Question & Answer

1.       Why do you think there is a trend toward greater democracy and decentralization in organizations today? Would a radical decentralized system be effective with Gen Z employees? Why?

Why are marginal external benefits typically likely to decline as output increases? Why is some cases might marginal external benefits be constant at all levels of output or even increase as more is produced?

When is the stated interest rate of a debt instrument presumed to be fair?

Briefly discuss the convergence efforts that are underway in the area of intangible assets.

This year, Leron and Sheena sold their home for $750,000 after all selling costs. Under the following scenarios, how much taxable gain does the home sale generate for Leron and Sheena? Assume the couple is married filing jointly.

Assume that on February 1, Procter & Gamble (P&G) paid $720,000 in advance for 2 years’ insurance coverage. Prepare P&G’s February 1 journal entry and the annual adjusting entry on June 30.

Zoop Corporation purchased for $300,000 a 30% interest in Murphy, Inc. This investment enables Zoop to exert significant influence over Murphy. During the year, Murphy earned net income of $180,000 and paid dividends of $60,000. Prepare Zoop’s journal entries related to this investment.

Shimei Inc. purchased computer equipment on March 1, 2014, for $31,000. The computer equipment has a useful life of 10 years and a salvage value of $1,000. For tax purposes, the MACRS class life is 5 years. Instructions (a) Assuming that the company uses the straight-line method for book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 2014 and (2) the tax return for 2014? (b) Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 2014 and (2) the tax return for 2014? (c) Why is depreciation for tax purposes different from depreciation for book purposes even if the company uses the same depreciation method to compute them both?

Will the industry supply be zero below a price of P5 in Figure 7.3?

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

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

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

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

What is sticking in a hot rolling operation?

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.

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?

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?

The ledger of Duggan Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared. An analysis of the accounts shows the following. 1. The equipment depreciates $250 per month. 2. One-third of the unearned rent was recognized as revenue during the quarter. 3. Interest of $500 is accrued on the notes payable. 4. Supplies on hand total $850. 5. Insurance expires at the rate of $300 per month. WATTEAU CO. TRIAL BALANCE JUNE 30, 2014 Debit Credit Cash $ 2,870 Accounts Receivable $ 3,231 Supplies 800 Equipment 3,800 Accounts Payable 2,666 Unearned Service Revenue 1,200 Common Stock 6,000 Retained Earnings 3,000 Service Revenue 2,380 Salaries and Wages Expense 3,400 Offi ce Expense 940 $13,371 $16,916 Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated Depreciation—Equipment $ 8,400 Notes Payable 20,000 Unearned Rent Revenue 9,300 Rent Revenue 60,000 Interest Expense –0– Salaries and Wages Expense 14,000 Instructions Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense. (Omit explanations.)

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.

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?

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?

In a certain grinding operation, the grade of the grinding wheel should be “M” (medium), but the only available wheel is grade “T” (hard). It is desired to make the wheel appear softer by making changes in cutting conditions. What changes would you recommend?

Mustafa’s tax basis in his partnership interest at the beginning of the year was $10,000. If his share of the partnership liabilities increased by $10,000 during the year and his share of partnership income for the year is $3,000, what is his tax basis in his partnership interest at the end of the year?

Heather in an attorney who paid $15,000 to join a country club in order to meet potential clients. This year she also paid $4,300 in greens fees when golfing with clients and an additional $1,700 paid by Heather for meals with clients in the clubhouse. Under what circumstances, if any, can Heather deduct all or part of the $21,000 paid to the country club this year?

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.