Question & Answer

Use the information for Rick Kleckner Corporation from BE21-3. Assume that at December 31, 2014, Kleckner made an adjusting entry to accrue interest expense of $29,530 on the lease. Prepare Kleckner’s January 1, 2015, journal entry to record the second lease payment of $53,920.

A press release announcing the appointment of the trustees of the new Financial Accounting Foundation stated that the Financial Accounting Standards Board (to be appointed by the trustees) “. . . will become the established authority for setting accounting principles under which corporations report to the shareholders and others” (AICPA news release July 20, 1972). Instructions (a) Identify the sponsoring organization of the FASB and the process by which the FASB arrives at a decision and issues an accounting standard. (b) Indicate the major types of pronouncements issued by the FASB and the purposes of each of these pronouncements.

Assume that the yield curves in the United States, France, and Japan are flat. If the U.S. yield curve suddenly becomes positively sloped, do you think the yield curves in France and Japan would be affected? If so, how? (LO3)

Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.

Sandra would like to organize LAB (a legal corporation) as either an S corporation or a C corporation for tax purposes. In either form, the entity is expected to generate an 8 percent annual before-tax return on a $500,000 investment. Sandra’s marginal income tax rate is 37 percent and her tax rate on qualified dividends and net capital gains is 20 percent. LAB’s income is not qualified business income (QBI) so Sandra is not allowed to claim the QBI deduction. Assume that LAB will distribute all of its earnings after entity-level taxes every year. Ignore the additional Medicare tax and the net investment income tax when computing your answers.   a. How much cash after taxes would Sandra receive from her investment in the first year if LAB is organized as either an S corporation or a C corporation?  b. What is the overall tax rate on LAB’s income in first year if LAB is organized as an S corporation or as a C corporation? c. At a high level, explain the differences between entity types in after-tax cash flow and overall tax rate on business income.

Using the facts in problem 41, if Scot and Vidia earn an additional $70,000 of taxable income, what is their marginal tax rate on this income?  How would your answer differ if they, instead, had $70,000 of additional deductions?

Explain (using intuition instead of math) why stock prices may decrease in response to a higher risk-free rate according to the CAPM. In some periods, the risk-free rate rises in response to higher economic growth. Explain (using intuition instead of math) why stock prices may increase in this situation even though the risk-free rate increases. (LO2)

Horace Greeley Corporation was organized in 2013 and began operations at the beginning of 2014. The company is involved in interior design consulting services. The following costs were incurred prior to the start of operations. Attorney’s fees in connection with organization of the company $15,000 Purchase of drafting and design equipment 10,000 Costs of meetings of incorporators to discuss organizational activities 7,000 State fi ling fees to incorporate 1,000 $33,000 Instructions (a) Compute the total amount of organization costs incurred by Greeley. (b) Prepare the journal entry to record organization costs for 2014.

Milner Family Importers sold goods to Tung Decorators for $30,000 on November 1, 2014, accepting Tung’s $30,000, 6-month, 6% note. Prepare Milner’s November 1 entry, December 31 annual adjusting entry, and May 1 entry for the collection of the note and interest.

Zach Taylor is settling a $20,000 loan due today by making 6 equal annual payments of $4,727.53. Determine the interest rate on this loan, if the payments begin one year after the loan is signed.

Callaway Golf Co. leases telecommunication equipment. Assume the following data for equipment leased from Photon Company. The lease term is 5 years and requires equal rental payments of $31,000 at the beginning of each year. The equipment has a fair value at the inception of the lease of $138,000, an estimated useful life of 8 years, and no residual value. Callaway pays all executory costs directly to third parties. Photon set the annual rental to earn a rate of return of 10%, and this fact is known to Callaway. The lease does not transfer title or contain a bargain-purchase option. How should Callaway classify this lease?

Solve Problem 24.21 except that in parts (a) and (b), determine the cutting speeds and tool lives for maximum production rate. Use of a spreadsheet calculator is recommended

Explain how underwriters use the overallotment option in IPOs. (LO3)

Described below are certain transactions of Edwardson Corporation. The company uses the periodic inventory system. 1. On February 2, the corporation purchased goods from Martin Company for $70,000 subject to cash discount terms of 2/10, n/30. Purchases and accounts payable are recorded by the corporation at net amounts after cash discounts. The invoice was paid on February 26. 2. On April 1, the corporation bought a truck for $50,000 from General Motors Company, paying $4,000 in cash and signing a one-year, 12% note for the balance of the purchase price. 3. On May 1, the corporation borrowed $83,000 from Chicago National Bank by signing a $92,000 zero-interest-bearing note due one year from May 1. 4. On August 1, the board of directors declared a $300,000 cash dividend that was payable on September 10 to stockholders of record on August 31. Instructions (a) Make all the journal entries necessary to record the transactions above using appropriate dates. (b) Edwardson Corporation’s year-end is December 31. Assuming that no adjusting entries relative to the transactions above have been recorded, prepare any adjusting journal entries concerning interest that are necessary to present fair financial statements at December 31. Assume straight-line amortization of discounts.

Lorenzo is considering starting a trucking company either in Texas or Oklahoma.  He will relocate his family, which includes his wife, children, and parents, to reside in the same state as his business.  What types of taxes may influence his decision of where to locate his business?

Amina is a 30 percent partner in the AOM Partnership when she sells her entire interest to Hope for $72,000 cash. At the time of the sale, Amina’s basis in AOM is $44,000 (which includes her $6,000 share of AOM liabilities). AOM does not have any hot assets. What is Amina’s gain or loss on the sale of her interest?

Maria has all of her stock in Mayan Corporation redeemed. Under what conditions will Maria treat the redemption as an exchange and recognize capital gain or loss?

What factors have to be present for income shifting to be a viable strategy?

Describe the type of material that is commonly used to make windshields for automobiles.

Chelsea Finance Company receives floating inflow payments from its provision of floating-rate loans. Its outflow payments are fixed because of its recent issuance of long-term bonds. Chelsea is concerned that interest rates will decline in the future. Yet, it does not want to hedge its interest rate risk because it believes interest rates may increase. Recommend a solution to Chelsea’s dilemma. (LO1, LO2)

The strength coefficient = 35,000 lb/in2 and strain-hardening exponent = 0.40 for a metal used in a forming operation in which the workpart is reduced in cross-sectional area by stretching. If the average flow stress on the part is 20,000 lb/in2 , determine the amount of reduction in cross-sectional area experienced by the part.

What is a coordinate measuring machine?

Tomiko is a 50 percent owner (partner) in the Tanaka partnership. During the year, the partnership reported $1,000 of interest income and $2,000 of dividends. How much of this income must Tomiko include in their gross income?

Veldre Company provides the following information about its defined benefit pension plan for the year 2014. Service cost $ 90,000 Contribution to the plan 105,000 Prior service cost amortization 10,000 Actual and expected return on plan assets 64,000 Benefi ts paid 40,000 Plan assets at January 1, 2014 640,000 Projected benefi t obligation at January 1, 2014 700,000 Accumulated OCI (PSC) at January 1, 2014 150,000 Interest/discount (settlement) rate 10% Instructions Compute the pension expense for the year 2014.

Describe the main source of funds for credit unions. Why might the average cost of funds to CUs be relatively stable even when market interest rates are volatile? (LO7)