Question & Answer

On July 1, 2014, Selig Company purchased for cash 40% of the outstanding capital stock of Spoor Corporation. Both Selig and Spoor have a December 31 year-end. Spoor Corporation, whose common stock is actively traded on the American Stock Exchange, paid a cash dividend on November 15, 2014, to Selig Company and its other stockholders. It also reported its total net income for the year of $920,000 to Selig Company. Instructions Prepare a one-page memorandum of instructions on how Selig Company should report the above facts in its December 31, 2014, balance sheet and its 2014 income statement. In your memo, identify and describe the method of valuation you recommend. Provide rationale where you can. Address your memo to the chief accountant at Selig Company.

Maria Rodriquez and Lynette Kingston are discussing accounting for income taxes. They are currently studying a schedule of taxable and deductible amounts that will arise in the future as a result of existing temporary differences. The schedule is as follows. Future Years 2014 2015 2016 2017 2018 Taxable income $850,000 Taxable amounts $375,000 $375,000 $375,000 $375,000 Deductible amounts (2,400,000) Enacted tax rate 50% 45% 40% 35% 30% Instructions (a) Explain the concept of future taxable amounts and future deductible amounts as illustrated in the schedule. (b) How do the carryback and carryforward provisions affect the reporting of deferred tax assets and deferred tax liabilities?

What is the difference between threading and tapping?

Describe the conditions in which a donation of property to a charity will result in a charitable contribution deduction of fair market value and when it will result in a deduction of the tax basis of the property.

Larry purchased an annuity from an insurance company that promises to pay him $1,500 per month for the rest of his life.  Larry paid $170,820 for the annuity.  Larry is in good health, and he is 72 years old.  Larry received the first annuity payment of $1,500 this month.  Use the expected number of payments in Exhibit 5-1 for this problem. a.       How much of the first payment should Larry include in gross income? b.       If Larry lives more than 15 years after purchasing the annuity, how much of each additional payment should he include in gross income? c.       What are the tax consequences if Larry dies just after he receives the 100th payment?

Presented below is a list of items that could be included in the intangible assets section of the balance sheet. 1. Investment in a subsidiary company. 2. Timberland. 3. Cost of engineering activity required to advance the design of a product to the manufacturing stage. 4. Lease prepayment (6 months’ rent paid in advance). 5. Cost of equipment obtained. 6. Cost of searching for applications of new research findings. 7. Costs incurred in the formation of a corporation. 8. Operating losses incurred in the start-up of a business. 9. Training costs incurred in start-up of new operation. 10. Purchase cost of a franchise. 11. Goodwill generated internally. 12. Cost of testing in search for product alternatives. 13. Goodwill acquired in the purchase of a business. 14. Cost of developing a patent. 15. Cost of purchasing a patent from an inventor. 16. Legal costs incurred in securing a patent. 17. Unrecovered costs of a successful legal suit to protect the patent. 18. Cost of conceptual formulation of possible product alternatives. 19. Cost of purchasing a copyright. 20. Research and development costs. 21. Long-term receivables. 22. Cost of developing a trademark. 23. Cost of purchasing a trademark. Instructions (a) Indicate which items on the list above would generally be reported as intangible assets in the balance sheet. (b) Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements.

Lincoln Brown has used a piece of land in their business for the past five years. The land qualifies as §1231 property. It is unclear whether Lincoln will have to recognize a gain or loss when they eventually sell the asset. Lincoln asks their accountant how the gain or loss would be characterized if they decide to sell. The accountant says that selling §1231 assets gives sellers “the best of both worlds.” Explain what the accountant means by this statement.

What restrictions might prevent a partner from selling their partnership interest to a third party?

Is the following statement true: ‘The greater the number of types of assets that are counted as being liquid, the smaller will be the bank deposits multiplier’?

What are inside basis and outside basis, and why are they relevant for taxing partnerships and partners?

Discuss briefly the three approaches that have been suggested for reporting changes in accounting principles.

What items will decrease a partner’s basis in the partnership interest?

