Question & Answer

Gershwin Corporation obtained a franchise from Sonic Hedgehog Inc. for a cash payment of $120,000 on April 1, 2014. The franchise grants Gershwin the right to sell certain products and services for a period of 8 years. Prepare Gershwin’s April 1 journal entry and December 31 adjusting entry.

P.1 What is a polymer? P.2 What are the three basic categories of polymers?

Incurring long-term debt with an arrangement whereby lenders receive an option to buy common stock during all or a portion of the time the debt is outstanding is a frequent corporate financing practice. In some situations, the result is achieved through the issuance of convertible bonds; in others, the debt instruments and the warrants to buy stock are separate. Instructions (a) (1) Describe the differences that exist in current accounting for original proceeds of the issuance of convertible bonds and of debt instruments with separate warrants to purchase common stock. (2) Discuss the underlying rationale for the differences described in (a)(1) above. (3) Summarize the arguments that have been presented in favor of accounting for convertible bonds in the same manner as accounting for debt with separate warrants. (b) At the start of the year, Huish Company issued $18,000,000 of 12% bonds along with detachable warrants to buy 1,200,000 shares of its $10 par value common stock at $18 per share. The bonds mature over the next 10 years, starting one year from date of issuance, with annual maturities of $1,800,000. At the time, Huish had 9,600,000 shares of common stock outstanding. The company received $20,040,000 for the bonds and the warrants. For Huish Company, 12% was a relatively low borrowing rate. If offered alone, at this time, the bonds would have sold in the market at a 22% discount. Prepare the journal entry (or entries) for the issuance of the bonds and warrants for the cash consideration received.

What are the primary factors to consider when deciding whether a worker should be considered an employee or a self-employed taxpayer for tax purposes?

] Marco, Jaclyn, and Carrie formed Daxing Partnership (a calendar-year-end entity) by contributing cash 10 years ago. Each partner owns an equal interest in the partnership and has an outside basis in their partnership interest of $104,000. On January 1 of the current year, Marco sells his partnership interest to Ryan for a cash payment of $137,000. The partnership has the following assets and no liabilities as of the sale date: Tax Basis Fair Market Value Cash $ 18,000 $ 18,000 Accounts receivable -0- 12,000 Inventory 69,000 81,000 Equipment 180,000 225,000 Stock investment 45,000 75,000    Totals $ 312,000 $ 411,000 The equipment was purchased for $240,000, and the partnership has taken $60,000 of depreciation. The stock was purchased seven years ago. a. What are the hot assets [§751(a)] for this sale? b. What is Marco’s gain or loss on the sale of his partnership interest? c. What is the character of Marco’s gain or loss? d. What are Ryan’s inside and outside bases in the partnership on the date of the sale?

On January 1, 2014, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer’s inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%. Instructions (a) Prepare the journal entry to record the initial transaction on January 1, 2014. (Round all computations to the nearest dollar.) (b) Prepare the journal entry to record any adjusting entries needed at December 31, 2014. Assume that the sales of Avery’s product to this customer occur evenly over the 3-year period.

1. In the case of buses, subsidies are often paid by local authorities to support various loss‑making routes. Is this the best way of supporting these services? 2. In the case of postal services, profitable parts of the service cross-subsidise the unprofitable parts. Should this continue if the industry were privatised?

In a wire drawing operation, why must the drawing stress never exceed the yield strength of the work metal?

The chairman of the board of directors of the company for which you are chief accountant has told you that he has little use for accounting figures based on historical cost. He believes that replacement values are of far more significance to the board of directors than “out-of-date costs.” Present some arguments to convince him that accounting data should still be based on historical cost.

What is the difference between a refundable and nonrefundable tax credit?

Part A: This year, Gumowski Company has each of the following items in its income statement. 1. Gross profits on installment sales. 2. Revenues on long-term construction contracts. 3. Estimated costs of product warranty contracts. 4. Premiums on officers’ life insurance policies with Gumowski as beneficiary. Instructions (a) Under what conditions would deferred income taxes need to be reported in the financial statements? (b) Specify when deferred income taxes would need to be recognized for each of the items above, and indicate the rationale for such recognition. Part B: Gumowski Company’s president has heard that deferred income taxes can be classified in different ways in the balance sheet. Instructions Identify the conditions under which deferred income taxes would be classified as a noncurrent item in the balance sheet. What justification exists for such classification?

