Question & Answer

Answer the following questions. (a) On May 1, 2014, Goldberg Company sold some machinery to Newlin Company on an installment contract basis. The contract required five equal annual payments, with the first payment due on May 1, 2014. What present value concept is appropriate for this situation? (b) On June 1, 2014, Seymour Inc. purchased a new machine that it does not have to pay for until May 1, 2016. The total payment on May 1, 2016, will include both principal and interest. Assuming interest at a 12% rate, the cost of the machine would be the total payment multiplied by what time value of money concept? (c) Costner Inc. wishes to know how much money it will have available in 5 years if five equal amounts of $35,000 are invested, with the first amount invested immediately. What interest table is appropriate for this situation? (d) Megan Hoffman invests in a “jumbo” $200,000, 3-year certificate of deposit at First Wisconsin Bank. What table would be used to determine the amount accumulated at the end of 3 years?

The extrusion die for a polyethylene parison used in blow molding has a mean diameter of 18.0 mm. The size of the ring opening in the die is 2.0 mm. The mean diameter of the parison is observed to swell to a size of 21.5 mm after exiting the die orifice. If the diameter of the blow molded container is to be 150 mm, determine (a) the corresponding wall thickness of the container and (b) the wall thickness of the parison.

Describe the relation between the book-tax differences associated with depreciation expense and the book-tax differences associated with gain or loss on disposition of depreciable assets.

If a taxpayer has owned a building for 10 years and decides that it should make significant improvements to the building, what is the recovery period for the improvements?

Gary inherited a Maine summer cabin on 10 acres from his grandmother. His grandparents originally purchased the property for $500 in 1951 and built the cabin at a cost of $10,000 in 1966. His grandfather died in 1981, and when his grandmother recently passed away, the property was appraised at $500,000 for the land and $700,000 for the cabin. Because Gary doesn’t currently live in New England, he decided that it would be best to put the property to use as a rental. What is Gary’s basis in the land and in the cabin?

On May 1, 2014, Friendly Company issued 2,000 $1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the fair value of the warrants cannot be determined. Instructions (a) Prepare the entry to record the issuance of the bonds and warrants. (b) Assume the same facts as part (a), except that the warrants had a fair value of $30. Prepare the entry to record the issuance of the bonds and warrants.

Samson Corporation issued a 4-year, $75,000, zero-interest-bearing note to Brown Company on January 1, 2014, and received cash of $47,664. The implicit interest rate is 12%. Prepare Samson’s journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest.

Why did the U.S. government rescue AIG during the credit crisis in 2008? (LO5)

The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows.   The following errors in the corporation’s accounting have been discovered: 1. January 2015 cash disbursements entered as of December 2014 included payments of accounts payable in the amount of $39,000, on which a cash discount of 2% was taken. 2. The inventory included $27,000 of merchandise that had been received at December 31 but for which no purchase invoices had been received or entered. Of this amount, $12,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30. 3. Sales for the first four days in January 2015 in the amount of $30,000 were entered in the sales journal as of December 31, 2014. Of these, $21,500 were sales on account and the remainder were cash sales. 4. Cash, not including cash sales, collected in January 2015 and entered as of December 31, 2014, totaled $35,324. Of this amount, $23,324 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan. Instructions (a) Restate the current assets and current liabilities sections of the balance sheet in accordance with good accounting practice. (Assume that both accounts receivable and accounts payable are recorded gross.) (b) State the net effect of your adjustments on Allessandro Scarlatti Company’s retained earnings balance.

Explain the motivation behind the Fed’s policy of purchasing massive amounts of mortgage-backed securities during the 2008 credit crisis. What could this policy accomplish that the Fed’s traditional monetary policy might not accomplish? (LO2, LO3)

The price of Garner stock is $40. There is also a call option on Garner stock that is at the money, with a premium of $2.00. There is also a put option on Garner stock that is at the money, with a premium of $1.80. Why would investors consider writing this call option and this put option? Why would some investors consider buying this call option and this put option?

Explain how liabilities of an LLC (taxed as a partnership) or an S corporation affect the amount of tax losses from the entity that limited liability company members and S corporation shareholders may deduct. Do the tax rules favor LLCs or S corporations?

The designer has specified that a 3/8-16 UNC low-carbon bolt (3/8 in nominal diameter, 16 threads/in) in a certain application should be stressed to its proof stress of 33,000 lb/in2 (see Table 32.2). Determine the maximum torque that should be used if C = 0.25.

In researching a tax question, you find only one authority (a trial-level court opinion) that is directly on point.  Which court would you least prefer to have heard this case, and why?

As stated in the chapter, notes to the financial statements are the means of explaining the items presented in the main body of the statements. Common note disclosures relate to such items as accounting policies, segmented information, and interim reporting. The financial statements of P&G are presented in Appendix 5B. The company’s complete annual report, including the notes to the financial statements, can be accessed at the book’s companion website, www.wiley.com/college/kieso. Instructions Refer to P&G’s financial statements and the accompanying notes to answer the following questions. (a) What specific items does P&G discuss in its Note 1—Summary of Significant Accounting Policies? (List the headings only.) (b) For what segments did P&G report segmented information? Which segment is the largest? Who is P&G’s largest customer? (c) What interim information was reported by P&G?

For the following independent cases, determine whether economic income is present and, if so, whether it must be included in gross income (i.e., is it realized and recognized for tax purposes?).

1.      Georgio owns a 20 percent profits and capital interest in Rain Tree LLC. For the current year, Rain Tree had the following revenues, expenses, gains, and losses: Sales revenue $70,000 Gain on sale of land (§1231) $11,000 Cost of goods sold ($26,000) Depreciation - MACRS ($3,000) §179 deduction* ($10,000) Employee wages ($11,000) Nondeductible fines and penalties ($3,000) Municipal bond interest $6,000 Short-term capital gains $4,000 Guaranteed payment to Sandra ($3,000)

For each of the following independent situations, indicate the amount the taxpayer must include in gross income and explain your answer: a.       Phil won $500 in the scratch-off state lottery.  There is no state income tax. b.       Ted won a compact car worth $17,000 in a TV game show.  Ted plans to sell the car next year. c.       Al Bore won the Nobel Peace Prize of $500,000 this year.  Rather than take the prize, Al designated that the entire award should go to Weatherhead Charity, a tax-exempt organization. d.       Jerry was awarded $2,500 from his employer, Acme Toons, when he was selected most handsome employee for Valentine’s Day this year. e.       Ellen won a $1,000 cash prize in a school essay contest.  The school is a tax-exempt entity, and Ellen plans to use the funds to pay her college education. f.       Gene won $400 in the office March Madness pool.

In what sense is the at-risk loss limitation rule more restrictive than the tax-basis loss limitation rule?

Roth Inc. has a deferred tax liability of $68,000 at the beginning of 2015. At the end of 2015, it reports accounts receivable on the books at $90,000 and the tax basis at zero (its only temporary difference). If the enacted tax rate is 34% for all periods, and income taxes payable for theperiod is $230,000, determine the amount of total income tax expense to report for 2015.

On January 5, 2014, Phelps Corporation received a charter granting the right to issue 5,000 shares of $100 par value, 8% cumulative and nonparticipating preferred stock, and 50,000 shares of $10 par value common stock. It then completed these transactions. Jan. 11 Issued 20,000 shares of common stock at $16 per share. Feb. 1 Issued to Sanchez Corp. 4,000 shares of preferred stock for the following assets: equipment with a fair value of $50,000; a factory building with a fair value of $160,000; and land with an appraised value of $270,000. July 29 Purchased 1,800 shares of common stock at $17 per share. (Use cost method.) Aug. 10 Sold the 1,800 treasury shares at $14 per share. Dec. 31 Declared a $0.25 per share cash dividend on the common stock and declared the preferred dividend. Dec. 31 Closed the Income Summary account. There was a $175,700 net income. Instructions (a) Record the journal entries for the transactions listed above. (b) Prepare the stockholders’ equity section of Phelps Corporation’s balance sheet as of December 31, 2014.

As discussed in Chapter 1, the International Accounting Standards Board (IASB) develops accounting standards for many international companies. The IASB also has developed a conceptual frameworkto help guide the setting of accounting standards. While the FASB and IASB have issued converged concepts statements on the objective and qualitative characteristics, other parts of their frameworks differ. Instructions Briefly discuss the similarities and differences between the FASB and IASB conceptual frameworks as  related to elements and their definitions.

Why does a partner’s tax basis in a partnership interest need to be adjusted annually?

How does the tax treatment of a partial liquidation differ from a stock redemption?

Presented below are the assumptions, principles, and constraint used in this chapter. Instructions Identify by number the accounting assumption, principle, or constraint that describes each situation below. Do not use a number more than once. (a) Allocates expenses to revenues in the proper period. (b) Indicates that fair value changes subsequent to purchase are not recorded in the accounts. (Do not use revenue recognition principle.) (c) Ensures that all relevant financial information is reported. (d) Rationale why plant assets are not reported at liquidation value. (Do not use historical cost principle.) (e) Indicates that personal and business record keeping should be separately maintained. (f) Separates financial information into time periods for reporting purposes. (g) Assumes that the dollar is the “measuring stick” used to report on financial performance.