Question & Answer

Why would a company restrict when a senior executive can exercise their         share options?             (LO2, 3 and 5)

Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2013, had the following balances. Land $ 300,000 Land improvements 140,000 Buildings 1,100,000 Equipment 960,000 During 2014, the following transactions occurred. 1. A tract of land was acquired for $150,000 as a potential future building site. 2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo’s common stock. On the acquisition date, Lobo’s stock had a closing market price of $37 per share on a national stock exchange. The plant facility was carried on Mendota’s books at $110,000 for land and $320,000 for the building at the exchange date. Current appraised values for the land and building, respectively, are $230,000 and $690,000. 3. Items of machinery and equipment were purchased at a total cost of $400,000. Additional costs were incurred as follows. Freight and unloading $13,000 Sales taxes 20,000 Installation 26,000 4. Expenditures totaling $95,000 were made for new parking lots, streets, and sidewalks at the corporation’s various plant locations. These expenditures had an estimated useful life of 15 years. 5. A machine costing $80,000 on January 1, 2006, was scrapped on June 30, 2014. Double-decliningbalance depreciation has been recorded on the basis of a 10-year life. 6. A machine was sold for $20,000 on July 1, 2014. Original cost of the machine was $44,000 on January 1, 2011, and it was depreciated on the straight-line basis over an estimated useful life of 7 years and a salvage value of $2,000. Instructions (Round to the nearest dollar.) (a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2014. Land Buildings Land Improvements Equipment (Hint: Disregard the related accumulated depreciation accounts.) (b) List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo’s financial statements.

1. A key policy objective of the UK Coalition government, achieved in April 2014, was to raise the personal income tax allowance to £10 000. This has been accompanied by the gradual removal of the same allowance from those earning over £100 000 (see Table 11.3). Evaluate these policies. 2. What would the effects be of cuts in (i) the basic rate of tax; (ii) the top rate of tax? 3. What tax changes (whether up or down) will have a positive incentive effect and also redistribute incomes more equally?

Classification of rework costs, uncertainties, critique of rework and scrap policy Fran Markus is in the cost accounting group at Boats Galore, a large manufacturing company that produces customised boats and yachts. The company sometimes experiences quality problems with its fibreglass raw material, causing flawed areas in boat hulls. The problem is often fixed by reworking the flawed areas. Other times the hull is scrapped because it is too flawed, and a new hull is fabricated. The spoilage policy at Boats Galore is to charge the cost of rework and spoilage to overhead unless it arises because a hull design is particularly complicated. In those cases, the cost is assigned to the job.   Two boats currently under construction require triple the amount of materials and labour time to enhance boat security. The customer wants each hull to be able to withstand the explosion of a small bomb. It is the company’s first order with this hull construction. Because of the new design and fibreglass process, the customer has agreed to a cost-plus contract and will pay cost plus a fixed percentage of cost. This contract assures that Boats Galore does not incur a loss from developing the enhanced security hull. This week, the third layer on one of the boat hulls had a flaw in the fibreglass. The area was reworked, after which it met the security requirements.   Fran receives weekly data on labour and materials for each boat under construction. For regular production, workers estimate the time and materials used to rework flawed fibreglass areas, and Fran adds those costs to overhead instead of recording them as a cost of the particular job. Now she needs to decide how to record the cost of rework for the enhanced security hulls. The production people are not sure whether the flaw was due to poor quality fibreglass or to the triple hull design. If Fran adds the cost to the job order, the customer will pay for the labour and supplies as part of the cost-plus price. If she adds the cost to overhead, the cost will be spread across all jobs and only part of it will be allocated to the job having the enhanced security hulls.   Required (a)     Critique the company’s accounting policy for rework and scrap. (b)     Describe uncertainties about the accounting treatment for the rework costs on the enhanced security hull job. (c)      Discuss the pros and cons of alternative accounting treatments for the rework costs on this job. (d)     Suppose you are an accounting work-experience student at Boats Galore. Fran asks you to recommend an accounting treatment for the rework costs on the enhanced security hull job. i) Write a memo to Fran with your recommendation. As you write the memo,          consider what information Fran will need from you to help her make a final            decision. ii) Write one or two paragraphs explaining how you decided what information to   include in your memo.

