Question & Answer

The partner in charge of the Kappeler Corporation audit comes by your desk and leaves a letter he has started to the CEO and a copy of the cash flow statement for the year ended December 31, 2014. Because he must leave on an emergency, he asks you to finish the letter by explaining: (1) the disparity between net income and cash flow, (2) the importance of operating cash flow, (3) the renewable source(s) of cash flow, and (4) possible suggestions to improve the cash position.   Date President Kappeler, CEO Kappeler Corporation 125 Wall Street Middleton, Kansas 67458 Dear Mr. Kappeler: I have good news and bad news about the financial statements for the year ended December 31, 2014. The good news is that net income of $100,000 is close to what we predicted in the strategic plan last year, indicating strong performance this year. The bad news is that the cash balance is seriously low. Enclosed is the Statement of Cash Flows, which best illustrates how both of these situations occurred simultaneously . . . Instructions Complete the letter to the CEO, including the four components requested by your boss.

What are the scientific and technical disciplines associated with nanoscience and nanotechnology?

Sketch a person’s indifference map for two goods X and Y. Mark the optimum consumption point. Now illustrate the following (you might need to draw a separate diagram for each): (a)  A rise in the price of good X, but no change in the price of good Y. (b)  A shift in the person’s tastes from good Y to good X. (c)  A fall in the person’s income and a fall in the price of good Y, with the result that the consumption of Y remains constant (but that of X falls).

In Figures 2.21 and 2.22, the initial change in price was caused by a shift in the demand curve. Redraw these two diagrams to illustrate the situation where the initial change in price was caused by a shift in the supply curve (as would be the case in the wheat market that we have just considered).

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

What is accuracy in measurement?

Brecker Company leases an automobile with a fair value of $10,906 from Emporia Motors, Inc., on the following terms: 1. Non-cancelable term of 50 months. 2. Rental of $250 per month (at end of each month). (The present value at 1% per month is $9,800.) 3. Estimated residual value after 50 months is $1,180. (The present value at 1% per month is $715.) Brecker Company guarantees the residual value of $1,180. 4. Estimated economic life of the automobile is 60 months. 5. Brecker Company’s incremental borrowing rate is 12% a year (1% a month). It is impracticable to determine Emporia’s implicit rate. Instructions (a) What is the nature of this lease to Brecker Company? (b) What is the present value of the minimum lease payments? (c) Record the lease on Brecker Company’s books at the date of inception. (d) Record the first month’s depreciation on Brecker Company’s books (assume straight-line). (e) Record the first month’s lease payment.

Clarence Weatherspoon, a super salesman contemplating retirement on his fifty-fifth birthday, decides to create a fund on an 8% basis that will enable him to withdraw $20,000 per year on June 30, beginning in 2018 and continuing through 2021. To develop this fund, Clarence intends to make equal contributions on June 30 of each of the years 2014–2017. Instructions (a) How much must the balance of the fund equal on June 30, 2017, in order for Clarence Weatherspoon to satisfy his objective? (b) What are each of Clarence’s contributions to the fund?

Under what circumstances is relative sales value an appropriate basis for determining the price assigned to inventory?

Five Satins Company purchased a piece of equipment at the beginning of 2011. The equipment cost $430,000. It has an estimated service life of 8 years and an expected salvage value of $70,000. The sum-of-the-years’-digits method of depreciation is being used. Someone has already correctly prepared a depreciation schedule for this asset. This schedule shows that $60,000 will be depreciated for a particular calendar year. Instructions Show calculations to determine for what particular year the depreciation amount for this asset will be $60,000.

Nieland Industries had one patent recorded on its books as of January 1, 2014. This patent had a book value of $288,000 and a remaining useful life of 8 years. During 2014, Nieland incurred research and development costs of $96,000 and brought a patent infringement suit against a competitor. On December 1, 2014, Nieland received the good news that its patent was valid and that its competitor could not use the process Nieland had patented. The company incurred $85,000 to defend this patent. At what amount should patent(s) be reported on the December 31, 2014, balance sheet, assuming monthly amortization of patents?

To what extent do the costs used to value inventories for external financial reporting support internal management decisions on issues such as whether to accept a special, one-off order or whether to outsource part or all of the production process?

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

On January 1, 2014, Doug Nelson Co. leased a building to Patrick Wise Inc. The relevant information related to the lease is as follows. 1. The lease arrangement is for 10 years. 2. The leased building cost $4,500,000 and was purchased for cash on January 1, 2014. 3. The building is depreciated on a straight-line basis. Its estimated economic life is 50 years with no salvage value. 4. Lease payments are $275,000 per year and are made at the end of the year. 5. Property tax expense of $85,000 and insurance expense of $10,000 on the building were incurred by Nelson in the first year. Payment on these two items was made at the end of the year. 6. Both the lessor and the lessee are on a calendar-year basis. Instructions (a) Prepare the journal entries that Nelson Co. should make in 2014. (b) Prepare the journal entries that Wise Inc. should make in 2014. (c) If Nelson paid $30,000 to a real estate broker on January 1, 2014, as a fee for finding the lessee, how much should be reported as an expense for this item in 2014 by Nelson Co.?

Eastman Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. Corporate records disclose the following. Inventory (beginning) $ 80,000 Sales revenue $415,000 Purchases 290,000 Sales returns 21,000 Purchase returns 28,000 Gross profi t % based on net selling price 35% Merchandise with a selling price of $30,000 remained undamaged after the fire, and damaged merchandise has a net realizable value of $8,150. The company does not carry fire insurance on its inventory. Instructions Prepare a formal labeled schedule computing the fire loss incurred. (Do not use the retail inventory method.)

