Question & Answer

1.      : Accept the fact you didn’t quite make your sales goal this year. Figure out ways to work smarter next year to increase the odds of achieving your target.

At the beginning of 2014, Aristotle Company acquired a mine for $970,000. Of this amount, $100,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 12,000,000 units of the ore appear to be in the mine. Aristotle incurred $170,000 of development costs associated with this mine prior to any extraction of minerals. It also determined that the fair value of its obligation to prepare the land for an alternative use when all of the mineral has been removed was $40,000. During 2014, 2,500,000 units of ore were extracted and 2,100,000 of these units were sold. Instructions Compute the following. (a) The total amount of depletion for 2014. (b) The amount that is charged as an expense for 2014 for the cost of the minerals sold during 2014.

1.    Contemporary best-selling management books often argue that customers are the most important element in the external environment. Do you agree? In what company situations might this statement be untrue?

Define “cost” as applied to the valuation of inventories.

Identify the five components that comprise pension expense. Briefly explain the nature of each component.

Presented below are two independent situations. Situation A: Annie Lennox Co. reports revenues of $200,000 and operating expenses of $110,000 in its first year of operations, 2014. Accounts receivable and accounts payable at year-end were $71,000 and $29,000, respectively. Assume that the accounts payable related to operating expenses. (Ignore income taxes.) Instructions Using the direct method, compute net cash provided by operating activities. Situation B: The income statement for Blues Traveler Company shows cost of goods sold $310,000 and operating expenses (exclusive of depreciation) $230,000. The comparative balance sheet for the year shows that inventory increased $26,000, prepaid expenses decreased $8,000, accounts payable (related to merchandise) decreased $17,000, and accrued expenses payable increased $11,000. Instructions Compute (a) cash payments to suppliers and (b) cash payments for operating expenses.

Robert and Keisha invited Bijan to join them in forming Aero, a plane-chartering company, as a corporation. Bijan did not want to join at the time and declined their invitation. More than a year later, Bijan changed his mind and transferred appreciated property to Aero in exchange for 45 percent of Aero stock. Is Bijan required to recognize his realized gain on the transaction?

What are the differences, if any, between the legal and tax classifications of business entities?

Scot and Vidia, married taxpayers, earn $240,000 in taxable income and $5,000 in interest from an investment in City of Tampa bonds.  Using the U.S. tax rate schedule for married filing jointly (see Example 1-3), how much federal tax will they owe?  What is their average tax rate?  What is their effective tax rate?  What is their current marginal tax rate?

Cost drivers; value chain; strategy; organisational structure Australian fashion designer Sean Ashby commenced his men’s swimwear and clothing business aussieBum in 2001. A keen swimmer and surfer, he was unable to find a good pair of men’s cossies and used his life savings of $20 000 to make a series of prototypes, buy materials and commence manufacturing in Australia. Despite rejection from local retailers who did not see the potential for aussieBum to compete with international brands, Ashby has proven critics wrong. He had no choice but to take his business online, with instant exposure to the international market. It now takes thousands of orders a day.   Since the company’s inception, Ashby says that aussieBum has ‘taken on its own little cult revolution’, with celebrities such as Ewan McGregor, Billy Connolly and David Beckham fans of the aussieBum brand. Even Kylie Minogue’s male dancers wore aussieBum cossies in the film clip for her song ‘Slow’. The marketing thrust behind Ashby’s aussieBum is to live the dream — ‘the dream to be independent and present our gear in a way that gets noticed. We don’t apologise for pushing the boundaries . . . We have a saying at aussieBum — If you doubt yourself, wear something else’.   The company doubled in size every year in its first five years and continued to grow by 20 per cent every quarter. By 2005, aussieBum earned more than $5 million in sales and carried no debt. The aussieBum brand now takes pride of place in stores such as Selfridges in the UK; Brown Thomas in Ireland; La Maison Stores in Canada; Alpha Male in Melrose Drive, Los Angeles; KaDeWa in Germany; as well as others in Spain, The Netherlands, Sweden, Poland and Russia. As well as direct department store sales, aussieBum’s internet retail orders are booming, with aussieBum being distributed to more than 70 countries. It now has over 200 000 consumers ordering direct via its custom built e-commerce site.   Most of the raw materials are sourced from Italy and China. By manufacturing in Australia, aussieBum hopes to promote Australia’s culture and relaxed lifestyle as well as eliminate restrictions that might come with outsourcing production to other countries. Moreover, producing locally (through independent manufacturers) provides flexibility and a reduced timeframe in getting new products to market. With a heavy emphasis on innovative product design, aussieBum pays close attention to the design phase of the product process.   Two recent examples of aussieBum’s flexibility and innovative approach to product development and marketing are worthy of note. First, it was able to capitalise on the consumer backlash against competitor Bonds when that company transferred more of its manufacturing offshore. Ashby estimates that aussieBum’s sales grew by at least 40 per cent as a result. Second, aussieBum was able to achieve continued growth during the global financial crisis. The company continues to avoid debt and own all its assets outright.       Required (a) With reference to the information provided, distinguish between structural and executional cost drivers. (b) Illustrate and describe the industry and organisational value chain in which aussieBum operates. (c) Classify aussieBum’s likely strategy as low cost or product differentiation. Explain. (d) Classify aussieBum’s organisational structure as centralised or decentralised. Explain. (e) With reference to disruptive innovation, do you consider aussieBum to be a disruptor to the traditional garment industry value chain? Discuss why or why not.

