Question & Answer

Behavioural issues associated with reward systems Fitness Forever International sells personal exercise equipment both within Australia and internationally. One division of Fitness Forever produces a product called Absaway, which is a specialised piece of equipment that focuses on exercising the abdominal region. The Absaway is manufactured with both internally sourced and purchased-in components.   The divisional performance report shows that the division made sales of 20 000 units at a price of $100 each. The variable costs were $60 per unit. Fixed costs were $200 000.   Fitness Forever calculates mangers’ bonuses based on profit. The manager of the Absaway division wants to maximize his bonus. To ensure that the divisional margin is reported at its highest possible level, the manager has been producing more units of the Absaway than required based on sales forecasts. Producing more units has the effect of increasing the ending inventory, which, in the income statement, reduces the cost of goods sold (also called cost of sales). This, in turn increases the divisional margin. The extra production of Absaway units has to be stored, thus increasing the need for warehouse space.   Required (a) Comment on the strategy of the manager to produce more units of product than are needed in order boost divisional profits. Is it in the best interest of Fitness Forever? (b) You have been asked to comment on the current reward system at the next board meeting and make recommendations about any changes you think are necessary. What will you say? (LO3, 4 and 5)

Looking at the Maths) 1. If P was originally measured in £s, what would happen to the value of the d term if P were now measured in pence? (Looking at the Maths) 2. Draw the schedule (table) and graph for equation (2) for prices from £1 to £10. What is it in the equation that determines the slope of the supply ‘curve’? (Looking at the Maths) 3.  Explain why the P and j terms have a positive sign, whereas the a1 and a2 terms have a negative sign.

Consider the following tax rate structure.  Is it horizontally equitable?  Why or why not?  Is it vertically equitable?  Why or why not?

What are the two main characteristics of intangible assets?

A high-speed steel broach (hardened) is to be resharpened to achieve a good finish. Specify the appropriate parameters of the grinding wheel for this job.

Why does the law generally require partnerships to adopt a tax year consistent with the year used by the partners?

] In July of this year, Stephen started a proprietorship called ECR (which stands for electric car repair). ECR uses the cash method of accounting and Stephen has produced the following financial information for this year:

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) Does P&G report any intangible assets, especially goodwill, in its 2011 financial statements and accompanying notes? (b) How much research and development (R&D) cost was expensed by P&G in 2010 and 2011? What percentage of sales revenue and net income did P&G spend on R&D in 2010 and 2011?

1.      : Instruct Rukman participants to reveal their participation in the corporate marketing program only if directly asked by the person they are talking to about the client’s products.

In 2024, SML Corp. reported taxable income of $100,000 before any NOL deductions. SML has a $170,000 NOL carryover that originated in 2017 and a $90,000 NOL carryover that originated in 2023. What is SML’s 2024 taxable income after the NOL deduction? What NOLs can SML carryover to 2025?

Treasure Land Corporation incurred the following costs in 2014. Cost of laboratory research aimed at discovery of new knowledge $120,000 Cost of testing in search for product alternatives 100,000 Cost of engineering activity required to advance the design of a product to the manufacturing stage 210,000 Prototype testing subsequent to meeting economic viability 75,000 $505,000 Prepare the necessary 2014 journal entry(ies) for Treasure Land.

Uhura Company has decided to expand its operations. The bookkeeper recently completed the balance sheet presented below in order to obtain additional funds for expansion.   Intangible assets Goodwill 80,000 Cash surrender value of life insurance 90,000 Prepaid expenses 12,000 Current liabilities Accounts payable 135,000 Notes payable (due next year) 125,000 Pension obligation 82,000 Rent payable 49,000 Premium on bonds payable 53,000 Long-term liabilities Bonds payable 500,000 Stockholders’ equity Common stock, $1.00 par, authorized 400,000 shares, issued 290,000 290,000 Additional paid-in capital 160,000 Retained earnings ? Instructions Prepare a revised balance sheet given the available information. Assume that the accumulated depreciation balance for the buildings is $160,000 and for the equipment, $105,000. The allowance for doubtful accounts has a balance of $17,000. The pension obligation is considered a long-term liability.

Suppose the net income generated by a bank is equal to 1.5 percent of its assets. Based on past experience, would the bank experience a loss or a gain? Explain. (LO2)

Alan Meer inherits a hotel from his grandmother, Mary, on February 11 of the current year. Mary bought the hotel for $730,000 three years ago. Mary deducted $27,000 of cost recovery on the hotel before her death. The fair market value of the hotel in February is $725,000. (Assume that the alternative valuation date is not used.) a. What is Alan’s adjusted basis in the hotel? b. If the fair market value of the hotel at the time of Mary’s death was $500,000, what is Alan’s basis?

Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of $400,000. The Johnson Division’s net assets, including the goodwill, have a carrying amount of $800,000. The recoverable amount of the division is estimated to be $1,000,000. Prepare Waters’ journal entry, if necessary, to record impairment of the goodwill.

