Question & Answer

Explain how the accounting for bad debts can be used for earnings management.

Heartland Company’s budgeted sales and budgeted cost of goods sold for the coming year are $144,000,000 and $99,000,000, respectively. Short-term interest rates are expected to average 10%. If Heartland can increase inventory turnover from its present level of 9 times a year to a level of 12 times per year, compute its expected cost savings for the coming year.

How have growth rates varied over the decades? Does the answer vary by country?

Cominsky Company purchased a machine on July 1, 2015, for $28,000. Cominsky paid $200 in title fees and county property tax of $125 on the machine. In addition, Cominsky paid $500 shipping charges for delivery, and $475 was paid to a local contractor to build and wire a platform for the machine on the plant floor. The machine has an estimated useful life of 6 years with a salvage value of $3,000. Determine the depreciation base of Cominsky’s new machine. Cominsky uses straight-line depreciation.

Under what circumstances can a taxpayer deduct medical expenses paid for a member of their family? Does it matter if the family member reports significant amounts of gross income and cannot be claimed as a dependent?

Explain the difference between obtaining funds from a venture capital firm and engaging in an IPO. Explain how the IPO may serve as a means by which the venture capital firm can cash out. (LO1)

On January 1, 2014, Ellen Greene Company makes the two following acquisitions. 1. Purchases land having a fair value of $200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $337,012. 2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000 (interest payable annually). The company has to pay 11% interest for funds from its bank. Instructions (Round answers to the nearest cent.) (a) Record the two journal entries that should be recorded by Ellen Greene Company for the two purchases on January 1, 2014. (b) Record the interest at the end of the first year on both notes using the effective-interest method.

Create a balance sheet for a typical bank, showing its main liabilities (sources of funds) and assets (uses of funds). (LO2, LO3)

Briefly discuss how a transfer of securities from the available- for-sale category to the trading category affects stockholders’ equity and income.

As of January 1, 2014, Aristotle Inc. installed the retail method of accounting for its merchandise inventory. To prepare the store’s financial statements at June 30, 2014, you obtain the following data. Cost Selling Price Inventory, January 1 $ 30,000 $ 43,000 Markdowns 10,500 Markups 9,200 Markdown cancellations 6,500 Markup cancellations 3,200 Purchases 104,800 155,000 Sales revenue 154,000 Purchase returns 2,800 4,000 Sales returns and allowances 8,000 Instructions (a) Prepare a schedule to compute Aristotle’s June 30, 2014, inventory under the conventional retail method of accounting for inventories. (b) Without prejudice to your solution to part (a), assume that you computed the June 30, 2014, inventory to be $59,400 at retail and the ratio of cost to retail to be 70%. The general price level has increased from 100 at January 1, 2014, to 108 at June 30, 2014. Prepare a schedule to compute the June 30, 2014, inventory at the June 30 price level under the dollar-value LIFO retail method.

The key components of a market interest rate are the risk-free rate and the credit risk premium. During a credit crisis, these two components may change substantially, but in different ways. Write a short essay that describes how the risk-free rate and the risk premium may change during a credit crisis. Explain why the financial markets can become paralyzed during a crisis. Is it because of changes in the risk-free rate or changes in the risk premium?

The following information is available for Wenger Corporation for 2013 (its first year of operations). 1. Excess of tax depreciation over book depreciation, $40,000. This $40,000 difference will reverse equally over the years 2014–2017. 2. Deferral, for book purposes, of $20,000 of rent received in advance. The rent will be recognized in 2014. 3. Pretax financial income, $300,000. 4. Tax rate for all years, 40%. Instructions (a) Compute taxable income for 2013. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013. (c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming taxable income of $325,000.

Leon Wight, a newly hired loan analyst, is examining the current liabilities of a corporate loan applicant. He observes that unearned revenues have declined in the current year compared to the prior year. Is this a positive indicator about the client’s liquidity? Explain.

