Question & Answer

At December 31, 2014, Redmond Company has outstanding three long-term debt issues. The first is a $2,000,000 note payable which matures June 30, 2017. The second is a$6,000,000 bond issue which matures September 30, 2018. The third is a $12,500,000 sinking fund debenture with annual sinking fund payments of $2,500,000 in each of the years 2016 through 2020. Instructions Prepare the required note disclosure for the long-term debt at December 31, 2014.

Bart is the favorite nephew of his aunt Thelma. Thelma transferred several items of value to Bart. For each of the following transactions, determine the effect on Bart’s gross income:

Burnitz Manufacturing Company was organized on January 1, 2014. During 2014, it has used in its reports to management the straight-line method of depreciating its plant assets. On November 8, you are having a conference with Burnitz’s officers to discuss the depreciation method to be used for income tax and stockholder reporting. James Bryant, president of Burnitz, has suggested the use of a new method, which he feels is more suitable than the straight-line method for the needs of the company during the period of rapid expansion of production and capacity that he foresees. Following is an example in which the proposed method is applied to a fixed asset with an original cost of $248,000, an estimated useful life of 5 years, and a salvage value of approximately $8,000. Accumulated Years of Depreciation Book Value Life Fraction Depreciation at End at End Year Used Rate Expense of Year of Year 1 1 1/15 $16,000 $ 16,000 $232,000 2 2 2/15 32,000 48,000 200,000 3 3 3/15 48,000 96,000 152,000 4 4 4/15 64,000 160,000 88,000 5 5 5/15 80,000 240,000 8,000 The president favors the new method because he has heard that: 1. It will increase the funds recovered during the years near the end of the assets’ useful lives when maintenance and replacement disbursements are high. 2. It will result in increased write-offs in later years and thereby will reduce taxes. Instructions (a) What is the purpose of accounting for depreciation? (b) Is the president’s proposal within the scope of generally accepted accounting principles? In making your decision, discuss the circumstances, if any, under which use of the method would be reasonable and those, if any, under which it would not be reasonable. (c) The president wants your advice on the following issues. (1) Do depreciation charges recover or create funds? Explain. (2) Assume that the Internal Revenue Service accepts the proposed depreciation method in this case. If the proposed method were used for stockholder and tax reporting purposes, how would it affect the availability of cash flows generated by operations?

Does the kiddie tax apply to all children no matter their age?  Explain.

Ethical decision making: the right thing to do84 In the past, drug makers have been reluctant to invest in cures for diseases in developing countries such as Africa and South America. Most people in these countries cannot afford to pay for treatments, and managers have typically invested in other long-term projects having higher returns. However, a few pharmaceutical companies have chosen to invest in neglected diseases, including tuberculosis, malaria and other tropical diseases. As an example, GlaxoSmithKline formed a joint venture with the World Health Organization to develop a malaria drug that costs less than 50 cents for a three-day treatment.                                    This type of investment has several goals. From a reputation perspective, managers accused of keeping drug prices artificially high may believe that providing low-cost cures will alleviate pressure from regulators and consumers to lower prices for drugs sold in the United States and other developed countries. Furthermore, people from some less-developed countries will eventually have the ability to pay for cures. Finally, ‘it is the right thing to do,’ according to journalist Robert Langreth. Novartis chairman Daniel Vasella says, ‘If you only look at maximizing short-term profit, you may not survive in the long term’.   Required Using figure 19.7, address the following question for this ethical dilemma to improve your skills in making ethical decisions. Think about your answers to these questions and discuss them with others: Does an ethical problem arise if pharmaceutical companies charge lower prices for drugs in developing countries than in developed countries? Why?             (LO2)

In some instances, accounting principles require a departure from valuing inventories at cost alone. Determine the proper unit inventory price in the following cases. Cases 1 2 3 4 5 Cost $15.90 $16.10 $15.90 $15.90 $15.90 Net realizable value 14.50 19.20 15.20 10.40 16.40 Net realizable value less normal profi t 12.80 17.60 13.75 8.80 14.80 Market (replacement cost) 14.80 17.20 12.80 9.70 16.80

What is the range of carbon percentages which defines an iron-carbon alloy as a steel?

Explain how the CAMELS ratings are used. (LO4)

1.      : Don’t require Rukman “connectors” to reveal their affiliation with the corporate word-of-mouth marketing campaign. They don’t have to recommend a product they don’t believe in.

Should management be upset if all variances for the period are unfavourable?

Examine the case for public ownership of an industry where a natural monopoly exists.

What is the difference between open and closed facts?  How is this distinction important in conducting tax research?

