Question & Answer

What are debentures? How do they differ from subordinated debentures? (LO2)

Explain why the use of residual income for performance evaluation provides better incentives, in some ways, than ROI, but still causes managers to make some decisions that could be harmful to an organisation in the long run.

Ralph owns a building that he is trying to lease. Ralph is a calendar-year, cash-method taxpayer and is trying to evaluate the tax consequences of three different lease arrangements. Under lease 1, the building rents for $500 per month, payable on the first of the next month, and the tenant must make a $500 security deposit that is refunded at the end of the lease. Under lease 2, the building rents for $5,500 per year, payable at the time the lease is signed, but no security deposit is required. Under lease 3, the building rents for $500 per month, payable at the beginning of each month, and the tenant must pay a security deposit of $1,000 that is to be applied toward the rent for the last two months of the lease.

Convers Corporation (calendar-year-end) acquired the following assets during the current tax year:

The Dotson Company, owner of Bleacher Mall, charges Rich Clothing Store a rental fee of $600 per month plus 5% of yearly profits over $500,000. Matt Rich, the owner of the store, directs his accountant, Ron Hamilton, to increase the estimate of bad debt expense and warranty costs in order to keep profits at $475,000. Instructions Answer the following questions. (a) Should Hamilton follow his boss’s directive? (b) Who is harmed if the estimates are increased? (c) Is Matt Rich’s directive ethical?

Jeremy is a calendar-year taxpayer who sometimes leases his business equipment to local organizations. He recorded the following receipts this year. Indicate the extent to which these payments are taxable income to Jeremy this year if Jeremy is (1) a cash-method taxpayer and (2) an accrual-method taxpayer.

Assume that inflation depends on two things: the level of aggregate demand, indicated by the inverse of unemployment (1/U), and the expected rate of inflation (π et). Assume that the rate of inflation (πt) is given by the equation:                              πt = (48/U – 6) + πet Assume initially (year 0) that the actual and expected rate of inflation is zero. (a)  What is the current (natural) rate of unemployment   (b)    Now assume in year 1 that the government wishes to reduce unemployment to 4 per cent and continues to expand aggregate demand by as much as is necessary to achieve this. Fill in the rows for years 0 to 4 in the following table. It is assumed for simplicity that the expected rate of inflation in a given year (πet) is equal to the actual rate of inflation in the previous year (πt–1). (c)    Now assume in year 5 that the government, worried about rising inflation, reduces aggregate demand sufficiently to reduce inflation by 3 per cent in that year. What must the rate of unemployment be raised to in that year?   (d)    Assuming that unemployment stays at this high level, continue the table for years 5 to 7.

Presented below are selected ledger accounts of Tucker Corporation as of December 31, 2014. Cash $ 50,000 Administrative expenses 100,000 Selling expenses 80,000 Net sales 540,000 Cost of goods sold 210,000 Cash dividends declared (2014) 20,000 Cash dividends paid (2014) 15,000 Discontinued operations (loss before income taxes) 40,000 Depreciation expense, not recorded in 2013 30,000 Retained earnings, December 31, 2013 90,000 Effective tax rate 30% Instructions (a) Compute net income for 2014. (b) Prepare a partial income statement beginning with income from continuing operations before income tax, and including appropriate earnings per share information. Assume 10,000 shares of common stock were outstanding during 2014.

Why will the multiplier effect of government transfer payments such as child benefit, pensions and social security be less than the full multiplier effect given by government expenditure on goods and services. Will this ‘transfer payments multiplier’ be the same as the tax multiplier? (Clue: will the recipients of such benefits have the same mpcd as the average person?)

Explain the distinction between a direct-financing lease and a sales-type lease for a lessor.

Cannondale Company purchased an electric wax melter on April 30, 2014, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase. List price of new melter $15,800 Cash paid 10,000 Cost of old melter (5-year life, $700 salvage value) 11,200 Accumulated depreciation—old melter (straight-line) 6,300 Secondhand fair value of old melter 5,200 Instructions Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Cannondale’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2013.

