Question & Answer

Anne Cleves Company reported the following amounts in the stockholders’ equity section of its December 31, 2013, balance sheet. Preferred stock, 10%, $100 par (10,000 shares authorized, 2,000 shares issued) $200,000 Common stock, $5 par (100,000 shares authorized, 20,000 shares issued) 100,000 Additional paid-in capital 125,000 Retained earnings 450,000 Total $875,000 During 2014, Cleves took part in the following transactions concerning stockholders’ equity. 1. Paid the annual 2013 $10 per share dividend on preferred stock and a $2 per share dividend on common stock. These dividends had been declared on December 31, 2013. 2. Purchased 1,700 shares of its own outstanding common stock for $40 per share. Cleves uses the cost method. 3. Reissued 700 treasury shares for land valued at $30,000. 4. Issued 500 shares of preferred stock at $105 per share. 5. Declared a 10% stock dividend on the outstanding common stock when the stock is selling for $45 per share. 6. Issued the stock dividend. 7. Declared the annual 2014 $10 per share dividend on preferred stock and the $2 per share dividend on common stock. These dividends are payable in 2015. Instructions (a) Prepare journal entries to record the transactions described above. (b) Prepare the December 31, 2014, stockholders’ equity section. Assume 2014 net income was $330,000.

Before Gordon Corporation engages in the treasury stock transactions listed below, its general ledger reflects, among others, the following account balances (par value of its stock is $30 per share). Paid-in Capital in Excess of Par—Common Stock Common Stock Retained Earnings $99,000 $270,000 $80,000 Instructions Record the treasury stock transactions (given below) under the cost method of handling treasury stock; use the FIFO method for purchase-sale purposes. (a) Bought 380 shares of treasury stock at $40 per share. (b) Bought 300 shares of treasury stock at $45 per share. (c) Sold 350 shares of treasury stock at $42 per share. (d) Sold 110 shares of treasury stock at $38 per share.

Cheng Company traded a used truck for a new truck. The used truck cost $30,000 and has accumulated depreciation of $27,000. The new truck is worth $37,000. Cheng also made a cash payment of $36,000. Prepare Cheng’s entry to record the exchange. (The exchange lacks commercial substance.)

You are asked to travel to Milwaukee to observe and verify the inventory of the Milwaukee branch of one of your clients. You arrive on Thursday, December 30, and find that the inventory procedures have just been started. You spot a railway car on the sidetrack at the unloading door and ask the warehouse superintendent, Buck Rogers, how he plans to inventory the contents of the car. He responds, “We are not going to include the contents in the inventory.” Later in the day, you ask the bookkeeper for the invoice on the carload and the related freight bill. The invoice lists the various items, prices, and extensions of the goods in the car. You note that the carload was shipped December 24 from Albuquerque, f.o.b. Albuquerque, and that the total invoice price of the goods in the car was $35,300. The freight bill called for a payment of $1,500. Terms were net 30 days. The bookkeeper affirms the fact that this invoice is to be held for recording in January. Instructions (a) Does your client have a liability that should be recorded at December 31? Discuss. (b) Prepare a journal entry(ies), if required, to reflect any accounting adjustment required. Assume a perpetual inventory system is used by your client. (c) For what possible reason(s) might your client wish to postpone recording the transaction?

Why is the minimum point of the AVC curve at a lower level of output than the minimum point of the AC curve?

Ferraro, Inc. established a stock-appreciation rights (SAR) program on January 1, 2014, which entitles executives to receive cash at the date of exercise for the difference between the market price of the stock and the pre-established price of $20 on 5,000 SARs. The required service period is 2 years. The fair value of the SARs are determined to be $4 on December 31, 2014, and $9 on December 31, 2015. Compute Ferraro’s compensation expense for 2014 and 2015.

Drawing an indifference curve diagram that illustrates Giffen behaviour can be difficult. Given that the substitution effect of the price change must be relatively small, how do you draw the indifference curves: i.e. how bowed in towards the origin should they be?

What is wheel grade?

Grady received $8,200 of Social Security benefits this year. Grady also reported salary and interest income this year. What amount of the benefits must Grady include in his gross income under the following two independent situations?

Explain how a yield curve would shift in response to a sudden expectation of rising interest rates, according to the pure expectations theory. (LO3)

Is it true that a corporation recognizes all gains and losses on liquidating distributions of property to noncorporate shareholders?  Explain.