The following items appear on Brueggen Company’s financial statements. 1. Under the caption Assets: Pension asset/liability. 2. Under the caption Liabilities: Pension asset/liability. 3. Under the caption Stockholders’ Equity: Prior service cost as a component of Accumulated Other Comprehensive Income. 4. On the income statement: Pension expense. Instructions Explain the significance of each of the items above on corporate financial statements. (Note: All items set forth above are not necessarily to be found on the statements of a single company.)

What is an ad valorem tax?  Name an example of this type of tax.

In 2024, Zach is single with no dependents.  He is not claimed as a dependent on another’s return.  All of his income is from salary and he does not have any for AGI deductions.  What is his earned income credit in 2024 in the following alternative scenarios? a. Zach is 29 years old and his AGI is $5,000.

Anne purchased an annuity from an insurance company that promised to pay her $20,000 per year for the next 10years.  Anne paid $145,000 for the annuity, and in exchange she will receive $200,000 over the term of the annuity.            a.  How much of the first $20,000 payment should Anne include in gross income? b.  How much income will Anne recognize over the term of the annuity?

Give two examples of positive statements about the economy, and two examples of normative ones. Now give two examples that are seemingly positive, but which have normative implications or undertones.

Paul Dobson Stores sell appliances for cash and also on the installment plan. Entries to record cost of sales are made monthly. PAUL DOBSON STORES TRIAL BALANCE DECEMBER 31, 2015 Dr. Cr. Cash $153,000 Installment Accounts Receivable, 2014 56,000 Installment Accounts Receivable, 2015 91,000 Inventory—New Merchandise 123,200 Inventory—Repossessed Merchandise 24,000 Accounts Payable $ 98,500 Deferred Gross Profi t, 2014 45,600 Capital Stock 170,000 Retained Earnings 93,900 Sales Revenue 343,000 Installment Sales 200,000 Cost of Goods Sold 255,000 Cost of Installment Sales 120,000 Loss on Repossession 800 Operating Expenses 128,000 $951,000 $951,000 The accounting department has prepared the following analysis of cash receipts for the year. Cash sales (including repossessed merchandise) $424,000 Installment accounts receivable, 2014 96,000 Installment accounts receivable, 2015 109,000 Other 36,000 Total $665,000 Repossessions recorded during the year are summarized as follows. 2014 Uncollected balance $8,000 Loss on repossession 800 Repossessed merchandise 4,800 Instructions From the trial balance and accompanying information: (a) Compute the rate of gross profit on installment sales for 2014 and 2015. (b) Prepare closing entries as of December 31, 2015, under the installment-sales method of accounting. (c) Prepare an income statement for the year ended December 31, 2015. Include only the realized gross profit in the income statement.

An RSW operation is used to make a series of spot welds between two pieces of aluminum, each 2.0 mm thick. The unit melting energy for aluminum = 2.90 J/mm3. Welding current = 6,000 amps, and time duration = 0.15 sec. Assume that the resistance = 75 micro-ohms. The resulting weld nugget measures 5.0 mm in diameter by 2.5 mm thick. How much of the total energy generated is used to form the weld nugget?

Identify a series of possible frictions which could affect the speed with which markets adjust or which affect the nature of market equilibria.

Explain how banks use credit default swaps. (LO4)

Samuels Co. appropriately uses the installment-sales method of accounting. On December 31, 2016, the books show balances as follows. Installment Receivables Deferred Gross Profit Gross Profit on Sales 2014 $12,000 2014 $ 7,000 2014 35% 2015 40,000 2015 26,000 2015 33% 2016 80,000 2016 95,000 2016 32% Instructions (a) Prepare the adjusting entry or entries required on December 31, 2016 to recognize 2016 realized gross profit. (Installment receivables have already been credited for cash receipts during 2016.) (b) Compute the amount of cash collected in 2016 on accounts receivable from each year.

Olga is married and files a joint tax return with her husband.  What amount of AMT exemption may she deduct under each of the following alternative circumstances?  a.  Her AMTI is $390,000.

Below is the income statement for a British company, Avon Rubber plc. Avon prepares its financial statements in accordance with IFRS.   Instructions (a) Review the Avon Rubber income statement and identify at least three differences between the IFRS income statement and an income statement of a U.S. company as presented in the chapter. (b) Identify any irregular items reported by Avon Rubber. Is the reporting of these irregular items in Avon’s income statement similar to reporting of these items in U.S. companies’ income statements? Explain.

Compare and contrast S corporations, C corporations, and partnerships in terms of tax consequences at formation, shareholder restrictions, income allocation, basis calculations, compensation to owners, taxation of distributions, and accounting periods.