Question & Answer

Discuss the method used to determine the amount of organizational expenditures or start-up costs that may be immediately expensed in the year a taxpayer begins business.

Some critics argue that insider trading should not be illegal, because it allows market prices to more quickly reflect the inside information. Write a short essay that supports or refutes this opinion.

What primary balance-to-GDP ratio would a country need to run to sustain a debt-to-GDP ratio of 60 per cent if the real interest rate is 2 per cent and economic growth is 4 per cent?

Boots Inc. is owned equally by Alfonso and his daughter Nancy, each of whom holds 1,000 shares in Boots. Alfonso wants to retire from the company, and it is decided that Boots will redeem all 1,000 of Alfonso’s shares for $25,000 per share on December 31 of this year. Alfonso’s tax basis in each share is $500. Boots Inc. has current E&P of $1,000,000 and accumulated E&P of $5,000,000.

Indicate whether the following statements about the conceptual framework are true or false. If false, provide a brief explanation supporting your position. (a) Accounting rule-making that relies on a body of concepts will result in useful and consistent pronouncements. (b) General-purpose financial reports are most useful to company insiders in making strategic business decisions. (c) Accounting standards based on individual conceptual frameworks generally will result in consistent and comparable accounting reports. (d) Capital providers are the only users who benefit from general-purpose financial reporting. (e) Accounting reports should be developed so that users without knowledge of economics and business can become informed about the financial results of a company. (f) The objective of financial reporting is the foundation from which the other aspects of the framework logically result.

What information is conveyed by the TTT curve?

(Looking at the Maths) The IS function can be written as                      Y = IS(r, G, t, X, M, er, Ye …) where G is government expenditure, t is the tax rate, X and M are the levels of exports and imports, er is the exchange rate, Ye is the expected level of real national income and “...” represents other unspecified determinants. Write an MP function in the form r = MP(– – – – –) identifying each of the determinants.

On January 1, 2014, Lennon Industries had stock outstanding as follows. 6% Cumulative preferred stock, $100 par value, issued and outstanding 10,000 shares $1,000,000 Common stock, $10 par value, issued and outstanding 200,000 shares 2,000,000 To acquire the net assets of three smaller companies, Lennon authorized the issuance of an additional 160,000 common shares. The acquisitions took place as shown below. On May 14, 2014, Lennon realized a $90,000 (before taxes) insurance gain on the expropriation of investments originally purchased in 2000. On December 31, 2014, Lennon recorded net income of $300,000 before tax and exclusive of the gain. Instructions Assuming a 50% tax rate, compute the earnings per share data that should appear on the financial statements of Lennon Industries as of December 31, 2014. Assume that the expropriation is extraordinary.

When must a company recognize an asset retirement obligation?

Flexible budget Helium Industries manufactures glitter balloons used as party accessories. The balloons are bagged in packages of 100 and sold for $20 per pack. The company incurs fixed manufacturing overhead of $25 000 per year and the fixed overhead is applied based on packs produced. Standard costs are: material $8 per unit, direct labour $5 per unit and variable overhead $3 per unit. The marketing manager believes sales for the coming year will be somewhere between 10 000 and 15 000 packs.   Required (a) Prepare a flexible budget for sales of 10 000, 12 000 and 15 000. (Allocate fixed overhead based on the sales volume.) (b) What advantages are there for Helium Industries in using a flexible budget?

Cameron purchases stock in Corporation X and in Corporation Y.  Neither corporation pays dividends.  The stocks both earn an identical before-tax rate of return.  Cameron sells stock in Corporation X after three years and he sells the stock in Corporation Y after five years.  Which investment likely earned a greater after-tax return?  Why?

Becker Ltd. is planning to adopt IFRS and prepare its first IFRS financial statements at December 31, 2015. What is the date of Becker’s opening balance sheet, assuming one year of comparative information? What periods will be covered in Becker’s first IFRS financial statements?

The following information is available for Remmers Corporation for 2014. 1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by $120,000. This difference will reverse in equal amounts of $30,000 over the years 2015–2018. 2. Interest received on municipal bonds was $10,000. 3. Rent collected in advance on January 1, 2014, totaled $60,000 for a 3-year period. Of this amount, $40,000 was reported as unearned at December 31, 2014, for book purposes. 4. The tax rates are 40% for 2014 and 35% for 2015 and subsequent years. 5. Income taxes of $320,000 are due per the tax return for 2014. 6. No deferred taxes existed at the beginning of 2014. Instructions (a) Compute taxable income for 2014. (b) Compute pretax financial income for 2014. (c) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes   for 2014 and 2015. Assume taxable income was $980,000 in 2015. (d) Prepare the income tax expense section of the income statement for 2014, beginning with “Income before income taxes.

