Question & Answer

The stockholders’ equity section of Martino Inc. at the beginning of the current year appears below. Common stock, $10 par value, authorized 1,000,000 shares, 300,000 shares issued and outstanding $3,000,000 Paid-in capital in excess of par—common stock 600,000 Retained earnings 570,000 During the current year, the following transactions occurred. 1. The company issued to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at $32. The rights were void after 30 days. The market price of the stock at this time was $34 per share. 2. The company sold to the public a $200,000, 10% bond issue at 104. The company also issued with each $100 bond one detachable stock purchase warrant, which provided for the purchase of common stock at $30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at $8. 3. All but 5,000 of the rights issued in (1) were exercised in 30 days. 4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing. 5. During the current year, the company granted stock options for 10,000 shares of common stock to company executives. The company, using a fair value option-pricing model, determines that each option is worth $10. The option price is $30. The options were to expire at year-end and were considered compensation for the current year. 6. All but 1,000 shares related to the stock-option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract. Instructions (a) Prepare general journal entries for the current year to record the transactions listed above. (b) Prepare the stockholders’ equity section of the balance sheet at the end of the current year. Assume that retained earnings at the end of the current year is $750,000.

James Kirk is a financial executive with McDowell Enterprises. Although James Kirk has not had any formal training in finance or accounting, he has a “good sense” for numbers and has helped the company grow from a very small company ($500,000 sales) to a large operation ($45 million in sales). With the business growing steadily, however, the company needs to make a number of difficult financial decisions in which James Kirk feels a little “over his head.” He therefore has decided to hire a new employee with “numbers” expertise to help him. As a basis for determining whom to employ, he has decided to ask each prospective employee to prepare answers to questions relating to the following situations he has encountered recently. Here are the questions. (a) In 2013, McDowell Enterprises negotiated and closed a long-term lease contract for newly constructed truck terminals and freight storage facilities. The buildings were constructed on land owned by the company. On January 1, 2014, McDowell took possession of the leased property. The 20-year lease is effective for the period January 1, 2014, through December 31, 2033. Advance rental payments of $800,000 are payable to the lessor (owner of facilities) on January 1 of each of the first 10 years of the lease term. Advance payments of $400,000 are due on January 1 for each of the last 10 years of the lease term. McDowell has an option to purchase all the leased facilities for $1 on December 31, 2033. At the time the lease was negotiated, the fair value of the truck terminals and freight storage facilities was approximately $7,200,000. If the company had borrowed the money to purchase the facilities, it would have had to pay 10% interest. Should the company have purchasedrather than leased the facilities? (b) Last year the company exchanged a piece of land for a non-interest-bearing note. The note is to be paid at the rate of $15,000 per year for 9 years, beginning one year from the date of disposal of the land. An appropriate rate of interest for the note was 11%. At the time the land was originally purchased, it cost $90,000. What is the fair value of the note? (c) The company has always followed the policy to take any cash discounts on goods purchased. Recently, the company purchased a large amount of raw materials at a price of $800,000 with terms 1/10, n/30 on which it took the discount. McDowell has recently estimated its cost of funds at 10%. Should McDowell continue this policy of always taking the cash discount?

A composite sample of carbon reinforced epoxy has dimensions of 12 in by 12 in by 0.25 in and mass of 1.8 lb. The carbon fibers have a modulus of elasticity of 50(106 ) lb/in2 and a density of 0.069 lb/in3 . The epoxy matrix has modulus of elasticity of 0.61(106 ) lb/in2 and a density of 0.042 lb/in3 . What is the volume fraction of (a) the carbon fibers and (b) the epoxy matrix in the sample? Assume there are no voids in the sample.

Harry and Sally formed the Evergreen Partnership by contributing the following assets in exchange for a 50 percent capital and profits interest in the partnership: Harry: Basis Fair Market Value Cash $ 30,000 $ 30,000 Land 100,000 120,000 Totals $ 130,000 $ 150,000 Sally: Equipment used in a business $200,000 $150,000 Totals $ 200,000 $ 150,000 a. How much gain or loss will Harry recognize on the contribution? b. How much gain or loss will Sally recognize on the contribution? c. How could the transaction be structured a different way to get a better result for Sally? d. What is Harry’s tax basis in his partnership interest? e. What is Sally’s tax basis in her partnership interest? f. What is Evergreen’s tax basis in its assets? g. Following the format in Exhibit 20-2, prepare a tax basis balance sheet for the Evergreen Partnership showing the tax capital accounts for the partners.

LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2014, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, LEW’s cost to produce its jewelry will increase, which would reduce its profit margins. To hedge the risk of increased gold prices, on April 1, 2014, LEW enters into a gold futures contract and designates this futures contract as a cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 500 ounces, and the terms of the contract give LEW the right and the obligation to purchase gold at a price of $300 per ounce. The price will be good until the contract expires on October 31, 2014. Assume the following data with respect to the price of the futures contract and the gold inventory purchase. Date Spot Price for October Delivery April 1, 2014 $300 per ounce June 30, 2014 310 per ounce September 30, 2014 315 per ounce Instructions Prepare the journal entries for the following transactions. (a) April 1, 2014—Inception of the futures contract, no premium paid. (b) June 30, 2014—LEW Co. prepares financial statements. (c) September 30, 2014—LEW Co. prepares financial statements. (d) October 10, 2014—LEW Co. purchases 500 ounces of gold at $315 per ounce and settles the futures contract. (e) December 20, 2014—LEW sells jewelry containing gold purchased in October 2014 for $350,000. The cost of the finished goods inventory is $200,000. (f) Indicate the amount(s) reported on the balance sheet and income statement related to the futures contract on June 30, 2014. (g) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2014.

Fill in the missing figures in the Table 6.3. (Note that the figures for MC come in the spaces between each level of output.)

three factors that determine whether a taxpayer is required to file a tax return.

What is the meaning of an initial return for an IPO? (LO3)

There are 14 correct answers in the following multiple choice questions (some questions have multiple answers that are correct). To attain a perfect score on the quiz, all correct answers must be given. Each correct answer is worth 1 point. Each omitted answer or wrong answer reduces the score by 1 point, and each additional answer beyond the correct number of answers reduces the score by 1 point. Percentage score on the quiz is based on the total number of correct answers 15.1 Which one of the following is the most common polymer type in fiber-reinforced polymer composites: (a) elastomers, (b) thermoplastics, or (c) thermosets? 15.2 Most rubber products are properly classified into which of the following categories (three best answers): (a) elastomer reinforced with carbon black, (b) fiber-reinforced composite, (c) particle-reinforced composite, (d) polymer matrix composite, (e) pure elastomer, and (f) pure polymer? 15.3 Other names for open mold processes include which of the following (two best answers): (a) compression molding, (b) contact lamination, (c) contact molding, (d) filament winding, (e) matched die molding, (f) preform molding, and (g) pultrusion? 15.4 Hand lay-up is classified in which of the following general categories of PMC shaping processes (two best answers): (a) closed mold process, (b) compression molding, (c) contact molding, (d) filament winding, or (e) open mold process? 15.5 A positive mold with a smooth surface will produce a good finish on which surface of the laminated product in the hand lay-up method: (a) inside surface or (b) outside surface? 15.6 A molding operation that uses sheet-molding compound (SMC) is a form of which one of the following: (a) compression molding, (b) contact molding, (c) injection molding, (d) open mold processing, (e) pultrusion, or (f) transfer molding? 15.7 Filament winding involves the use of which one of the following fiber reinforcements: (a) continuous filaments, (b) fabrics, (c) mats, (d) prepregs, (e) short fibers, or (f) woven rovings? 15.8 In filament winding, when the continuous filament is wound around the cylindrical mandrel at a helix angle close to 90°, it is called which of the following (one best answer): (a) bi-axial winding, (b) helical winding, (c) hoop winding, (d) perpendicular winding, (e) polar winding, or (f) radial winding? 15.9 Pultrusion is most similar to which one of the following plastic shaping processes: (a) blow-molding, (b) extrusion, (c) injection molding, or (d) thermoforming? 15.10 Water jet cutting is one of several ways of cutting or trimming uncured or cured FRPs; in the case of cured FRPs, the process is noted for its reduction of dust and noise: (a) true or (b) false?

