Question & Answer

George Hincapie Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directorshas decided to raise funds for the new plant by issuing $2,000,000 of 11% term corporate bonds on March 1, 2014, due on March 1, 2029, with interest payable each March 1 and September 1. At the time of issuance, the market interest rate for similar financial instruments is 10%. Instructions As the controller of the company, determine the selling price of the bonds.

Use the information from BE23-4 for Bloom Corporation. Prepare the cash flows from operating activities section of Bloom’s 2014 statement of cash flows using the indirect method.

Button Company has the following two temporary differences between its income tax expense and income taxes payable. 2014 2015 2016 Pretax fi nancial income $840,000 $910,000 $945,000 Excess depreciation expense on tax return (30,000) (40,000) (10,000) Excess warranty expense in fi nancial income 20,000 10,000 8,000 Taxable income $830,000 $880,000 $943,000 The income tax rate for all years is 40%. Instructions (a) Assuming there were no temporary differences prior to 2014, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, 2015, and 2016. (b) Indicate how deferred taxes will be reported on the 2016 balance sheet. Button’s product warranty is for 12 months. (c) Prepare the income tax expense section of the income statement for 2016, beginning with the line “Pretax financial income.”

If the bonds in Question 8 are classified as available-forsale and they have a fair value at December 31, 2014, of $3,604,000, prepare the journal entry (if any) at December 31, 2014, to record this transaction.

Twinbrook Corporation needed to upgrade to a larger manufacturing facility. Twinbrook first acquired a new manufacturing facility for $2,100,000 cash and then transferred the facility it was using (building and land) to White Flint Corporation for $2,000,000 three months later. Does the exchange qualify for like-kind exchange treatment? (Hint: Examine Revenue Procedures 2000-37 and 2004-51.)  If not, can you propose a change in the transaction that will allow it to qualify?

1.       : As algorithmic control becomes more common in organizations, how might it affect the roles of managers and employees? Can you think of ways algorithmic tools might be used to decentralize control? Explain.

Carla incorporated her sole proprietorship by transferring inventory, a building, and land to the corporation in return for 100 percent of the corporation’s stock. The property transferred to the corporation had the following fair market values and adjusted tax bases.     FMV    Adjusted Tax Basis Inventory$    20,000$        10,000 Building    150,000        100,000 Land    250,000        300,000 Total$  420,000$      410,000

Explain the mechanisms whereby the DAD and IS curves will shift by the same amount as the DAS and MP curves in the long run.

What is the difference between open and closed facts?  How is this distinction important in conducting taxresearch?

A heat source can transfer 3500 J/sec to a metal part surface. The heated area is circular, and the heat intensity decreases as the radius increases, as follows: 70% of the heat is concentrated in a circular area that is 3.75 mm in diameter. Is the resulting power density enough to melt metal?

How would you attempt to value time that you yourself save (a) getting to work; (b) going on holiday; (c) going out in the evening?

What book-tax differences in year 1 and year 2 associated with its capital gains and losses would DEF Inc. report in the following alternative scenarios?  Identify each book-tax difference as favorable or unfavorable and as permanent or temporary.   a.  In year 1, DEF recognized a loss of $15,000 on land that it had held for investment.  In year 1, it also recognized a $30,000 gain on equipment it had purchased a few years ago. The equipment sold for $50,000 and had an adjusted basis of $20,000.  DEF had deducted $40,000 of tax depreciation on the equipment. In year 2, DEF recognized a capital loss of $2,000.

Selane Eatery operates a catering service specializing in business luncheons for large corporations. Selane requires customers to place their orders 2 weeks in advance of the scheduled events. Selane bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Selane recognize revenue related to its catering service?

In countries experiencing high inflation, the annual interest rate may exceed 50 percent; in other countries such as the United States and many European countries, the annual interest rates are typically less than 10 percent. Do you think such a large difference in interest rates is due primarily to country-specific differences in the risk-free rates or in the credit risk premiums? Explain. (LO3)

The directors of Merchant Corporation are considering the issuance of a stock dividend. They have asked you to discuss the proposed action by answering the following questions. Instructions (a) What is a stock dividend? How is a stock dividend distinguished from a stock split (1) from a legal standpoint, and (2) from an accounting standpoint? (b) For what reasons does a corporation usually declare a stock dividend? A stock split? (c) Discuss the amount, if any, of retained earnings to be capitalized in connection with a stock dividend.

