Question & Answer

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 certified public accountant is frequently called upon by management for advice regarding methods of computing depreciation. Of comparable importance, although it arises less frequently, is the question of whether the depreciation method should be based on consideration of the assets as units, as a group, or as having a composite life. Instructions (a) Briefly describe the depreciation methods based on treating assets as (1) units and (2) a group or as having a composite life. (b) Present the arguments for and against the use of each of the two methods. (c) Describe how retirements are recorded under each of the two methods.

On January 1, 2015, Wilke Corp. had 480,000 shares of common stock outstanding. During 2015, it had the following transactions that affected the common stock account. February 1 Issued 120,000 shares March 1 Issued a 10% stock dividend May 1 Acquired 100,000 shares of treasury stock June 1 Issued a 3-for-1 stock split October 1 Reissued 60,000 shares of treasury stock Instructions (a) Determine the weighted-average number of shares outstanding as of December 31, 2015. (b) Assume that Wilke Corp. earned net income of $3,456,000 during 2015. In addition, it had 100,000 shares of 9%, $100 par nonconvertible, noncumulative preferred stock outstanding for the entire year. Because of liquidity considerations, however, the company did not declare and pay a preferred dividend in 2015. Compute earnings per share for 2015, using the weighted-average number of shares determined in part (a). (c) Assume the same facts as in part (b), except that the preferred stock was cumulative. Compute earnings per share for 2015. (d) Assume the same facts as in part (b), except that net income included an extraordinary gain of $864,000 and a loss from discontinued operations of $432,000. Both items are net of applicable income taxes. Compute earnings per share for 2015.

The actuary for the pension plan of Gustafson Inc. calculated the following net gains and losses. Incurred during the Year (Gain) or Loss 2014 $300,000 2015 480,000 2016 (210,000) 2017 (290,000) Other information about the company’s pension obligation and plan assets is as follows. Projected Benefi t Plan Assets As of January 1, Obligation (market-related asset value) 2014 $4,000,000 $2,400,000 2015 4,520,000 2,200,000 2016 5,000,000 2,600,000 2017 4,240,000 3,040,000 Gustafson Inc. has a stable labor force of 400 employees who are expected to receive benefits under the plan. The total service-years for all participating employees is 5,600. The beginning balance of accumulated OCI (G/L) is zero on January 1, 2014. The market-related value and the fair value of plan assets are the same for the 4-year period. Use the average remaining service life per employee as the basis for amortization. Instructions (Round to the nearest dollar.) Prepare a schedule which reflects the minimum amount of accumulated OCI (G/L) amortized as a component of net periodic pension expense for each of the years 2014, 2015, 2016, and 2017. Apply the “corridor” approach in determining the amount to be amortized each year.

Van Hatten Industries has three operating divisions—Depp Construction Division, DeMent Publishing Division, and Ankiel Securities Division. Each division maintains its own accounting system and method of revenue recognition. Depp Construction Division During the fiscal year ended November 30, 2014, Depp Construction Division had one construction project in process. A $30,000,000 contract for construction of a civic center was granted on June 19, 2014, and construction began on August 1, 2014. Estimated costs of completion at the contract date were $25,000,000 over a 2-year time period from the date of the contract. On November 30, 2014, construction costs of $7,200,000 had been incurred and progress billings of $9,500,000 had been made. The construction costs to complete the remainder of the project were reviewed on November 30, 2014, and were estimated to amount to only $16,800,000 because of an expected decline in raw materials costs. Revenue recognition is based upon a percentage-of-completion method. DeMent Publishing Division The DeMent Publishing Division sells large volumes of novels to a few book distributors, which in turn sell to several national chains of bookstores. DeMent allows distributors to return up to 30% of sales, and distributors give the same terms to bookstores. While returns from individual titles fluctuate greatly, the returns from distributors have averaged 20% in each of the past 5 years. A total of $7,000,000 of paperback novel sales were made to distributors during fiscal 2014. On November 30, 2014 (the end of the fiscal year), $1,500,000 of fiscal 2014 sales were still subject to return privileges over the next 6 months. The remaining $5,500,000 of fiscal 2014 sales had actual returns of 21%. Sales from fiscal 2013 totaling $2,000,000 were collected in fiscal 2014 less 18% returns. This division records revenue according to the method referred to as revenue recognition when the right of return exists. Ankiel Securities Division Ankiel Securities Division works through manufacturers’ agents in various cities. Orders for alarm systems and down payments are forwarded from agents, and the division ships the goods f.o.b. factory directly to customers (usually police departments and security guard companies). Customers are billed directly for the balance due plus actual shipping costs. The company received orders for $6,000,000 of goods during the fiscal year ended November 30, 2014. Down payments of $600,000 were received, and $5,200,000 of goods were billed and shipped. Actual freight costs of $100,000 were also billed. Commissions of 10% on product price are paid to manufacturing agents after goods are shipped to customers. Such goods are warranted for 90 days after shipment, and warranty returns have been about 1% of sales. Revenue is recognized at the point of sale by this division. Instructions (a) There are a variety of methods of revenue recognition. Define and describe each of the following methods of revenue recognition, and indicate whether each is in accordance with generally accepted accounting principles. (1) Point of sale. (2) Completion-of-production. (3) Percentage-of-completion. (4) Installment-sales. (b) Compute the revenue to be recognized in fiscal year 2014 for each of the three operating divisions of Van Hatten Industries in accordance with generally accepted accounting principles.

