Question & Answer

Explain five management competencies and the trend toward bosslessness in today’s world.

Why might it present problems for a firm if managers are overconfident? Can you think of any reason why CEOs might be more inclined to optimism than the population average?

How would raising interest rates in this way affect the balance between the current and financial accounts of the balance of payments?

Fairbanks Corporation purchased 400 ordinary shares of Sherman Inc. as a trading investment for $13,200. During the year, Sherman paid a cash dividend of $3.25 per share. At year-end, Sherman shares were selling for $34.50 per share. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment.

What is Circular 230?

What quantitative materiality test is applied to determine whether a segment is significant enough to warrant separate disclosure?

What are the differences, if any, between the legal and tax classifications of business entities?

Can a bank simultaneously maximize return and minimize credit risk? If not, what can it do instead? (LO4)

In a turning operation on low carbon steel (175 BHN), cutting speed = 400 ft/min, feed = 0.010 in/rev, and depth of cut = 0.075 in. The lathe has a mechanical efficiency = 0.85. Based on the unit horsepower values in Table 21.2, determine (a) the horsepower consumed by the turning operation and (b) the horsepower that must be generated by the lathe.

To what extent do (a) income tax, (b) VAT and (c) a poll tax meet the various requirements for a good tax system?

Explain the difference between a freely floating system and a dirty float. Which type is more representative of the U.S. system? (LO1)

1.      Vote in support of Hank Schmidt’s decision to hold each individual member accountable for the entire project. The professor clearly stated his policy at the beginning of the semester, and the students should have been more vigilant. The committee should not undercut a professor’s explicit policy.

Adam elects the accrual method of accounting for his business. What amount of deductions does Adam recognize this year for the following transactions?  a) Adam guarantees that he will refund the cost of any goods sold to a client if the goods fail within a year of delivery. In December of this year, Adam agreed to refund $2,400 to clients, and he expects to make payment in January of next year. b) On December 1 of this year, Adam paid $480 for a one-year contract with CleanUP Services to clean his store. The agreement calls for services to be provided on a weekly basis. c) Adam was billed $240 for annual personal property taxes on his delivery van. Because this was the first time Adam was billed for these taxes, he did not make payment until January of next year. However, he considers the amounts immaterial.

Gottlieb Co. owes $199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some property and cancel the entire debt. The property has a book value of $90,000 and a fair value of $140,000. Instructions (a) Prepare the journal entry on Gottlieb’s books for debt restructure. (b) Prepare the journal entry on Ceballos’s books for debt restructure.

Adriana Co., with annual net sales of $5 million, maintains a markup of 25% based on cost. Adriana’s expenses average 15% of net sales. What is Adriana’s gross profit and net profit in dollars?

Sandra would like to organize LAB (a legal corporation) as either an S corporation or a C corporation for tax purposes. In either form, the entity is expected to generate an 8 percent annual before-tax return on a $500,000 investment. Sandra’s marginal income tax rate is 37 percent and her tax rate on qualified dividends and net capital gains is 20 percent. LAB’s income is not qualified business income (QBI) so Sandra is not allowed to claim the QBI deduction. Assume that LAB will distribute all of its earnings after entity-level taxes every year. Ignore the additional Medicare tax and the net investment income tax when computing your answers.   a. How much cash after taxes would Sandra receive from her investment in the first year if LAB is organized as either an S corporation or a C corporation?  b. What is the overall tax rate on LAB’s income in first year if LAB is organized as an S corporation or as a C corporation? c. At a high level, explain the differences between entity types in after-tax cash flow and overall tax rate on business income.

Explain why the stock price of a firm may rise when the firm announces that it is repurchasing its shares. (LO4)

Neither depreciation on replacement cost nor depreciation adjusted for changes in the purchasing power of the dollar has been recognized as generally accepted accounting principles for inclusion in the primary financial statements. Briefly present the accounting treatment that might be used to assist in the maintenance of the ability of a company to replace its productive capacity.

Assuming Alexa receives $20,000 in gross rental receipts, answer the following questions:

Under what circumstances would a rise in income tax act as (a) a disincentive and (b) an incentive to effort?

How would the shifts in the SRAS curve be affected if, in response to rising output levels, firms increased their investment expenditures?

Dejan owns stock in two S corporations, Blue and Green. He actively participates in the management of Blue but maintains ownership in Green only as a passive investor.  Dejan has no other business investments.  Both Blue and Green anticipate a loss this year, and Dejan’s basis in his stock of both corporations is $0. All else equal, if Dejan plans on making a capital contribution to at least one of the corporations this year, to which firm should he contribute in order to increase his chances of deducting the loss allocated to him from the entity?  Why?

List two examples of non-linear cost functions and describe a method of developing a cost function for each one.

What is the danger of issuing too much stock? What is the role of the securities firm that serves as the underwriter, and how can it ensure that the firm does not issue too much stock? (LO2, LO4)

Cardinals Corporation purchased a computer on December 31, 2013, for $105,000, paying $30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2014. An assumed interest rate of 10% is implicit in the purchase price. Instructions (Round to two decimal places.) (a) Prepare the journal entry(ies) at the date of purchase. (b) Prepare the journal entry(ies) at December 31, 2014, to record the payment and interest (effectiveinterest method employed). (c) Prepare the journal entry(ies) at December 31, 2015, to record the payment and interest (effectiveinterest method employed). E10-16 (Asset Acquisition) Hayes Industries purchased the following assets and constructed a building as well. All this was done during the current year. Assets 1 and 2: These assets were purchased as a lump sum for $100,000 cash. The following informationwas gathered. Depreciation to Initial Cost on Date on Seller’s Book Value on Description Seller’s Books Books Seller’s Books Appraised Value Machinery $100,000 $50,000 $50,000 $90,000 Equipment 60,000 10,000 50,000 30,000 Asset 3: This machine was acquired by making a $10,000 down payment and issuing a $30,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $15,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $35,900. Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.) Facts concerning the trade-in are as follows. Cost of machinery traded $100,000 Accumulated depreciation to date of sale 40,000 Fair value of machinery traded 80,000 Cash received 10,000 Fair value of machinery acquired 70,000 Asset 5: Equipment was acquired by issuing 100 shares of $8 par value common stock. The stock had a market price of $11 per share. Construction of Building: A building was constructed on land purchased last year at a cost of $150,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows. Date Payment 2/1 $120,000 6/1 360,000 9/1 480,000 11/1 100,000 To finance construction of the building, a $600,000, 12% construction loan was taken out on February 1. The loan was repaid on November 1. The firm had $200,000 of other outstanding debt during the year at a borrowing rate of 8%. Instructions Record the acquisition of each of these assets.