Chemical milling is used in an aircraft plant to create pockets in wing sections made of an aluminum alloy. The starting thickness of one workpart of interest is 20 mm. A series of rectangular-shaped pockets 12 mm deep are to be etched with dimensions 200 mm by 400 mm. The corners of each rectangle are radiused to 15 mm. The part is an aluminum alloy and the etchant is NaOH. The penetration rate for this combination is 0.024 mm/min and the etch factor is 1.75. Determine (a) metal removal rate in mm3/min, (b) time required to etch to the specified depth, and (c) required dimensions of the opening in the cut and peel maskant to achieve the desired pocket size on the part.

Estimate the real interest rate over the last year. If financial market participants overestimate inflation in a particular period, will real interest rates be relatively high or low? Explain. (LO2)

Travis and Alix Weber are equal partners in the Tralix Partnership, which does not have a §754 election in place. Alix sells one-half of her interest (25 percent) to Michael Tomei for $30,000 cash. Just before the sale, Alix’s basis in her entire partnership interest is $75,000, including her $30,000 share of the partnership liabilities. Tralix’s assets on the sale date are as follows: Basis Fair Market Value Cash $ 40,000 $ 40,000 Inventory 30,000 90,000 Land held for investment 80,000 50,000    Totals $ 150,000 $ 180,000 a. What are the amount and character of Alix’s recognized gain or loss on the sale? b. What is Alix’s basis in her remaining partnership interest? c. What is Michael’s basis in his partnership interest? d. What is the effect of the sale on the partnership’s basis in the assets?

What is a §197 intangible? How do taxpayers recover the costs of these intangibles? How do taxpayers recover the cost of a §197 intangible that expires (such as a covenant not to compete)?

Why might you expect the interest rate movements of various industrialized countries to be more highly correlated in recent years than they were in earlier years? (LO2)

Jayhawk Forecasting Services analyzed several factors that could affect interest rates in the future. Most factors were expected to place downward pressure on interest rates. Jayhawk also expected that although the annual budget deficit was to be cut by 40 percent from the previous year, the deficit would still be very large. Because Jayhawk believed that the deficit’s impact would more than offset the effects of other factors, it forecast interest rates to increase by 2 percent. Comment on Jayhawk’s logic. (LO2)

What is a conceptual framework? Why is a conceptual framework necessary in financial accounting?

How does the Fed’s monetary policy affect economic conditions? (LO5)

The accounts listed below appeared in the December 31 trial balance of the Savard Theater.   Instructions (a) From the account balances listed above and the information given below, prepare the annual adjusting entries necessary on December 31. (Omit explanations.) (1) The equipment has an estimated life of 16 years and a salvage value of $24,000 at the end of that time. (Use straight-line method.) (2) The note payable is a 90-day note given to the bank October 20 and bearing interest at 8%. (Use 360 days for denominator.) (3) In December, 2,000 coupon admission books were sold at $30 each. They could be used for admission any time after January 1. (4) Advertising expense paid in advance and included in Advertising Expense $1,100. (5) Salaries and wages accrued but unpaid $4,700. (b) What amounts should be shown for each of the following on the income statement for the year? (1) Interest expense. (3) Advertising expense. (2) Admissions revenue. (4) Salaries and wages expense.

