Question & Answer

Why can convertible bonds be issued by firms at a higher price than other bonds? (LO2)

What has been the trend in noninterest income in recent years? Explain. (LO2)

Each of the following items must be considered in preparing a statement of cash flows for Blackwell Inc. for the year ended December 31, 2014. State where each item is to be shown in the statement, if at all. (a) Plant assets that had cost $18,000 6½ years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $4,000. (b) During the year, 10,000 shares of common stock with a stated value of $20 a share were issued for $41 a share. (c) Uncollectible accounts receivable in the amount of $22,000 were written off against Allowance for Doubtful Accounts. (d) The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of available-for-sale securities for $38,000 cash.

Describe the conditions in which a donation of property to a charity will result in a charitable contribution deduction of fair market value and when it will result in a deduction of the tax basis of the property.

Despite being a publicly traded company only since 1987, Northland Cranberries of Wisconsin Rapids, Wisconsin, is one of the world’s largest cranberry growers. During its short life as a publicly traded corporation, it has engaged in an aggressive growth strategy. As a consequence, the company has taken on significant amounts of both short-term and long-term debt. The following information is taken from recent annual reports of the company.   Instructions (a) Evaluate the company’s liquidity by calculating and analyzing working capital and the current ratio. (b) The discussion of the company’s liquidity, shown below, was provided by the company in the Management Discussion and Analysis section of the company’s annual report. Comment on whether you agree with management’s statements, and what might be done to remedy the situation.

Your aunt recently received the annual report for a company in which she has invested. The report notes that the statements have been prepared in accordance with IFRS. She has also heard that certain terms have special meanings in accounting relative to everyday use. She would like you to explain the meaning of terms she has come across related to accounting. Instructions Access the IASB Framework at the IASB website (http://eifrs.iasb.org/ ). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to prepare responses to the following items. (Provide paragraph citations.) (a) How is “materiality” defined in the framework? (b) Briefly discuss how materiality relates to (1) the relevance of financial information, and (2) completeness. (c) Your aunt observes that under IFRS, the financial statements are prepared on the accrual basis. According to the framework, what does “accrual basis” mean?

The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marksand- Spencer-Annual-report-and-financial-statements-2012.pdf. Instructions Refer to M&S’s financial statements and the accompanying notes to answer the following questions. (a) Using the notes to the consolidated financial statements, determine M&S’s revenue recognition policies. (b) Give two examples of where historical cost information is reported in M&S’s financial statements and related notes. Give two examples of the use of fair value information reported in either the financial statements or related notes. (c) How can we determine that the accounting principles used by M&S are prepared on a basis consistent with those of last year? (d) What is M&S’s accounting policy related to refunds and loyalty schemes? Why does M&S include the accounting for refunds and loyalty schemes in its critical accounting estimates and judgments?

Reed Pentak, a finance major, has been following globalization and made the following observation concerning accounting convergence: “I do not see many obstacles concerning development of a single accounting standard for inventories.” Prepare a response to Reed to explain the main obstacle to achieving convergence in the area of inventory accounting.

Give some other examples of changes in one injection or withdrawal that can affect others.

Explain the types of cash flow characteristics that would cause a firm to hedge interest rate risk by swapping floating-rate payments for fixed payments. Why would some firms avoid the use of interest rate swaps, even when they are highly exposed to interest rate risk? (LO1)

Kobestrongly dislikes SUVs and is appalled that so many are on the road.  He proposes to eliminate the federal income tax and replace it with a $50,000 annual tax per SUV.  Based on the number of SUVs currently owned in the United States, he estimates the tax will generate exactly the amount of tax revenue currently collected from the income tax.  What is wrong with Kobe’s proposal?  What type of forecasting is Kobelikely using?

A 3.0-in-long cylindrical billet whose diameter = 1.5 in is reduced by indirect extrusion to a diameter = 0.375 in. Die angle = 90°. In the Johnson equation, a = 0.8 and b = 1.5. In the flow curve for the work metal, K = 75,000 lb/in2 and n = 0.25. Determine (a) extrusion ratio, (b) true strain (homogeneous deformation), (c) extrusion strain, (d) ram pressure, (e) ram force, and (f) power if the ram speed = 20 in/min.