In a turning operation, spindle speed is set to provide a cutting speed of 1.8 m/s. The feed and depth of cut of cut are 0.30 mm and 2.6 mm, respectively. The tool rake angle is 8°. After the cut, the deformed chip thickness is measured to be 0.49 mm. Determine (a) shear plane angle, (b) shear strain, and (c) material removal rate. Use the orthogonal cutting model as an approximation of the turning process

A gundrilling operation is used to drill a 9/64-in diameter hole to a certain depth. It takes 4.5 minutes to perform the drilling operation using high pressure fluid delivery of coolant to the drill point. The current spindle speed = 4000 rev/min, and feed = 0.0017 in/rev. In order to improve the surface finish in the hole, it has been decided to increase the speed by 20% and decrease the feed by 25%. How long will it take to perform the operation at the new cutting conditions?

The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2014, $147,000; 2015, $185,000. Early in 2016, the following errors were discovered. 1. Depreciation of equipment for 2014 was overstated $17,000. 2. Depreciation of equipment for 2015 was understated $38,500. 3. December 31, 2014, inventory was understated $50,000. 4. December 31, 2015, inventory was overstated $16,200. Instructions Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.)

Theory Suppose that the U.S. Treasury decided to finance its deficit with mostly long-term funds. How could this decision affect the term structure of interest rates? If short-term and long-term markets were segmented, would the Treasury’s decision have a more or less pronounced impact on the term structure? Explain. (LO3)

1.      Order the following primary value chain activities in the correct sequence. a.       Marketing and sales activities b.      Service activities c.       Operations d.      Outbound logistics   e.       Inbound logistics

Martinez Corporation engaged in the following cash transactions during 2014. Sale of land and building $191,000 Purchase of treasury stock 40,000 Purchase of land 37,000 Payment of cash dividend 95,000 Purchase of equipment 53,000 Issuance of common stock 147,000 Retirement of bonds 100,000 Compute the net cash provided (used) by investing activities.

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

Sylvan Inc. entered into a noncancelable lease arrangement with Breton Leasing Corporation for a certain machine. Breton’s primary business is leasing; it is not a manufacturer or dealer. Sylvan will lease the machine for a period of 3 years, which is 50% of the machine’s economic life. Breton will take possession of the machine at the end of the initial 3-year lease and lease it to another, smaller company that does not need the most current version of the machine. Sylvan does not guarantee any residual value for the machine and will not purchase the machine at the end of the lease term. Sylvan’s incremental borrowing rate is 10%, and the implicit rate in the lease is 9%. Sylvan has no way of knowing the implicit rate used by Breton. Using either rate, the present value of the minimum lease payments is between 90% and 100% of the fair value of the machine at the date of the lease agreement. Sylvan has agreed to pay all executory costs directly, and no allowance for these costs is included in the lease payments. Breton is reasonably certain that Sylvan will pay all lease payments. Because Sylvan has agreed to pay all executory costs, there are no important uncertainties regarding costs to be incurred by Breton. Assume that no indirect costs are involved. Instructions (a) With respect to Sylvan (the lessee), answer the following. (1) What type of lease has been entered into? Explain the reason for your answer. (2) How should Sylvan compute the appropriate amount to be recorded for the lease or asset acquired? (3) What accounts will be created or affected by this transaction, and how will the lease or asset and other costs related to the transaction be matched with earnings? (4) What disclosures must Sylvan make regarding this leased asset? (b) With respect to Breton (the lessor), answer the following. (1) What type of leasing arrangement has been entered into? Explain the reason for your answer. (2) How should this lease be recorded by Breton, and how are the appropriate amounts determined? (3) How should Breton determine the appropriate amount of earnings to be recognized from each lease payment? (4) What disclosures must Breton make regarding this lease?

Explain how pension funds participate in financial markets. (LO2)

At December 31, 2014, Burr Corporation owes $500,000 on a note payable due February 15, 2015. (a) If Burr refinances the obligation by issuing a long-term note on February 14 and using the proceeds to pay off the note due February 15, how much of the $500,000 should be reported as a current liability at December 31, 2014? (b) If Burr pays off the note on February 15, 2015, and then borrows $1,000,000 on a long-term basis on March 1, how much of the $500,000 should be reported as a current liability at December 31, 2014, the end of the fiscal year?

Explain why financial institutions are highly exposed to systemic risk during a financial crisis. (LO4)

What are the factors that affect weldability