Question & Answer

What are the three alternative accounting methods available to a seller that is exposed to continued risks of ownership through return of the product?

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

Dean supports Leicester City football club and has paid £80 for a ticket to watch them play in a cup final. The maximum amount he is willing to pay for the ticket is £200. Another Leicester City supporter offers him £400 for the ticket. Even though there are no restrictions on the resale of the tickets, Dean decides not to sell. Is his decision consistent with the predictions of rational decision making in standard economic theory? Explain your answer.

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.

Farell is a member of Sierra Vista LLC. Although Sierra Vista is involved in a number of different business ventures, it is not currently involved in real estate either as an investor or as a developer. On January 1, year 1, Farell has a $100,000 tax basis in his LLC interest that includes his $90,000 share of Sierra Vista’s general liabilities. By the end of the year, Farell’s share of Sierra Vista’s general liabilities have increased to $100,000. Because of the time he spends in other endeavors, Farell does not materially participate in Sierra Vista. His share of the Sierra Vista losses for year 1 is $120,000. As a partner in the Riverwoods Partnership, he also has year 1, Schedule K-1 passive income of $5,000. Farell is single and has no other sources of business income or loss. a. Determine how much of the Sierra Vista loss Farell will currently be able to deduct on his tax return for year 1, and list the losses suspended due to tax basis, at-risk, and passive activity loss limitations. b. Assuming Farell’s Riverwoods K-1 indicates passive income of $30,000, determine how much of the Sierra Vista loss he will ultimately be able to deduct on his tax return for year 1, and list the losses suspended due to tax basis, at-risk, and passive activity loss limitations. c. Assuming Farell is deemed to be an active participant in Sierra Vista, determine how much of the Sierra Vista loss he will ultimately be able to deduct on his tax return for year 1, and list the losses suspended due to tax basis, at-risk, and passive activity loss limitations. d. Assuming Farell is deemed to be an active participant in Sierra Vista, and he also has a $300,000 loss from a sole proprietorship, determine how much total trade or business loss Farell will deduct on his return in year 1.

Vargo Corp. owes $270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2014. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2016, reduce the principal to $220,000, and reduce the interest rate to 5%, payable annually on December 31. Instructions (a) Prepare the journal entries on Vargo’s books on December 31, 2014, 2015, 2016. (b) Prepare the journal entries on First Trust’s books on December 31, 2014, 2015, 2016.

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.

What implicit and explicit costs would a firm avoid if it decided not to expand production?

Jake is a professional dog trainer who purchases and trains dogs for use by law enforcement agencies. Last year Jake purchased 500 bags of dog food from a large pet food company at an average cost of $30 per bag. This year, however, Jake purchased 500 bags of dog food from a local pet food company at an average cost of $45 per bag. Under what circumstances would the IRS likely challenge the cost of Jake’s dog food as unreasonable?

How would one measure the angle of repose for a given amount of metallic powder?

Using the facts in Problem 51, what is the minimum tax that Pedro should pay to make the tax structure vertically equitable with respect to the amount of tax paid?  This would result in what type of tax rate structure?

Is the assumption of rational expectations on its own sufficient for anticipated demand shocks to have no impact on economic activity even in the short run?

On December 31, 2014, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,000,000 to $2,400,000. 2. Extending the maturity date from December 31, 2014, to January 1, 2018. 3. Reducing the interest rate from 12% to 10%. Barkley pays interest at the end of each year. On January 1, 2018, Barkley Company pays $2,400,000 in cash to Firstar Bank. Instructions (a) Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring? (b) Can Barkley Company record a gain under the term modification mentioned above? Explain. (c) Assuming that the interest rate Barkley should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after the debt restructuring. (d) Prepare the interest payment entry for Barkley Company on December 31, 2016. (e) What entry should Barkley make on January 1, 2018?

The drive unit of a positioning table for a component insertion machine is based on a stepping motor and leadscrew mechanism. The specifications are for the table speed to be 25 mm/s over a 600 mm range and for the accuracy to be 0.025 mm. The pitch of the leadscrew = 4.5 mm, and the gear ratio = 5:1 (5 turns of the motor for each turn of the leadscrew). The mechanical errors in the motor, gear box, leadscrew, and table connection are characterized by a normal distribution with standard deviation = 0.005 mm. Determine (a) the minimum number of step angles in the stepping motor, and (b) the frequency of the pulse train required to drive the table at the desired maximum speed for the stepping motor in part (a).

