Question & Answer

Rainmaker Company prepares its financial statements in accordance with IFRS. In 2014, Rainmaker recorded the following revaluation adjustments related to its buildings and land: The company’s building increased in value by $200,000; its land declined by $35,000. How will these revaluation adjustments affect Rainmaker’s balance sheet? Will the reporting differ under GAAP? Explain.

Draw up a similar table to Table 24.3, only this time assume that the figures are: LDC 6 wheat or 2 cloth; DC 8 wheat or 20 cloth. What are the opportunity cost ratios now?

What is the difference between a basic process and a secondary process?

A portion of the combined statement of income and retained earnings of Seminole Inc. for the current year follows. Income before extraordinary item $15,000,000 Extraordinary loss, net of applicable income tax (Note 1) 1,340,000 Net income 13,660,000 Retained earnings at the beginning of the year 83,250,000 96,910,000 Dividends declared: On preferred stock—$6.00 per share $ 300,000 On common stock—$1.75 per share 14,875,000 15,175,000 Retained earnings at the end of the year $81,735,000 Note 1. During the year, Seminole Inc. suffered a major casualty loss of $1,340,000 after applicable income tax reduction of $1,200,000. At the end of the current year, Seminole Inc. has outstanding 8,500,000 shares of $10 par common stock and 50,000 shares of 6% preferred. On April 1 of the current year, Seminole Inc. issued 1,000,000 shares of common stock for $32 per share to help finance the casualty. Instructions Compute the earnings per share on common stock for the current year as it should be reported to stockholders.

In 2013, Austin Powers Corporation developed a new product that will be marketed in 2014. In connection with the development of this product, the following costs were incurred in 2013: research and development costs $400,000; materials and supplies consumed $60,000; and compensation paid to research consultants $125,000. It is anticipated that these costs will be recovered in 2016. What is the amount of research and development costs that Austin Powers should record in 2013 as a charge to expense?

Why is the MCL curve horizontal?

Why might the relationship between the demand for money and the rate of interest be an unstable one?

What is the rationale for requiring partners to defer most gains and all losses when they contribute property to a partnership?

Explain collateralized debt obligations (CDOs). (LO4)

How is it determined whether deferred tax amounts are considered to be “related” to specific asset or liability amounts?

Residual income; ROI; EVA The following selected data pertain to Garfield Landscaping for last year.       Required (a)           Calculate the residual income. (b)           Calculate the return on investment. (c)           Calculate the economic value added.

Paolo is a 50 percent partner in the Capri Partnership and has decided to terminate his partnership interest. Paolo is considering two options as potential exit strategies. The first is to sell his partnership interest to the two remaining 25 percent partners, Giuseppe and Isabella, for $105,000 cash and the assumption of Paolo’s share of Capri’s liabilities. Under this option, Giuseppe and Isabella would each pay $52,500 for half of Paolo’s interest. The second option is to have Capri liquidate Paolo’s partnership interest with a proportionate distribution of the partnership assets. Paolo’s basis in his partnership interest is $110,000, including Paolo’s share of Capri’s liabilities. Capri reports the following balance sheet as of the termination date: Assets Tax Basis FMV Cash $ 80,000 $ 80,000 Receivables 40,000 40,000 Inventory 50,000 80,000 Land 50,000 60,000    Totals $ 220,000 $ 260,000 Liabilities and capital Liabilities $ 50,000 Capital – Paolo 85,000  – Giuseppe 42,500  – Isabella 42,500       Totals $ 220,000 a. If Paolo sells his partnership interest to Giuseppe and Isabella for $105,000, what are the amount and character of Paolo’s recognized gain or loss? b. Giuseppe and Isabella each have a basis in Capri of $55,000 before any purchase of Paolo’s interest. What are Giuseppe’s and Isabella’s bases in their partnership interests following the purchase of Paolo’s interest? c. If Capri liquidates Paolo’s partnership interest with a proportionate distribution of the partnership assets ($25,000 deemed cash from debt relief, $15,000 of actual cash, and half of the remaining assets), what are the amount and character of Paolo’s recognized gain or loss? d. If Capri liquidates Paolo’s interest, what is Paolo’s basis in the distributed assets? e. Compare and contrast Paolo’s options for terminating his partnership interest. Assume that Paolo’s marginal tax rate is 35 percent and his capital gains rate is 15 percent.

If banks choose to operate a 20 per cent liquidity ratio and receive extra cash deposits of £10 million: (a)  how much credit will ultimately be created? (b)  by how much will total deposits have expanded? (c)  what is the size of the bank deposits multiplier?

What do you understand by people’s expectations of inflation becoming ‘anchored’? Why might this be important for actual rates of inflation?

What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why?

Lucy and Ricky Ricardo live in Los Angeles, California.  After they were married, they started a business named ILL Corporation (a C corporation).  For state law purposes, the shares of stock in ILL Corp. are listed under Ricky’s name only.  Ricky signed the Form 2553 electing to have ILL taxed as an S corporation for federal income tax purposes, but Lucy did not sign.  Given that California is a community property state, is the S election for ILL Corp. valid?

At a recent meeting of the accounting staff in your company, the controller raised the issue of using present value techniques to conduct impairment tests for some of the company’s fixed assets. Some of the more senior members of the staff admitted having little knowledge of present value concepts in this context, but they had heard about a FASB Concepts Statement that may be relevant. As the junior staff in the department, you have been asked to conduct some research of the authoritative literature on this topic and report back at the staff meeting next week. Instructions If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and access the FASB Statements of Financial Accounting Concepts. 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) Identify the recent concept statement that addresses present value measurement in accounting. (b) What are some of the contexts in which present value concepts are applied in accounting measurement? (c) Provide definitions for the following terms: (1) Best estimate. (2) Estimated cash flow (contrasted to expected cash flow). (3) Fresh-start measurement. (4) Interest methods of allocation.

Cosmo contributed land with a fair market value of $400,000 and a tax basis of $90,000 to the Y Mountain partnership in exchange for a 25 percent profits and capital interest in the partnership. The land is secured by a $120,000 nonrecourse liability. Other than this nonrecourse liability, Y Mountain partnership does not have any liability. a. How much gain will Cosmo recognize from the contribution? b. What is Cosmo’s tax basis in his partnership interest?

Recall from Chapter 13 that Hincapie Co. (a specialty bike-accessory manufacturer) is expecting growth in sales of some products targeted to the low-price market. Hincapie is contemplating a preferred stock issue to help finance this expansion in operations. The company is leaning toward participating preferred stock because ownership will not be diluted, but the investors will get an extra dividend if the company does well. The company management wants to be certain that its reporting of this transaction is transparent to its current shareholders and wants you to research the disclosure requirements related to its capital structure. Instructions If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses. (a) Identify the authoritative literature that addresses disclosure of information about capital structure. (b) Find definitions of the following: (1) Securities. (2) Participation rights. (3) Preferred stock. (c) What information about securities must companies disclose? Discuss how Hincapie should report the proposed preferred stock issue.

What is one of the important applications of titanium nitride, as mentioned in the text?

What is meant by hysteresis when applied to unemployment? How do you account for this phenomenon in the 1980s?

If the industry under perfect competition faces a downward-sloping demand curve, why does an individual firm face a horizontal demand curve?

What is meant by solvency? What information in the balance sheet can be used to assess a company’s solvency?

Indicate the amount (if any) that Josh can deduct as an ordinary and necessary business deduction in each of the following situations and explain your solution.

What actions can either the buyers or sellers take in each of the examples in Table 5.1 to help overcome some of the potential problems caused by the unobservable characteristics?