Question & Answer

What other forms of intervention are likely to be necessary to back up the work of regulatory bodies?

What would you pay for a $50,000 debenture bond that matures in 15 years and pays $5,000 a year in interest if you wanted to earn a yield of: (a) 8%? (b) 10%? (c) 12%?

Larry purchased an annuity from an insurance company that promises to pay him $1,500 per month for the rest of his life.  Larry paid $170,820 for the annuity.  Larry is in good health, and he is 72 years old.  Larry received the first annuity payment of $1,500 this month.  Use the expected number of payments in Exhibit 5-1 for this problem. a.       How much of the first payment should Larry include in gross income? b.       If Larry lives more than 15 years after purchasing the annuity, how much of each additional payment should he include in gross income? c.       What are the tax consequences if Larry dies just after he receives the 100th payment?

Give an example of a noncontact inspection technique.

For each item below, indicate to which category of elements of financial statements it belongs. (a) Retained earnings (e) Depreciation (h) Dividends (b) Sales (f) Loss on sale of equipment (i) Gain on sale of investment (c) Additional paid-in capital (g) Interest payable (j) Issuance of common stock (d) Inventory

Surface roughness is a measurable aspect of surface texture; what does surface roughness mean?

The following facts relate to Krung Thep Corporation. 1. Deferred tax liability, January 1, 2014, $40,000. 2. Deferred tax asset, January 1, 2014, $0. 3. Taxable income for 2014, $95,000. 4. Pretax financial income for 2014, $200,000. 5. Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $240,000. 6. Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $35,000. 7. Tax rate for all years, 40%. 8. The company is expected to operate profitably in the future. Instructions (a) Compute income taxes payable for 2014. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014. (c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.”

For a recent 2-year period, the balance sheet of Santana Dotson Company showed the following stockholders’ equity data at December 31 (in millions). 2014 2013 Additional paid-in capital $ 931 $ 817 Common stock 545 540 Retained earnings 7,167 5,226 Treasury stock 1,564 918 Total stockholders’ equity $7,079 $5,665 Common stock shares issued 218 216 Common stock shares authorized 500 500 Treasury stock shares 34 27 Instructions (a) Answer the following questions. (1) What is the par value of the common stock? (2) What is the cost per share of treasury stock at December 31, 2014, and at December 31, 2013? (b) Prepare the stockholders’ equity section at December 31, 2014.

Suppose you asked your favorite AI query tool “How long is the carryover period for NOLs incurred in 2024?” and the AI tool responded as follows:   The carryover period for a net operating loss (NOL) incurred in 2024 would typically be up to 20 years. This means that the corporation or individual with the NOL can carry the loss forward and use it to offset taxable income in future tax years for up to 20 years from the year in which the NOL was generated.   Is the AI answer to the question correct?  Explain.

Remember the question we asked at the beginning of the Chapter 4 (page 105): ‘Do you ever purchase things irrationally? If so, what are they and why is your behaviour irrational?’ Can you explain this behaviour better in the light of behavioural economics?

Malone Company determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2013, December 31, 2014, and December 31, 2015, as shown below. Cost Lower-of-Cost-or-Market 12/31/13 $650,000 $650,000 12/31/14 780,000 712,000 12/31/15 905,000 830,000 Instructions (a) Prepare the journal entries required at December 31, 2014, and at December 31, 2015, assuming that the cost-of-goods-sold method of adjusting to lower-of-cost-or-market is used. (b) Prepare the journal entries required at December 31, 2014, and at December 31, 2015, assuming that the loss method of adjusting to lower-of-cost-or-market is used.

Hart Golf Co. uses titanium in the production of its specialty drivers. Hart anticipates that it will need to purchase 200 ounces of titanium in November 2014, for clubs that will be shipped in the spring and summer of 2015. However, if the price of titanium increases, this will increase the cost to produce the clubs, which will result in lower profit margins. To hedge the risk of increased titanium prices, on May 1, 2014, Hart enters into a titanium futures contract and designates this futures contract as a cash flow hedge of the anticipated titanium purchase. The notional amount of the contract is 200 ounces, and the terms of the contract give Hart the option to purchase titanium at a price of $500 per ounce. The price will be good until the contract expires on November 30, 2014. Assume the following data with respect to the price of the call options and the titanium inventory purchase Spot Price for Date November Delivery May 1, 2014 $500 per ounce June 30, 2014 520 per ounce September 30, 2014 525 per ounce Instructions Present the journal entries for the following dates/transactions. (a) May 1, 2014—Inception of futures contract, no premium paid. (b) June 30, 2014—Hart prepares financial statements. (c) September 30, 2014—Hart prepares financial statements. (d) October 5, 2014—Hart purchases 200 ounces of titanium at $525 per ounce and settles the futures contract. (e) December 15, 2014—Hart sells clubs containing titanium purchased in October 2014 for $250,000. The cost of the finished goods inventory is $140,000. (f) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2014.

Suppose you asked your favorite AI query tool the following question: “What is the Kiddie Tax?”  The AI tool provided the following response:

