Question & Answer

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

Dividends are sometimes said to have been paid “out of retained earnings.” What is the error, if any, in that statement?

In terms of the UK economy, are the following net injections, net withdrawals or neither? If there is uncertainty, explain your assumptions. (a)  Firms are forced to take a cut in profits in order to give a pay rise. (b)  Firms spend money on research. (c)  The government increases personal tax allowances. (d)  The general public invests more money in banks and building societies. (e)  UK investors earn higher dividends on overseas investments. (f)   The government purchases US military aircraft. (g)  People draw on their savings to finance holidays abroad. (h)  People draw on their savings to finance holidays in the UK. (i)   The government runs a budget deficit (spends more than it receives in tax revenues) and finances it by borrowing from the general public. (j)   The government runs a budget deficit and finances it through new money created by the central bank.

Using the theory of present bias, provide an economic rationale for government regulation of the payday loan market.

(Threshold Concept 14) 1. Give some examples of supply-side policy. (see Chapter 23 for some ideas if you are stuck). (Threshold Concept 14) 2. If there is an increase in aggregate supply, will this result in an increase in potential growth?

For what reasons may the NAIRU increase?

What are the two basic timing strategies? What is the intent of each?

{Research}  Using the Internal Revenue Code, describe two deductions for AGI that are not discussed in this chapter.

When a corporation has NOL carryovers arising in different years, can it choose which NOL carryover to deduct first in a given year? Explain.

In a surface grinding operation performed on hardened plain carbon steel, the grinding wheel has a diameter = 200 mm and width = 25 mm. The wheel rotates at 2400 rev/min, with a depth of cut (infeed) = 0.05 mm/pass and a crossfeed = 3.50 mm. The reciprocating speed of the work is 6 m/min, and the operation is performed dry. Determine (a) length of contact between the wheel and the work and (b) volume rate of metal removed. (c) If there are 64 active grits/cm2 of wheel surface, estimate the number of chips formed per unit time. (d) What is the average volume per chip? (e) If the tangential cutting force on the work = 25 N, compute the specific energy in this operation?

Ray Albertson is 72 years old and lives by himself in an apartment in Salt Lake City.Ray’s gross income for the year is $3,000.Ray’s support is provided as follows:Himself (11 percent), his daughters Diane (20 percent) and Karen (15percent), his sons Mike (20 percent) and Kenneth (10 percent), his friend Milt (14 percent), and his cousin Henry (12 percent).Absent a multiple support agreement, of the parties mentioned in the problem, who may claim adependency exemption for Ray as a qualifying relative

Using a graph similar to Figure 20.7, trace through the effect of a reduction in aggregate demand.

If a firm faces a shortage of workers with very specific skills, it may decide to undertake the necessary training itself. If on the other hand it faces a shortage of unskilled workers it may well offer a small wage increase in order to obtain the extra labour. In the first case it is responding to an increase in demand for labour by attempting to shift the supply curve. In the second case it is merely allowing a movement along the supply curve. Use a demand and supply diagram to illustrate each case. Given that elasticity of supply is different in each case, do you think that these are the best policies for the firm to follow? What would happen to wages and economic rent if it used the second policy in the first case?

What is the difference between a pattern and a core in sand molding?

Charlie Brown, controller for Kelly Corporation, is preparing the company’s income statement at year-end. He notes that the company lost a considerable sum on the sale of some equipment it had decided to replace. Since the company has sold equipment routinely in the past, Brown knows the losses cannot be reported as extraordinary. He also does not want to highlight it as a material loss since he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more depreciation during the assets’ lives, the losses would not be so great. Since depreciation is included among the company’s operating expenses, he wants to report the losses along with the company’s expenses, where he hopes it will not be noticed. Instructions (a) What are the ethical issues involved? (b) What should Brown do?

Maple Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Jian, who immediately elected S corporation status.  On December 31 of the current year, Maple distributed $30,000 cash to Jian.  What are the amount and character of gain Jian must recognize on the distribution in each of the following alternative scenarios?

Discuss briefly the three approaches that have been suggested for reporting changes in accounting principles.

Griseta & Dubel Inc. was formed early this year to sell merchandise credits to merchants who distribute the credits free to their customers. For example, customers can earn additional credits based on the dollars they spend with a merchant (e.g., airlines and hotels). Accounts for accumulating the credits and catalogs illustrating the merchandise for which the credits may be exchanged are maintained online. Centers with inventories of merchandise premiums have been established for redemption of the credits. Merchants may not return unused credits to Griseta & Dubel. The following schedule expresses Griseta & Dubel’s expectations as to percentages of a normal month’s activity that will be attained. For this purpose, a “normal month’s activity” is defined as the level of operations expected when expansion of activities ceases or tapers off to a stable rate. The company expects that this level will be attained in the third year and that sales of credits will average $6,000,000 per month throughout the third year. Actual Merchandise Credit Credit Sales Premium Purchases Redemptions Month Percent Percent Percent 6th 30% 40% 10% 12th 60 60 45 18th 80 80 70 24th 90 90 80 30th 100 100 95 Griseta & Dubel plans to adopt an annual closing date at the end of each 12 months of operation. Instructions (a) Discuss the factors to be considered in determining when revenue should be recognized in measuring the income of a business enterprise. (b) Discuss the accounting alternatives that should be considered by Griseta & Dubel Inc. for the recognition of its revenues and related expenses. (c) For each accounting alternative discussed in (b), give balance sheet accounts that should be used and indicate how each should be classified.

Compare and contrast an employee’s FICA tax payment responsibilities with those of a self-employed taxpayer.

One of the inspectors in the quality control department has frequently used the Brinell and Rockwell hardness tests, for which equipment is available in the company. He claims that all hardness tests are based on the same principle as the Brinell test, which is that hardness is always measured as the applied load divided by the area of the impressions made by an indentor. (a) Is he correct? (b) If not, what are some of the other principles involved in hardness testing, and what are the associated tests?

Why cannot a direct conversion be made between the ductility measures of elongation and reduction in area using the assumption of constant volume?

If people are generally risk averse, why do so many people around the world take part in national lotteries?

Remuneration disclosure The ASX Corporate Governance Principles and Recommendations set out rules to deal with enhanced management performance and effectiveness and requires disclosure of the process for performance evaluation of the board, its committees and individual directors and key executives. However, the outcomes of individual evaluations are not required to be disclosed.   Required Why do you think such a recommendation is included in the guidelines? (LO5)

Assume a free-floating exchange rate. Draw a diagram like Figure 25.6, only this time show an initial equilibrium national income with a balance of payments surplus.          (a)  Mark the size of the surplus.          (b)  Show the resulting shifts in the (X–M) and the E curves.          (c)  Mark the eventual equilibrium.          (d)  Show the size of the income and substitution effects (of the change in the exchange rate).          (e)  Under what circumstances will the income effect be (i) ‘desirable’; (ii) ‘undesirable’?          (f)   Could the income effect of the change in the exchange rate ever be larger than the substitution effect?

How can earnings management affect the quality of earnings?