Cannondale Company purchased an electric wax melter on April 30, 2014, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase. List price of new melter $15,800 Cash paid 10,000 Cost of old melter (5-year life, $700 salvage value) 11,200 Accumulated depreciation—old melter (straight-line) 6,300 Secondhand fair value of old melter 5,200 Instructions Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Cannondale’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2013.

How does abrasive belt grinding differ from a conventional surface grinding operation?

Weisberg Corporation has 10,000 shares of $100 par value, 6%, preference shares and 50,000 ordinary shares of $10 par value outstanding at December 31, 2014. Instructions Answer the questions in each of the following independent situations. (a) If the preference shares are cumulative and dividends were last paid on the preference shares on December 31, 2011, what are the dividends in arrears that should be reported on the December 31, 2014, statement of financial position? How should these dividends be reported? (b) If the preference shares are convertible into seven shares of $10 par value ordinary shares and 3,000 shares are converted, what entry is required for the conversion, assuming the preference shares were issued at par value? (c) If the preference shares were issued at $107 per share, how should the preference shares be reported in the equity section?

If the shares in a monopoly (such as a water company) were very widely distributed among the population, would the shareholders necessarily want the firm to use its monopoly power to make larger profits?

What factors could explain why some countries have a higher multiplier than others?

Volunteer Corporation reported taxable income of $500,000 from operations this year. The company paid federal income taxes of $105,000 on this taxable income.  During the year, the company made a distribution of land to its sole shareholder, Rocky. The land’s fair market value was $75,000 and its tax and E&P basis to Volunteer was $25,000. Rocky assumed a mortgage attached to the land of $15,000. Volunteer had accumulated E&P of $750,000 at the beginning of the year.

] Haru is a self-employed cash-method, calendar-year taxpayer, who made the following cash payments related to his business this year. Calculate the after-tax cost of each payment assuming Haru has a 37 percent marginal tax rate.

Why is the price inelasticity of demand for private car transport a problem when formulating a policy for the reduction of traffic congestion? What could be done to change the price elasticity of demand in a desirable direction?

Which is preferable: general subsidies for public transport, or cheap fare policies for specific groups (such as children, students and pensioners)?

Connie Chung Corporation adopted the dollar-value LIFO retail inventory method on January 1, 2013. At that time the inventory had a cost of $54,000 and a retail price of $100,000. The following information is available.8 Year-End Inventory at Retail Current Year Cost—Retail % Year-End Price Index 2013 $118,720 57% 106 2014 138,750 60% 111 2015 125,350 61% 115 2016 162,500 58% 125 The price index at January 1, 2013, is 100. Instructions Compute the ending inventory at December 31 of the years 2013–2016. (Round to the nearest dollar.)

Explain why some companies that issue bonds engage in interest rate swaps in financial markets. Why do they not simply issue bonds that require the type of payments (fixed or variable) that they prefer to make? (LO1)

On April 1, 2014, Dougherty Inc. entered into a costplus- fixed-fee contract to construct an electric generator for Altom Corporation. At the contract date, Dougherty estimated that it would take 2 years to complete the project at a cost of $2,000,000. The fixed fee stipulated in the contract is $450,000. Dougherty appropriately accounts for this contract under the percentage-of-completion method. During 2014, Dougherty incurred costs of $800,000 related to the project. The estimated cost at December 31, 2014, to complete the contract is $1,200,000. Altom was billed $600,000 under the contract. Instructions Prepare a schedule to compute the amount of gross profit to be recognized by Dougherty under the contract for the year ended December 31, 2014. Show supporting computations in good form.

If pension expense recognized in a period exceeds the current amount funded by the employer, what kind of account arises, and how should it be reported in the financial statements? If the reverse occurs—that is, current funding by the employer exceeds the amount recognized as pension expense—what kind of account arises, and how should it be reported?

Nicole is a calendar-year taxpayer who accounts for her business using the cash method. On average, Nicole sends out bills for about $12,000 of her services at the first of each month. The bills are due by the end of the month, and typically 70 percent of the bills are paid on time and 98 percent are paid within 60 days.