Question & Answer

During some crises, investors shift their funds out of the stock market and into money market securities for safety, even if they do not fear that interest rates will rise. Explain how and why these actions by investors affect the yield curve. Is the shift best explained by expectations theory, liquidity premium theory, or segmented markets theory? (LO3)

Contrast the cash-basis method and the accrual method of accounting for warranty costs.

Melinda invests $200,000 in a City of Heflin bond that pays 6 percent interest.  Alternatively, Melinda could have invested the $200,000 in a bond recently issued by Surething Inc. that pays 8 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond.  Assume Melinda’s marginal tax rate is 25 percent.

On January 1, 2014, Barwood Corporation granted 5,000 options to executives. Each option entitles the holder to purchase one share of Barwood’s $5 par value common stock at $50 per share at any time during the next 5 years. The market price of the stock is $65 per share on the date of grant. The fair value of the options at the grant date is $150,000. The period of benefit is 2 years. Prepare Barwood’s journal entries for January 1, 2014, and December 31, 2014 and 2015.

What is graphite?

The Samsons are trying to determine whether they can claim their 22-year-old adopted son, Jason, as a dependent. Jason is currently a full-time student at an out-of-state university. Jason lived in his parents’ home for three months of the year, and he was away at school for the rest of the year. He received $9,500 in scholarships this year for his outstanding academic performance and earned $4,800 of income working a part-time job during the year. The Samsons paid a total of $5,000 to support Jason while he was away at college. Jason used the scholarship, the earnings from the part-time job, and the money from the Samsons as his only sources of support. Can the Samsons claim Jason as their dependent?

Kathleen Battle says, “Retained earnings should be reported as an asset, since it is earnings which are reinvested in the business.” How would you respond to Battle?

Your friend just told you about a penny stock that they purchased, which increased in price from $0.10 to $0.50 per share. You start investigating penny stocks, and after conducting a large amount of research, you find a stock with a quoted price of $0.05. Upon further investigation, you notice that the ask price for the stock is $0.08 and that the bid price is $0.01. Discuss the possible reasons for this wide bid–ask spread. (LO2)

This year, Darrel’s distributive share from Alcove Partnership includes $6,000 of interest income, $3,000 of dividend income, and $70,000 ordinary business income. a. Assume that Darrel materially participates in the partnership. How much of his distributive share from Alcove Partnership is potentially subject to the net investment income tax? b. Assume that Darrel does not materially participate in the partnership. How much of his distributive share from Alcove Partnership is potentially subject to the net investment income tax?

Balanced scorecard, financial and non-financial measures Dyggur Equipment manufactures and sells heavy equipment used in construction and mining. Customers are contractors who want reliable equipment at a low cost. The entity’s strategy is to provide reliable products at a price lower than its competitors. Management wants to emphasise quick delivery and quick turnaround when equipment needs repair or service so that contractors are not without their equipment often or for long. Dyggur is considering the following performance measures for use in its balanced scorecard.   Required (a)  Categorise each of the following potential balanced scorecard measures as             follows: F    Financial C   Customer I     Internal business process L   Learning and growth   (a)   Manufacturing cycle time per product (b)   Market share (c)   Average ratings on customer satisfaction surveys (d)   Average cost per unit (e)   Economic value added (f)   Percentage of receivables collected (g)   Dollar value of warranty work (h)   Time between order and delivery (i)    Time it takes to repair returned equipment (j)    Number of focus groups for new products (k)   Number of new uses for current products (l)    Number of times new technology is applied to current products (m)  Number of product change suggestions from sales (n)   Number of engineering change orders to improve manufacturing cycle (o)   Revenue growth (p)   Employee training hours (q)   Number of quality improvement suggestions from employees (r)   Number of new customers (s)   Number of repeat customers (t)    Employee turnover rate (u)   Defect rates for manufacturing production (v)   Percentage of error free-rates in: (i)   purchasing (ii)  billing (iii) customer record keeping    (b) Explain how Dyggur would use the scorecard solely as a diagnostic tool.

1. How much would be supplied at a price of 70p per kilo? 2. Draw a supply curve for farmer X. Are the axes drawn to the same scale as in Figure 2.3?