Assume the bonds in BE14-2 were issued at 103. Prepare the journal entries for (a) January 1, (b) July 1, and (c) December 31. Assume The Colson Company records straight-line amortization semiannually.

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)

If you had to explain or define “generally acceptedaccounting principles or standards,” what essential characteristicswould you include in your explanation?

45. Shauna Coleman is single. She is employed as an architectural designer for Streamline Design (SD). Shauna wanted to determine her taxable income. She correctly calculated her AGI. However, she wasn’t sure how to compute the rest of her taxable income. She provided the following information with hopes that you could use it to determine her taxable income for 2024.

New machinery, which replaced a number of employees, was installed and put in operation in the last month of the fiscal year. The employees had been dismissed after payment of an extra month’s wages, and this amount was added to the cost of the machinery. Discuss the propriety of the charge. If it was improper, describe the proper treatment.

Sue’s Construction is in its fourth year of business. Sue performs long-term construction projects and accounts for them using the completed-contract method. Sue built an apartment building at a price of $1,100,000. The costs and billings for this contract for the first three years are as follows. 2014 2015 2016 Costs incurred to date $240,000 $600,000 $ 790,000 Estimated costs yet to be incurred 560,000 200,000 –0– Customer billings to date 150,000 410,000 1,100,000 Collection of billings to date 120,000 340,000 950,000 Sue has contacted you, a certified public accountant, about the following concern. She would like to attract some investors, but she believes that in order to recognize revenue she must first “deliver” the product. Therefore, on her balance sheet, she did not recognize any gross profits from the above contract until 2016, when she recognized the entire $310,000. That looked good for 2016, but the preceding years looked grim by comparison. She wants to know about an alternative to this completed-contract revenue recognition. Instructions Draft a letter to Sue, telling her about the percentage-of-completion method of recognizing revenue. Compare it to the completed-contract method. Explain the idea behind the percentage-of-completion method. In addition, illustrate how much revenue she could have recognized in 2014, 2015, and 2016 if she had used this method.

What are the natural tolerance limits?

Distinguish between a normal good, an inferior good and a Giffen good. Use indifference curves to illustrate your answer.

The life of a business is divided into specific time periods, usually a year, to measure results of operations for each such time period and to portray financial conditions at the end of each period. (a) This practice is based on the accounting assumption that the life of the business consists of a series of time periods and that it is possible to measure accurately the results of operations for each period. Comment on the validity and necessity of this assumption. (b) What has been the effect of this practice on accounting? What is its relation to the accrual system? What influence has it had on accounting entries and methodology?

Presently, the profession requires that earnings per share be disclosed on the face of the income statement. What are some disadvantages of reporting ratios on the financial statements?

How do you think the shape of the yield curve for commercial paper and other money market instruments compares to the yield curve for Treasury securities? Explain your logic. (LO1)

Hart, an individual, bought an asset for $500,000 and has claimed $100,000 of depreciation deductions against the asset. Hart has a marginal tax rate of 32 percent. Answer the questions presented in the following alternative scenarios (assume Hart had no property transactions other than those described in the problem): a. What are the amount and character of Hart’s recognized gain or loss if the asset is tangible personal property sold for $450,000?  What effect does the sale have on Hart’s tax liability for the year?  b. What are the amount and character of Hart’s recognized gain or loss if the asset is tangible personal property sold for $550,000?  What effect does the sale have on Hart’s tax liability for the year?  c. What are the amount and character of Hart’s recognized gain or loss if the asset is tangible personal property sold for $350,000?  What effect does the sale have on Hart’s tax liability for the year?  d. What are the amount and character of Hart’s recognized gain or loss if the asset is a nonresidential building sold for $450,000?  What effect does the sale have on Hart’s tax liability for the year?  e. Now assume that Hart is a C corporation. What are the amount and character of its recognized gain or loss if the asset is a nonresidential building sold for $450,000?  What effect does the sale have on Hart’s tax liability for the year (assume a 21 percent tax rate)?  f. Assuming that the asset is real property, which entity type should be used to minimize the taxes paid on real estate gains?

What is net interest? Identify the elements of net interest and explain how they are computed.

A cylindrical workpart 200 mm in diameter and 700 mm long is to be turned in an engine lathe. Cutting speed = 2.30 m/s, feed = 0.32 mm/rev, and depth of cut = 1.80 mm. Determine (a) cutting time, and (b) metal removal rate.