Question & Answer

Nottebart Corporation has outstanding 10,000 shares of $100 par value, 6% preferred stock and 60,000 shares of $10 par value common stock. The preferred stock was issued in January 2014, and no dividends were declared in 2014 or 2015. In 2016, Nottebart declares a cash dividend of $300,000. How will the dividend be shared by common and preferred stockholders if the preferred is (a) noncumulative and (b) cumulative?

Is a qualifying relative always a qualifying person for purposes of determining head of household filing status?

What happens to partnership losses allocated to partners in excess of the tax basis in their partnership interests?

Daisy Taylor has developed a viable new business idea. Her idea is to design and manufacture cookware that remains cool to the touch when in use. She has had several family members and friends try out her prototype cookware, and they have consistently given the cookware rave reviews. With this encouragement, Daisy started giving serious thought to starting up a business called “Cool Touch Cookware” (CTC). Daisy understands that it will take a few years for the business to become profitable.  She would like to grow her business and perhaps at some point “go public” or sell the business to a large retailer.   Daisy, who is single, decided to quit her full-time job so that she could focus all of her efforts on the new business. Daisy had some savings to support her for a while, but she did not have any other source of income. She was able to recruit Kesha and Aryan to join her as initial equity investors in CTC. Kesha has an MBA and a law degree. She was employed as a business consultant when she decided to leave that job to work with Daisy and Aryan. Aryan owns a very profitable used car business. Because buying and selling used cars takes all his time, he is interested in becoming only a passive investor in CTC. He wanted to get in on the ground floor because he really likes the product and believes CTC will be wildly successful. While CTC originally has three investors, Daisy and Kesha have plans to grow the business and seek more owners and capital in the future.   The three owners agreed that Daisy would contribute land and cash for a 30 percent interest in CTC, Kesha would contribute services (legal and business advisory) for the first two years for a 30 percent interest, and Aryan would contribute cash for a 40 percent interest. The plan called for Daisy and Kesha to be actively involved in managing the business, while Aryan would not be. The three equity owners’ contributions are summarized as follows:     Daisy Contributed FMV Adjusted  Basis Ownership Interest Land (held as investment) $120,000 $70,000 30% Cash$30,000   Kesha Contributed Services $150,000 30%   Aryan Contributed Cash $200,000 40%   Working together, Daisy and Kesha made the following five-year income and loss projections for CTC. They anticipate the business will be profitable and that it will continue to grow after the first five years.   Cool Touch Cookware 5-Year Income and Loss Projections     Year Income (Loss) 1 ($200,000) 2 ($80,000) 3 ($20,000) 4 $60,000 5 $180,000     With plans for Daisy and Kesha to spend a considerable amount of their time working for and managing CTC, the owners would like to develop a compensation plan that works for all parties. Down the road, they plan to have two business locations (in different cities). Daisy would take responsibility for the activities of one location and Kesha would take responsibility for the other. Finally, they would like to arrange for some performance-based financial incentives for each location.  To get the business activities started, Daisy and Kesha determined CTC would need to borrow $800,000 to purchase a building to house its manufacturing facilities and its administrative offices (at least for now). Also, in need of additional cash, Daisy and Kesha arranged to have CTC borrow $300,000 from a local bank and to borrow $200,000 cash from Aryan. CTC would pay Aryan a market rate of interest on the loan, but there was no fixed date for principal repayment.   Required: Identify significant tax and nontax issues or concerns that may differ across entity types and discuss how they are relevant to the choice of entity decision for CTC.   Several issues or concerns exist in forming a new business and choosing an entity. Some of the non-tax issues are:

What are the significant differences in the equipment and operating procedures between injection molding of thermoplastics and injection molding of thermosets?

Presented in Illustration 21-31 are the financial statement disclosures from the January 31, 2012, annual report of Wal-Mart Stores, Inc. Instructions Answer the following questions related to these disclosures. (a) What is the total obligation under capital leases at January 31, 2012, for Wal-Mart? (b) What is the total rental expense reported for leasing activity for the year ended January 31, 2012, for Wal-Mart? (c) Estimate the off-balance-sheet liability due to Wal-Mart’s operating leases at January 31, 2012.