The diameter of an extruder barrel is 65 mm and its length = 1.75 m. The screw rotates at 55 rev/min. The screw channel depth = 5.0 mm, and the flight angle = 18°. The head pressure at the die end of the barrel is 5.0 x 106 Pa. The viscosity of the polymer melt is given as 100 Pa-s. Find the volume flow rate of the plastic in the barrel.

Assume that as traffic density increases along a given stretch of road, there comes a point when traffic begins to slow down. The following table gives the times taken for a car to travel the stretch of road (in minutes) according to the number of cars entering the road per minute. Cars entering the road 5 6 7 8 9 10 11 Journey time 10 10 11 13 16 22 30 (a)  Copy out the table and add the following rows: (i) total journey time for all cars; (ii) extra journey time as traffic increases by one more car (marginal social time cost); (iii) additional time cost imposed on other road users for each additional car entering the road (marginal external time cost). (See Table 13.3 in the text.) (b)  Assume that time is valued at 10p per minute. On a graph, plot the marginal private time cost (journey time) and the marginal social time cost. (c)  Assume that electronic road pricing is introduced. What charge should be levied when traffic density reaches (i) 6 cars per minute; (ii) 8 cars per minute; (iii) 11 cars per minute? (d)  What additional information would you need in order to work out the socially efficient traffic density on this particular stretch of road?

1.       : Would you expect the structure of a company such as eBay, which operates almost entirely online, to differ from the structure of a bricks-and-mortar company, such as General Motors, which uses the Internet for some things, such as customer service and business-to-business transactions? Why or why not?

Which of the above assumptions do you think would be correct in each of the following cases?                (a)  Supermarket checkout operators.                (b)  Agricultural workers.                (c)  Crane operators.                (d)  Economics teachers.                (e)  Call-centre workers.                (f)   Professional footballers.                (g)  Bar workers.

Gottschalk Company sponsors a defined benefit plan for its 100 employees. On January 1, 2014, the company’s actuary provided the following information. Accumulated other comprehensive loss (PSC) $150,000 Pension plan assets (fair value and market-related asset value) 200,000 Accumulated benefi t obligation 260,000 Projected benefi t obligation 380,000 The average remaining service period for the participating employees is 10 years. All employees are expected to receive benefits under the plan. On December 31, 2014, the actuary calculated that the present value of future benefits earned for employee services rendered in the current year amounted to $52,000; the projected benefit obligation was $490,000; fair value of pension assets was $276,000; the accumulated benefit obligation amounted to $365,000. The expected return on plan assets and the discount rate on the projected benefit obligation were both 10%. The actual return on plan assets is $11,000. The company’s current year’s contribution to the pension plan amounted to $65,000. No benefits were paid during the year. Instructions (a) Determine the components of pension expense that the company would recognize in 2014. (With only one year involved, you need not prepare a worksheet.) (b) Prepare the journal entry to record the pension expense and the company’s funding of the pension plan in 2014. (c) Compute the amount of the 2014 increase/decrease in gains or losses and the amount to be amortized in 2014 and 2015. (d) Indicate the pension amounts reported in the financial statement as of December 31, 2014.

Dave LaCroix recently received a 10 percent capital and profits interest in Cirque Capital LLC in exchange for consulting services he provided. If Cirque Capital had paid an outsider to provide the advice, it would have deducted the payment as compensation expense. Cirque Capital’s balance sheet on the day Dave received his capital interest appears below: Assets: Basis Fair Market Value Cash $ 150,000 $ 150,000 Investments 200,000 700,000 Land 150,000 250,000 Totals $ 500,000 $1,100,000   Liabilities and capital: Nonrecourse liabilities 100,000 100,000 Tatsuki* 200,000 500,000 Robert* 200,000 500,000 Totals $ 500,000 $ 1,100,000

Are there other points in the supply chain/production process where firms could make use of a better understanding of behavioural economics?