There are 20 correct answers in the following multiple choice questions (some questions have multiple answers that are correct). To attain a perfect score on the quiz, all correct answers must be given. Each correct answer is worth 1 point. Each omitted answer or wrong answer reduces the score by 1 point, and each additional answer beyond the correct number of answers reduces the score by 1 point. Percentage score on the quiz is based on the total number of correct answers. 2.1 The basic structural unit of matter is which one of the following: (a) atom, (b) electron, (c) element, (d) molecule, or (e) nucleus? 2.2 Approximately how many different elements have been identified (one best answer): (a) 10, (b) 50, (c) 100, (d) 200, or (e) 500? 2.3 In the Periodic Table, the elements can be divided into which of the following categories (three best answers): (a) ceramics, (b) gases, (c) liquids, (d) metals, (e) nonmetals, (f) polymers, (g) semi-metals, and (h) solids? 2.4 The element with the lowest density and smallest atomic weight is which one of the following: (a) aluminum, (b) argon, (c) helium, (d) hydrogen, or (e) magnesium? 2.5 Which of the following bond types are classified as primary bonds (three correct answers): (a) covalent bonding, (b) hydrogen bonding, (c) ionic bonding, (d) metallic bonding, and (e) van der Waals forces? 2.6 How many atoms are there in the face-centered cubic (FCC) unit cell (one correct answer): (a) 8, (b) 9, (c) 10, (d) 12, or (e) 14?             2.7 Which of the following are not point defects in a crystal lattice structure (three correct answers): (a) edge dislocation, (b) grain boundaries, (c) interstitialcy, (d) Schottky defect, (e) screw dislocation, or (f) vacancy? 2.8 Which one of the following crystal structures has the fewest slip directions and therefore the metals with this structure are generally more difficult to deform at room temperature: (a) BCC, (b) FCC, or (c) HCP? 2.9 Grain boundaries are an example of which one of the following types of crystal structure defects: (a) dislocation, (b) Frenkel defect, (c) line defects, (d) point defects, or (e) surface defects? 2.10 Twinning is which of the following (three best answers): (a) elastic deformation, (b) mechanism of plastic deformation, (c) more likely at high deformation rates, (d) more likely in metals with HCP structure, (e) slip mechanism, and (f) type of dislocation? 2.11 Polymers are characterized by which of the following bonding types (two correct answers): (a) adhesive, (b) covalent, (c) hydrogen, (d) ionic, (e) metallic, and (f) van der Waals?

Indiana Jones Corporation enters into a 6-year lease of equipment on January 1, 2014, which requires 6 annual payments of $40,000 each, beginning January 1, 2014. In addition, Indiana Jones guarantees the lessor a residual value of $20,000 at lease-end. The equipment has a useful life of 6 years. Prepare Indiana Jones’ January 1, 2014, journal entries assuming an interest rate of 10%.

Presented below is a list of accounts in alphabetical order. Accounts Receivable Inventory—Ending Accumulated Depreciation—Buildings Land Accumulated Depreciation—Equipment Land for Future Plant Site Accumulated Other Comprehensive Income Loss from Flood Advances to Employees Noncontrolling Interest Advertising Expense Notes Payable (due next year) MAllowance for Doubtful Accounts Paid-in Capital in Excess of Par—Preferred StockBond Sinking Fund Patents Bonds Payable Payroll Taxes Payable Buildings Pension Liability Cash (in bank) Petty Cash Cash (on hand) Preferred Stock  ash Surrender Value of Life Insurance Premium on Bonds Payable Commission Expense Prepaid Rent Common Stock Purchase Returns and Allowances Copyrights Purchases Debt Investments (trading) Retained Earnings Dividends Payable Salaries and Wages Expense (sales) Equipment Salaries and Wages Payable Freight-In Sales Discounts Gain on Disposal of Equipment Sales Revenue Interest Receivable Treasury Stock (at cost) Inventory—Beginning Unearned Subscriptions Revenue Instructions Prepare a classified balance sheet in good form. (No monetary amounts are to be shown.)

