Question & Answer

What is the difference between primary and secondary authorities?  Explain the role of each authority type in conducting tax research.

In an orthogonal cutting operation, the 0.250 in wide tool has a rake angle of 5°. The lathe is set so the chip thickness before the cut is 0.010 in. After the cut, the deformed chip thickness is measured to be 0.027 in. Calculate (a) the shear plane angle and (b) the shear strain for the operation.

How should the results of installment sales be reported on the income statement?

On July 1, 2014, Torvill Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,900,000. On July 1, Torvill estimated that it would take between 2 and 3 years to complete the building. On December 31, 2016, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2014, 2015, and 2016. At At At 12/31/14 12/31/15 12/31/16 Contract costs incurred to date $ 300,000 $1,200,000 $2,100,000 Estimated costs to complete the contract 1,200,000 800,000 –0– Billings to Gumbel 300,000 1,100,000 1,850,000 Instructions (a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore income taxes.) (b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore income taxes.)

How would the political business cycle be affected if governments were able to choose when to hold elections?

For what reasons should the percentage-of-completion method be used over the completed-contract method whenever possible?

How does a corporation’s adjustment to earnings and profits differ based on the tax treatment of a stock redemption to the shareholder (i.e., as either a dividend or exchange)?

Amigos Burrito Inc. sells franchises to independent operators throughout the northwestern part of the United States. The contract with the franchisee includes the following provisions. 1. The franchisee is charged an initial fee of $120,000. Of this amount, $20,000 is payable when the agreement is signed, and a $20,000 non-interest-bearing note is payable at the end of each of the 5 subsequent years. 2  All of the initial franchise fee collected by Amigos is to be refunded and the remaining obligation canceled if, for any reason, the franchisee fails to open his or her franchise. 3. In return for the initial franchise fee, Amigos agrees to (a) assist the franchisee in selecting the location for the business, (b) negotiate the lease for the land, (c) obtain financing and assist with building design, (d) supervise construction, (e) establish accounting and tax records, and (f) provide expert advice over a 5-year period relating to such matters as employee and management training, quality control, and promotion. 4. In addition to the initial franchise fee, the franchisee is required to pay to Amigos a monthly fee of 2% of sales for menu planning, receipt innovations, and the privilege of purchasing ingredients from Amigos at or below prevailing market prices. Management of Amigos Burrito estimates that the value of the services rendered to the franchisee at the time the contract is signed amounts to at least $20,000. All franchisees to date have opened their locations at the scheduled time, and none have defaulted on any of the notes receivable. The credit ratings of all franchisees would entitle them to borrow at the current interest rate of 10%. The present value of an ordinary annuity of five annual receipts of $20,000 each discounted at 10% is $75,816. Instructions (a) Discuss the alternatives that Amigos Burrito Inc. might use to account for the initial franchise fees, evaluate each by applying generally accepted accounting principles, and give illustrative entries for each alternative. (b) Given the nature of Amigos Burrito’s agreement with its franchisees, when should revenue be recognized? Discuss the question of revenue recognition for both the initial franchise fee and the additional monthly fee of 2% of sales, and give illustrative entries for both types of revenue. (c) Assume that Amigos Burrito sells some franchises for $100,000, which includes a charge of $20,000 for the rental of equipment for its useful life of 10 years; that $50,000 of the fee is payable immediately and the balance on non-interest-bearing notes at $10,000 per year; that no portion of the $20,000 rental payment is refundable in case the franchisee goes out of business; and that title to the equipment remains with the franchisor. Under those assumptions, what would be the preferable method of accounting for the rental portion of the initial franchise fee? Explain.

Euro NCAP carries out crash tests on new cars in order to assess the extent to which they are safer than the minimum required. The cars are given a percentage score in four different categories, including adult occupant protection and child occupant protection. An overall safety rating is then awarded. Based on the test results in 2020, the Volkswagen ID. 3 was judged to be the safest car on the market. If you observed that these cars were more likely to be involved in traffic accidents, could this be an example of adverse selection or moral hazard? Explain.

Imagine that a public project yields a return of 13 per cent (after taking into account all social costs and benefits), whereas a 15 per cent private return could typically be earned in the private sector. How would you justify diverting resources from the private sector to this project?

