Question & Answer

What were some of the more obvious reasons for the savings institution crisis of the late 1980s? (LO6)

Jack operates a large home repair business as a sole proprietorship. Besides providing services, Jack also sells home repair supplies to homeowners. However, these sales constitute a relatively small portion of Jack’s income. Describe the conditions under which Jack would need to account for sales and purchases of plumbing supplies using the accrual method. (Hint: Read §471(c) and Reg. §1.471-1.)

Why do marginal cost curves intersect both the average variable cost curve and the average cost curve at their lowest point?

Cathy, Heathcliff, and Isabelle are equal shareholders in Wuthering Heights (WH), an S corporation. Heathcliff has decided he would like to terminate the S election. In the following alternative scenarios, indicate whether the termination will occur and indicate the date if applicable (assume no alternative termination dates are selected).

On June 3, Hunt Company sold to Ann Mount merchandise having a sales price of $8,000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling $120, terms n/30, was received by Mount on June 8 from the Olympic Transport Service for the freight cost. Upon receipt of the goods, June 5, Mount notified Hunt Company that merchandise costing $600 contained flaws that rendered it worthless. The same day, Hunt Company issued a credit memo covering the worthless merchandise and asked that it be returned at company expense. The freight on the returned merchandise was $24, paid by Hunt Company on June 7. On June 12, the company received a check for the balance due from Mount. Instructions (a) Prepare journal entries for Hunt Company to record all the events noted above under each of the following bases. (1) Sales and receivables are entered at gross selling price. (2) Sales and receivables are entered net of cash discounts. (b) Prepare the journal entry under basis (2), assuming that Ann Mount did not remit payment until August 5.

Ray Albertson is 72 years old and lives by himself in an apartment in Salt Lake City.Ray’s gross income for the year is $3,000.Ray’s support is provided as follows:Himself (11 percent), his daughters Diane (20 percent) and Karen (15percent), his sons Mike (20 percent) and Kenneth (10 percent), his friend Milt (14 percent), and his cousin Henry (12 percent).Absent a multiple support agreement, of the parties mentioned in the problem, who may claim adependency exemption for Ray as a qualifying relative

What are the primary advantages of having a Codificationof generally accepted accounting principles?

On July 1, 2014, Roberts Corporation issued $3,000,000 of 9% bonds payable in 20 years. The bonds include detachable warrants giving the bondholder the right to purchase for $30 one share of $1 par value common stock at any time during the next 10 years. The bonds were sold for $3,000,000. The value of the warrants at the time of issuance was $100,000. Prepare the journal entry to record this transaction.

How does a corporation’s decision to pay dividends affect its overall tax rate?

Describe the differences between a proportional, progressive, and regressive tax rate structure.

Bella Partnership is an equal partnership in which each of the partners has a basis in their partnership interest of $10,000. Bella reports the following balance sheet: Assets: Tax Basis FMV Inventory $ 20,000 $ 30,000 Land 10,000 15,000    Totals $ 30,000 $ 45,000 Liabilities and capital: Capital- Toby 10,000 - Kaelin 10,000 - Andrew 10,000   Totals $ 30,000 a. Identify the hot assets if Toby decides to sell his partnership interest. Are these assets “hot” for purposes of distributions? b. If Bella distributes the land to Toby in complete liquidation of his partnership interest, what tax issues should be considered?

Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material. (a) Legal fees paid in connection with the purchase of land are $1,500. (b) Eduardo, Inc. paves the driveway leading to the office building at a cost of $21,000. (c) A meat market purchases a meat-grinding machine at a cost of $3,500. (d) On June 30, Monroe and Meno, medical doctors, pay 6 months’ office rent to cover the month of July and the next 5 months. (e) Smith’s Hardware Company pays $9,000 in wages to laborers for construction on a building to be used in the business. (f) Alvarez’s Florists pays wages of $2,100 for the month an employee who serves as driver of their delivery truck.

Describe how a business adopts a permissible accounting method. Explain whether a taxpayer can adopt an impermissible accounting method.

Horatio and Kelly were divorced at the end of last year.Neither Horatio nor Kelly remarried during the current year and Horatio moved out of state.Determine the filing status of Horatio and Kelly for the current year in the following independent situations: a.     Horatio and Kelly did not have any children and neither reported any dependents in the current year.   Horatio and Kelly will both file as single taxpayers.   b.    Horatio and Kelly had one child Amy, who turned 10 years of age in the current year.Amy lived with Kelly for all of the current year and Kelly provided all of her support.

Why is the drying step, so important in the processing of traditional ceramics, usually not required in processing of new ceramics?

