Question & Answer

1.      Describe the primary activities in the value chain for an accounting firm that issues audit reports. In your opinion, which primary activities create the most value?

The following expenditures and receipts are related to land, land improvements, and buildings acquired for use in a business enterprise. The receipts are enclosed in parentheses. (a) Money borrowed to pay building contractor (signed a note) $(275,000) (b) Payment for construction from note proceeds 275,000 (c) Cost of land fill and clearing 8,000 (d) Delinquent real estate taxes on property assumed by purchaser 7,000 (e) Premium on 6-month insurance policy during construction 6,000 (f) Refund of 1-month insurance premium because construction completed early (1,000) (g) Architect’s fee on building 22,000 (h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000) 250,000 (i) Commission fee paid to real estate agency 9,000 (j) Installation of fences around property 4,000 (k) Cost of razing and removing building 11,000 (l) Proceeds from salvage of demolished building (5,000) (m) Interest paid during construction on money borrowed for construction 13,000 (n) Cost of parking lots and driveways 19,000 (o) Cost of trees and shrubbery planted (permanent in nature) 14,000 (p) Excavation costs for new building 3,000 Instructions Identify each item by letter and list the items in columnar form, using the headings shown below. All receipt amounts should be reported in parentheses. For any amounts entered in the Other Accounts column, also indicate the account title.

{Planning}Tesha works for a company that pays a year-end bonus in January of each defer the bonus income.  Assume Congress recently passed tax legislation that decreases individual tax rates as of next year.  Does this increase or decrease the benefits of the bonus deferral this year?  What if Congress passed legislation that increased tax rates next year?  Should Tesha ask the company to change its policy this year?  What additional information do you need to answer this question?year (instead of December of the preceding year) to allow employees to

A rotational molding operation is to be used to mold a hollow playing ball out of polypropylene. The ball will be 1.25 ft in diameter and its wall thickness should be 3/32 in. What weight of PP powder should be loaded into the mold in order to meet these specifications? The specific gravity of the PP grade is 0.90, and the density of water is 62.4 lb/ft3 .

The housing for a certain machinery product is made of two components, both aluminum castings. The larger component has the shape of a dish sink, and the second component is a flat cover that is attached to the first component to create an enclosed space for the machinery parts. Sand casting is used to produce the two castings, both of which are plagued by defects in the form of misruns and cold shuts. The foreman complains that the parts are too thin, and that is the reason for the defects. However, it is known that the same components are cast successfully in other foundries. What other explanation can be given for the defects?

On January 1, 2014, Blair Corporation purchased for $500,000 a tract of land (site number 101) with a building. Blair paid a real estate broker’s commission of $36,000, legal fees of $6,000, and title guarantee insurance of $18,000. The closing statement indicated that the land value was $500,000 and the building value was $100,000. Shortly after acquisition, the building was razed at a cost of $54,000. Blair entered into a $3,000,000 fixed-price contract with Slatkin Builders, Inc. on March 1, 2014, for the construction of an office building on land site number 101. The building was completed and occupied on September 30, 2015. Additional construction costs were incurred as follows. Plans, specifi cations, and blueprints $21,000 Architects’ fees for design and supervision 82,000 The building is estimated to have a 40-year life from date of completion and will be depreciated using the 150% declining-balance method. To finance construction costs, Blair borrowed $3,000,000 on March 1, 2014. The loan is payable in 10 annual installments of $300,000 starting on March 1, 2015, plus interest at the rate of 10%. Blair’s weighted-average amounts of accumulated building construction expenditures were as follows. For the period March 1 to December 31, 2014 $1,300,000 For the period January 1 to September 30, 2015 1,900,000 Instructions (a) Prepare a schedule that discloses the individual costs making up the balance in the land account in respect of land site number 101 as of September 30, 2015. (b) Prepare a schedule that discloses the individual costs that should be capitalized in the office building account as of September 30, 2015 Show supporting computations in good form.

Ragatz, Inc., a drug company, reported the following information. The company prepares its financial statements in accordance with GAAP. 2014 (,000) Current liabilities $ 554,114 Convertible subordinated debt 648,020 Total liabilities 1,228,313 Stockholders’ equity 176,413 Net income 58,333 Analysts attempting to compare Ragatz to drug companies that issue debt with detachable warrants may face a challenge due to differences in accounting for convertible debt. Instructions (a) Compute the following ratios for Ragatz, Inc. (Assume that year-end balances approximate annual averages.) (1) Return on assets. (2) Return on common stock equity. (3) Debt to assets ratio. (b) Briefly discuss the operating performance and financial position of Ragatz. Industry averages for these ratios in 2014 were ROA 3.5%; return on equity 16%; and debt to assets 75%. Based on this analysis, would you make an investment in the company’s 5% convertible bonds? Explain. (c) Assume you want to compare Ragatz to an IFRS company like Merck (which issues nonconvertible debt with detachable warrants). Assuming that the fair value of the equity component of Ragatz’s convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Ragatz and Merck?

