Question & Answer

1.    : Some people say an organization could never be “prepared” for a disaster such as the shooting at a Walmart in El Paso, Texas; the Japan nuclear disaster; or the huge BP oil spill in the Gulf of Mexico. Discuss the potential value of crisis planning in situations like these, even if the situations are difficult to plan for.

: Describe how diversity initiatives such as sponsor relationships, employee resource groups, and coaching programs help create an inclusive climate that values diversity.

Explain how pro-cyclical lending criteria applied by financial institutions could amplify fluctuations in real GDP.

Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment’s list price. Each note’s stated interest rate is below the customer’s market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults. Instructions (a) What is the appropriate valuation basis for Corrs’s notes receivable at the date it sells equipment? (b) How should Corrs account for the sale, without recourse, of a February 1, 2014, note receivable sold on May 1, 2014? Why is it appropriate to account for it in this way? (c) At December 31, 2014, how should Corrs measure and account for the impact of estimated losses resulting from notes receivable that it (1) Retained and did not sell? (2) Sold to bank with recourse?

1.      What additional investigation might Whitley and Vinson undertake before settling on a plan of action toward Cam?

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?

The present level of a country’s exports is £12 billion; investment is £2 billion; government expenditure is £4 billion; total consumer spending (not Cd) is £36 billion; imports are £12 billion and expenditure taxes are £2 billion. The economy is currently in equilibrium. It is estimated that an income of £50 billion is necessary to generate full employment. The mps is 0.1, the mpt is 0.05 and the mpm is 0.1 (a)  Is there an inflationary or deflationary gap in this situation? (b)  What is the size of the gap? (Don’t confuse this with the difference between Ye and YF.) (c)  What would be the appropriate government policies to close this gap?

Explain how and why the option premiums may change in response to a surprise announcement that the Fed will increase interest rates, even if stock prices are not affected. (LO2)

The following statement is an excerpt from the FASB pronouncement related to interim reporting. Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise. The usefulness of such information rests on the relationship that it has to the annual results of operations. Accordingly, the Board has concluded that each interim period should be viewed primarily as an integral part of an annual period.  n general, the results for each interim period should be based on the accounting principles and practices used by an enterprise in the preparation of its latest annual financial statements unless a change in an accounting practice or policy has been adopted in the current year. The Board has concluded, however, that certain accounting principles and practices followed for annual reporting purposes may require modification at interim reporting dates so that the reported results for the interim period may better relate to the results of operations for the annual period. Instructions Listed on the next page are six independent cases on how accounting facts might be reported on an individual company’s interim financial reports. For each of these cases, state whether the method proposed to be used for interim reporting would be acceptable under generally accepted accounting principles applicable to interim financial data. Support each answer with a brief explanation. (a) J. D. Long Company takes a physical inventory at year-end for annual financial statement purposes. Inventory and cost of sales reported in the interim quarterly statements are based on estimated gross profit rates, because a physical inventory would result in a cessation of operations. Long Company does have reliable perpetual inventory records. (b) Rockford Company is planning to report one-fourth of its pension expense each quarter. (c) Republic Company wrote inventory down to reflect lower-of-cost-or-market in the first quarter. At year-end, the market exceeds the original acquisition cost of this inventory. Consequently, management plans to write the inventory back up to its original cost as a year-end adjustment. (d) Gansner Company realized a large gain on the sale of investments at the beginning of the second quarter. The company wants to report one-third of the gain in each of the remaining quarters. (e) Fredonia Company has estimated its annual audit fee. It plans to pro rate this expense equally over all four quarters. (f) LaBrava Company was reasonably certain it would have an employee strike in the third quarter. As a result, it shipped heavily during the second quarter but plans to defer the recognition of the sales in excess of the normal sales volume. The deferred sales will be recognized as sales in the third quarter when the strike is in progress. LaBrava Company management thinks this is more representative of normal second- and third-quarter operations.

What are the three committees that debate proposed tax legislation?

How do speculators use put options? Describe the conditions under which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option? (LO3)

On February 1, 2014, Buffalo Corporation issued 3,000 shares of its $5 par value common stock for land worth $31,000. Prepare the February 1, 2014, journal entry.

Consider the cases for and against a poll tax.

Cost categories; cost function The Leyland Hospital Cafe has been reporting losses in past months. In July, for example, the loss was $5000. The Cafe purchases prepared food directly from Hospital Food Services. This charge varies proportionately with the number and kind of meals served. Personnel who are paid by the Cafe serve the food, tend the cash register, waiting and clean tables, and wash dishes. The staffing levels in the cafe rarely change; the existing staff can usually handle daily fluctuations in volume. Administrative costs are primarily the salaries of the Cafe manager and her office staff. The hospital charges the Cafe a surcharge of 10 per cent of its revenue. Utility costs are the costs of cooling, heating, and lighting the Cafe during its normal operating hours.   The hospital’s management is considering shutting the Cafe down because it has been operating at a loss.   Required (a)          List the fixed expenses of the Cafe. (b)          List the variable expenses of the Cafe and the most likely cost driver for each expense. (c)           Write out the cost function for running the Cafe. (d)          Estimate the profit or loss for August if the revenues of the Cafe increase to $80 000. (e)           Explain why the original data show a loss but part (d) shows a profit. Be specific.