Presented on page 634 are three different and unrelated situations involving depreciation accounting. Answer the question(s) at the end of each situation. Situation I: Recently, Broderick Company experienced a strike that affected a number of its operating plants. The controller of this company indicated that it was not appropriate to report depreciation expense during this period because the equipment did not depreciate and an improper matching of costs and revenues would result. She based her position on the following points. 1. It is inappropriate to charge the period with costs for which there are no related revenues arising from production. 2. The basic factor of depreciation in this instance is wear and tear. Because equipment was idle, no wear and tear occurred. Instructions Comment on the appropriateness of the controller’s comments. Situation II: Etheridge Company manufactures electrical appliances, most of which are used in homes. Company engineers have designed a new type of blender which, through the use of a few attachments, will perform more functions than any blender currently on the market. Demand for the new blender can be projected with reasonable probability. In order to make the blenders, Etheridge needs a specialized machine that is not available from outside sources. It has been decided to make such a machine in Etheridge’s own plant. Instructions (a) Discuss the effect of projected demand in units for the new blenders (which may be steady, decreasing, or increasing) on the determination of a depreciation method for the machine. (b) What other matters should be considered in determining the depreciation method? (Ignore income tax considerations.) Situation III: Haley Paper Company operates a 300-ton-per-day kraft pulp mill and four sawmills in Wisconsin. The company is in the process of expanding its pulp mill facilities to a capacity of 1,000 tons per day and plans to replace three of its older, less efficient sawmills with an expanded facility. One of the mills to be replaced did not operate for most of 2014 (current year), and there are no plans to reopen it before the new sawmill facility becomes operational. In reviewing the depreciation rates and in discussing the salvage values of the sawmills that were to be replaced, it was noted that if present depreciation rates were not adjusted, substantial amounts of plant costs on these three mills would not be depreciated by the time the new mill came on stream. Instructions What is the proper accounting for the four sawmills at the end of 2014?

Describe the circumstances under which distributions from defined contribution plan are penalized. What are the penalties?

Kemper Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2015 at a cost of $1,000,000. At December 31, 2014, the raw materials to be purchased have a market value of $950,000. Prepare any necessary December 31, 2014, entry.

When must an S corporation make estimated tax payments?

Hatch Company has two classes of capital stock outstanding: 8%, $20 par preferred and $5 par common. At December 31, 2014, the following accounts were included in stockholders’ equity. Preferred Stock, 150,000 shares $ 3,000,000 Common Stock, 2,000,000 shares 10,000,000 Paid-in Capital in Excess of Par—Preferred Stock 200,000 Paid-in Capital in Excess of Par—Common Stock 27,000,000 Retained Earnings 4,500,000 The following transactions affected stockholders’ equity during 2015. Jan. 1 30,000 shares of preferredstock issued at $22 per share. Feb. 1 50,000 shares of common stock issued at $20 per share. June 1 2-for-1 stock split (par value reduced to $2.50).July 1 30,000 shares of common treasury stock purchased at $10 per share. Hatch uses the cost method.Sept. 15 10,000 shares of treasury stock reissuedat $11 per share. Dec. 31 The preferred dividend is declared, and a common dividend of 50¢ per share is declared. Dec. 31 Net income is $2,100,000. Instructions Prepare the stockholders’ equity section for Hatch Company at December 31, 2015. Show all supporting computations.

Create a balance sheet for a typical bank, showing its main liabilities (sources of funds) and assets (uses of funds). (LO2, LO3)

Mayaguez Corporation provides its officers with bonuses based on net income. For 2014, the bonuses total $350,000 and are paid on February 15, 2015. Prepare Mayaguez’s December 31, 2014, adjusting entry and the February 15, 2015, entry.

Uhura Company has decided to expand its operations. The bookkeeper recently completed the balance sheet presented below in order to obtain additional funds for expansion.   Intangible assets Goodwill 80,000 Cash surrender value of life insurance 90,000 Prepaid expenses 12,000 Current liabilities Accounts payable 135,000 Notes payable (due next year) 125,000 Pension obligation 82,000 Rent payable 49,000 Premium on bonds payable 53,000 Long-term liabilities Bonds payable 500,000 Stockholders’ equity Common stock, $1.00 par, authorized 400,000 shares, issued 290,000 290,000 Additional paid-in capital 160,000 Retained earnings ? Instructions Prepare a revised balance sheet given the available information. Assume that the accumulated depreciation balance for the buildings is $160,000 and for the equipment, $105,000. The allowance for doubtful accounts has a balance of $17,000. The pension obligation is considered a long-term liability.

What would the isoquant map look like if there were (a) continuously increasing returns to scale; (b) continuously decreasing returns to scale?

A machinability rating is to be determined for a new work material using the cutting speed for a 60- min tool life as the basis of comparison. For the base material (B1112 steel), test data resulted in Taylor equation parameter values of n = 0.29 and C = 500, where speed is in m/min and tool life is min. For the new material, the parameter values were n = 0.21 and C = 400. These results were obtained using cemented carbide tooling. (a) Compute a machinability rating for the new material. (b) Suppose the machinability criterion were the cutting speed for a 10-min tool life rather than the present criterion. Compute the machinability rating for this case. (c) What do the results of the two calculations show about the difficulties in machinability measurement?