What is accomplished when a bank integrates its liability management with its asset management? (LO1)

1.       : Can you think of a bad decision from your own school or work experience, or from recent business or political news stories, that was made in an effort to correct or justify a past decision? As a new manager, how might you resist the urge to choose a decision alternative based on the idea that it might correct or validate a previous decision?

Brecker Company leases an automobile with a fair value of $10,906 from Emporia Motors, Inc., on the following terms: 1. Non-cancelable term of 50 months. 2. Rental of $250 per month (at end of each month). (The present value at 1% per month is $9,800.) 3. Estimated residual value after 50 months is $1,180. (The present value at 1% per month is $715.) Brecker Company guarantees the residual value of $1,180. 4. Estimated economic life of the automobile is 60 months. 5. Brecker Company’s incremental borrowing rate is 12% a year (1% a month). It is impracticable to determine Emporia’s implicit rate. Instructions (a) What is the nature of this lease to Brecker Company? (b) What is the present value of the minimum lease payments? (c) Record the lease on Brecker Company’s books at the date of inception. (d) Record the first month’s depreciation on Brecker Company’s books (assume straight-line). (e) Record the first month’s lease payment.

Dave LaCroix recently received a 10 percent capital and profits interest in Cirque Capital LLC in exchange for consulting services he provided. If Cirque Capital had paid an outsider to provide the advice, it would have deducted the payment as compensation expense. Cirque Capital’s balance sheet on the day Dave received his capital interest appears below: Assets: Basis Fair Market Value Cash $ 150,000 $ 150,000 Investments 200,000 700,000 Land 150,000 250,000 Totals $ 500,000 $1,100,000   Liabilities and capital: Nonrecourse liabilities 100,000 100,000 Tatsuki* 200,000 500,000 Robert* 200,000 500,000 Totals $ 500,000 $ 1,100,000

What are the reasons that a company gives trade discounts? Why are trade discounts not recorded in the accounts like cash discounts?

Is the LIFO recapture tax a C corporation tax or an S corporation tax?  Explain.

61. Joaquin is a 30 percent partner in the SBD Partnership, a calendar-year-end entity. As of the end of this year, Joaquin has an outside basis in his interest in SBD of $188,000, which includes his share of the $60,000 of partnership liabilities. On December 31, SBD makes a proportionate distribution of the following assets to Joaquin: Tax BasisFMV Cash $ 40,000 $40,000 Inventory 55,000 65,000 Land 30,000 45,000 Totals $ 125,000 $150,000 a. What are the tax consequences (amount and character of recognized gain or loss, basis in distributed assets) of the distribution to Joaquin if the distribution is an operating distribution? b. What are the tax consequences (amount and character of recognized gain or loss, basis in distributed assets) of the distribution to Joaquin if the distribution is a liquidating distribution? c. Compare and contrast the results from parts (a) and (b).

Arruza Co. is considering switching from the specific-goods LIFO approach to the dollar-value LIFO approach. Because the financial personnel at Arruza know very little about dollar-value LIFO, they ask you to answer the following questions. (a) What is a LIFO pool? (b) Is it possible to use a LIFO pool concept and not use dollar-value LIFO? Explain. (c) What is a LIFO liquidation? (d) How are price indexes used in the dollar-value LIFO method? (e) What are the advantages of dollar-value LIFO over specific-goods LIFO?

What is the tax base for the Social Security and Medicare taxes for an employee or employer?  What is the tax base for Social Security and Medicare taxes for a self-employed individual?  Is the self-employment tax in addition to or in lieu of federal income tax?

Blue Devil Savings and Loan Association has a large number of 10-year fixed-rate mortgages and obtains most of its funds from short-term deposits. It uses the yield curve to assess the market’s anticipation of future interest rates. It believes that expectations of future interest rates are the major force in affecting the yield curve. Assume that an upward-sloping yield curve with a steep slope exists. Based on this information, should Blue Devil consider using financial futures as a hedging technique? Explain. (LO2)

What is an adjustable-rate mortgage (ARM)? Discuss the potential advantages that such mortgages offer a savings institution. (LO4)

What are the noteworthy properties of titanium?

Explain the process of proprietary trading by securities firms. How was it affected by the Volcker Rule? (LO1, LO5)

Explain how bond prices may be affected by money supply growth, oil prices, and economic growth. (LO2)