There are 20 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. 2.1 The basic structural unit of matter is which one of the following: (a) atom, (b) electron, (c) element, (d) molecule, or (e) nucleus? 2.2 Approximately how many different elements have been identified (one best answer): (a) 10, (b) 50, (c) 100, (d) 200, or (e) 500? 2.3 In the Periodic Table, the elements can be divided into which of the following categories (three best answers): (a) ceramics, (b) gases, (c) liquids, (d) metals, (e) nonmetals, (f) polymers, (g) semi-metals, and (h) solids? 2.4 The element with the lowest density and smallest atomic weight is which one of the following: (a) aluminum, (b) argon, (c) helium, (d) hydrogen, or (e) magnesium? 2.5 Which of the following bond types are classified as primary bonds (three correct answers): (a) covalent bonding, (b) hydrogen bonding, (c) ionic bonding, (d) metallic bonding, and (e) van der Waals forces? 2.6 How many atoms are there in the face-centered cubic (FCC) unit cell (one correct answer): (a) 8, (b) 9, (c) 10, (d) 12, or (e) 14?             2.7 Which of the following are not point defects in a crystal lattice structure (three correct answers): (a) edge dislocation, (b) grain boundaries, (c) interstitialcy, (d) Schottky defect, (e) screw dislocation, or (f) vacancy? 2.8 Which one of the following crystal structures has the fewest slip directions and therefore the metals with this structure are generally more difficult to deform at room temperature: (a) BCC, (b) FCC, or (c) HCP? 2.9 Grain boundaries are an example of which one of the following types of crystal structure defects: (a) dislocation, (b) Frenkel defect, (c) line defects, (d) point defects, or (e) surface defects? 2.10 Twinning is which of the following (three best answers): (a) elastic deformation, (b) mechanism of plastic deformation, (c) more likely at high deformation rates, (d) more likely in metals with HCP structure, (e) slip mechanism, and (f) type of dislocation? 2.11 Polymers are characterized by which of the following bonding types (two correct answers): (a) adhesive, (b) covalent, (c) hydrogen, (d) ionic, (e) metallic, and (f) van der Waals?

The stockholders’ equity section of Martino Inc. at the beginning of the current year appears below. Common stock, $10 par value, authorized 1,000,000 shares, 300,000 shares issued and outstanding $3,000,000 Paid-in capital in excess of par—common stock 600,000 Retained earnings 570,000 During the current year, the following transactions occurred. 1. The company issued to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at $32. The rights were void after 30 days. The market price of the stock at this time was $34 per share. 2. The company sold to the public a $200,000, 10% bond issue at 104. The company also issued with each $100 bond one detachable stock purchase warrant, which provided for the purchase of common stock at $30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at $8. 3. All but 5,000 of the rights issued in (1) were exercised in 30 days. 4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing. 5. During the current year, the company granted stock options for 10,000 shares of common stock to company executives. The company, using a fair value option-pricing model, determines that each option is worth $10. The option price is $30. The options were to expire at year-end and were considered compensation for the current year. 6. All but 1,000 shares related to the stock-option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract. Instructions (a) Prepare general journal entries for the current year to record the transactions listed above. (b) Prepare the stockholders’ equity section of the balance sheet at the end of the current year. Assume that retained earnings at the end of the current year is $750,000.

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.

Winsor Inc. recently purchased Holiday Corp., a large midwestern home painting corporation. One of the terms of the merger was that if Holiday’s income for 2014 was $110,000 or more, 10,000 additional shares would be issued to Holiday’s stockholders in 2015. Holiday’s income for 2013 was $120,000. Instructions (a) Would the contingent shares have to be considered in Winsor’s 2013 earnings per share computations? (b) Assume the same facts, except that the 10,000 shares are contingent on Holiday’s achieving a net income of $130,000 in 2014. Would the contingent shares have to be considered in Winsor’s earnings per share computations for 2013?

Explain how state and local governments benefit from the provisions that allow taxpayers to exclude interest on state and local bonds from their gross income.

Oregon Co. had purchased 200 shares of Washington Co. for $40 each this year and classified the investment as a trading security. Oregon Co. sold 100 shares of the stock for $45 each. At year-end, the price per share of the Washington Co. stock had dropped to $35. Instructions Prepare the journal entries for these transactions and any year-end adjustments.

If two or more firms were charging similar prices, what types of evidence would you look for to prove that this was collusion rather than coincidence?

What is the basic difference between low-density and high-density polyethylene?

The following statement was prepared by Maloney Corporation’s accountant. MALONEY CORPORATION STATEMENT OF SOURCES AND APPLICATION OF CASH FOR THE YEAR ENDED SEPTEMBER 30, 2014 Sources of cash Net income $111,000 Depreciation and depletion 70,000 Increase in long-term debt 179,000 Changes in current receivables and inventories, less current liabilities (excluding current maturities of long-term debt) 14,000 $374,000 Application of cash Cash dividends $ 60,000 Expenditure for property, plant, and equipment 214,000 Investments and other uses 20,000 Change in cash 80,000 $374,000 The following additional information relating to Maloney Corporation is available for the year ended September 30, 2014. 1. Salaries and wages expense attributable to stock option plans was $25,000 for the year. 2. Expenditures for property, plant, and equipment $250,000 Proceeds from retirements of property, plant, and equipment 36,000 Net expenditures $214,000 3. A stock dividend of 10,000 shares of Maloney Corporation common stock was distributed to common stockholders on April 1, 2014, when the per share market price was $7 and par value was $1. 4. On July 1, 2014, when its market price was $6 per share, 16,000 shares of Maloney Corporation common stock were issued in exchange for 4,000 shares of preferred stock. 5. Depreciation expense $ 65,000 Depletion expense 5,000 $ 70,000 6. Increase in long-term debt $620,000 Less: Redemption of debt 441,000 Net increase $179,000 Instructions (a) In general, what are the objectives of a statement of the type shown above for Maloney Corporation? Explain. (b) Identify the weaknesses in the form and format of Maloney Corporation’s statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.) (c) For each of the six items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable.

Stan Conner and Mark Stein were discussing the presentation format of the statement of cash flows of Bombeck Co. At the bottom of Bombeck’s statement of cash flows was a separate section entitled “Noncash investing and financing activities.” Give three examples of significant non-cash transactions that would be reported in this section.

What method(s) might be used in the accounts to record a loss due to a price decline in the inventories? Discuss.

ELS Corporation reported gross receipts for 2021-2023 for Scenarios A, B, and C as follows: