Question & Answer

Discuss and illustrate how a correction of an error in previously issued financial statements should be handled.

(Threshold Concept 14) 1. Give some examples of supply-side policy. (see Chapter 23 for some ideas if you are stuck). (Threshold Concept 14) 2. If there is an increase in aggregate supply, will this result in an increase in potential growth?

Andre constructs and installs cabinets in homes.  Blair sells and installs carpet in apartments.  Andre and Blair worked out an arrangement whereby Andre installed cabinets in Blair’s home and Blair installed carpet in Andre’s home.  Neither Andre nor Blair believes they are required to recognize any gross income on this exchange because neither received cash.  Do you agree with them?  Explain.

What is meant by the term “qualitative characteristics of accounting information”?

What is meant by impairment of a loan? Under what circumstances should a creditor recognize an impaired loan?

Metheny Corporation’s lease arrangements qualify as sales-type leases at the time of entering into the transactions. How should the corporation recognize revenues and costs in these situations?

Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes. Instructions For each item below, indicate whether it involves: (1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset. (2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability. (3) A permanent difference. Use the appropriate number to indicate your answer for each. (a) ______ The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets. (b) ______ A landlord collects some rents in advance. Rents received are taxable in the period when they are received. (c) ______ Expenses are incurred in obtaining tax-exempt income. (d) ______ Costs of guarantees and warranties are estimated and accrued for financial reporting purposes. (e) ______ Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes. (f) ______ For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes but the assets’ lives are shorter for tax purposes. (g) ______ Interest is received on an investment in tax-exempt municipal obligations. (h) ______ Proceeds are received from a life insurance company because of the death of a key officer. (The company carries a policy on key officers.) (i) ______ The tax return reports a deduction for 80% of the dividends received from U.S. corporations. The cost method is used in accounting for the related investments for financial reporting purposes. (j) ______ Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled. (k) ______ Expenses on stock options are accrued for financial reporting purposes.

How should discount on bonds payable be reported on the financial statements? Premium on bonds payable?

Hannah Tywin owns 100 shares of MM Inc. stock. She sells the stock on December 11 for $25 per share. She received the stock as a gift from her Aunt Pam on March 20 of this year when the fair market value of the stock was $18 per share. Aunt Pam originally purchased the stock seven years ago at a price of $12 per share. What are the amount and character of Hannah’s recognized gain or loss on the stock?

1.    : Consider the leadership position of a senior partner in a law firm. What task, subordinate, and organizational factors might serve as substitutes for leadership in this situation?

After several profitable years running her business, Ingrid decided to acquire the assets of a small competing business. On May 1 of year 1, Ingrid acquired the competing business for $300,000. Ingrid allocated $50,000 of the purchase price to goodwill. Ingrid’s business reports its taxable income on a calendar-year basis.  a. How much amortization expense on the goodwill can Ingrid deduct in year 1, year 2, and year 3? b. In lieu of the original facts, assume that Ingrid purchased only a phone list with a useful life of 5 years for $10,000. How much amortization expense on the phone list can Ingrid deduct in year 1, year 2, and year 3?

What is the relationship known as Chvorinov's rule in casting?

Describe why the IRS might be skeptical of permitting requests for changes in accounting method without a good business purpose.

1.    : Suggest two personal traits that you would admire in a business leader today. Might these traits be more valuable in some situations than in others? Explain.

What is the major distinction (a) between revenues and gains and (b) between expenses and losses?

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.

Geiberger Corporation manufactures replicators. On January 1, 2014, it leased to Althaus Company a replicator that had cost $110,000 to manufacture. The lease agreement covers the 5-year useful life of the replicator and requires 5 equal annual rentals of $40,800 payable each January 1, beginning January 1, 2014. An interest rate of 12% is implicit in the lease agreement. Collectibility of the rentals is reasonably assured, and there are no important uncertainties concerning costs. Prepare Geiberger’s January 1, 2014, journal entries.

What potential problems could arise if the balanced scorecard was developed without a strategy map being available? (LO2)

Stallman Company took a physical inventory on December 31 and determined that goods costing $200,000 were on hand. Not included in the physical count were $25,000 of goods purchased from Pelzer Corporation, f.o.b. shipping point, and $22,000 of goods sold to Alvarez Company for $30,000, f.o.b. destination. Both the Pelzer purchase and the Alvarez sale were in transit at year-end. What amount should Stallman report as its December 31 inventory?c

Futabatei Enterprises purchased a delivery truck on January 1, 2014, at a cost of $27,000. The truck has a useful life of 7 years with an estimated salvage value of $6,000. The straight-line method is used for book purposes. For tax purposes, the truck, having an MACRS class life of 7 years, is classified as 5-year property; the optional MACRS tax rate tables are used to compute depreciation. In addition, assume that for 2014 and 2015 the company has revenues of $200,000 and operating expenses (excluding depreciation) of $130,000. Instructions (a) Prepare income statements for 2014 and 2015. (The final amount reported on the income statement should be income before income taxes.) (b) Compute taxable income for 2014 and 2015. (c) Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes. (d) Explain why depreciation for book and tax purposes will generally be different over the useful life of a depreciable asset.

Under what conditions should a contingent liability be recorded?

The copper-nickel system is a simple alloy system, as indicated by its phase diagram. Why is it so simple?

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

The following are two independent situations. Situation 1: Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of $13 per share on March 18, 2014. On June 30, Martinez declared and paid a $75,000 cash dividend. On December 31, Martinez reported net income of $122,000 for the year. At December 31, the market price of Martinez Fashion was $15 per share. The securities are classified as available-for-sale. Situation 2: Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2014. On June 15, Seles declared and paid a cash dividend of $36,000. On December 31, Seles reported a net income of $85,000 for the year. Instructions Prepare all necessary journal entries in 2014 for both situations.6

Describe what the AMT exemption is and who is and isn’t allowed to deduct the exemption.  How is it similar to the standard deduction and how is it dissimilar?