Question & Answer

What are reversing entries, and why are they used?

Faith Evans Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Faith Evans Corp. has issued 10,000 units. Each unit consists of a $500 par, 12% subordinated debenture and 10 shares of $5 par common stock. The investment banker has retained 400 units as the underwriting fee. The other 9,600 units were sold to outside investors for cash at $880 per unit. Prior to this sale, the 2-week ask price of common stock was $40 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value. Instructions (a) Prepare the journal entry to record Evans’ transaction, under the following conditions. (1) Employing the incremental method. (2) Employing the proportional method, assuming the recent price quote on the common stock reflects fair value. (b) Briefly explain which method is, in your opinion, the better method.

What is meant by the designation 12 x 36 inch lathe?

Carol Keene, corporate comptroller for Dumaine Industries, is trying to decide how to present “Property, plant, and equipment” in the balance sheet. She realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall she knows the company’s plant assets are rather old. She feels that she can disclose one figure titled “Property, plant, and equipment, net of depreciation,” and the result will be a low figure. However, it will not disclose the age of the assets. If she chooses to show the cost less accumulated depreciation, the age of the assets will be apparent. She proposes the following. Property, plant, and equipment, net of depreciation $10,000,000 rather than Property, plant, and equipment $50,000,000 Less: Accumulated depreciation 40,000,000 Net book value $10,000,000 Instructions Answer the following questions. (a) What are the ethical issues involved? (b) What should Keene do?

The executive officers of Rouse Corporation have a performance-based compensation plan. The performance criteria of this plan is linked to growth in earnings per share. When annual EPS growth is 12%, the Rouse executives earn 100% of the shares; if growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives receive no additional compensation. In 2014, Joan Devers, the controller of Rouse, reviews year-end estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Kurt Adkins, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1%. Devers is not sure she should do this because she believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the computation. Instructions Answer the following questions. (a) What, if any, is the ethical dilemma for Devers? (b) Should Devers’s knowledge of the compensation plan be a factor that influences her estimate? (c) How should Devers respond to Adkins’s request?

The following example was provided to encourage the use of the LIFO method. In a nutshell, LIFO subtracts inflation from inventory costs, deducts it from taxable income, and records it in a LIFO reserve account on the books. The LIFO benefit grows as inflation widens the gap between currentyear and past-year (minus inflation) inventory costs. This gap is: With LIFO Without LIFO Revenues $3,200,000 $3,200,000 Cost of goods sold 2,800,000 2,800,000 Operating expenses 150,000 150,000 Operating income 250,000 250,000 LIFO adjustment 40,000 0 Taxable income $ 210,000 $ 250,000 Income taxes @ 36% $ 75,600 $ 90,000 Cash fl ow $ 174,400 $ 160,000 Extra cash $ 14,400 0 Increased cash fl ow 9% 0% Instructions (a) Explain what is meant by the LIFO reserve account. (b) How does LIFO subtract inflation from inventory costs? (c) Explain how the cash flow of $174,400 in this example was computed. Explain why this amount may not be correct. (d) Why does a company that uses LIFO have extra cash? Explain whether this situation will always exist.

Cost function; opportunity cost; relevant costs Yummy Yoghurt sells yogurt cones in a variety of natural flavours. Data for a recent month follow: Required (a)          Categorise each cost as fixed or variable. (b)          Create a cost function.

Question: Duncan Company reports the following financial information before adjustments. Dr. Cr. Accounts Receivable $100,000 Allowance for Doubtful Accounts $ 2,000 Sales Revenue (all on credit) 900,000 Sales Returns and Allowances 50,000 Instructions Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 1% of net sales and (b) 5% of accounts receivable.

An adhesive must cure in order to bond. What is meant by the term curing?

Sophia recently won a tax case litigated in the 7th Circuit.  She recently heard that the Supreme Court denied the writ of certiorari.  Should she be happy or not, and why?

