Question & Answer

Presented below is selected information related to Martin Burke Inc. at year-end. All these accounts have debit balances. Cable television franchises Film contract rights Music copyrights Customer lists Research and development costs Prepaid expenses Goodwill Covenants not to compete Cash Brand names Discount on notes payable Notes receivable Accounts receivable Investments in affi liated companies Property, plant, and equipment Organization costs Internet domain name Land Instructions Identify which items should be classified as an intangible asset. For those items not classified as an intangible asset, indicate where they would be reported in the financial statements.

What are the possible treatments for tax purposes of a net operating loss? What are the circumstances that determine the option to be applied? What is the proper treatment of a net operating loss for financial reporting purposes?

Castle Leasing Company signs a lease agreement on January 1, 2014, to lease electronic equipment to Jan Way Company. The term of the noncancelable lease is 2 years, and payments are required at the end of each year. The following information relates to this agreement: 1. Jan Way has the option to purchase the equipment for $16,000 upon termination of the lease. 2. The equipment has a cost and fair value of $160,000 to Castle Leasing Company. The useful economic life is 2 years, with a salvage value of $16,000. 3. Jan Way Company is required to pay $5,000 each year to the lessor for executory costs. 4. Castle Leasing Company desires to earn a return of 10% on its investment. 5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor. Instructions (a) Prepare the journal entries on the books of Castle Leasing to reflect the payments received under the lease and to recognize income for the years 2014 and 2015. (b) Assuming that Jan Way Company exercises its option to purchase the equipment on December 31, 2015, prepare the journal entry to reflect the sale on Castle’s books.

Using the information from BE19-2, assume this is the only difference between Oxford’s pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the December 31, 2014, balance sheet.

Suppose the cutting speed in Problems 21.7 and 21.8 is 200 ft/min. From your answers to those problems, find (a) the horsepower consumed in the operation, (b) metal removal rate in in3 /min, (c) unit horsepower (hp-min/in3 ), and (d) the specific energy (in-lb/in3 )

Explain how the credit crisis adversely affected many other people and institutions beyond homeowners and mortgage companies. (LO5)

Do theories of the long-run and short-run consumption functions help us to understand consumer reactions to a change in taxes? (See section 17.1 and Case Studies 17.1 – 17.4 on the student website.

Use the information for Rode Inc. given in IFRS19-7. Assume that it is probable that the entire net operating loss carryforward will not be realized in future years. Prepare the journal entry(ies) necessary at the end of 2014.

Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock as an availablefor- sale investment for $13,200. During the year, Sherman paid a cash dividend of $3.25 per share. At yearend, Sherman stock was selling for $34.50 per share. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)

Describe the RP technology called solid ground curing.

1.       A management professor once said that for successful management, studying the present was most important, studying the past was next most important, and studying the future should come last. Do you agree? Why?

Explain why the price of a good is no reflection of the total value that consumers put on it.

Pat Delaney Company leases an automobile with a fair value of $8,725 from John Simon Motors, Inc., on the following terms: 1. Noncancelable term of 50 months. 2. Rental of $200 per month (at end of each month). (The present value at 1% per month is $7,840.) 3. Estimated residual value after 50 months is $1,180. (The present value at 1% per month is $715.) Delaney Company guarantees the residual value of $1,180. 4. Estimated economic life of the automobile is 60 months. 5. Delaney Company’s incremental borrowing rate is 12% a year (1% a month). Simon’s implicit rate is unknown. Instructions (a) What is the nature of this lease to Delaney Company? (b) What is the present value of the minimum lease payments? (c) Record the lease on Delaney Company’s books at the date of inception. (d) Record the first month’s depreciation on Delaney Company’s books (assume straight-line). (e) Record the first month’s lease payment.

At December 31, 2013, the available-for-sale equity portfolio for Steffi Graf, Inc. is as follows. Security Cost Fair Value Unrealized Gain (Loss) A $17,500 $15,000 ($2,500) B 12,500 14,000 1,500 C 23,000 25,500 2,500 Total $53,000 $54,500 1,500 Previous fair value adjustment balance—Dr. 400 Fair value adjustment—Dr. $1,100 On January 20, 2014, Steffi Graf, Inc. sold security A for $15,100. The sale proceeds are net of brokerage fees. Instructions (a) Prepare the adjusting entry at December 31, 2013, to report the portfolio at fair value. (b) Show the balance sheet presentation of the investment-related accounts at December 31, 2013. (Ignore notes presentation.) (c) Prepare the journal entry for the 2014 sale of security A.

What types of contractual obligations must be disclosed in great detail in the notes to the balance sheet? Why do you think these detailed provisions should be disclosed?

At December 31, 2014, Indigo Girls Company has outstanding noncancelable purchase commitments for 36,000 gallons, at $3.00 per gallon, of raw material to be used in its manufacturing process. The company prices its raw material inventory at cost or market, whichever is lower. Instructions (a) Assuming that the market price as of December 31, 2014, is $3.30, how would this matter be treated in the accounts and statements? Explain. (b) Assuming that the market price as of December 31, 2014, is $2.70, instead of $3.30, how would you treat this situation in the accounts and statements? (c) Give the entry in January 2015, when the 36,000-gallon shipment is received, assuming that the situation given in (b) above existed at December 31, 2014, and that the market price in January 2015 was $2.70 per gallon. Give an explanation of your treatment.