Refer to the Partridge Insurance Illustration in the chapter. Explain how         the support departments can be classified as both cost objects and cost        pools in the costing system.

Agassi Corporation is preparing the comparative financial statements to be included in the annual report to stockholders. Agassi employs a fiscal year ending May 31. Income from operations before income taxes for Agassi was $1,400,000 and $660,000, respectively, for fiscal years ended May 31, 2015 and 2014. Agassi experienced an extraordinary loss of $400,000 because of an earthquake on March 3, 2015. A 40% combined income tax rate pertains to any and all of Agassi Corporation’s profits, gains, and losses. Agassi’s capital structure consists of preferred stock and common stock. The company has not issued any convertible securities or warrants and there are no outstanding stock options. Agassi issued 40,000 shares of $100 par value, 6% cumulative preferred stock in 2011. All of this stock is outstanding, and no preferred dividends are in arrears. There were 1,000,000 shares of $1 par common stock outstanding on June 1, 2013. On September 1, 2013, Agassi sold an additional 400,000 shares of the common stock at $17 per share. Agassi distributed a 20% stock dividend on the common shares outstanding on December 1, 2014. These were the only common stock transactions during the past 2 fiscal years. Instructions (a) Determine the weighted-average number of common shares that would be used in computing earnings per share on the current comparative income statement for: (1) The year ended May 31, 2014. (2) The year ended May 31, 2015. (b) Starting with income from operations before income taxes, prepare a comparative income statement for the years ended May 31, 2015 and 2014. The statement will be part of Agassi Corporation’s annual report to stockholders and should include appropriate earnings per share presentation. (c) The capital structure of a corporation is the result of its past financing decisions. Furthermore, the earnings per share data presented on a corporation’s financial statements is dependent upon the capital structure. (1) Explain why Agassi Corporation is considered to have a simple capital structure. (2) Describe how earnings per share data would be presented for a corporation that has a complex capital structure.

As a newly enrolled accounting major, you are anxious to better understand accounting institutions and sources of accounting literature. As a first step, you decide to explore the IASB’s Framework for the Preparation and Presentation of Financial Statements. Instructions Access the IASB Framework at the IASB website (http://eifrs.iasb.org/ ). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following items. (Provide paragraph citations.) (a) What is the objective of financial reporting? (b) What other means are there of communicating information, besides financial statements? (c) Indicate some of the users and the information they are most directly concerned with in economic decision-making.

Presented below is information related to Ivan Calderon Corp. for the year 2014. Net sales $1,300,000 Write-off of inventory due to obsolescence $ 80,000 Cost of goods sold 780,000 Depreciation expense omitted by accident in 2013 55,000 Selling expenses 65,000 Casualty loss (extraordinary item) before taxes 50,000 Administrative expenses 48,000 Cash dividends declared 45,000 Dividend revenue 20,000 Retained earnings at December 31, 2013 980,000 Interest revenue 7,000 Effective tax rate of 34% on all items Instructions (a) Prepare a multiple-step income statement for 2014. Assume that 60,000 shares of common stock are outstanding. (b) Prepare a separate retained earnings statement for 2014.

