Question & Answer

How is money supply growth affected by an increase in the reserve requirement ratio? (LO2)

reported the following data in its annual report. Feb. 27, Feb. 26, Feb. 25, 2010 2011 2012 Total revenues $40,597 $37,534 $36,100 Cost of sales (using LIFO) 31,444 29,124 28,010 Year-end inventories using FIFO 2,606 2,552 2,492 Year-end inventories using LIFO 2,342 2,270 2,150 (a) Compute SUPERVALU’s inventory turnovers for 2011 and 2012, using: (1) Cost of sales and LIFO inventory. (2) Cost of sales and FIFO inventory. (b) Some firms calculate inventory turnover using sales rather than cost of goods sold in the numerator. Calculate SUPERVALU’s 2011 and 2012 turnover, using: (1) Sales and LIFO inventory. (2) Sales and FIFO inventory. (c) Describe the method that SUPERVALU’s appears to use. (d) State which method you would choose to evaluate SUPERVALU’s performance. Justify your choice.

In recent years, private equity funds have grown substantially. Will the creation of private equity funds increase the semistrong form of market efficiency in the stock market? Explain. (LO5)

Using the information from BE19-2, assume this is the only difference between Oxford’s pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the December 31, 2014, balance sheet.

In what ways is a monopolistically competitive firm likely to be less efficient than one under perfect competition?

Using the Internal Revenue Code, describe two deductions for AGI that are not discussed in this chapter.

Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2014. (000 omitted) Net sales revenue $640,000 Costs and expenses Cost of goods sold $500,000 Selling, general, and administrative expenses 66,000 Other, net 17,000 583,000 Income before income tax 57,000 Income tax 19,400 Net income 37,600 Retained earnings at beginning of period, as previously reported 141,000 Adjustment required for correction of error (7,000) Retained earnings at beginning of period, as restated 134,000 Dividends on common stock (12,200) Retained earnings at end of period $159,400 Additional facts are as follows. 1. “Selling, general, and administrative expenses” for 2014 included a charge of $8,500,000 that was usual but infrequently occurring. 2. “Other, net” for 2014 included an extraordinary item (charge) of $6,000,000. If the extraordinary item (charge) had not occurred, income taxes for 2014 would have been $21,400,000 instead of $19,400,000. 3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made). 4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements. Instructions Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)

Assuming that liquidity and interest rate expectations are both important for explaining the shape of a yield curve, what does a flat yield curve indicate about the market’s perception of future interest rates? (LO3)

1. Name some industries where external economies of scale are gained. What are the specific external economies in each case? 2. Would you expect external economies to be associated with the concentration of an industry in a particular region?

As of January 1, 2014, Aristotle Inc. installed the retail method of accounting for its merchandise inventory. To prepare the store’s financial statements at June 30, 2014, you obtain the following data. Cost Selling Price Inventory, January 1 $ 30,000 $ 43,000 Markdowns 10,500 Markups 9,200 Markdown cancellations 6,500 Markup cancellations 3,200 Purchases 104,800 155,000 Sales revenue 154,000 Purchase returns 2,800 4,000 Sales returns and allowances 8,000 Instructions (a) Prepare a schedule to compute Aristotle’s June 30, 2014, inventory under the conventional retail method of accounting for inventories. (b) Without prejudice to your solution to part (a), assume that you computed the June 30, 2014, inventory to be $59,400 at retail and the ratio of cost to retail to be 70%. The general price level has increased from 100 at January 1, 2014, to 108 at June 30, 2014. Prepare a schedule to compute the June 30, 2014, inventory at the June 30 price level under the dollar-value LIFO retail method.

A stepper motor serves as the drive unit for the linear joint of an industrial robot. The joint must have an accuracy of 0.25 mm. The motor is attached to a leadscrew through a 2:1 gear reduction (2 turns of the motor for 1 turn of the leadscrew). The pitch of the leadscrew is 5.0 mm. The mechanical errors in the system (due to backlash of the leadscrew and the gear reducer) can be represented by a normal distribution with standard deviation = ±0.05 mm. Specify the number of step angles that the motor must have in order to meet the accuracy requirement.