Clancey Inc. issues $2,000,000 of 7% bonds due in 10 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 8%. What amount will Clancey receive when it issues the bonds?

It is possible that as people get richer they will spend a smaller and smaller fraction of each rise in income (and save a larger fraction). Why might this be so? What effect will it have on the shape of the consumption function?

Independence Corporation needs to replace some of the assets used in its trade or business and is contemplating the following exchanges:   Exchange Asset Given Up by Independence Asset Received by Independence A Office building in Chicago, IL Piece of land in Toronto, Canada B Large warehouse on 2 acres Small warehouse on 22 acres C Office building in Green Bay, WI, used in the business Apartment complex in Newport Beach, CA, that will be held as an investment

If the vertical scale for Figure A1.2 ran from 0 to 5 million, how would this alter your impression of the degree to which unemployment had changed?

Presented below is information related to Langston Hughes Corporation. Price Index LIFO Cost Retail Inventory on December 31, 2014, when dollar-value LIFO is adopted 100 $36,000 $ 74,500 Inventory, December 31, 2015 110 ? 100,100 Instructions Compute the ending inventory under the dollar-value LIFO method at December 31, 2015. The cost-toretail ratio for 2015 was 60%.

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?

The following summarized information relates to the installmentsales activity of Phillips Stores, Inc. for the year 2014. Installment sales during 2014 $500,000 Cost of goods sold on installment basis 350,000 Collections from customers 180,000 Unpaid balances on merchandise repossessed 24,000 Estimated value of merchandise repossessed 11,200 Instructions (a) Prepare journal entries at the end of 2014 to record on the books of Phillips Stores, Inc. the summarized data above. (b) Prepare the entry to record the gross profit realized during 2014.

How do you think accounting irregularities affect the pricing of corporate stock in general? From an investor’s viewpoint, how do you think the information used to price stocks changes in response to accounting irregularities? (LO6)

What is working capital? How does working capital relate to the operating cycle?

Many years ago a famous member of Congress proposed eliminating federal income tax withholding.  What criterion for evaluating tax systems did this proposal violate?  What would likely have been the result of eliminating withholding?

Why are fillers added to a polymer?

Koch Corporation is in the process of preparing its annual financial statements for the fiscal year ended April 30, 2015. Because all of Koch’s shares are traded intrastate, the company does not have to file any reports with the Securities and Exchange Commission. The company manufactures plastic, glass, and paper containers for sale to food and drink manufacturers and distributors. Koch Corporation maintains separate control accounts for its raw materials, work in process, and finished goods inventories for each of the three types of containers. The inventories are valued at the lowerof- cost-or-market. The company’s property, plant, and equipment are classified in the following major categories: land, office buildings, furniture and fixtures, manufacturing facilities, manufacturing equipment, and leasehold improvements. All fixed assets are carried at cost. The depreciation methods employed depend on the type of asset (its classification) and when it was acquired. Koch Corporation plans to present the inventory and fixed asset amounts in its April 30, 2015, balance sheet as shown below. Inventories $4,814,200 Property, plant, and equipment (net of depreciation) 6,310,000 Instructions What information regarding inventories and property, plant, and equipment must be disclosed by Koch Corporation in the audited financial statements issued to stockholders, either in the body or the notes, for the 2014–2015 fiscal year?

Explain how breakeven point would be affected under both absorption and variable costing.

Explain why some hedge funds failed as a result of the credit crisis of 2008–2009. (LO4)

Boilermaker Inc. reported taxable income of $500,000 this year and paid federal income taxes of $105,000. Not included in the company’s computation of taxable income is tax-exempt income of $20,000, disallowed meals and entertainment expenses of $30,000, and disallowed expenses related to the tax-exempt income of $1,000.  Boilermaker deducted depreciation of $100,000 on its tax return. Under the alternative (E&P) depreciation method, the deduction would have been $60,000.  Compute Boilermaker’s current E&P.

Why is the Normal statistical table used in a Six Sigma program different from the standard normal tables found in textbooks on probability and statistics?