Shapiro Inc. was incorporated in 2013 to operate as a computer software service firm with an accounting fiscal year ending August 31. Shapiro’s primary product is a sophisticated online inventory-control system; its customers pay a fixed fee plus a usage charge for using the system. Shapiro has leased a large, Alpha-3 computer system from the manufacturer. The lease calls for a monthly rental of $40,000 for the 144 months (12 years) of the lease term. The estimated useful life of the computer is 15 years. Each scheduled monthly rental payment includes $3,000 for full-service maintenance on the computer to be performed by the manufacturer. All rentals are payable on the first day of the month beginning with August 1, 2014, the date the computer was installed and the lease agreement was signed. The lease is noncancelable for its 12-year term, and it is secured only by the manufacturer’s chattel lien on the Alpha-3 system. This lease is to be accounted for as a capital lease by Shapiro, and it will be depreciated by the straightline method with no expected salvage value. Borrowed funds for this type of transaction would cost Shapiro 12% per year (1% per month). Following is a schedule of the present value of $1 for selected periods discounted at 1% per period when payments are made at the beginning of each period. Periods Present Value of $1 per Period (months) Discounted at 1% per Period 1 1.000 2 1.990 3 2.970 143 76.658 144 76.899 Instructions Prepare all entries Shapiro should have made in its accounting records during August 2014 relating to this lease. Give full explanations and show supporting computations for each entry. Remember, August 31, 2014, is the end of Shapiro’s fiscal accounting period and it will be preparing financial statements on that date. Do not prepare closing entries.

Which is a more appropriate tax rate to use to compare taxpayers’ tax burdens – the average or the effective tax rate?  Why?

The accountant of Latifa Shoe Co. has compiled the following information from the company’s records as a basis for an income statement for the year ended December 31, 2014. Rent revenue $ 29,000 Interest expense 18,000 Market appreciation on land above cost 31,000 Salaries and wages expense (selling) 114,800 Supplies (selling) 17,600 Income tax 37,400 Salaries and wages expense (administrative) 135,90 5Other administrative expenses $ 51,700 Cost of goods sold 496,000 Net sales 980,000 Depreciation on plant assets (70% selling, 30% administrative) 65,000 Cash dividends declared 16,000 There were 20,000 shares of common stock outstanding during the year. Instructions (a) Prepare a multiple-step income statement. (b) Prepare a single-step income statement. (c) Which format do you prefer? Discuss.

Why would a new partner who pays more for a partnership interest than the selling partner’s outside basis want the partnership to elect a special basis adjustment?

In 2014, Leppard Inc. issued 1,000 shares of $10 par value common stock for land worth $40,000. (a) Prepare Leppard’s journal entry to record the transaction. (b) Indicate the effect the transaction has on cash. (c) Indicate how the transaction is reported on the statement of cash flows.

What are the two basic timing strategies? What is the intent of each?

: Summarize how SWOT analysis can be used to evaluate a company’s strengths, weaknesses, opportunities, and threats.

What are the main goals of the Federal Open Market Committee? How does it attempt to achieve these goals? (LO1)

Identify the selective surface-hardening methods.

Jesper Parnevik borrowed $70,000 on March 1, 2012. This amount plus accrued interest at 12% compounded semiannually is to be repaid March 1, 2022. To retire this debt, Jesper plans to contribute to a debt retirement fund five equal amounts starting on March 1, 2017, and for the next 4 years. The fund is expected to earn 10% per annum. Instructions How much must be contributed each year by Jesper Parnevik to provide a fund sufficient to retire the debt on March 1, 2022?

Use of prior year costs; quality of information Software Solutions is a family-owned business that has been in operation for more than 15 years. The board of directors is comprised of mainly family members, plus a few professionals such as an accountant and lawyer. Regina is a staff accountant who has been working on the budget for the last several weeks. The chief financial officer (CFO) needs to present the budget at the next board meeting and wants a preliminary copy in two days. Regina is certain that she will not be able to finish the budget within two days. Several department heads have not turned in their preliminary figures, and two departments have budgeted large increases in fixed costs for replacing computer equipment. Regina knows she should have alerted the CFO about these budgeted increases, but she has not had time.   One of her co-workers knows that Regina is behind and suggests that she use last year’s budgets for those departments that have not provided information and also for the departments that increased their budgets by large amounts. The co-worker says that the budget can be straightened out later because the board does not pay attention to the details.   Required (a)          Is this an ethical dilemma for Regina? Why? (b)          Why might it be important for the board of directors to have as much updated information as possible about the budget? (c)           What should Regina do, given that not enough time is available to gather high-quality information? Explain your thinking.

Describe how a business adopts a permissible accounting method. Explain whether a taxpayer can adopt an impermissible accounting method.