If a country imports a whole range of goods whose average income elasticity of demand is the same as for home-produced goods, will the mpm rise or fall as national income rises?

Explain how variable costing income statements can be reconciled to absorption costing income statements.

Identify some of the reasons why machining is commercially and technologically important

You manage a hotel resort located on the South Beach on the Island of Kauai in Hawaii. You are shifting the focus of your resort from a traditional fun-in-the-sun destination to eco-tourism. (Eco-tourism focuses on environmental awareness and education.) How would you classify the following projects in terms of compliance, strategic, and operational?   a.   Convert the pool heating system from electrical to solar power. b.   Build a 4-mile nature hiking trail. c.   Renovate the horse barn. d.   Launch a new promotional campaign with Hawaii Airlines. e.   Convert 12 adjacent acres into a wildlife preserve. f.    Update all the bathrooms in condos that are 10 years or older. g.   Change hotel brochures to reflect eco-tourism image. h.   Test and revise disaster response plan.                                                         How easy was it to classify these projects? What made some projects more difficult than others?

An article in Barron’s noted the following. Okay. Last fall, someone with a long memory and an even longer arm reached into that bureau drawer and came out with a moldy cheese sandwich and the equally moldy notion of corporate forecasts. We tried to find out what happened to the cheese sandwich—but, rats!, even recourse to the Freedom of Information Act didn’t help. However, the forecast proposal was dusted off, polished up and found quite serviceable. The SEC, indeed, lost no time in running it up the old flagpole—but no one was very eager to salute. Even after some of the more objectionable features—compulsory corrections and detailed explanations of why the estimates went awry—were peeled off the original proposal. Seemingly, despite the Commission’s smiles and sweet talk, those craven corporations were still afraid that an honest mistake would lead them down the primrose path to consent decrees and class action suits. To lay to rest such qualms, the Commission last week approved a “Safe Harbor” rule that, providing the forecasts were made on a reasonable basis and in good faith, protected corporations from litigation should the projections prove wide of the mark (as only about 99% are apt to do). Instructions (a) What are the arguments for preparing profit forecasts? (b) What is the purpose of the “safe harbor” rule? (c) Why are corporations concerned about presenting profit forecasts?

On January 1, 2014, Wetzel Company sold property for $250,000. The note will be collected as follows: $120,000 in 2014, $90,000 in 2015, and $40,000 in 2016. The property had cost Wetzel $150,000 when it was purchased in 2012. Instructions (a) Compute the amount of gross profit realized each year, assuming Wetzel uses the cost-recovery method. (b) Compute the amount of gross profit realized each year, assuming Wetzel uses the installment-sales method.

After securing lease commitments from several major stores, Auer Shopping Center, Inc. was organized and built a shopping center in a growing suburb. The shopping center would have opened on schedule on January 1, 2014, if it had not been struck by a severe tornado in December. Instead, it opened for business on October 1, 2014. All of the additional construction costs that were incurred as a result of the tornado were covered by insurance. In July 2013, in anticipation of the scheduled January opening, a permanent staff had been hired to promote the shopping center, obtain tenants for the uncommitted space, and manage the property. A summary of some of the costs incurred in 2013 and the first nine months of 2014 follows. January 1, 2014 through 2013 September 30, 2014 Interest on mortgage bonds $720,000 $540,000 Cost of obtaining tenants 300,000 360,000 Promotional advertising 540,000 557,000 The promotional advertising campaign was designed to familiarize shoppers with the center. Had it been known in time that the center would not open until October 2014, the 2013 expenditure for promotional advertising would not have been made. The advertising had to be repeated in 2014. All of the tenants who had leased space in the shopping center at the time of the tornado accepted the October occupancy date on condition that the monthly rental charges for the first 9 months of 2014 be canceled. Instructions Explain how each of the costs for 2013 and the first 9 months of 2014 should be treated in the accounts of the shopping center corporation. Give the reasons for each treatment.

What is cross-linking in a polymer, and what is its significance?