At December 31, 2013, Belmont Company had a net deferred tax liability of $375,000. An explanation of the items that compose this balance is as follows3 Resulting Balances Temporary Differences in Deferred Taxes 1. Excess of tax depreciation over book depreciation $200,000 2. Accrual, for book purposes, of estimated loss contingency from pending lawsuit that is expected to be settled in 2014. The loss will be deducted on the tax return when paid. (50,000) 3. Accrual method used for book purposes and installment method used for tax purposes for an isolated installment sale of an investment. 225,000 $375,000 In analyzing the temporary differences, you find that $30,000 of the depreciation temporary difference will reverse in 2014, and $120,000 of the temporary difference due to the installment sale will reverse in 2014. The tax rate for all years is 40%. Instructions Indicate the manner in which deferred taxes should be presented on Belmont Company’s December 31, 2013, balance sheet.

Explain how the credit risk of finance companies differs from that of other lending financial institutions. (LO5)

: Explain the relationship between goals and plans and the types of goals an organization should have.

Explain the conditions that led to the debt crisis in Greece. (LO3)

Explain how accountants and managers decide which cost variances to monitor.

1. We defined the factor of production ‘land’ to include raw materials. Does the analysis of rent that we have just been looking at apply to raw materials? 2. The supply of land in a particular area may be totally inelastic, but the supply of land in that area for a specific purpose (e.g. growing wheat) will be upward sloping: the higher the price of wheat and thus the higher the rent that wheat producers are prepared to pay, the more will be made available for wheat production. Using the concept of transfer earnings, what will determine the elasticity of supply of land for any particular purpose?

At December 31, 2014, Coburn Corp. has assets of $10,000,000, liabilities of $6,000,000, common stock of $2,000,000 (representing 2,000,000 shares of $1 par common stock), and retained earnings of $2,000,000. Net sales for the year 2014 were $18,000,000, and net income was $800,000. As auditors of this company, you are making a review of subsequent events on February 13, 2015, and you find the following. 1. On February 3, 2015, one of Coburn’s customers declared bankruptcy. At December 31, 2014, this company owed Coburn $300,000, of which $60,000 was paid in January 2015. 2. On January 18, 2015, one of the three major plants of the client burned. 3. On January 23, 2015, a strike was called at one of Coburn’s largest plants, which halted 30% of its production. As of today (February 13), the strike has not been settled. 4. A major electronics enterprise has introduced a line of products that would compete directly with Coburn’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor has been able to achieve quality similar to that of Coburn’s products but at a price 50% lower. Coburn officials say they will meet the lower prices, which are high enough to cover variable manufacturing and selling costs but which permit recovery of only a portion of fixed costs. 5. Merchandise traded in the open market is recorded in the company’s records at $1.40 per unit on December 31, 2014. This price had prevailed for 2 weeks, after release of an official market report that predicted vastly enlarged supplies; however, no purchases were made at $1.40. The price throughout the preceding year had been about $2, which was the level experienced over several years. On January 18, 2015, the price returned to $2, after public disclosure of an error in the official calculations of the prior December, correction of which destroyed the expectations of excessive supplies. Inventory at December 31, 2015, was on a lower-of-cost-or-market basis. 6. On February 1, 2015, the board of directors adopted a resolution accepting the offer of an investment banker to guarantee the marketing of $1,200,000 of preferred stock. Instructions State in each case how the 2014 financial statements would be affected, if at all.

Describe the circumstances in which an individual taxpayer with a net §1231 gain will have different portions of the gain taxed at different rates.

Assume that in a household one parent currently works full time and the other stays at home to look after the family. How would you set about identifying and calculating the opportunity costs of the second parent now taking a full-time job? How would such calculations be relevant in deciding whether it is worth taking that job?

Using the facts from Problem 49, what will happen to the government’s tax revenues if Song chooses to spend more time pursuing her other passions besides work in response to the tax rate change and therefore earns only $75,000 in taxable income?  What is the term that describes this type of reaction to a tax rate increase?  What types of taxpayers are likely to respond in this manner?

What are the criteria by which machinability is commonly assessed in a production machining operation?

Jessica’s friend Zachary once stated that he couldn’t understand why someone would take a tax course.  Why is this a rather naïve view?

In addition to surface cleaning, what is the main function performed by shot peening?

What are some aspects of business that require knowledge of taxation?  What are some aspects of personal finance that require knowledge of taxation?

Describe some ways in which taxes affect the political process in the United States.