1.      : Would you rate Casper’s competitive strategy as pursuing differentiation, cost leadership, focus, or a combination of these? Explain. Do you think Casper will grow successfully and turn a profit? Why?

1.              : Say nothing about the false numbers. Of course, the company will miss the projections and have to come up with a good explanation, but, after all, isn’t that par for the course among fledgling high-tech companies? Chances are the whole thing will blow over without a problem.

1.    You are a middle manager helping to implement a new corporate cost-cutting strategy, and you’re meeting skepticism, resistance, and, in some cases, outright hostility from your subordinates. In what ways might you or the company have been able to avoid this situation? Where do you go from here?

Presented below are three unrelated situations involving equity securities. Situation 1: An equity security, whose fair value is currently less than cost, is classified as available-for-sale but is to be reclassified as trading. Situation 2: A noncurrent portfolio with an aggregate fair value in excess of cost includes one particular security whose fair value has declined to less than one-half of the original cost. The decline in value is considered to be other than temporary. Situation 3: The portfolio of trading securities has a cost in excess of fair value of $13,500. The availablefor- sale portfolio has a fair value in excess of cost of $28,600. Instructions What is the effect upon carrying value and earnings for each of the situations above?

Baden Corporation entered into a lease agreement for 10 photocopy machines for its corporate headquarters. The lease agreement qualifies as an operating lease in all terms except there is a bargain-purchase option. After the 5-year lease term, the corporation can purchase each copier for $1,000, when the anticipated fair value is $2,500. Jerry Suffolk, the financial vice president, thinks the financial statements must recognize the lease agreement as a capital lease because of the bargain-purchase option. The controller, Diane Buchanan, disagrees: “Although I don’t know much about the copiers themselves, there is a way to avoid recording the lease liability.” She argues that the corporation might claim that copier technology advances rapidly and that by the end of the lease term the machines will most likely not be worth the $1,000 bargain price. Instructions Answer the following questions. (a) What ethical issue is at stake? (b) Should the controller’s argument be accepted if she does not really know much about copier technology? Would it make a difference if the controller were knowledgeable about the pace of change in copier technology? (c) What should Suffolk do?

Teton Corporation issued $600,000 of 7% bonds on November 1, 2014, for $644,636. The bonds were dated November 1, 2014, and mature in 10 years, with interest payable each May 1 and November 1. Teton uses the effective-interest method with an effective rate of 6%. Prepare Teton’s December 31, 2014, adjusting entry.

1.    : Harley-Davidson, which once boasted that it made “big toys for big boys,” is trying to lure more women to the brand to make up for declining sales in a slow economy. How do you think this move will complement or confound the company’s differentiation strategy, which has long been based on a macho image?

1.    In a study asking what people wanted from leaders versus followers, people ranked maturity number 8 for followers but number 15 for leaders. What might account for people wanting a higher maturity level from followers?

A review of the ledger of Baylor Company at December 31, 2014, produces the following data pertaining to the preparation of annual adjusting entries. 1. Salaries and Wages Payable $0. There are eight employees. Salaries and wages are paid every Friday for the current week. Five employees receive $700 each per week, and three employees earn $600 each per week. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December. 2. Unearned Rent Revenue $429,000. The company began subleasing office space in its new building on November 1. Each tenant is required to make a $5,000 security deposit that is not refundable until occupancy is terminated. At December 31, the company had the following rental contracts that are paid in full for the entire term of the lease. Date Term (in months) Monthly Rent Number of Leases Nov. 1 6 $6,000 5 Dec. 1 6 $8,500 4 3. Prepaid Advertising $13,200. This balance consists of payments on two advertising contracts. The contracts provide for monthly advertising in two trade magazines. The terms of the contracts are asshown below. Contract Date Amount Number of Magazine Issues A650 May 1 $6,000 12 B974 Oct. 1 7,200 24 The first advertisement runs in the month in which the contract is signed. 4. Notes Payable $60,000. This balance consists of a note for one year at an annual interest rate of 12%, dated June 1. Instructions Prepare the adjusting entries at December 31, 2014. (Show all computations).

Explain why demand might increase for relevant and useful information in the future. What professional skills will help you meet that need?