Question & Answer

Recording transactions in the accounting system requires knowledge of the important characteristics of the elements of financial statements, such as assets and liabilities. In addition, accountants must understand the inherent uncertainty in accounting measures and distinctions between related accounting concepts that are important in evaluating the effects of transactions on the financial statements. Instructions Access the IASB Framework at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following items. (Provide paragraph citations.) (a) Provide the definition of an asset and discuss how the economic benefits embodied in an asset might flow to a company. (b) Provide the definition of a liability and discuss how a company might satisfy a liability. (c) What is “accrual basis”? How do adjusting entries illustrate application of the accrual basis?

The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marksand- Spencer-Annual-report-and-financial-statements-2012.pdf. Instructions Refer to M&S’s financial statements and the accompanying notes to answer the following questions. (a) What were M&S’s total assets at 31 March 2012? At 2 April 2011? (b) How much cash (and cash equivalents) did M&S have on 31 March 2012? (c) What were M&S’s selling and marketing expenses in 2012? In 2011? (d) What were M&S’s revenues in 2012? In 2011? (e) Using M&S’s financial statements and related notes, identify items that may result in adjusting entries for prepayments and accruals. (f) What were the amounts of M&S’s depreciation and amortization expense in 2011 and 2012?

The interest rate on a one-year loan can be decomposed into a one-year risk-free (free from default risk) component and a risk premium that reflects the potential for default on the loan in that year. A change in economic conditions can affect the risk-free rate and the risk premium. The risk-free rate is usually affected by changing economic conditions to a greater degree than the risk premium. Explain how a weaker economy will likely affect the risk-free component, the risk premium, and the overall cost of a one-year loan obtained by (1) the Treasury, and (2) a corporation. Will the change in the cost of borrowing be more pronounced for the Treasury or for the corporation? Why? (LO2)

What are the two main categories of printed circuit board assemblies, as distinguished by the method of attaching components to the board?

1.    : What strategic plans could the college or university at which you are taking this management course adopt to compete for students in the marketplace? Would these plans depend on the school’s goals?

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?

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:

Data for Anita Baker Company are presented in E23-18. Instructions Prepare entries in journal form for all adjustments that should be made on a worksheet for a statement of cash flows.

Explain why systemic risk is a source of concern in the bond and other debt markets. Also explain how the Financial Reform Act of 2010 was intended to reduce systemic risk. (LO2)

Will this type of behaviour tend to lead to profit maximisation?

Kehoe, Inc. owes $40,000 to Ritter Company. How much would Kehoe have to pay each year if the debt is retired through four equal payments (made at the end of the year), given an interest rate on the debt of 12%? (Round to two decimal places.)

Use the loanable funds framework to explain how European economic conditions might affect U.S. interest rates. (LO1, LO2)

Streep Factory provides a 2-year warranty with one of its products which was first sold in 2014. In that year, Streep spent $70,000 servicing warranty claims. At year-end, Streep estimates that an additional $400,000 will be spent in the future to service warranty claims related to 2014 sales. Prepare Streep’s journal entry to record the $70,000 expenditure and the December 31 adjusting entry, assuming the expenditures are inventory costs.

Amirante Inc. manufactures an X-ray machine with an estimated life of 12 years and leases it to Chambers Medical Center for a period of 10 years. The normal selling price of the machine is $411,324, and its guaranteed residual value at the end of the noncancelable lease term is estimated to be $15,000. The hospital will pay rents of $60,000 at the beginning of each year and all maintenance, insurance, and taxes. Amirante Inc. incurred costs of $250,000 in manufacturing the machine and $14,000 in negotiating and closing the lease. Amirante Inc. has determined that the collectibility of the lease payments is reasonably predictable, that there will be no additional costs incurred, and that the implicit interest rate is 10%. Instructions (a) Discuss the nature of this lease in relation to the lessor and compute the amount of each of the following items. (1) Lease receivable at inception of the lease. (2) Sales price. (3) Cost of sales. (b) Prepare a 10-year lease amortization schedule. (c) Prepare all of the lessor’s journal entries for the first year.

What decision approach would you have used if you were Tate? Why?

The flow curve parameters for the aluminum alloy of Problem 19.29 are: K = 240 MPa and n = 0.16. If the die angle in this operation = 90°, and the corresponding Johnson strain equation has constants a = 0.8 and b = 1.5, compute the maximum force required to drive the ram forward at the start of extrusion.

1.    Would the task environment for a wireless provider such as Verizon Wireless contain the same elements as that for a government welfare agency? Discuss the similarities and differences.

Sasha owes additional tax imposed in a recent audit.  In addition to the tax, will she be assessed other amounts?  If so, how will these amounts be determined?

1. The income–consumption curve in Figure 4.12 is drawn as positively sloped at low levels of income. Why? 2. Show the effect of a rise in income on the demand for X and Y where this time Y is the inferior good and X is the normal good. Is the income–consumption curve positively or negatively sloped?

1.    : Based on your knowledge of the following companies, how effective would you say any one of the following acquisitions was in terms of creating synergy? Why?    a) T-Mobile’s merger with Sprint    b) Google’s purchase of YouTube    c) PepsiCo’s purchase of Frito-Lay

Give examples of how the government intervenes to protect the interests of dependants from bad economic decisions taken on their behalf.

The U.S. Securities and Exchange Commission (SEC) was created in 1934 and consists of five commissioners and a large professional staff. The SEC professional staff is organized into five divisions and several principal offices. The primary objective of the SEC is to support fair securities markets. The SEC also strives to foster enlightened stockholder participation in corporate decisions of publicly traded companies. The SEC has a significant presence in financial markets, the development of accounting practices, and corporation-shareholder relations, and has the power to exert influence on entities whose actions lie within the scope of its authority. Instructions (a) Explain from where the Securities and Exchange Commission receives its authority. (b) Describe the official role of the Securities and Exchange Commission in the development of financial accounting theory and practices. (c) Discuss the interrelationship between the Securities and Exchange Commission and the Financial Accounting Standards Board with respect to the development and establishment of financial accounting theory and practices.

Sabonis Cosmetics Co. purchased machinery on December 31, 2013, paying $50,000 down and agreeing to pay the balance in four equal installments of $40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price. Instructions Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates. (Round answers to the nearest cent.) (a) December 31, 2013. (d) December 31, 2016. (b) December 31, 2014. (e) December 31, 2017. (c) December 31, 2015.

Buckley, an individual, began a business two years ago and has never sold a §1231 asset. Buckley has owned each of the assets since they began the business. In the current year, Buckley sold the following business assets:  Asset Original Cost Accumulated Depreciation Gain/Loss Computers $6,000 $2,000 ($3,000) Machinery 10,000 4,000 (2,000) Furniture 20,000 12,000 7,000  Building 100,000 10,000 (1,000)

What is glazing, as applied to ceramics?