The TimpRiders LP has operated a motorcycle dealership for a number of years. Amir is the limited partner, Francesca is the general partner, and they share capital and profits equally. Francesca works full time managing the partnership. Both the partnership and the partners report on a calendar-year basis. At the start of the current year, Amir and Francesca had bases of $10,000 and $3,000 respectively, and the partnership did not have any liabilities. During the current year, the partnership reported the following results from operations: Net sales $650,000 Cost of goods sold $500,000 Operating expenses $160,000 Short-term capital loss $2,000 Tax-exempt interest $2,000 §1231 gain $6,000 On the last day of the year, the partnership distributed $3,000 each to Amir and Francesca. a. What outside basis do Amir and Francesca have in their partnership interests at the end of the year? b. How much of their losses are currently not deductible by Amir and Francesca because of the tax-basis limitation? c. To what extent does the passive activity loss limitation apply in restricting their deductible losses for the year? d. Using the information provided, prepare TimpRiders’ page 1 and Schedule K to be included with its Form 1065 for the current year. Also, prepare a Schedule K-1 for Amir and Francesca.

Neumann Company computed earnings per share as follows. Net incomeCommon shares outstanding at year-end Neumann has a simple capital structure. What possible errors might the company have made in the computation? Explain.

A three-axis CNC machining center is tended by a worker who loads and unloads parts between machining cycles. The machining cycle takes 5.75 min, and the worker takes 2.80 min using a hoist to unload the part just completed and load and fixture the next part onto the machine worktable. A proposal has been made to install a two-position pallet shuttle at the machine so that the worker and the machine tool can perform their respective tasks simultaneously rather than sequentially. The pallet shuttle would transfer the parts between the machine worktable and the load/unload station in 15 sec. Determine (a) the current cycle time for the operation and (b) the cycle time if the proposal is implemented. What is the percentage increase in hourly production rate that would result from using the pallet shuttle?

How will the size of normal ‘profit’ vary with the general state of the economy?

Explain the difference between service cost and prior service cost.

How do securities firms facilitate leveraged buyouts? Why are securities firms that are better able to raise funds in the capital markets preferred by corporations that need advice on proposed acquisitions? (LO1)

Starr Co. had sales revenue of $540,000 in 2014. Other items recorded during the year were: Cost of goods sold $330,000 Salaries and wages expense 120,000 Income tax expense 25,000 Increase in value of company reputation 15,000 Other operating expenses 10,000 Unrealized gain on value of patents 20,000 Prepare a single-step income statement for Starr for 2014. Starr has 100,000 shares of stock outstanding.

Assess the operation and success of the HIPC programme?

Sheryl Crow Equipment Company sold 500 Rollomatics during 2014 at $6,000 each. During 2014, Crow spent $20,000 servicing the 2-year warranties that accompany the Rollomatic. All applicable transactions are on a cash basis. Instructions (a) Prepare 2014 entries for Crow using the expense warranty approach. Assume that Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years. (b) Prepare 2014 entries for Crow assuming that the warranties are not an integral part of the sale. Assume that of the sales total, $150,000 relates to sales of warranty contracts. Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years. Estimate revenues to be recognized on the basis of costs incurred and estimated costs.

Explain how to estimate the beta of a stock. Explain why beta serves as a measure of the stock’s risk. (LO4)

A 6.0-in wafer has a processable area with a 5.85-in diameter. How many square IC chips can be fabricated within this area, if each chip is 0.50 in on a side? Assume the cut lines (streets) between chips are of negligible width.

What is the limitation on a deductible IRA contribution?

Using the facts from the previous problem, Oriole Corporation proposes to pay Larry $100,000 and give him an installment note that will pay him $30,000 per year for the next 10 years plus a market rate of interest. Will this arrangement allow Larry to treat the redemption as an exchange?

Ehlo Company is a multiproduct firm. Presented below is information concerning one of its products, the Hawkeye. Date Transaction Quantity Price/Cost 1/1 Beginning inventory 1,000 $12 2/4 Purchase 2,000 18 2/20 Sale 2,500 30 4/2 Purchase 3,000 23 11/4 Sale 2,200 33 Instructions Compute cost of goods sold, assuming Ehlo uses: (a) Periodic system, FIFO cost flow. (d) Perpetual system, LIFO cost flow. (b) Perpetual system, FIFO cost flow. (e) Periodic system, weighted-average cost flow. (c) Periodic system, LIFO cost flow. (f) Perpetual system, moving-average cost flow.