Newton Inc. uses a calendar year for financial reporting. The company is authorized to issue 9,000,000 shares of $10 par common stock. At no time has Newton issued any potentially dilutive securities. Listed below is a summary of Newton’s common stock activities. 1. Number of common shares issued and outstanding at December 31, 2012 2,000,000 2. Shares issued as a result of a 10% stock dividend on September 30, 2013 200,000 3. Shares issued for cash on March 31, 2014 2,000,000 Number of common shares issued and outstanding at December 31, 2014 4,200,000 4. A 2-for-1 stock split of Newton’s common stock took place on March 31, 2015 Instructions (a) Compute the weighted-average number of common shares used in computing earnings per common share for 2013 on the 2014 comparative income statement. (b) Compute the weighted-average number of common shares used in computing earnings per common share for 2014 on the 2014 comparative income statement. (c) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2014 on the 2015 comparative income statement. (d) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2015 on the 2015 comparative income statement.

Swift Corp., a capital goods manufacturing business that started on January 4, 2014, and operates on a calendar-year basis, uses the installmentsales method of profit recognition in accounting for all its sales. The following data were taken from the 2014 and 2015 records. 2014 2015 Installment sales $480,000 $620,000 Gross profi t as a percent of costs 25% 28% Cash collections on sales of 2014 $130,000 $240,000 Cash collections on sales of 2015 –0– $160,000 The amounts given for cash collections exclude amounts collected for interest charges. Instructions (a) Compute the amount of realized gross profit to be recognized on the 2015 income statement, prepared using the installment-sales method. (Round percentages to three decimal places.) (b) State where the balance of Deferred Gross Profit would be reported on the financial statements for 2015. (c) Compute the amount of realized gross profit to be recognized on the income statement, prepared using the cost-recovery method.

Lee is 30 years old and single.Lee paid all the costs of maintaining his household for the entire year.Determine Lee’s filing status in each of the following alternative situations: a.       Lee is Ashton’s uncle.Ashton is 15 years old and has gross income of $5,000. Ashton lived in Lee’s home from April 1 through the end of the year. b.      Lee is Ashton’s uncle.Ashton is 20 years old, not a full-time student, and has gross income of $7,000. Ashton lived in Lee’s home from April 1 through the end of the year. c.       Lee is Ashton’s uncle.Ashton is 22 years old and was a full-time student from January through April.Ashton’s gross income was $5,000.Ashton lived in Lee’s home from April 1 through the end of the year. d.      Lee is Ashton’s cousin.Ashton is 18 years old, has gross income of $3,000, and is not a full-time student. Ashton lived in Lee’s home from April 1 through the end of the year. e.       Lee and Ashton are cousins.Ashton is 18 years old, has gross income of $3,000, and is not a full-time student. Ashton lived in Lee’s home for the entire year.

Write a short essay on the future of thrift operations. Should savings institutions be merged into the banking industry, or should they remain distinctly different from commercial banks?

Tones Industries has the following patents on its December 31, 2013, balance sheet. Patent Item Initial Cost Date Acquired Useful Life at Date Acquired Patent A $30,600 3/1/10 17 years Patent B $15,000 7/1/11 10 years Patent C $14,400 9/1/12 4 years The following events occurred during the year ended December 31, 2014. 1. Research and development costs of $245,700 were incurred during the year. 2. Patent D was purchased on July 1 for $36,480. This patent has a useful life of 9½ years. 3. As a result of reduced demands for certain products protected by Patent B, a possible impairment of Patent B’s value may have occurred at December 31, 2014. The controller for Tones estimates the expected future cash flows from Patent B will be as follows. Year Expected Future Cash Flows 2015 $2,000 2016 2,000 2017 2,000 The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.) Instructions (a) Compute the total carrying amount of Tones’ patents on its December 31, 2013, balance sheet. (b) Compute the total carrying amount of Tones’ patents on its December 31, 2014, balance sheet.

An orthogonal cutting operation is performed using a rake angle of 15°, chip thickness before the cut = 0.012 in and width of cut = 0.100 in. The chip thickness ratio is measured after the cut to be 0.55. Determine (a) the chip thickness after the cut, (b) shear angle, (c) friction angle, (d) coefficient of friction, and (e) shear strain.

A 200.00 mm sine bar is used to inspect an angle on a part. The angle has a dimension of 35.0 ± 1.8°. The sine bar rolls have a diameter of 30.0 mm. A set of gage blocks is available that can form any height from 10.0000 to 199.9975 mm in increments of 0.0025 mm. Determine (a) the height of the gage block stack to inspect the minimum angle, (b) height of the gage block stack to inspect the maximum angle, and (c) smallest increment of angle that can be setup at the nominal angle size. All inspection is performed on a surface plate.

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.

AAA Inc. acquired a machine in year 1. In May of year 3, it sold the asset. Can AAA find its year 3 depreciation percentage for the machine on the MACRS table? If not, what adjustment must AAA make to its full-year depreciation percentage to determine its year 3 depreciation?

Shaw Company sells goods that cost $300,000 to Ricard Company for $410,000 on January 2, 2014. The sales price includes an installation fee, which is valued at $40,000. The fair value of the goods is $370,000. The installation is expected to take 6 months. Instructions (a) Prepare the journal entry (if any) to record the sale on January 2, 2014. (b) Shaw prepares an income statement for the first quarter of 2014, ending on March 31, 2014. How much revenue should Shaw recognize related to its sale to Ricard?