Question & Answer

Joseph contributed $22,000 in cash and equipment with a tax basis of $5,000 and a fair market value of $11,000 to Berry Hill Partnership in exchange for a partnership interest. a. What is Joseph’s tax basis in his partnership interest? b. What is Berry Hill’s basis in the equipment?

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for dilutive securities, stock-based compensation, and earnings per share.

When an employer makes a below-market loan to an employee, what are tax consequences to the employer and employee?

1. If the firm adjusts the size of its mark-up according to changes in demand and the actions of competitors, could its actions approximate to setting price and output where MC = MR? 2. Some firms set their prices by adding a mark-up to average variable cost (the mark-up would be larger to include an element to cover fixed cost). Why might this make pricing easier for the firm? (See Box 6.7.)

Question: The following data were taken from the balance sheet accounts of Masefield Corporation on December 31, 2013. Current assets $540,000 Debt investments 624,000 Common stock (par value $10) 500,000 Paid-in capital in excess of par 150,000 Retained earnings 840,000 Instructions Prepare the required journal entries for the following unrelated items. (a) A 5% stock dividend is declared and distributed at a time when the market price per share is $39. (b) The par value of the common stock is reduced to $2 with a 5-for-1 stock split. (c) A dividend is declared January 5, 2014, and paid January 25, 2014, in bonds held as an investment. The bonds have a book value of $100,000 and a fair value of $135,000.

If anti-monopoly legislation is effective enough, is there ever any need to prevent mergers from going ahead?

Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2014. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31. Instructions Compute the depreciation expense under the following methods. Each of the following should be considered unrelated. (a) Straight-line depreciation for 2014. (b) Activity method for 2014, assuming that machine usage was 800 hours. (c) Sum-of-the-years’-digits for 2015. (d) Double-declining-balance for 2015.

Solve Problem 22.17 except that the workpiece is 5.0 in wide and the cutter is offset to one side so that the swath cut by the cutter = 1.0 in wide. This is called partial face milling, Figure 22.20(b).

During 2014, Williamson Company changed from FIFO to weighted-average inventory pricing. Pretax income in 2013 and 2012 (Williamson’s first year of operations) under FIFO was $160,000 and $180,000, respectively. Pretax income using weighted-average pricing in the prior years would have been $145,000 in 2013 and $170,000 in 2012. In 2014, Williamson Company reported pretax income (using weighted-average pricing) of $180,000. Show comparative income statements for Williamson Company, beginning with “Income before income tax,” as presented on the 2014 income statement. (The tax rate in all years is 30%.)

Vargo Corp. owes $270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2014. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2016, reduce the principal to $220,000, and reduce the interest rate to 5%, payable annually on December 31. Instructions (a) Prepare the journal entries on Vargo’s books on December 31, 2014, 2015, 2016. (b) Prepare the journal entries on First Trust’s books on December 31, 2014, 2015, 2016.

How does the Fed’s monetary policy affect economic conditions? (LO5)

Using the facts in Problem 51, what is the minimum tax that Pedro should pay to make the tax structure vertically equitable with respect to the amount of tax paid?  This would result in what type of tax rate structure?

Differentiate between “loss carryback” and “loss carryforward.” Which can be accounted for with the greater certainty when it arises? Why?

Briefly describe the plastic extrusion process.

Shawnee Corp., a household appliances dealer, purchases its inventories from various suppliers. Shawnee has consistently stated its inventories at the lower-of-cost (FIFO)-or-market. Instructions Shawnee is considering alternate methods of accounting for the cash discounts it takes when paying its suppliers promptly. From a theoretical standpoint, discuss the acceptability of each of the following methods. (a) Financial income when payments are made. (b) Reduction of cost of goods sold for the period when payments are made. (c) Direct reduction of purchase cost.

Your client, Keith Moreland Leasing Company, is preparing a contract to lease a machine to Souvenirs Corporation for a period of 25 years. Moreland has an investment cost of $365,755 in the machine, which has a useful life of 25 years and no salvage value at the end of that time. Your client is interested in earning an 11% return on its investment and has agreed to accept 25 equal rental payments at the end of each of the next 25 years. Instructions You are requested to provide Moreland with the amount of each of the 25 rental payments that will yield an 11% return on investment.

Prepare the following adjusting entries at August 31 for Walgreens. (a) Interest on notes payable of $300 is accrued. (b) Services performed but unbilled total $1,400. (c) Salaries and wages earned by employees of $700 have not been recorded. (d) Bad debt expense for year is $900. Use the following account titles: Service Revenue, Accounts Receivable, Interest Expense, Interest Payable,Salaries and Wages Expense, Salaries and Wages Payable, Allowance for Doubtful Accounts, and Bad Debt Expense.

Under what circumstances would a higher rate of investment lead to a higher rate of economic growth?

Compare the relative merits of banning certain types of market structure with banning certain types of market behaviour.

Compare the relative merits of using GNY statistics with those of various basic needs indicators when assessing both the level and the rate of a country’s economic development.

A torque wrench is used on a 3/4-10 UNC bolt in an automobile final assembly plant. A torque of 70 ft-lb is generated by the wrench. If the torque coefficient = 0.17, determine the tensile stress in the bolt.

Part 1: Capital leases and operating leases are the two classifications of leases described in FASB pronouncements from the standpoint of the lessee. Instructions (a) Describe how a capital lease would be accounted for by the lessee both at the inception of the lease and during the first year of the lease, assuming the lease transfers ownership of the property to the lessee by the end of the lease. (b) Describe how an operating lease would be accounted for by the lessee both at the inception of the lease and during the first year of the lease, assuming equal monthly payments are made by the lessee at the beginning of each month of the lease. Describe the change in accounting, if any, when rental payments are not made on a straight-line basis. Do not discuss the criteria for distinguishing between capital leases and operating leases. Part 2: Sales-type leases and direct-financing leases are two of the classifications of leases described in FASB pronouncements from the standpoint of the lessor. Instructions Compare and contrast a sales-type lease with a direct-financing lease as follows. (a) Lease receivable. (b) Recognition of interest revenue. (c) Manufacturer’s or dealer’s profit. Do not discuss the criteria for distinguishing between the leases described above and operating leases.

Hui is currently considering investing in municipal bonds that earn 6 percent interest, or in taxable bonds issued by the Coca-Cola Company that pay 8 percent. If Hui’s tax rate is 22 percent, which bond should Hui choose? Which bond should Hui choose if the rate is 32 percent? At what tax rate would Hui be indifferent between the bonds? What strategy is this decision based upon?

On January 1, 2014, Novotna Company purchased $400,000, 8% bonds of Aguirre Co. for $369,114. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2019. Novotna Company uses the effective-interest method to amortize discount or premium. On January 1, 2016, Novotna Company sold the bonds for $370,726 after receiving interest to meet its liquidity needs. Instructions (a) Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale. (b) Prepare the amortization schedule for the bonds. (c) Prepare the journal entries to record the semiannual interest on July 1, 2014, and December 31, 2014. (d) If the fair value of Aguirre bonds is $372,726 on December 31, 2015, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on January 1, 2015, is a debit of $3,375.) (e) Prepare the journal entry to record the sale of the bonds on January 1, 2016.

Why does Congress provide tax deferral on the formation of a corporation?