Make the calculations and plot on linearly scaled axes the relationship for unit melting energy as a function of temperature. Use temperatures as follows to construct the plot: 200°C, 400°C, 600°C, 800°C, 1000°C, 1200°C, 1400°C, 1600°C, 1800°C, and 2000°C. On the plot, mark the positions of some of the welding metals in Table 29.2. Use of a spreadsheet program is recommended for the calculations.

Terry was ill for three months and missed work during this period. During the illness, Terry received $4,500 in sick pay from a disability insurance policy. What amounts are included in Terry’s gross income under the following independent circumstances?

The following data relate to the operation of Kramer Co.’s pension plan in 2015. The pension worksheet for 2014 is provided in P20-10. Service cost $59,000 Actual return on plan assets 32,000 Amortization of prior service cost 28,000 Annual contributions 51,000 Benefi ts paid retirees 27,000 Average service life of all employees 25 years For 2015, Kramer will use the same assumptions as 2014 for the expected rate of returns on plan assets. The settlement rate for 2015 is 10%. Instructions (a) Prepare a pension worksheet for 2015 and accompanying computations and amortization of the loss, if any, in 2015 using the corridor approach. (b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31. (c) Indicate the pension amounts reported in the financial statements.

1.       : Why do you think research has found that women receive less harsh feedback than men during performance reviews? How might that affect a woman’s career? Explain.

At December 31, 2014, Suffolk Corporation had an estimated warranty liability of $105,000 for accounting purposes and $0 for tax purposes. (The warranty costs are not deductible until paid.) The effective tax rate is 40%. Compute the amount Suffolk should report as a deferred tax asset at December 31, 2014.

Laurie is thinking about investing in one or several of the following investment options:   • Corporate bonds (ordinary interest paid annually) • Dividend-paying stock (qualified dividends) • Life insurance (tax-exempt) • Savings account • Growth stock   a) Assuming all of the options earn similar returns before taxes, rank Laurie’s investment options from highest to lowest according to their after-tax returns.   b) Which of the investments employ the deferral and/or conversion tax planning strategies?   c) How does the time period of the investment affect the returns from these alternatives?   d) How do these alternative investments differ in terms of their nontax characteristics?

Name three approaches to measuring benefit obligations from a pension plan and explain how they differ.

Will the adoption of labour-intensive techniques necessarily lead to a more equal distribution of income?

Developing direct cost standards; cost variances; use of variance analysis The Mighty Morphs produces two popular games, Powerful Puffs and Mini-Mite Morphs. Following are standard costs:       The standards call for more than one disk and documentation book per unit because of normal waste due to faulty DVDs and poor binding.   Actual costs for last week follow:       Management decided that it would require too much effort to keep track of how many DVDs and hours are used for each of the games separately. Accordingly, the DVD materials and labour variances are combined rather than computed separately for each game.   Required (a) What is the documentation price variance for Mini-Mite Morphs? (b) What is the efficiency variance for DVDs? (c) What is the sum of all variances for assembly labour for both games? (d) Discuss the pros and cons of building waste into the standards.

The incredible growth of Amazon.com has put fear into the hearts of traditional retailers. Amazon’s stock price has soared to amazing levels. However, it is often pointed out in the financial press that it took the company several years to report its first profit. The following financial information is taken from a recent annual report.   Instructions (a) Calculate free cash flow for Amazon for the current and prior years, and discuss its ability to finance expansion from internally generated cash. Thus far Amazon has avoided purchasing large warehouses. Instead, it has used those of others. It is possible, however, that in order to increase customer satisfaction the company may have to build its own warehouses. If this happens, how might your impression of its ability to finance expansion change? (b) Discuss any potential implications of the change in Amazon’s cash provided by operations from the prior year to the current year.

Wayne Cooper has some questions regarding the theoretical framework in which GAAP is set. He knows that the FASB and other predecessor organizations have attempted to develop a conceptual framework for accounting theory formulation. Yet, Wayne’s supervisors have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Wayne did notice that accounting rules seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework. Wayne feels that some of his anxiety about accounting theory and accounting semantics could be alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice. Instructions (a) Help Wayne recognize the purpose of and benefit of a conceptual framework. (b) Identify any Statements of Financial Accounting Concepts issued by the FASB that may be helpful to Wayne in developing his theoretical background.