McNabb Company spent $190,000 developing a new process, $45,000 in legal fees to obtain a patent, and $91,000 to market the process that was patented, all in the year 2014. How should these costs be accounted for in 2014?

Discuss the accounting treatment or disclosure that should be accorded a declared but unpaid cash dividend, an accumulated but undeclared dividend on cumulative preferred stock, and a stock dividend distributable.

List (a) the similarities and (b) the differences in the accounting treatments of depreciation and cost depletion.

Chris Spear invested $15,000 today in a fund that earns 8% compounded annually. To what amount will the investment grow in 3 years? To what amount would the investment grow in 3 years if the fund earns 8% annual interest compounded semiannually?

After securing lease commitments from several major stores, Auer Shopping Center, Inc. was organized and built a shopping center in a growing suburb. The shopping center would have opened on schedule on January 1, 2014, if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2014. All of the additional construction costs that were incurred as a result of the tornado were covered by insurance. In July 2013, in anticipation of the scheduled January opening, a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space, and manage the property. A summary of some of the costs incurred in 2013 and the first nine months of 2014 follows. January 1, 2014 through 2013 September 30, 2014 Interest on mortgage bonds $720,000 $540,000 Cost of obtaining tenants 300,000 360,000 Promotional advertising 540,000 557,000 The promotional advertising campaign was designed to familiarize shoppers with the center. Had it been known in time that the center would not open until October 2014, the 2013 expenditure for promotional advertising would not have been made. The advertising had to be repeated in 2014. All of the tenants who had leased space in the shopping center at the time of the tornado accepted the October occupancy date on condition that the monthly rental charges for the first 9 months of 2014 be canceled. Instructions Explain how each of the costs for 2013 and the first 9 months of 2014 should be treated in the accounts of the shopping center corporation. Give the reasons for each treatment.

Stan Conner and Mark Stein were discussing the presentation format of the statement of cash flows of Bombeck Co. At the bottom of Bombeck’s statement of cash flows was a separate section entitled “Noncash investing and financing activities.” Give three examples of significant non-cash transactions that would be reported in this section.

Katie recently won a ceramic dalmatian valued at $800 on a television game show.  She questions whether this prize is taxable since it was a “gift” she won on the show.  a.  Use an available tax research service to answer Katie’s question. b.  Write a letter to Katie communicating the results of your research

Describe the book-tax differences that arise from nonqualified stock options.

Daniel Barenboim sells and erects shell houses, that is, frame structures that are completely finished on the outside but are unfinished on the inside except for flooring, partition studding, and ceiling joists. Shell houses are sold chiefly to customers who are handy with tools and who have time to do the interior wiring, plumbing, wall completion and finishing, and other work necessary to make the shell houses livable dwellings. Barenboim buys shell houses from a manufacturer in unassembled packages consisting of all lumber, roofing, doors, windows, and similar materials necessary to complete a shell house. Upon commencing operations in a new area, Barenboim buys or leases land as a site for its local warehouse, field office, and display houses. Sample display houses are erected at a total cost of $30,000 to $44,000 including the cost of the unassembled packages. The chief element of cost of the display houses is the unassembled packages, inasmuch as erection is a short, low-cost operation. Old sample models are torn down or altered into new models every 3 to 7 years. Sample display houses have little salvage value because dismantling and moving costs amount to nearly as much as the cost of an unassembled package. Instructions (a) A choice must be made between (1) expensing the costs of sample display houses in the periods in which the expenditure is made and (2) spreading the costs over more than one period. Discuss the advantages of each method. (b) Would it be preferable to amortize the cost of display houses on the basis of (1) the passage of time or (2) the number of shell houses sold? Explain.

Rubio recently invested $20,000 (tax basis) in purchasing a limited partnership interest. His at-risk amount is $15,000. In addition, Rubio’s share of the limited partnership loss for the year is $22,000, his share of income from a different limited partnership is $5,000, and he has $40,000 in wage income and $10,000 in long-term capital gains. a. How much of Rubio’s $22,000 loss is allowed considering only the tax basis loss limitations? b. How much of the loss from part (a) is allowed under the at-risk limitations? c. How much of Rubio’s $22,000 loss from the limited partnership can he deduct in the current year considering all limitations?