Question & Answer

How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?

Explain the circumstances under which an increase in pensions and child benefit would (a) increase national income; (b) leave national income unaffected; (c) decrease national income.

Compare and contrast computing the depreciation deduction for tangible personal property versus computing the depreciation deduction for real property under both the regular tax and alternative tax systems.

{Research} Last year Acme paid Ralph $15,000 to install a new air-conditioning unit at its headquarters building.  The air conditioner did not function properly, and this year Acme requested that Ralph return the payment.  Because Ralph could not repair one critical part in the unit, he refunded the cost of the repair, $5,000, to Acme. a.       Is Ralph required to include the $15,000 payment he received last year in his gross income from last year? b.       What are the tax implications of the repayment if Ralph was in the 35 percent tax bracket when he received the $15,000 payment from Acme, but was in the 28 percent tax bracket when he refunded $5,000 to Acme? c.       How would you answer part b. if Ralph refunded $2,500 to Acme and not $5,000?

Define “cost” as applied to the valuation of inventories.

Farell is a member of Sierra Vista LLC. Although Sierra Vista is involved in a number of different business ventures, it is not currently involved in real estate either as an investor or as a developer. On January 1, year 1, Farell has a $100,000 tax basis in his LLC interest that includes his $90,000 share of Sierra Vista’s general liabilities. By the end of the year, Farell’s share of Sierra Vista’s general liabilities have increased to $100,000. Because of the time he spends in other endeavors, Farell does not materially participate in Sierra Vista. His share of the Sierra Vista losses for year 1 is $120,000. As a partner in the Riverwoods Partnership, he also has year 1, Schedule K-1 passive income of $5,000. Farell is single and has no other sources of business income or loss. a. Determine how much of the Sierra Vista loss Farell will currently be able to deduct on his tax return for year 1, and list the losses suspended due to tax basis, at-risk, and passive activity loss limitations. b. Assuming Farell’s Riverwoods K-1 indicates passive income of $30,000, determine how much of the Sierra Vista loss he will ultimately be able to deduct on his tax return for year 1, and list the losses suspended due to tax basis, at-risk, and passive activity loss limitations. c. Assuming Farell is deemed to be an active participant in Sierra Vista, determine how much of the Sierra Vista loss he will ultimately be able to deduct on his tax return for year 1, and list the losses suspended due to tax basis, at-risk, and passive activity loss limitations. d. Assuming Farell is deemed to be an active participant in Sierra Vista, and he also has a $300,000 loss from a sole proprietorship, determine how much total trade or business loss Farell will deduct on his return in year 1.

How would raising interest rates in this way affect the balance between the current and financial accounts of the balance of payments?

Homer Winslow and Jane Alexander are discussing various aspects of the FASB’s concepts statement on the objective of financial reporting. Homer indicates that this pronouncement provides little, if any, guidance to the practicing professional in resolving accounting controversies. He believes that the statement provides such broad guidelines that it would be impossible toapply the objective to present-day reporting problems. Jane concedes this point but indicates that the objective is still needed to provide a starting point for the FASB in helping to improve financial reporting. Instructions (a) Indicate the basic objective established in the conceptual framework. (b) What do you think is the meaning of Jane’s statement that the FASB needs a starting point to resolve accounting controversies?

Rider Company negotiates a forward swap, to begin two years from now, in which it will swap fixed payments for floating-rate payments. What will be the effect on Rider if interest rates rise substantially over the next two years? That is, would Rider be better off by using this forward swap than if it had simply waited two years before negotiating the swap? Explain. (LO2)

Amanda would like to organize BAL as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 8 percent annual before-tax return on a $500,000 investment. Amanda’s marginal income tax rate is 37 percent, and her tax rate on qualified dividends and net capital gains is 20%. Assume that BAL will distribute half of its after-tax earnings every year as a dividend if it is formed as a C corporation. Assume the income is not eligible for the QBI deduction. Further, when computing your answers, include the self-employment tax (use a 2.9% marginal rate for self-employment income because Amanda has salary in excess of the wage base limit) but not the additional Medicare tax or the net investment income tax.    a. How much cash after taxes would Amanda receive from her investment in the first year if BAL is organized as an LLC? What if BAL is organized as a C corporation?  b. What is the overall tax rate on BAL’s income in the first year if BAL is organized as an LLC or it is organized as a C corporation? c. At a high level, explain the primary factors contributing to differences between entities in cash flow and overall tax rate on business income.

Why would it be difficult for a central bank to predict the precise effect on money supply of open-market operations?