You assemble the following information for Seneca Department Store, which computes its inventory under the dollar-value LIFO method. Cost Retail Inventory on January 1, 2014 $216,000 $300,000 Purchases 364,800 480,000 Increase in price level for year 9% Instructions Compute the cost of the inventory on December 31, 2014, assuming that the inventory at retail is (a) $294,300 and (b) $365,150.

What is meant by the paradox of aggregates? Of what importance might they be for how we analyse macroeconomic problems?

What is service cost, and what is the basis of its measurement?

The volume of manufacturing in a period has an effect on income calculated using absorption costing but has no effect on income calculated using variable costing. Explain.

What is the effect on an entity’s breakeven point of a lower income tax rate?

The transactions listed below relate to Wainwright Inc. You are to assume that on the date on which each of the transactions occurred, the corporation’s accounts showed only common stock ($100 par) outstanding, a current ratio of 2.7:1, and a substantial net income for the year to date (before giving effect to the transaction concerned). On that date, the book value per share of stock was $151.53. Each numbered transaction is to be considered completely independent of the others, and its related answer should be based on the effect(s) of that transaction alone. Assume that all numbered transactions occurred during 2015 and that the amount involved in each case is sufficiently material to distort reported net income if improperly included in the determination of net income. Assume further that each transaction was recorded in accordance with generally accepted accounting principles and, where applicable, in conformity with the all-inclusive concept of the income statement. For each of the numbered transactions you are to decide whether it: (a) Increased the corporation’s 2015 net income. (b) Decreased the corporation’s 2015 net income. (c) Increased the corporation’s total retained earnings directly (i.e., not via net income). (d) Decreased the corporation’s total retained earnings directly. (e) Increased the corporation’s current ratio. (f) Decreased the corporation’s current ratio. (g) Increased each stockholder’s proportionate share of total stockholders’ equity. (h) Decreased each stockholder’s proportionate share of total stockholders’ equity. (i) Increased each stockholder’s equity per share of stock (book value). (j) Decreased each stockholder’s equity per share of stock (book value). (k) Had none of the foregoing effects. Instructions List the numbers 1 through 9. Select as many letters as you deem appropriate to reflect the effect(s) of each transaction as of the date of the transaction by printing beside the transaction number the letter(s) that identifies that transaction’s effect(s). Transactions _____ 1. In January, the board directed the write-off of certain patent rights that had suddenly and unexpectedly become worthless. _____ 2. The corporation sold at a profit land and a building that had been idle for some time. Under the terms of the sale, the corporation received a portion of the sales price in cash immediately, the balance maturing at 6-month intervals. _____ 3. Treasury stock originally repurchased and carried at $127 per share was sold for cash at $153 per share. _____ 4. The corporation wrote off all of the unamortized discount and issue expense applicable to bonds that it refinanced in 2015. _____ 5. The corporation called in all its outstanding shares of stock and exchanged them for new shares on a 2-for-1 basis, reducing the par value at the same time to $50 per share. _____ 6. The corporation paid a cash dividend that had been recorded in the accounts at time of declaration. _____ 7. Litigation involving Wainwright Inc. as defendant was settled in the corporation’s favor, with the plaintiff paying all court costs and legal fees. In 2012, the corporation had appropriately established a special contingency for this court action. (Indicate the effect of reversing the contingency only.) _____ 8. The corporation received a check for the proceeds of an insurance policy from the company with which it is insured against theft of trucks. No entries concerning the theft had been made previously, and the proceeds reduce but do not cover completely the loss. _____ 9. Treasury stock, which had been repurchased at and carried at $127 per share, was issued as a stock dividend. In connection with this distribution, the board of directors of Wainwright Inc. had authorized a transfer from retained earnings to permanent capital of an amount equal to the aggregate market value ($153 per share) of the shares issued. No entries relating to this dividend had been made previously.