Los Lobos Corp. uses the direct method to prepare its statement of cash flows. Los Lobos’s trial balances at December 31, 2014 and 2013, are as follows.December 31 2014 2013 Debits Cash $ 35,000 $ 32,000 Accounts receivable 33,000 30,000 Inventory 31,000 47,000 Property, plant, and equipment 100,000 95,000 Unamortized bond discount 4,500 5,000 Cost of goods sold 250,000 380,000 Selling expenses 141,500 172,000 General and administrative expenses 137,000 151,300 Interest expense 4,300 2,600 Income tax expense 20,400 61,200 $756,700 $976,100 Credits Allowance for doubtful accounts $ 1,300 $ 1,100 Accumulated depreciation—plant assets 16,500 15,000 Accounts payable 25,000 15,500 Income taxes payable 21,000 29,100 Deferred tax liability 5,300 4,600 8% callable bonds payable 45,000 20,000 Common stock 50,000 40,000 Paid-in capital in excess of par 9,100 7,500 Retained earnings 44,700 64,600 Sales revenue 538,800 778,700 $756,700 $976,100 Additional information: 1. Los Lobos purchased $5,000 in equipment during 2014. 2. Los Lobos allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses. 3. Bad debt expense for 2014 was $5,000, and write-offs of uncollectible accounts totaled $4,800. Instructions Determine what amounts Los Lobos should report in its statement of cash flows for the year ended December 31, 2014, for the following items. (a) Cash collected from customers. (d) Cash paid for income taxes. (b) Cash paid to suppliers. (e) Cash paid for selling expenses. (c) Cash paid for interest.

What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in an impairment?

Cineplex Corporation is a diversified company that operates in five different industries: A, B, C, D, and E. The following information relating to each segment is available for 2015. A B C D E Sales revenue $40,000 $ 75,000 $580,000 $35,000 $55,000 Cost of goods sold 19,000 50,000 270,000 19,000 30,000 Operating expenses 10,000 40,000 235,000 12,000 18,000 Total expenses 29,000 90,000 505,000 31,000 48,000 Operating profi t (loss) $11,000 $ (15,000) $ 75,000 $ 4,000 $ 7,000 Identifi able assets $35,000 $ 80,000 $500,000 $65,000 $50,000 Sales of segments B and C included intersegment sales of $20,000 and $100,000, respectively. Instructions (a) Determine which of the segments are reportable based on the: (1) Revenue test. (2) Operating profit (loss) test. (3) Identifiable assets test. (b) Prepare the necessary disclosures required by GAAP.

On January 1, 2013, Locke Company, a small machine-tool manufacturer, acquired for $1,260,000 a piece of new industrial equipment. The new equipment had a useful life of 5 years, and the salvage value was estimated to be $60,000. Locke estimates that the new equipment can produce 12,000 machine tools in its first year. It estimates that production will decline by 1,000 units per year over the remaining useful life of the equipment. The following depreciation methods may be used: (1) straight-line, (2) double-declining-balance, (3) sum-of-the-years’-digits, and (4) units-of-output. For tax purposes, the class life is 7 years. Use the MACRS tables for computing depreciation. Instructions (a) Which depreciation method would maximize net income for financial statement reporting for the 3-year period ending December 31, 2015? Prepare a schedule showing the amount of accumulated depreciation at December 31, 2015, under the method selected. Ignore present value, income tax, and deferred income tax considerations. (b) Which depreciation method (MACRS or optional straight-line) would minimize net income for income tax reporting for the 3-year period ending December 31, 2015? Determine the amount of accumulated depreciation at December 31, 2015. Ignore present value considerations.

The following defined pension data of Rydell Corp. apply to the year 2014. Projected benefi t obligation, 1/1/14 (before amendment) $560,000 Plan assets, 1/1/14 546,200 Pension liability 13,800 On January 1, 2014, Rydell Corp., through plan amendment, grants prior service benefi ts having a present value of 120,000 Settlement rate 9% Service cost 58,000 Contributions (funding) 65,000 Actual (expected) return on plan assets 52,280 Benefi ts paid to retirees 40,000 Prior service cost amortization for 2014 17,000 Instructions For 2014, prepare a pension worksheet for Rydell Corp. that shows the journal entry for pension expense and the year-end balances in the related pension accounts.

What distinguishes operating from liquidating distributions?