Why is friction generally undesirable in metal forming operations?

A continuous weld is to be made around the circumference of a round steel tube of diameter = 6.0 ft, using a submerged arc welding operation under automatic control at a voltage of 25 volts and current of 300 amps. The tube is slowly rotated under a stationary welding head. The heat transfer factor for SAW is = 0.95 and the assumed melting factor = 0.7. The cross-sectional area of the weld bead is 0.12 in2. If the unit melting energy for the steel = 150 Btu/in3, determine (a) the rotational speed of the tube and (b) the time required to complete the weld.

A 300-mm-long wrench is used to tighten a Metric 20x2.5 bolt. The proof strength of the bolt for the particular alloy is 380 MPa. The torque coefficient is 0.21. Determine the maximum force that can be applied to the end of the wrench so that the bolt does not permanently deform.

Why are revenue and expense accounts called temporary or nominal accounts?

Tori Amos Corporation began operations on December 1, 2013. The only inventory transaction in 2013 was the purchase of inventory on December 10, 2013, at a cost of $20 per unit. None of this inventory was sold in 2013. Relevant information is as follows. Ending inventory units December 31, 2013 100 December 31, 2014, by purchase date December 2, 2014 100 July 20, 2014 50 150 During the year, the following purchases and sales were made. Purchases Sales March 15 300 units at $24 April 10 200 July 20 300 units at 25 August 20 300 September 4 200 units at 28 November 18 150 December 2 100 units at 30 December 12 200 The company uses the periodic inventory method. Instructions (a) Determine ending inventory under (1) specific identification, (2) FIFO, (3) LIFO, and (4) average cost. (b) Determine ending inventory using dollar-value LIFO. Assume that the December 2, 2014, purchase cost is the current cost of inventory. (Hint: The beginning inventory is the base layer priced at $20 per unit.)

Deirdre sold 100 shares of stock to her brother, James, for $2,400. Deirdre purchased the stock several years ago for $3,000.  a. What gain or loss does Deirdre recognize on the sale? b. What amount of gain or loss does James recognize if he sells the stock for $3,200? c. What amount of gain or loss does James recognize if he sells the stock for $2,600? d. What amount of gain or loss does James recognize if he sells the stock for $2,000?

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.

Why is silicon a desirable work material in microsystem technology?

Franklin Corp. has an investment that it has held for several years. When it purchased the investment, Franklin classified and accounted for it as available-for-sale. Can Franklin use the fair value option for this investment? Explain.

Distinguish between a price variance and an efficiency variance.

3. Under what circumstances would the production possibility curve be (a) a straight line; (b) bowed in toward the origin? Are these circumstances ever likely?

Alexander Enterprises leases property to Hamilton, Inc. Because Hamilton, Inc. is experiencing financial difficulty, Alexander agrees to receive five rents of $20,000 at the end of each year, with the rents deferred 3 years. What is the present value of the five rents discounted at 12%?

Is it easier to describe what a capital asset is or what it is not?Explain

Name some of the abrasive operations available to achieve very good surface finishes

Corp. had $100,000 of 7%, $20 par value preferred stock and 12,000 shares of $25 par value common stock outstanding throughout 2014. (a) Assuming that total dividends declared in 2014 were$64,000, and that the preferred stock is not cumulative but is fully participating, common stockholders should receive 2014 dividends of what amount? (b) Assuming that total dividends declared in 2014 were $64,000, and that the preferred stock is fully participating and cumulative with preferred dividends in arrears for 2013, preferred stockholders should receive 2014 dividends totaling what amount? (c) Assuming that total dividends declared in 2014 were $30,000, that the preferred stock is cumulative, nonparticipating, and was issued on January 1, 2013, and that $5,000 of preferred dividends were declared and paid in 2013, the common stockholders should receive 2014 dividends totaling what amount?

What would have happened if countries in deficit had not responded to an outflow of gold by reducing total expenditure?