On March 1, 2014, Chance Company entered into a contract to build an apartment building. It is estimated that the building will cost $2,000,000 and will take 3 years to complete. The contract price was $3,000,000. The following information pertains to the construction period. 2014 2015 2016 Costs to date $ 600,000 $1,560,000 $2,100,000 Estimated costs to complete 1,400,000 520,000 –0– Progress billings to date 1,050,000 2,000,000 3,000,000 Cash collected to date 950,000 1,950,000 2,850,000 Instructions (a) Compute the amount of gross profit to be recognized each year, assuming the percentage ofcompletion method is used. (b) Prepare all necessary journal entries for 2016. (c) Prepare a partial balance sheet for December 31, 2015, showing the balances in the receivables and inventory accounts.

Yesenia is a lawyer who uses the cash method of accounting. Last year Yesenia provided a client with legal services worth $55,000, but the client could not pay the fee. This year Yesenia requested that in lieu of paying Yesenia $55,000 for the services, the client could make a $45,000 gift to Yesenia’s daughter. Yesenia’s daughter received the check for $45,000 and deposited it in her bank account. How much of this income is taxed, if any, to Yesenia? Explain.

Norma Smith is the controller of Baylor Corporation and is responsible for the preparation of the year-end financial statements. The following transactions occurred during the year. (a) On December 20, 2014, a former employee filed a legal action against Baylor for $100,000 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote. (b) Bonuses to key employees based on net income for 2014 are estimated to be $150,000. (c) On December 1, 2014, the company borrowed $600,000 at 8% per year. Interest is paid quarterly. (d) Credit sales for the year amounted to $10,000,000. Baylor’s expense provision for doubtful accounts is estimated to be 3% of credit sales. (e) On December 15, 2014, the company declared a $2.00 per share dividend on the 40,000 shares of common stock outstanding, to be paid on January 5, 2015. (f) During the year, customer advances of $160,000 were received; $50,000 of this amount was earned by December 31, 2014. Instructions For each item above, indicate the dollar amount to be reported as a current liability. If a liability is not reported, explain why.

Santo Corporation has eight expense accounts in its general ledger which could be classified as selling expenses. Should Santo report these eight expenses separately in its income statement or simply report one total amount for selling expenses?

Jeraldine believes that when the §1231 look-back rule applies, the taxpayer deducts a §1231 loss in a previous year against §1231 gains in the current year. Explain whether Jeraldine’s description is correct.

Taxable income and pretax financial income would be identical for Huber Co. except for its treatments of gross profit on installment sales and estimated costs of warranties. The income computations shown on page 1164 have been prepared. Taxable income 2013 2014 2015 Excess of revenues over expenses  excluding two temporary differences) $160,000 $210,000 $90,000 Installment gross profi t collected 8,000 8,000 8,000 Expenditures for warranties (5,000) (5,000) (5,000) Taxable income $163,000 $213,000 $93,000 Pretax fi nancial income 2013 2014 2015 Excess of revenues over expenses (excluding two temporary differences) $160,000 $210,000 $90,000 Installment gross profi t earned 24,000 –0– –0– Estimated cost of warranties (15,000) –0– –0– Income before taxes $169,000 $210,000 $90,000 The tax rates in effect are 2013, 40%; 2014 and 2015, 45%. All tax rates were enacted into law on January 1, 2013. No deferred income taxes existed at the beginning of 2013. Taxable income is expected in all future years. Instructions Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013, 2014, and 2015.

McElroy Company has the following portfolio of investment securities at September 30, 2014, its last reporting date. Trading Securities Cost Fair Value Horton, Inc. common (5,000 shares) $215,000 $200,000 Monty, Inc. preferred (3,500 shares) 133,000 140,000 Oakwood Corp. common (1,000 shares) 180,000 179,000 On October 10, 2014, the Horton shares were sold at a price of $54 per share. In addition, 3,000 shares of Patriot common stock were acquired at $54.50 per share on November 2, 2014. The December 31, 2014, fair values were Monty $106,000, Patriot $132,000, and the Oakwood common $193,000. All the securities are classified as trading. Instructions (a) Prepare the journal entries to record the sale, purchase, and adjusting entries related to the trading securities in the last quarter of 2014. (b) How would the entries in part (a) change if the securities were classified as available-for-sale?

provided the following disclosure in a recent annual report. New accounting pronouncement (partial) . . . the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101—“Revenue Recognition in Financial Statements” (SAB 101). This SAB deals with various revenue recognition issues, several of which are common within the retail industry. As a result of the issuance of this SAB . . . the Company is currently evaluating the effects of the SAB on its method of recognizing revenues related to layaway sales and will make any accounting method changes necessary during the first quarter of [next year]. In response to SAB 101, Wal-Mart changed its revenue recognition policy for layaway transactions, in which Wal-Mart sets aside merchandise for customers who make partial payment. Before the change, Wal-Mart recognized all revenue on the sale at the time of the layaway. After the change, Wal-Mart does not recognize revenue until customers satisfy all payment obligations and take possession of the merchandise. Instructions (a) Discuss the expected effect on income (1) in the year that Wal-Mart makes the changes in its revenue recognition policy, and (2) in the years following the change. (b) Evaluate the extent to which Wal-Mart’s previous revenue policy was consistent with the revenue recognition principle. (c) If all retailers had used a revenue recognition policy similar to Wal-Mart’s before the change, are there any concerns with respect to the qualitative characteristic of comparability? Explain.

Twenty-five jewelry pieces, each with a surface area = 0.5 in2 are to be gold plated in a batch plating operation. (a) What average plating thickness will result if 8 amps are applied for 10 min in a cyanide bath? (b) What is the value of the gold that will be plated onto each piece if one ounce of gold is valued at $900? The density of gold = 0.698 lb/in3