Explain how the future value of an ordinary annuity interest table is converted to the future value of an annuity due interest table.

Presented below is information related to Rembrandt Inc.’s inventory. (per unit) Skis Boots Parkas Historical cost $190.00 $106.00 $53.00 Selling price 212.00 145.00 73.75 Cost to distribute 19.00 8.00 2.50 Current replacement cost 203.00 105.00 51.00 Normal profi t margin 32.00 29.00 21.25 Determine the following: (a) the two limits to market value (i.e., the ceiling and the floor) that should be used in the lower-of-cost-or-market computation for skis, (b) the cost amount that should be used inthe lower-of-cost-or-market comparison of boots, and (c) the market amount that should be used to valueparkas on the basis of the lower-of-cost-or-market.

Why is the heat transfer factor in arc-welding processes that utilize consumable electrodes greater than in those that use nonconsumable electrodes?

Distinguish among the following: (1) a general checking account, (2) an imprest bank account, and (3) a lockbox account.

Hendricks Corporation purchased trading investment bonds for $50,000 at par. At December 31, Hendricks received annual interest of $2,000, and the fair value of the bonds was $47,400. Prepare Hendricks’ journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)

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

How might differences in presentation of comparative data under GAAP and IFRS affect adoption of IFRS by U.S. companies?

Indicate how each of the following accounts should be classified in the stockholders’ equity section. (a) Common Stock. (b) Retained Earnings. (c) Paid-in Capital in Excess of Par—Common Stock. (d) Treasury Stock. (e) Paid-in Capital from Treasury Stock. (f) Paid-in Capital in Excess of Stated Value—Common Stock. (g) Preferred Stock.

Aggie Corporation made a distribution of $500,000 to Rusty Cedar in partial liquidation of the company on December 31 of this year.  Rusty, an individual, owns 100 percent of Aggie Corporation. The distribution was in exchange for 50 percent of Rusty’s stock in the company. At the time of the distribution, the shares had a fair market value of $200 per share. Rusty’s tax basis in the shares was $50 per share. Aggie had E&P of $8,000,000 at the time of the distribution.

Explain the use of a sinking-fund provision. How can it reduce the investor’s risk? (LO2)

Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.

This year, Paula and Simon (married filing jointly) estimate that their tax liability will be $200,000.  Last year, their total tax liability was $170,000.  They estimate that their tax withholding from their employers will be $175,000.  Are Paula and Simon required to increase their withholdings or make estimated tax payments this year to avoid the underpayment penalty?  If so, how much?

Describe what is meant by qualified business income for purposes of the deduction for qualified business income.

What are the primary characteristics of an annuity?Differentiate between an “ordinary annuity” and an “annuity due.”

Why are real wages likely to be more flexible downwards than money wages?

Parnevik Company has the following securities in its investment portfolio on December 31, 2014 (all securities were purchased in 2014): (1) 3,000 shares of Anderson Co. common stock which cost $58,500, (2) 10,000 shares of Munter Ltd. common stock which cost $580,000, and (3) 6,000 shares of King Company preferred stock which cost $255,000. The Fair Value Adjustment account shows a credit of $10,100 at the end of 2014. In 2015, Parnevik completed the following securities transactions. 1. On January 15, sold 3,000 shares of Anderson’s common stock at $22 per share less fees of $2,150. 2. On April 17, purchased 1,000 shares of Castle’s common stock at $33.50 per share plus fees of $1,980. On December 31, 2015, the market prices per share of these securities were Munter $61, King $40, and Castle $29. In addition, the accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik will not actively trade these securities because the top management intends to hold them for more than one year. Instructions (a) Prepare the entry for the security sale on January 15, 2015. (b) Prepare the journal entry to record the security purchase on April 17, 2015. (c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2015. (d) How should the unrealized gains or losses be reported on Parnevik’s balance sheet?

The problem in a certain thermoforming operation is that there is too much thinning in the walls of the large cup-shaped part. The operation is conventional pressure thermoforming using a positive mold, and the plastic is an ABS sheet with an initial thickness of 3.2 mm. (a) Why is thinning occurring in the walls of the cup? (b) What changes could be made in the operation to correct the problem?

Rode Inc. incurred a net operating loss of $500,000 in 2014. Combined income for 2012 and 2013 was $350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward. Rode expects to return to profitability in 2015.