Turtle Creek Partnership had the following revenues, expenses, gains, losses, and distributions: Sales revenue $40,000 Long-term capital gains $2,000 Cost of goods sold ($13,000) Depreciation - MACRS ($3,000) Amortization of organization costs ($1,000) Guaranteed payments to partners for general management ($10,000) Cash distributions to partners ($2,000)

Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1990, Maddox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Maddox’s fiscal year, November 30, 2014, are shown below. The inventories are stated at cost before any year-end adjustments. Finished goods $647,000 Work in process 112,500 Raw materials 264,000 Factory supplies 69,000 The following information relates to Maddox’s inventory and operations. 1. The finished goods inventory consists of the items analyzed below. 2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment. 3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan. 4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20% above the current market price. The market value of the rest of the raw materials is $127,400. 5. The total market value of the work in process inventory is $108,700. 6. Included in the cost of factory supplies are obsolete items with an historical cost of $4,200. The market value of the remaining factory supplies is $65,900. 7. Maddox applies the lower-of-cost-or-market method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Maddox applies the lower-of-costor- market method to the total of each inventory account. 8. Consider all amounts presented above to be material in relation to Maddox’s financial statements taken as a whole. Instructions (a) Prepare the inventory section of Maddox’s balance sheet as of November 30, 2014, including any required note(s). (b) Without prejudice to your answer to (a), assume that the market value of Maddox’s inventories is less than cost. Explain how this decline would be presented in Maddox’s income statement for the fiscal year ended November 30, 2014. Cost Market Down tube shifter Standard model $ 67,500 $ 67,000 Click adjustment model 94,500 89,000 Deluxe model 108,000 110,000 Total down tube shifters 270,000 266,000 Bar end shifter Standard model 83,000 90,050 Click adjustment model 99,000 97,550 Total bar end shifters 182,000 187,600 Head tube shifter Standard model 78,000 77,650 Click adjustment model 117,000 119,300 Total head tube shifters 195,000 196,950 Total fi nished goods $647,000 $650,550 (c) Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2014, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2014. Discuss the impact, if any, that this purchase commitment would have on Maddox’s financial statements prepared for the fiscal year ended November 30, 2014.

What is the basic difference between low-density and high-density polyethylene?

The following statement was prepared by Maloney Corporation’s accountant. MALONEY CORPORATION STATEMENT OF SOURCES AND APPLICATION OF CASH FOR THE YEAR ENDED SEPTEMBER 30, 2014 Sources of cash Net income $111,000 Depreciation and depletion 70,000 Increase in long-term debt 179,000 Changes in current receivables and inventories, less current liabilities (excluding current maturities of long-term debt) 14,000 $374,000 Application of cash Cash dividends $ 60,000 Expenditure for property, plant, and equipment 214,000 Investments and other uses 20,000 Change in cash 80,000 $374,000 The following additional information relating to Maloney Corporation is available for the year ended September 30, 2014. 1. Salaries and wages expense attributable to stock option plans was $25,000 for the year. 2. Expenditures for property, plant, and equipment $250,000 Proceeds from retirements of property, plant, and equipment 36,000 Net expenditures $214,000 3. A stock dividend of 10,000 shares of Maloney Corporation common stock was distributed to common stockholders on April 1, 2014, when the per share market price was $7 and par value was $1. 4. On July 1, 2014, when its market price was $6 per share, 16,000 shares of Maloney Corporation common stock were issued in exchange for 4,000 shares of preferred stock. 5. Depreciation expense $ 65,000 Depletion expense 5,000 $ 70,000 6. Increase in long-term debt $620,000 Less: Redemption of debt 441,000 Net increase $179,000 Instructions (a) In general, what are the objectives of a statement of the type shown above for Maloney Corporation? Explain. (b) Identify the weaknesses in the form and format of Maloney Corporation’s statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.) (c) For each of the six items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable.

Indicate the proper accounting for the following items. (a) Organization costs. (c) Operating losses. (b) Advertising costs.

Instructions Go to the book’s companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc. (a) Which company had the greater percentage increase in total assets from 2010 to 2011? (b) Using the Selected Financial Data section of these two companies, determine their 5-year average growth rates related to net sales and income from continuing operations. (c) Which company had more depreciation and amortization expense for 2011? Provide a rationale as to why there is a difference in these amounts between the two companies.

Discuss at least two situations in which estimates could affect the usefulness of information in the balance sheet.

What are the major limitations of the balance sheet as a source of information?

Some argue that having various organizations establish accounting principles iswasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclosethe type of information it considered important. In addition, if an investor wants additional information, the investor could contact the company and pay to receive the additional information desired. Instructions Comment on the appropriateness of this viewpoint.

{Research} XYZ declared a $1 per share dividend on August 15.  The date of record for the dividend was September 1 (the stock began selling ex-dividend on September 2).  The dividend was paid on September 10.  Ellis is a cash-method taxpayer.  Determine if he must include the dividends in gross income under the following independent circumstances