Question & Answer

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?

Fergiehas the choice between investing in a State of New York bond at 5 percent and a Surething bond at 8 percent.  Assuming that both bonds have the same nontax characteristics and that Fergie has a 30 percent marginal tax rate, in which bond should she invest?

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.

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

What are the major types of subsequent events? Indicate how each of the following “subsequent events” would be reported. (a) Collection of a note written off in a prior period. (b) Issuance of a large preferred stock offering. (c) Acquisition of a company in a different industry. (d) Destruction of a major plant in a flood. (e) Death of the company’s chief executive officer (CEO). (f) Additional wage costs associated with settlement of a four-week strike. (g) Settlement of a federal income tax case at considerably more tax than anticipated at year-end. (h) Change in the product mix from consumer goods to industrial goods.

Where should the following items be shown on the balance sheet, if shown at all? (a) Allowance for doubtful accounts. (b) Merchandise held on consignment. (c) Advances received on sales contract. (d) Cash surrender value of life insurance. (e) Land. (f) Merchandise out on consignment. (g) Franchises. (h) Accumulated depreciation of equipment. (i) Materials in transit—purchased f.o.b. destination.

Randy deducted a high level of itemized deductions two years ago relative to his income level.  He recently received an IRS notice requesting documentation for his itemized deductions.  What audit procedure likely identified his tax return for audit?

Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program. After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved, answer these questions: (a) What might be the advantages of leasing the assets instead of owning them? (b) What might be the disadvantages of leasing the assets instead of owning them? (c) In what way will the balance sheet be differently affected by leasing the assets as opposed to issuing bonds and purchasing the assets?

: Explain social entrepreneurship as a vital part of today’s small-business environment.

You have just started work for Warren Co. as part of the controller’s group involved in current financial reporting problems. Jane Henshaw, controller for Warren, is interested in your accounting background because the company has experienced a series of financial reporting surprises over the last few years. Recently, the controller has learned from the company’s auditors that there is authoritative literature that may apply to its investment in securities. She assumes that you are familiar with this pronouncement and asks how the following situations should be reported in the financial statements. Situation 1: Trading securities in the current assets section have a fair value that is $4,200 lower than cost. Situation 2: A trading security whose fair value is currently less than cost is transferred to the availablefor- sale category. Situation 3: An available-for-sale security whose fair value is currently less than cost is classified as noncurrent but is to be reclassified as current. Situation 4: A company’s portfolio of available-for-sale securities consists of the common stock of one company. At the end of the prior year, the fair value of the security was 50% of original cost, and this reduction in fair value was reported as an other than temporary impairment. However, at the end of the current year, the fair value of the security had appreciated to twice the original cost. Situation 5: The company has purchased some convertible debentures that it plans to hold for less than a year. The fair value of the convertible debentures is $7,700 below its cost. Instructions What is the effect upon carrying value and earnings for each of the situations above? Assume that these situations are unrelated.

What are the possible channels through which hysteresis effects can arise, such that demand shocks have persistent effects on the macroeconomy?

The shear strength of a certain work material = 50,000 lb/in2 . An orthogonal cutting operation is performed using a tool with a rake angle = 20° at the following cutting conditions: cutting speed = 100 ft/min, chip thickness before the cut = 0.015 in, and width of cut = 0.150 in. The resulting chip thickness ratio = 0.50. Determine (a) the shear plane angle, (b) shear force, (c) cutting force and thrust force, and (d) friction force.

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?

: What do you recommend Adam do to increase production in a business setting that does not seem to value high production?

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.

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.

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?

What methods are used in practice to determine the extent of progress toward completion? Identify some “input measures” and some “output measures” that might be used to determine the extent of progress.

Identify the four forces that act upon the chip in the orthogonal metal cutting model but cannot be measured directly in an operation.

Identify some of the advantages of adhesive bonding compared to alternative joining methods.

Margaret Avery Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2012, the company expends $325,000 on a research project, but by the end of 2012, it is impossible to determine whether any benefit will be derived from it. (a) What account should be charged for the $325,000, and how should it be shown in the financial statements? (b) The project is completed in 2013, and a successful patent is obtained. The R&D costs to complete the project are $130,000 ($36,000 of these costs were incurred after achieving economic viability). The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2013 total $24,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also,record patent amortization (full year) in 2013. (c) In 2014, the company successfully defends the patent in extended litigation at a cost of $47,200, thereby extending the patent life to December 31, 2021. What is the proper way to account for thiscost?Also, record patent amortization (full year) in 2014. (d) Additional engineering and consulting costs incurred in 2014 required to advance the design of a new version of the product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably, but it is highly uncertain if there will be a market for the new version of the product. Discuss the proper accounting treatment for this cost.

Refer to the accounting change by Wertz Construction Company in BE22-1. Wertz has a profitsharing plan, which pays all employees a bonus at year-end based on 1% of pretax income. Compute the indirect effect of Wertz’s change in accounting principle that will be reported in the 2014 income statement, assuming that the profit-sharing contract explicitly requires adjustment for changes in income numbers.

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.

The two-bin approach is used to control inventory for a particular low-cost component. Each bin holds 1200 units. The annual usage of the component is 45,000 units. Cost to order the component is around $70. (a) What is the imputed holding cost per unit for this data? (b) If the actual annual holding cost per unit is only 7 cents, what lot size should be ordered? (c) How much more is the current two-bin approach costing the company annually, compared to the economic order quantity?

An electron-beam welding operation is to be accomplished to butt weld two sheet-metal parts that are 3.0 mm thick. The unit melting energy = 5.0 J/mm3. The weld joint is to be 0.35 mm wide, so that the cross section of the fused metal is 0.35 mm by 3.0 mm. If accelerating voltage = 25 kV, beam current = 30 milliamp, heat transfer factor f1 = 0.85, and melting factor f2 = 0.75, determine the travel speed at which this weld can be made along the seam