This year Jorge received a refund of property taxes that he deducted on his tax return last year. Jorge is not sure whether he should include the refund in his gross income. What would you tell him?

Prater Inc. enters into an exchange in which it gives up its warehouse on 10 acres of land and receives a tract of land. A summary of the exchange is as follows:   Transferred           FMV Original       Basis Accumulated Depreciation Warehouse $300,000 $225,000 $45,000 Land50,00050,000 Mortgage on warehouse30,000 Cash20,00020,000   Assets Received          FMV Land $340,000 What are Prater’s realized and recognized gain on the exchange and its basis in the assets it received in the exchange?

Garison Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. Garison uses two sales promotion techniques—warranties and premiums—to attract customers. Musical instruments and sound equipment are sold with a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. The premium is offered on the recorded and sheet music. Customers receive a coupon for each dollar spent on recorded music or sheet music. Customers may exchange 200 coupons and $20 for a digital MP3 player. Garison pays $32 for each player and estimates that 60% of the coupons given to customers will be redeemed. Garison’s total sales for 2014 were $7,200,000—$5,700,000 from musical instruments and sound reproduction equipment and $1,500,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled $164,000 during 2014. A total of 6,500 players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2014. The accrual method is used by Garison to account for the warranty and premium costs for financial reporting purposes. The balances in the accounts related to warranties and premiums on January 1, 2014, were as shown below. Inventory of Premiums $ 37,600 Premium Liability 44,800 Warranty Liability 136,000 Instructions Garison Music Emporium is preparing its financial statements for the year ended December 31, 2014. Determine the amounts that will be shown on the 2014 financial statements for the following. (a) Warranty Expense. (d) Inventory of Premiums. (b) Warranty Liability. (e) Premium Liability. (c) Premium Expense.

Julie paid a day care center to watch her two-year-old son this year while she worked as a computer programmer for a local start-up company.  What amount of child and dependent care credit can Julie claim in 2024 in each of the following alternative scenarios? a.  Julie paid $2,000 to the day care center and her AGI is $50,000 (all salary).

What is filament winding?

What are the reasons why the bulk deformation processes are important commercially and technologically?

In a laser beam welding process, what is the quantity of heat per unit time (J/sec) that is transferred to the material if the heat is concentrated in circle with a diameter of 0.2 mm? Assume the power density provided in Table 29.1.

Presented below are a number of balance sheet accounts of Deep Blue Something, Inc. (a) Investment in Preferred Stock. (h) Interest Payable. (b) Treasury Stock. (i) Deficit. (c) Common Stock. (j) Equity Investments (trading). (d) Dividends Payable. (k) Income Taxes Payable. (e) Accumulated Depreciation—Equipment. (l) Unearned Subscriptions Revenue. (f) Construction in Process. (m) Work in Process. (g) Petty Cash. (n) Salaries and Wages Payable. Instructions For each of the accounts above, indicate the proper balance sheet classification. In the case of borderline items, indicate the additional information that would be required to determine the proper classification.

In an article that appeared in the Wall Street Journal, the phrases “phantom (paper) profits” and “high LIFO profits” through involuntary liquidation were used. Explain these phrases.

Pine Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Alejandro, who has always operated it as a C corporation.  However, at the beginning of this year, Alejandro made a qualifying S election for Pine Corp., effective January 1.  Pine Corp. reported $70,000 of C corporation earnings and profits on the effective date of the S election.  This year (its first S corporation year), Pine Corp. reported business income of $50,000.  Alejandro’s basis in his Pine Corp. stock at the beginning of the year was $15,000.  What are the amount and character of income or gain Alejandro must recognize on the following alternative distributions, and what is his basis in his Pine Corp. stock at the end of the year?

What date or event does the profession believe should be used in determining the value of a stock option? What arguments support this position?

Indicate how each of the following accounts should be classified in the equity section. (a) Share Capital—Ordinary. (e) Share Premium—Treasury. (b) Retained Earnings. (f) Share Capital—Preference. (c) Share Premium—Ordinary. (g) Accumulated Other Comprehensive Income. (d) Treasury Shares.

Describe the like-kind property requirements for real property for purposes of qualifying for a like-kind exchange. Explain whether land held for investment by a corporation will qualify as like-kind property with land held by an individual for personal use.

Jake is a professional dog trainer who purchases and trains dogs for use by law enforcement agencies. Last year Jake purchased 500 bags of dog food from a large pet food company at an average cost of $30 per bag. This year, however, Jake purchased 500 bags of dog food from a local pet food company at an average cost of $45 per bag. Under what circumstances would the IRS likely challenge the cost of Jake’s dog food as unreasonable?