Question & Answer

Which would you expect to fluctuate more: the money multiplier (DM4/Dcash), or the simple ratio, M4/cash, illustrated in Figure 18.4?

“The financial statements of a company are management’s, not the accountant’s.” Discuss the implications of this statement.

Why will Pareto optimality not be achieved in markets where there are substantial economies of scale in production?

Explain the differences and similarities among the direct, step-down, and reciprocal methods.

What is sticking in a hot rolling operation?

Daniel is considering selling two stocks that have not performed well over recent years. A friend recently informed Daniel that one of his stocks has a special designation, which allows him to treat a loss up to $50,000 on this stock as an ordinary loss rather than the typical capital loss. Daniel figures that he has a loss of $60,000 on each stock. If Daniel’s marginal tax rate is 35 percent and he has $120,000 of other capital gains (taxed at 15 percent), what is the tax savings from the special tax treatment?

On September 1, 2014, Winans Corporation acquired Aumont Enterprises for a cash payment of $700,000. At the time of purchase, Aumont’s balance sheet showed assets of $620,000, liabilities of $200,000, and owners’ equity of $420,000. The fair value of Aumont’s assets is estimated to be $800,000. Compute the amount of goodwill acquired by Winans.

For each of the unrelated transactions described below, present the entry(ies) required to record each transaction. 1. Grand Corp. issued $20,000,000 par value 10% convertible bonds at 99. If the bonds had not been convertible, the company’s investment banker estimates they would have been sold at 95. Expenses of issuing the bonds were $70,000. 2. Hoosier Company issued $20,000,000 par value 10% bonds at 98. One detachable stock purchase warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $4. 3. Suppose Sepracor, Inc. called its convertible debt in 2014. Assume the following related to the transaction. The 11%, $10,000,000 par value bonds were converted into 1,000,000 shares of $1 par value common stock on July 1, 2014. On July 1, there was $55,000 of unamortized discount applicable to the bonds, and the company paid an additional $75,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.

In what circumstances could a calendar-year C corporation make an election on February 1, year 1, to be taxed as an S corporation in year 1 but not have the election effective until year 2?

Explain how the Financial Reform Act of 2010 and the rules issued to implement it attempted to reduce the risk in the financial system resulting from the use of credit default swaps. (LO7)

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.

Part I: The appropriate method of amortizing a premium or discount on issuance of bonds is the effectiveinterest method. Instructions (a) What is the effective-interest method of amortization and how is it different from and similar to the straight-line method of amortization? (b) How is amortization computed using the effective-interest method, and why and how do amounts obtained using the effective-interest method differ from amounts computed under the straight-line method? Part II: Gains or losses from the early extinguishment of debt that is refunded can theoretically be accounted for in three ways: 1. Amortized over remaining life of old debt. 2. Amortized over the life of the new debt issue. 3. Recognized in the period of extinguishment. Instructions (a) Develop supporting arguments for each of the three theoretical methods of accounting for gains and losses from the early extinguishment of debt. (b) Which of the methods above is generally accepted and how should the appropriate amount of gain or loss be shown in a company’s financial statements?

Elton Co. has the following postretirement benefit plan balances on January 1, 2014. Accumulated postretirement benefi t obligation $2,250,000 Fair value of plan assets 2,250,000 The interest (settlement) rate applicable to the plan is 10%. On January 1, 2015, the company amends the plan so that prior service costs of $175,000 are created. Other data related to the plan are: 2014 2015 Service costs $ 75,000 $ 85,000 Prior service costs amortization –0– 12,000 Contributions (funding) to the plan 45,000 35,000 Benefi ts paid 40,000 45,000 Actual return on plan assets 140,000 120,000 Expected rate of return on assets 8% 6% Instructions (a) Prepare a worksheet for the postretirement plan in 2014. (b) Prepare any journal entries related to the postretirement plan that would be needed at December 31, 2014. (c) Prepare a worksheet for 2015 and any journal entries related to the postretirement plan as of December 31, 2015. (d) Indicate the postretirement-benefit–related amounts reported in the 2015 financial statements.

Explain the difference between a long hedge and a short hedge used by financial institutions. When is a long hedge more appropriate than a short hedge? (LO2)

When are partnerships mandated to adjust the basis of their assets (inside basis) when a partner sells a partnership interest or receives a partnership distribution?

As a cost accountant for San Francisco Cannery, you have been approached by Phil Perriman, canning room supervisor, about the 2014 costs charged to his department. In particular, he is concerned about the line item “depreciation.” Perriman is very proud of the excellent condition of his canning room equipment. He has always been vigilant about keeping all equipment serviced and well oiled. He is sure that the huge charge to depreciation is a mistake; it does not at all reflect the cost of minimal wear and tear that the machines have experienced over the last year. He believes that the charge should be considerably lower. The machines being depreciated are six automatic canning machines. All were put into use on January 1, 2014. Each cost $625,000, having a salvage value of $55,000 and a useful life of 12 years. San Francisco depreciates this and similar assets using double-declining-balance depreciation. Perriman has also pointed out that if you used straight-line depreciation, the charge to his department would not be so great. Instructions Write a memo to Phil Perriman to clear up his misunderstanding of the term “depreciation.” Also, calculate year-1 depreciation on all machines using both methods. Explain the theoretical justification for doubledeclining- balance and why, in the long run, the aggregate charge to depreciation will be the same under both methods.

A shareholder receives appreciated noncash property in a corporate distribution and assumes a liability attached to the property. How does this assumption affect the amount of gain the corporation recognizes? From the corporation’s perspective, does it matter if the liability assumed by the shareholder exceeds the property’s gross fair market value?

Define manufacturing engineering.

If a firm has a typically shaped average cost curve and sets prices 10 per cent above average cost, what will its supply curve look like?

Explain the use of the price-earnings ratio for valuing a stock. Why might investors derive different valuations for a stock when using the PE method? Why might investors derive an inaccurate valuation of a firm when using the PE method? (LO1)

Identify the two recognized lease accounting methods for lessees and distinguish between them.

Carlos Arruza Company exchanged equipment used in its manufacturing operations plus $3,000 in cash for similar equipment used in the operations of Tony LoBianco Company. The following information pertains to the exchange. Carlos Arruza Co. Tony LoBianco Co. Equipment (cost) $28,000 $28,000 Accumulated depreciation 19,000 10,000 Fair value of equipment 12,500 15,500 Cash given up 3,000 Instructions (a) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance. (b) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.

Draw an injections and withdrawals diagram, with a fairly flat W curve. Mark the equilibrium level of national income. Now draw a second, steeper W curve passing through the same point. This second W curve would correspond to the case where tax rates were higher. Assuming now that there has been an increase in injections, draw a second J line above the first. Mark the new equilibrium level of national income with each of the two W curves. You can see that national income rises less with the steeper W curve. The higher tax rates are having a dampening effect on the multiplier.

Name some of the important semiconductor materials.

On August 1, Hyde, Inc. exchanged productive assets with Wiggins, Inc. Hyde’s asset is referred to below as “Asset A,” and Wiggins’ is referred to as “Asset B.” The following facts pertain to these assets. Asset A Asset B Original cost $96,000 $110,000 Accumulated depreciation (to date of exchange) 40,000 47,000 Fair value at date of exchange 60,000 75,000 Cash paid by Hyde, Inc. 15,000 Cash received by Wiggins, Inc. 15,000 Instructions (a) Assuming that the exchange of Assets A and B has commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles. (b) Assuming that the exchange of Assets A and B lacks commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.