Describe profile milling.

Agua Linda, Inc., is a calendar-year corporation. What is the original due date for the corporate tax return? What happens if the original due date falls on a Saturday?

If a firm faces a shortage of workers with very specific skills, it may decide to undertake the necessary training itself. If on the other hand it faces a shortage of unskilled workers it may well offer a small wage increase in order to obtain the extra labour. In the first case it is responding to an increase in demand for labour by attempting to shift the supply curve. In the second case it is merely allowing a movement along the supply curve. Use a demand and supply diagram to illustrate each case. Given that elasticity of supply is different in each case, do you think that these are the best policies for the firm to follow? What would happen to wages and economic rent if it used the second policy in the first case?

Using the facts in Problem 45, what interest rate does the State of New York bond need to offer to make Fergie indifferent between investing in the two bonds?

A part to be turned in an engine lathe must have a surface finish of 1.6 µm. The part is made of a free-machining aluminum alloy. Cutting speed = 150 m/min, and depth of cut = 4.0 mm. The nose radius on the tool = 0.75 mm. Determine the feed that will achieve the specified surface finish

Because of calamitous earthquake losses, Bernstein Company, one of your client’s oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client’s total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company—none of which is collectible—equals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.

Variances and flexible budgets Sherry North is the supply manager for West Industries, a manufacturer of garden furniture for the major department store in Australia. As part of her bonus plan, Sherry must meet the materials budget that was established at the beginning of the year. As West Industries manufactures three products in large volumes, standard costs are easily established for the factors of production. The reports for the first half of the year indicate that the materials variance is unfavourable. In an attempt to achieve her bonus target Sherry has been purchasing lower-grade materials at reduced costs for a new supplier. Management have been very pleased with the turnaround in the variance.   Required What implications do Sherry’s actions have for West Industries as a whole (especially in relation to other variances that may be reported in the production area)?

On January 2, 2009, Banno Corporation issued $1,500,000 of 10% bonds at 97 due December 31, 2018. Legal and other costs of $24,000 were incurred in connection with the issue. Interest on the bonds is payable annually each December 31. The $24,000 issue costs are being deferred and amortized on a straight-line basis over the 10-year term of the bonds. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method.”) The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2014, Banno called $900,000 face amount of the bonds and redeemed them. Instructions Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result of retiring the $900,000 of bonds in 2014 and prepare the journal entry to record the redemption.

The accounts below appear in the ledger of Anita Baker Company. Retained Earnings Dr. Cr. Bal. Jan. 1, 2014 Credit Balance $ 42,000 Aug. 15 Dividends (cash) $15,000 27,000 Dec. 31 Net Income for 2014 $40,000 67,000 Equipment Dr. Cr. Bal. Jan. 1, 2014 Debit Balance $140,000 Aug. 3 Purchase of Equipment $62,000 202,000 Sept. 10 Cost of Equipment Constructed 48,000 250,000 Nov. 15 Equipment Sold $56,000 194,000 Accumulated Depreciation— Equipment Dr. Cr. Bal. Jan. 1, 2014 Credit Balance $ 84,000 Apr. 8 Extraordinary Repairs $21,000 63,000 Nov. 15 Accum. Depreciation on Equipment Sold 25,200 37,800 Dec. 31 Depreciation for 2014 $16,800 54,600 Instructions From the postings in the accounts above, indicate how the information is reported on a statement of cash flows by preparing a partial statement of cash flows using the indirect method. The loss on sale of equipment (November 15) was $5,800.

Simon just received a 30-day letter from the IRS indicating a proposed assessment.  Does he have to pay the additional tax?  What are his options?

Why might it be a good tax planning strategy for an S corporation with one shareholder to pay a salary to the shareholder on the low end of what the services are potentially worth?

Several years ago, your client, Brooks Robinson, started an office-cleaning service. His business was very successful, owing much to his legacy as the greatest defensive third baseman in major league history and his nickname, “The Human Vacuum Cleaner.”  Brooks operated his business as a sole proprietorship and used the cash-basis method of accounting. Brooks was advised by his attorney that it is too risky to operate his business as a sole proprietorship and that he should incorporate to limit his liability. Brooks has come to you for advice on the tax implications of incorporation. His balance sheet is presented below. Under the terms of the incorporation, Brooks would transfer the assets to the corporation in return for 100 percent of the company’s common stock. The corporation would also assume the company’s liabilities (payables and mortgage).