On December 31, 2014, before the books were closed, the management and accountants of Madrasa Inc. made the following determinations about three pieces of equipment. 1. Equipment A was purchased January 2, 2011. It originally cost $540,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2014, the decision was made to change the depreciation method from straight-line to sum-of-the-years’-digits, and the estimates relating to useful life and salvage value remained unchanged. 2. Equipment B was purchased January 3, 2010. It originally cost $180,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for 15  and have a zero residual value. In 2014, the decision was made to shorten the total life of this asset to 9 years and to estimate the residual value at $3,000. 3. Equipment C was purchased January 5, 2010. The asset’s original cost was $160,000, and this amount was entirely expensed in 2010. This particular asset has a 10-year useful life and no residual value. The straight-line method was chosen for depreciation purposes. Additional data: 1. Income in 2014 before depreciation expense amounted to $400,000. 2. Depreciation expense on assets other than A, B, and C totaled $55,000 in 2014. 3. Income in 2013 was reported at $370,000. 4. Ignore all income tax effects. 5. 100,000 shares of common stock were outstanding in 2013 and 2014. Instructions (a) Prepare all necessary entries in 2014 to record these determinations. (b) Prepare comparative retained earnings statements for Madrasa Inc. for 2013 and 2014. The company had retained earnings of $200,000 at December 31, 2012.

King Company is contemplating the purchase of a smaller company, which is a distributor of King’s products. Top management of King is convinced that the acquisition will result in significant synergies in its selling and distribution functions. The financial management group (of which you are a part) has been asked to analyze the effects of the acquisition on the combined company’s financial statements. This is the first acquisition for King, and some of the senior staff insist that based on their recollection of goodwill accounting, any goodwill recorded on the acquisition will result in a “drag” on future earnings for goodwill amortization. Other younger members on the staff argue that goodwill accounting has changed. Your supervisor asks you to research this issue. Instructions Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.) (a) Identify the accounting literature that addresses goodwill and other intangible assets. (b) Define goodwill. (c) Is goodwill subject to amortization? Explain. (d) When goodwill is recognized by a subsidiary, should it be tested for impairment at the consolidated level or the subsidiary level? Discuss.

Doctor Bones prescribed physical therapy in a pool to treat Jack’s broken back. In response to this advice (and for no other reason), Jack built a swimming pool in his backyard and strictly limited use of the pool to physical therapy. Jack paid $25,000 to build the pool, but he wondered if this amount could be deducted as a medical expense. Determine if a capital expenditure such as the cost of a swimming pool qualifies for the medical expense deduction.

Static and flexible budgets Plush pet toys are produced in a largely automated factory in standard lots of 100 toys each. A standard cost system is used to control costs and to assign cost to inventory.       Variable overhead, estimated at $5 per lot, consists of miscellaneous items such as thread, a variety of plastic squeakers, and paints that are applied to create features such as eyes and whiskers. Fixed overhead, estimated at $24 000 per month, consists largely of depreciation on the automated machinery and rent for the building. Variable overhead is allocated based on lots produced. The standard fixed overhead allocation rate is based on the estimated output of 1000 lots per month.             Required (a)        Prepare a production budget for the coming year based on planned production  12 000 lots. (b)       Compare the budget prepared in (a) with a flexible budget based on actual activity of 15 000 lots.

Assume that European countries impose a quota on goods imported from the United States and that the United States does not plan to retaliate. How could this affect the value of the euro? Explain. (LO2)

What are some of the common law issues that a tax practitioner may face with respect to their duties and how might a tax practitioner avoid these issues?

Presented below are three different transactions related to materiality. Explain whether you would  classify these transactions as material. (a) Blair Co. has reported a positive trend in earnings over the last 3 years. In the current year, it reduces its bad debt allowance to ensure another positive earnings year. The impact of this adjustment is equal to 3% of net income. (b) Hindi Co. has an extraordinary gain of $3.1 million on the sale of plant assets and a $3.3 million loss on the sale of investments. It decides to net the gain and loss because the net effect is considered immaterial. Hindi Co.’s income for the current year was $10 million. (c) Damon Co. expenses all capital equipment under $25,000 on the basis that it is immaterial. The company has followed this practice for a number of years.

Burke Company has purchased two tracts of land. One tract will be the site of its new manufacturing plant, while the other is being purchased with the hope that it will be sold in the next year at a profit. How should these two tracts of land be reported in the balance sheet?

Holyfield Corporation wishes to exchange a machine used in its operations. Holyfield has received the following offers from other companies in the industry. 1. Dorsett Company offered to exchange a similar machine plus $23,000. (The exchange has commercial substance for both parties.) 2. Winston Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.) 3. Liston Company offered to exchange a similar machine, but wanted $3,000 in addition to Holyfield’s machine. (The exchange has commercial substance for both parties.) In addition, Holyfield contacted Greeley Corporation, a dealer in machines. To obtain a new machine, Holyfield must pay $93,000 in addition to trading in its old machine. Date Amount July 30, 2014 $ 900,000 January 30, 2015 1,500,000 May 30, 2015 1,600,000 Total payments $4,000,000 Holyfield Dorsett Winston Liston Greeley Machine cost $160,000 $120,000 $152,000 $160,000 $130,000 Accumulated depreciation 60,000 45,000 71,000 75,000 –0– Fair value 92,000 69,000 92,000 95,000 185,000 Instructions For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company.

Describe the U.S. government’s efforts to infuse capital into all of the very large banks during the credit crisis. (LO6)