Question & Answer

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?

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?

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.

What is wheel grade?

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

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

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)

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.

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.

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.

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?

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

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)

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?

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.

Oliver Corporation has owned stock of Conrad Corporation since 2011. At December 31, 2014, its balances related to this investment were: Equity Investments $185,000 Fair Value Adjustment (AFS) 34,000 Dr. Unrealized Holding Gain or Loss—Equity 34,000 Cr. On January 1, 2015, Oliver purchased additional stock of Conrad Company for $475,000 and now has significant influence over Conrad. If the equity method had been used in 2011–2014, Oliver’s share of income would have been $33,000 greater than dividends received. Prepare Oliver’s journal entries to record th purchase of the investment and the change to the equity method.

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.

The following data relate to the operation of Kramer Co.’s pension plan in 2015. The pension worksheet for 2014 is provided in P20-10. Service cost $59,000 Actual return on plan assets 32,000 Amortization of prior service cost 28,000 Annual contributions 51,000 Benefi ts paid retirees 27,000 Average service life of all employees 25 years For 2015, Kramer will use the same assumptions as 2014 for the expected rate of returns on plan assets. The settlement rate for 2015 is 10%. Instructions (a) Prepare a pension worksheet for 2015 and accompanying computations and amortization of the loss, if any, in 2015 using the corridor approach. (b) Prepare the journal entries (from the worksheet) to reflect all pension plan transactions and events at December 31. (c) Indicate the pension amounts reported in the financial statements.

A horizontal true centrifugal casting process is used to make aluminum rings with the following dimensions: length = 5 cm, outside diameter = 65 cm, and inside diameter = 60 cm. (a) Determine the rotational speed that will provide a G-factor = 60. (b) Suppose that the ring were made out of steel instead of aluminum. If the rotational speed computed in part (a) were used in the steel casting operation, determine the G-factor and (c) centrifugal force per square meter (Pa) on the mold wall. (d) Would this rotational speed result in a successful operation?

Explain how the investment account is affected by investee activities under the equity method.

Describe the dilemma of securities firms that served as underwriters for Facebook’s IPOs when attempting to satisfy Facebook and the institutional investors that invested in Facebook’s stock. Do you think that those securities firms satisfied Facebook or the investors in the IPO? Explain. (LO3)

Cecil cashed in a Series EE savings bond with a redemption value of $14,000 and an original cost of $9,800. For each of the following independent scenarios, calculate the amount of interest Cecil will include in his gross income assuming he files as a single taxpayer:

At December 31, 2014, Suffolk Corporation had an estimated warranty liability of $105,000 for accounting purposes and $0 for tax purposes. (The warranty costs are not deductible until paid.) The effective tax rate is 40%. Compute the amount Suffolk should report as a deferred tax asset at December 31, 2014.