Question & Answer

Can a shareholder’s basis in S corporation stock ever be adjusted to a negative number? Why or why not?

The records for the Clothing Department of Sharapova’s Discount Store are summarized below for the month of January. Inventory, January 1: at retail $25,000; at cost $17,000 Purchases in January: at retail $137,000; at cost $82,500 Freight-in: $7,000 Purchase returns: at retail $3,000; at cost $2,300 Transfers in from suburban branch: at retail $13,000; at cost $9,200 Net markups: $8,000 Net markdowns: $4,000 Inventory losses due to normal breakage, etc.: at retail $400 Sales revenue at retail: $95,000 Sales returns: $2,400 Instructions (a) Compute the inventory for this department as of January 31, at retail prices. (b) Compute the ending inventory using lower-of-average-cost-or-market.

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

Brooke owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home where she meets with clients, prepares bills, and performs other work-related tasks. The home office is 300 square feet, and the entire house is 4,500 square feet. Brooke incurred the following home-related expenses during the year. Brooke itemizes her deductions, and her itemized deduction for non-home business taxes is less than $10,000 by more than the real property taxes allocated to business use of the home. Unless indicated otherwise, assume Brooke uses the actual expense method to compute home office expenses.

What is the difference between horizontal and vertical equity?  How do tax preferences affect people’s view of horizontal equity?

What is meant by “accounting symmetry” between the entries recorded by the debtor and creditor in a troubleddebt restructuring involving a modification of terms? In what ways is the accounting for troubled-debt restructurings non-symmetrical?

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.

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?

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.

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)

The following comment appeared in the financial press: “Inadequate financial disclosure, particularly with respect to how management views the future and its role in the marketplace, has always been a stone in the shoe. After all, if you don’t know how a company views the future, how can you judge the worth of its corporate strategy?” What are some arguments for reporting earnings forecasts?

Why is ultraviolet light favored over visible light in photolithography?

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?

Remmers Company manufactures desks. Most of the company’s desks are standard models and are sold on the basis of catalog prices. At December 31, 2014, the following finished desks appear in the company’s inventory. Finished Desks A B C D 2014 catalog selling price $450 $480 $900 $1,050 FIFO cost per inventory list 12/31/14 470 450 830 960 Estimated current cost to manufacture (at December 31, 2014, and early 2015) 460 430 610 1,000 Sales commissions and estimated other costs of disposal 50 60 80 130 2015 catalog selling price 500 540 900 1,200 The 2014 catalog was in effect through November 2014, and the 2015 catalog is effective as of December 1, 2014. All catalog prices are net of the usual discounts. Generally, the company attempts to obtain a 20% gross profit on selling price and has usually been successful in doing so. Instructions At what amount should each of the four desks appear in the company’s December 31, 2014, inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-market approach for valuation of inventories on an individual-item basis?

Define manufacturing engineering.

Laser-beam welding and electron-beam welding are often compared because they both produce very high power densities. LBW has certain advantages over EBW. What are they?

Hyundai is considering opening a plant in two neighboring states.  One state has a corporate tax rate of 10 percent.  If operated in this state, the plant is expected to generate $1,000,000 pretax profit.  The other state has a corporate tax rate of 2 percent.  If operated in this state, the plant is expected to generate $930,000 of pretax profit.  Which state should Hyundai choose?  Why do you think the plant in the state with a lower tax rate would produce a lower before-tax income?

1.      Broken Rock LLC was recently formed with the following members: Name Tax Year-End Capital/Profits % George Allen December 31 33.33% Elanax Corp. June 30 33.33% Elizabeth Cheam December 31 33.34% What is the required taxable year-end for Broken Rock LLC?

Your roommate is puzzled. During the last year, the company in which she is a stockholder reported a net loss of $675,000, yet its cash increased $321,000 during the same period of time. Explain to your roommate how this situation could occur.

Simon Company determines that its goodwill is impaired. It finds that its implied goodwill is $360,000 and its recorded goodwill is $400,000. The fair value of its identifiable assets is $1,450,000. What is the amount of goodwill impaired?

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.

A headline in the Wall Street Journal stated, “Firms Increasingly Tap Their Pension Funds to Use Excess Assets.” What is the accounting issue related to the use of these “excess assets” by companies?

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.

What is the process of jiggering?

Presented below is a list of possible transactions. 1. Purchased inventory for $80,000 on account (assume perpetual system is used). 2. Issued an $80,000 note payable in payment on account (see item 1 above). 3. Recorded accrued interest on the note from item 2 above. 4. Borrowed $100,000 from the bank by signing a 6-month, $112,000, zero-interest-bearing note. 5. Recognized 4 months’ interest expense on the note from item 4 above. 6. Recorded cash sales of $75,260, which includes 6% sales tax. 7. Recorded wage expense of $35,000. The cash paid was $25,000; the difference was due to various amounts withheld. 8. Recorded employer’s payroll taxes. 9. Accrued accumulated vacation pay. 10. Recorded an asset retirement obligation. 11. Recorded bonuses due to employees. 12. Recorded a contingent loss on a lawsuit that the company will probably lose. 13. Accrued warranty expense (assume expense warranty approach). 14. Paid warranty costs that were accrued in item 13 above. 15. Recorded sales of product and related warranties (assume sales warranty approach). 16. Paid warranty costs under contracts from item 15 above. 17. Recognized warranty revenue (see item 15 above). 18. Recorded estimated liability for premium claims outstanding. Instructions Set up a table using the format shown below and analyze the effect of the 18 transactions on the financial statement categories indicated