The UK government introduced the Soft Drinks Industry Levy in April 2018. Explain how this tax works and discuss its impact on both soft drinks companies and consumer behaviour.

What factors will determine whether a country’s joining a customs union will lead to trade creation or trade diversion?

Discuss why an incentive package might include individual, divisional and        corporate-level performance targets.

Compare a centralized database system to a decentralized, distributed blockchain system. (LO2)

Angela Lansbury Company deposits all receipts and makes all payments by check. The following information is available from the cash records.   Instructions (a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance. (b) Prepare the general journal entry or entries to correct the Cash account.

Accounting information provides useful information about business transactions and events. Those who provide and use financial reports must often select and evaluate accounting alternatives. The FASB statement on qualitative characteristics of accounting information examines the characteristics of accounting information that make it useful for decision-making. It also points out that various limitations inherent in the measurement and reporting process may necessitate trade-offs or sacrifices among the characteristics of useful information. Instructions (a) Describe briefly the following characteristics of useful accounting information. (1) Relevance. (4) Comparability. (2) Faithful representation. (5) Consistency. (3) Understandability. (b) For each of the following pairs of information characteristics, give an example of a situation in which one of the characteristics may be sacrificed in return for a gain in the other. (1) Relevance and faithful representation. (3) Comparability and consistency. (2) Relevance and consistency. (4) Relevance and understandability. (c) What criterion should be used to evaluate trade-offs between information characteristics?

Aubrey Inc. issued $4,000,000 of 10%, 10-year convertible bonds on June 1, 2014, at 98 plus accrued interest. The bonds were dated April 1, 2014, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2015, $1,500,000 of these bonds were converted into 30,000 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion. Instructions (a) Prepare the entry to record the interest expense at October 1, 2014. Assume that accrued interest payable was credited when the bonds were issued. (Round to nearest dollar.) (b) Prepare the entry(ies) to record the conversion on April 1, 2015. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made.

Explain why mortgage originators have been criticized for their behavior during the credit crisis. Should other participants in the mortgage securitization process have recognized that lack of complete disclosure in mortgages? (LO5)

Explain the meaning of a temporary difference as it relates to deferred tax computations, and give three examples.

Explain the dilemma of stock analysts who work for securities firms and assign ratings to large corporations. Why might they prefer not to assign low ratings to weak but large corporations? (LO6)

What is the deposit method and when might it be applied?

Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position. (a) The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability. (b) Relevant information only has predictive value, confirmatory value, or both. (c) Information that is a faithful representation is characterized as having predictive or confirmatory value. (d) Comparability pertains only to the reporting of information in a similar manner for different companies. (e) Verifiability is solely an enhancing characteristic for faithful representation. (f) In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities.

The FASB requires a reconciliation between the effective tax rate and the federal government’s statutory rate. Of what benefit is such a disclosure requirement?

Koch Corporation’s adjusted trial balance contained the following asset accounts at December 31, 2014: Cash $7,000; Land $40,000; Patents $12,500; Accounts Receivable $90,000; Prepaid Insurance $5,200; Inventory $30,000; Allowance for Doubtful Accounts $4,000; Equity Investments (trading) $11,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.

Illustrate equilibrium in the market for loanable funds using a demand and supply diagram.