Question & Answer

A U.S. insurance company purchased British 20-year Treasury bonds instead of U.S. 20-year Treasury bonds because the coupon rate was 2 percentage points higher on the British bonds. Assume that the insurance company sold the bonds after five years. Its yield over the five-year period was substantially less than the yield it would have received on the U.S. bonds over the same five-year period. Assume that the U.S. insurance company had hedged its exchange rate exposure. Given that the lower yield was not because of default risk or exchange rate risk, explain how the British bonds could have generated a lower yield than the U.S. bonds. (Assume that either type of bond could have been purchased at the par value.) (LO2, LO5)

On November 24, 2014, 26 passengers on Windsor Airlines Flight No. 901 were injured upon landing when the plane skidded off the runway. Personal injury suits for damages totaling $9,000,000 were filed on January 11, 2015, against the airline by 18 injured passengers. The airline carries no insurance. Legal counsel has studied each suit and advised Windsor that it can reasonably expect to pay 60% of the damages claimed. The financial statements for the year ended December 31, 2014, were issued February 27, 2015. Instructions (a) Prepare any disclosures and journal entries required by the airline in preparation of the December 31, 2014, financial statements. (b) Ignoring the November 24, 2014, accident, what liability due to the risk of loss from lack of insurance coverage should Windsor Airlines record or disclose? During the past decade, the company has experienced at least one accident per year and incurred average damages of $3,200,000. Discuss fully.

For the copper-nickel phase diagram in Figure 6.2, find the compositions of the liquid and solid phases for a nominal composition of 70% Ni and 30% Cu at 1371°C (2500°F).

Under what conditions should a short-term obligation be excluded from current liabilities?

Why are trading halts sometimes imposed on particular stocks? (LO4)

What are two other names for ram type EDMs?

Ford Motor Co. is considering alternate methods of accounting for the cash discounts it takes when paying suppliers promptly. One method suggested was to report these discounts as financial income when payments are made. Comment on the propriety of this approach.

Is it possible for a taxpayer to receive rental income that is not subject to taxation? Explain.

Campbell, a single taxpayer, earns $400,000 in taxable income and $2,000 in interest from an investment in State of New York bonds.  Using the U.S. tax rate schedule (see Appendix C), how much federal tax will she owe?  What is her average tax rate?  What is her effective tax rate?  What is her current marginal tax rate?

During 2014, Simms Company redeemed $2,000,000 of bonds payable for $1,880,000 cash. Indicate how this transaction would be reported on a statement of cash flows, if at all.

Jackie has just opened her copy of the Code for the first time.  She looks at the table of contents and wonders why it is organized the way it is.  She questions whether it makes sense to try and understand the Code’s organization.  What are some reasons why understanding the organization of the Internal Revenue Code may prove useful?

How do changing tax rates affect the timing strategy? What information do you need to determine the appropriate timing strategy when tax rates change?

What accounting treatment is normally given to the following items in accounting for plant assets? (a) Additions. (b) Major repairs. (c) Improvements and replacements.

1.      : Ignore the test. Cheryl has proved herself via work experience and deserves the job.

Simon just received a 30-day letter from the IRS indicating a proposed assessment.  Does he have to pay the additional tax?  What are his options?

Balanced scorecard measures Curry House owns a number of stores that sell fast food. As part of its compensation packages, Curry House provides employees with bonuses based on customer satisfaction surveys. Recent analysis of the data shows a positive correlation between survey ratings and sales; that is, as customer satisfaction increases, sales increase. However, at a certain point in this trend, sales plateau even though the ratings continue to increase. In addition, increasing customer satisfaction causes costs to also increase because more time is spent with each customer and more employees are on hand to help with food preparation and cashiering to reduce the time that customers wait for their food to be prepared. Other factors that appear to affect customer satisfaction are the general cleanliness of the store and the attitudes of the cashiers as they provide customer service. A factor that strongly affects sales at each store is its health rating from the local council. These ratings are published in the local daily newspaper. When a store has a low rating, sales at that outlet drop off until publication of an improved rating occurs. The owner wants to add one or more financial performance measures to the bonus package so that employees will earn more money when customer satisfaction increases at the same time that financial performance is also increasing.   Required                         (a)     Describe advantages and disadvantages of using a combination of performance measures reflecting the customer and financial perspectives. (b)     Management would like to add other customer-related measures and is considering replacing survey satisfaction with some other measure. List one potential measure and list at least one advantage and one disadvantage for it. (c)     List one additional performance measure that could be included in the compensation package. Explain what it is and what it would contribute. (d)     Explain how the scorecard measures (particularly the customer perspective) are being used in part as a boundary system.

Teresa Ramirez and Lenny Traylor are examining the following statement of cash flows for Pacific Clothing Store’s first year of operations. PACIFIC CLOTHING STORE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 2014 Sources of cash From sales of merchandise $ 382,000 From sale of capital stock 380,000 From sale of investment 120,000 From depreciation 80,000 From issuance of note for truck 30,000 From interest on investments 8,000 Total sources of cash 1,000,000 PACIFIC CLOTHING STORE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 2014 (CONTINUED) Uses of cash For purchase of fi xtures and equipment 330,000 For merchandise purchased for resale 253,000 For operating expenses (including depreciation) 170,000 For purchase of investment 95,000 For purchase of truck by issuance of note 30,000 For purchase of treasury stock 10,000 For interest on note 3,000 Total uses of cash 891,000 Net increase in cash $ 109,000 Teresa claims that Pacific’s statement of cash flows is an excellent portrayal of a superb first year, with cash increasing $109,000. Lenny replies that it was not a superb first year—that the year was an operating failure, the statement was incorrectly presented, and $109,000 is not the actual increase in cash. Instructions (a) With whom do you agree, Teresa or Lenny? Explain your position. (b) Using the data provided, prepare a statement of cash flows in proper indirect method form. The only noncash items in income are depreciation and the gain from the sale of the investment  purchase and sale are related).

What is the primary polymer ingredient in natural rubber?

In each of the following independent cases, indicate the amount (1) deductible for AGI, (2) deductible from AGI, and (3) neither deductible for nor deductible from AGI before considering income limitations or the standard deduction.

In a chemical milling operation on a flat mild steel plate, it is desired to cut an ellipse-shaped pocket to a depth of 0.4 in. The semiaxes of the ellipse are a = 9.0 in and b = 6.0 in. A solution of hydrochloric and nitric acids will be used as the etchant. Determine (a) metal removal rate in in3/hr, (b) time required to etch to depth, and (c) required dimensions of the opening in the cut and peel maskant required to achieve the desired pocket size on the part.

Does the use of floating-rate loans eliminate interest rate risk? Explain. (LO3)

Shetland Inc. had pretax financial income of $154,000 in 2014. Included in the computation of that amount is insurance expense of $4,000 which is not deductible for tax purposes. In addition, depreciation for tax purposes exceeds accounting depreciation by $10,000. Prepare Shetland’s journal entry to record 2014 taxes, assuming a tax rate of 45%.

What are some of the noteworthy properties of magnesium?

Bandung Corporation began 2014 with a $92,000 balance in the Deferred Tax Liability account. At the end of 2014, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2014 is $525,000, the tax rate for all years is 40%, and taxable income for 2014 is $405,000. 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.”

The Fed intervened heavily during the 2008 credit crisis. Write a short essay explaining whether you believe the Fed’s intervention improved conditions in financial markets or made conditions worse.