Question & Answer

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?

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

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

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.

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?

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)

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?

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

Consider the following independent situations. (a) Mike Finley wishes to become a millionaire. His money market fund has a balance of $92,296 and has a guaranteed interest rate of 10%. How many years must Mike leave that balance in the fund in order to get his desired $1,000,000? (b) Assume that Sally Williams desires to accumulate $1 million in 15 years using her money market fund balance of $182,696. At what interest rate must Sally’s investment compound annually?

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?

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.

Conlin Corporation had the following tax information. Year Taxable Income Tax Rate Taxes Paid 2012 $300,000 35% $105,000 2013 $325,000 30% $ 97,500 2014 $400,000 30% $120,000 In 2015, Conlin suffered a net operating loss of $480,000, which it elected to carry back. The 2015 enacted tax rate is 29%. Prepare Conlin’s entry to record the effect of the loss carryback.

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

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?

Explain how some government defined-benefit plans have become underfunded as a result of overestimating their rate of return on investment. (LO4)

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.

What are the common methods for assessing surface roughness?

A business buys two identical tangible personal property assets for the same price. It buys one at the beginning of the year and one at the end of year. Under what conditions would the taxpayer’s depreciation on each asset be exactly the same? Under what conditions would it be different?

Cougar Corporation is owned equally by Cat Stevens and a partnership that is owned equally by Cat’s father and two unrelated individuals. Cat and the partnership each owns 3,000 shares in Cougar. Cat wants to reduce his ownership in the company, and it is decided that Cougar will redeem 1,500 of his shares for $25,000 per share. Cat’s tax basis in each share is $5,000. What are the income tax consequences to Cat as a result of the stock redemption, assuming the company has earnings and profits of $10 million?

Tim’s parents plan to provide him with $50,000 to support him while he establishes a new landscaping business. In exchange for the support, Tim will maintain the landscape at his father’s business. Under what conditions will the transfer of $50,000 be included in Tim’s gross income? Explain. Do you have a recommendation for Tim and his parents?

Englehart Co. provides the following information about its postretirement benefit plan for the year 2014. Service cost $ 90,000 Prior service cost amortization 3,000 Contribution to the plan 56,000 Actual and expected return on plan assets 62,000 Benefi ts paid 40,000 Plan assets at January 1, 2014 710,000 Accumulated postretirement benefi t obligation at January 1, 2014 760,000 Accumulated OCI (PSC) at January 1, 2014 100,000 Dr. Discount rate 9% Instructions Compute the postretirement benefit expense for 2014.

In 2014, Bailey Corporation discovered that equipment purchased on January 1, 2012, for $50,000 was expensed at that time. The equipment should have been depreciated over 5 years, with no salvage value. The effective tax rate is 30%. Prepare Bailey’s 2014 journal entry to correct the error.

Why are single station assembly cells generally not suited to high-production jobs?