Hatch Company has two classes of capital stock outstanding: 8%, $20 par preferred and $5 par common. At December 31, 2014, the following accounts were included in stockholders’ equity. Preferred Stock, 150,000 shares $ 3,000,000 Common Stock, 2,000,000 shares 10,000,000 Paid-in Capital in Excess of Par—Preferred Stock 200,000 Paid-in Capital in Excess of Par—Common Stock 27,000,000 Retained Earnings 4,500,000 The following transactions affected stockholders’ equity during 2015. Jan. 1 30,000 shares of preferredstock issued at $22 per share. Feb. 1 50,000 shares of common stock issued at $20 per share. June 1 2-for-1 stock split (par value reduced to $2.50).July 1 30,000 shares of common treasury stock purchased at $10 per share. Hatch uses the cost method.Sept. 15 10,000 shares of treasury stock reissuedat $11 per share. Dec. 31 The preferred dividend is declared, and a common dividend of 50¢ per share is declared. Dec. 31 Net income is $2,100,000. Instructions Prepare the stockholders’ equity section for Hatch Company at December 31, 2015. Show all supporting computations.

Why will exporters probably welcome a ‘deterioration’ in the terms of trade?

Gordon Company started operations on January 1, 2009, and has used the FIFO method of inventory valuation since its inception. In 2015, it decides to switch to the average-cost method. You are provided with the following information. Net Income Retained Earnings (Ending Balance) Under FIFO Under Average-Cost Under FIFO 2009 $100,000 $ 90,000 $100,000 2010 70,000 65,000 160,000 2011 90,000 80,000 235,000 2012 120,000 130,000 340,000 2013 300,000 290,000 590,000 2014 305,000 310,000 780,000 Instructions (a) What is the beginning retained earnings balance at January 1, 2011, if Gordon prepares comparative financial statements starting in 2011? (b) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014? (c) What is the beginning retained earnings balance at January 1, 2015, if Gordon prepares singleperiod financial statements for 2015? (d) What is the net income reported by Gordon in the 2014 income statement if it prepares comparative financial statements starting with 2012?

Becker Corporation sells farm machinery on the installment plan. On July 1, 2014, Becker entered into an installment-sales contract with Valente Inc. for an 8-year period. Equal annual payments under the installment sale are $100,000 and are due on July 1. The first payment was made on July 1, 2014. Additional information: 1. The amount that would be realized on an outright sale of similar farm machinery is $586,842. 2. The cost of the farm machinery sold to Valente Inc. is $425,000. 3. The finance charges relating to the installment period are based on a stated interest rate of 10%, which is appropriate. 4. Circumstances are such that the collection of the installments due under the contract is reasonably assured. Instructions What income or loss before income taxes should Becker record for the year ended December 31, 2014, as a result of the transaction above?

What is a “wash sale”? What is the purpose of the wash sale tax rules?

Tom was just hired by Acme Corporation and has decided to purchase disability insurance.  This insurance promises to pay him weekly benefits to replace his salary should he be unable to work because of disability.  Disability insurance is also available through Acme as part of its compensation plan.  Acme pays these premiums as a nontaxable fringe benefit, but the plan promises to pay about 10 percent less in benefits.  If Tom elects to have Acme pay the premiums, then his compensation will be reduced by an equivalent amount.  Should tax considerations play a role in Tom’s choice to buy disability insurance through Acme or on his own?  Explain.

Discuss the importance of selecting an appropriate cost driver for cost allocation.

Suppose transfer prices are set at market prices and a manager who previously purchased internally begins to purchase externally. Explain what it means to say that the outsourcing decision might have been suboptimal.

Describe each of the two types of sheet-metal-bending operations: V-bending and edge bending

Everly Corporation acquires a coal mine at a cost of $400,000. Intangible development costs total $100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is $80,000), after which it can be sold for $160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for leases.

Assume that (1) investors and borrowers expect that the economy will weaken and that inflation will decline, (2) investors require a small liquidity premium, and (3) markets are partially segmented and the Treasury currently has a preference for borrowing in shortterm markets. Explain how each of these forces would affect the term structure, holding other factors constant. Then explain the effect on the term structure overall. (LO3)

Navajo Corporation traded a used truck (cost $20,000, accumulated depreciation $18,000) for a small computer worth $3,300. Navajo also paid $500 in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

Define crimping in the context of electrical connections.

The table in Box 1.2 shows time-series data for four different variables for four different countries. Would there have been any advantage in giving the figures for each separate year? Would there have been any disadvantage?