Besides flat rolling and shape rolling, identify some additional bulk forming processes that use rolls to effect the deformation

How are state-sponsored 529 educational savings plans taxed if investment returns are used for educational purposes? Are the returns taxed differently if they are not ultimately used to pay for education costs?

Why are the molds generally more costly in mechanical thermoforming than in pressure or vacuum thermoforming?

Explain how the Treasury uses the primary market to obtain adequate funding from the U.S. government. (LO1)

Daria is considering investing in one of two partnerships that will build, own, and operate a hotel. One is located in Canada and one is located in Arizona. Assuming both investments will generate the same before-tax rate of return, which entity should Daria invest in when considering the after-tax consequences of the investment?  Assume Daria’s marginal tax rate is 37 percent, she will be a passive investor in the business, and she will report the flow-through income from either entity on her tax return. Explain (ignore any foreign tax credit issues).

Gator Inc. reported taxable income of $1,000,000 this year and paid federal income taxes of $210,000. Included in the company’s computation of taxable income is gain from the sale of a depreciable asset of $50,000. The income tax basis of the asset was $100,000. The E&P basis of the asset using the alternative depreciation system was $175,000. Compute Gator’s current E&P.

Describe the dilemma of securities firms that served as underwriters for Facebook’s IPOs when attempting to satisfy Facebook and the institutional investors that invested in Facebook’s stock. Do you think that those securities firms satisfied Facebook or the investors in the IPO? Explain. (LO3)

A cylindrical part is warm upset forged in an open die. The initial diameter is 45 mm and the initial height is 40 mm. The height after forging is 25 mm. The coefficient of friction at the die-work interface is 0.20. The yield strength of the work material is 285 MPa, and its flow curve is defined by a strength coefficient of 600 MPa and a strain-hardening exponent of 0.12. Determine the force in the operation (a) just as the yield point is reached (yield at strain = 0.002), (b) at a height of 35 mm, (c) at a height of 30 mm, and (d) at a height of 25 mm. Use of a spreadsheet calculator is recommended

What accounting treatment is normally given to the following items in accounting for plant assets? (a) Additions. (b) Major repairs. (c) Improvements and replacements.

Ames Quartet Inc. factors receivables with a carrying amount of $200,000 to Joffrey Company for $160,000 on a with recourse basis. Instructions The recourse provision has a fair value of $1,000. This transaction should be recorded as a sale. Prepare the appropriate journal entry to record this transaction on the books of Ames Quartet Inc.

To help pay for the city’s new stadium, the city of Birmingham recently enacted a 1 percent surcharge on hotel rooms. Is this a tax?  Why or why not?

If the Bank of England issues £1 million of extra bonds and buys back £1 million of Treasury bills, will there automatically be a reduction in credit by a set multiple of £1 million?

Charlie was hired by Ajax this year as a corporate executive and a member of the board of directors. During the current year, Charlie received the following payments or benefits paid on his behalf.

Describe the Financial Services Modernization Act of 1999. Explain how it affected commercial bank operations and how it changed the competitive landscape among financial institutions. (LO2)

Define manufacturing engineering.

Consider the arguments from the perspective of an advanced country for and against protecting its industries from imports of manufactures from developing countries.

The upper and lower control limits for a p chart are: LCL = 0.19 and UCL = 0.24. Determine the sample size n that is used with this control chart.

What are the five principal parameters of a grinding wheel?

Aruna, a sole proprietor, wants to sell two assets that she no longer needs for her business. Both assets qualify as §1231 assets. The first is machinery and will generate a $10,000 §1231 loss on the sale. The second is land that will generate a $7,000 §1231 gain on the sale. Aruna’s ordinary marginal tax rate is 32 percent. a. Assuming she sells both assets in December of year 1 (the current year), what effect will the sales have on Aruna’s tax liability? b. Assuming that Aruna sells the land in December of year 1 and the machinery in January of year 2, what effect will the sales have on Aruna’s tax liability for each year? c. Explain why selling the assets in separate years will result in greater tax savings for Aruna.