concerned about whether intangible assets could generate cash in case of liquidation. As a consequence, goodwill arising from a purchase transaction during the current year and recorded at $800,000 was written off as follows. Retained Earnings 800,000 Goodwill 800,000 (f) Because of a “fire sale,” equipment obviously worth $200,000 was acquired at a cost of $155,000. The following entry was made. Equipment 200,000 Cash 155,000 Sales Revenue 45,000

Describe a put option on interest rate futures. How does it differ from selling a futures contract? (LO6)

A bending operation is to be performed on 4.0 mm thick cold-rolled steel sheet that is 25 mm wide and 100 mm long. The sheet is bent along the 25 mm direction, so that the bend is 25 mm long. The resulting sheet metal part has an acute angle of 30° and a bend radius of 6 mm. Determine (a) the bend allowance and (b) the length of the neutral axis of the part after the bend. (Hint: the length of the neutral axis before the bend = 100.0 mm).

Under what circumstances will a liquidating corporation be allowed to recognize a loss in a non-pro rata distribution?

Ace Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems. In connection with her examination of Ace’s financial statements for the year ended December 31, 2015, Gloria Rodd, CPA, completed field work 2 weeks ago. Ms. Rodd now is evaluating the significance of the following items prior to preparing her auditor’s report. Except as noted, none of these items have been disclosed in the financial statements or notes. Item 1: A 10-year loan agreement, which the company entered into 3 years ago, provides that dividend payments may not exceed net income earned after taxes subsequent to the date of the agreement. The balance of retained earnings at the date of the loan agreement was $420,000. From that date through December 31, 2015, net income after taxes has totaled $570,000 and cash dividends have totaled $320,000. On the basis of these data, the staff auditor assigned to this review concluded that there was no retained earnings restriction at December 31, 2015. Item 2: Recently Ace interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were paid regularly through 2014, discontinued for all of 2015 to finance purchase of equipment for the company’s new plant, and resumed in the first quarter of 2016. In the annual report, dividend policy is to be discussed in the president’s letter to stockholders. Item 3: A major electronics firm has introduced a line of products that will compete directly with Ace’s primary line, now being produced in the specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Ace’s line. The competitor announced its new line during the week following completion of field work. Ms. Rodd read the announcement in the newspaper and discussed the situation by telephone with Ace executives. Ace will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but will permit recovery of only a portion of fixed costs. Item 4: The company’s new manufacturing plant building, which cost $2,400,000 and has an estimated life of 25 years, is leased from Wichita National Bank at an annual rental of $600,000. The company is obligated to pay property taxes, insurance, and maintenance. At the conclusion of its 10-year noncancelable lease, the company has the option of purchasing the property for $1. In Ace’s income statement, the rental payment is reported on a separate line. Instructions For each of the above items, discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client. (The cumulative effect of the four items should not be considered.)