In the following debate, take the position of an investor who wants to evaluate the liquidity of a company. Team Debate: Team 1: Argue for including inventory, pre paids, and deferrals in working capital. Team 2: Argue against including inventory, prepaids, and deferrals in working capital.
> Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Both firms have an EBIT of $2 million. Assume that all of the MM assumptions are met. a. Suppose that both firms are subject to
> Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume that: (1) all of the MM assumptions are met, (2) both firms are subject to a 40% federal-plus-state corporate tax rate,
> Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume that: (1) there are no corporate or personal taxes, (2) all of the other MM assumptions are met, (3) EBIT is $2 million,
> Air Tampa has just been incorporated, and its board of directors is grappling with the question of optimal capital structure. The company plans to offer commuter air services between Tampa and smaller surrounding cities. Jaxair has been around for a few
> An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $60 million in debt at a 5% interest rate. Its cost of debt is 5% and its unlevered cost of equity is 11%. After Year 1, free cash flows and tax savings are expect
> An unlevered firm has a value of $600 million. An otherwise identical but levered firm has $240 million in debt. Under the Miller model, what is the value of the levered firm if the corporate tax rate is 34%, the personal tax rate on equity is 10%, and t
> Sheldon Corporation projects the following free cash flows (FCFs) and interest expenses for the next 3 years, after which FCF and interest expenses are expected to grow at a constant 7% rate. Sheldon’s unlevered cost of equity is 13% it
> Suppose that the exchange rate is 0.60 dollars per Swiss franc. If the franc appreciates 10% against the dollar, how many francs would a dollar buy tomorrow?
> What is an exchange rate? What is the difference between direct and indirect rates? What is a cross rate?
> On October 1, 2017, Harvey Company adopted a stock-option plan that granted options to key executives to purchase 30,000 shares of the company’s $10 par value common stock. The options were granted on January 2, 2018, and were exercisable 2 years after t
> The following information is available for the Albany Corporation for the year 2017: Actual and expected return on plan assets ……………………. $12,000 Benefits paid to retirees ……………………………………………… $40,000 Contributions to the fund ……………………………………………. $95,000 In
> George Company purchased land for use as its corporate headquarters. A small factory that was on the land when it was purchased was torn down, and before the new building’s foundation could be constructed, a substantial amount of rock had to be blasted a
> A company may acquire plant assets (among other ways) for cash, on a deferred payment plan, by exchanging other assets, or by a combination of these ways. Required: a. Identify six costs that should be capitalized as the cost of the land. For your answer
> Property, plant, and equipment (plant assets) generally represent a material portion of the total assets of most companies. Accounting for the acquisition and use of such assets is therefore an important part of the financial reporting process. Required:
> Your client found three suitable sites, each having certain unique advantages, for a new plant. To thoroughly investigate the advantages and disadvantages of each site, one‐year options were purchased for an amount equal to 5 percent of the contract pric
> Jay Manufacturing, Inc., began operations five years ago producing the probo, a new type of instrument it hoped to sell to doctors, dentists, and hospitals. The demand for probos far exceeded initial expectations, and the company was unable to produce en
> Depreciation continues to be one of the most controversial, difficult, and important problem areas in accounting. Required: a. Explain the conventional accounting concept of depreciation accounting. b. Discuss its conceptual merit with respect to i. The
> On October 10, 2016, Mason Engineering Company completed negotiations on a contract for the purchase of new equipment. Under the terms of the agreement, the equipment may be purchased now or Mason may wait until January 10, 2017, to make the purchase. Th
> The City of Martinsville donated land to Essex Company. The fair value of the land was $100,000. The land had cost the city $45,000. Required: a. Describe the current accounting treatment for the land. Include in your answer the amount at which the land
> The concept of conservatism has been influential in the development of accounting theory and practice. A major effect of conservatism is that accountants tend to recognize losses, but not gains. For example, when the value of an asset is impaired, it is
> The accounting profession has employed the matching concept to determine what to report in the income statement and to determine how to measure items reported in the income statement. This concept implies that expenses should be measured directly, and th
> Calculating the costs of pension plans, requires the understanding of certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financia
> The FASB has issued SFAC No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises.” In general, this statement sets recognition criteria and guidance for what information should be incorporated into financial statements and whe
> In 2013 Airbus announced a contract to deliver 50 A380 airplanes to Emirates for $20 billion to be delivered between 2016 and 2018. Required: Outline the five‐step revenue recognition process for this transaction.
> You are requested to deliver your auditor’s report personally to the board of directors of Sebal Manufacturing Corporation and answer questions posed about the financial statements. While reading the statements, one director asks, “What are the precise m
> Bonanza Trading Stamps, Inc., was formed early this year to sell trading stamps throughout the Southwest to retailers, who distribute the stamps free to their customers. Books for accumulating the stamps and catalogs illustrating the merchandise for whic
> Economic income is considered to be a better predictor of future cash flows than accounting income is. A technique used by securities analysts to determine the degree of correlation between a firm’s accounting earnings and its true economic income is qua
> Progresso Corporation, one of your new audit clients, has not reported EPS data in its annual reports to stockholders in the past. The president requested that you furnish information about the reporting of EPS data in the current year’s annual report in
> It is important in accounting theory to be able to distinguish the types of accounting changes. Required: a. If a public company desires to change from the sum‐of‐year’s‐ digits depreciation method to the straight‐line method for its fixed assets, what t
> Discuss how a company’s primary financial statements are useful to potential investors who are trying to decide whether to buy stock in the company. Support your discussion by citing objectives outlined in the Conceptual Framework.
> The motion picture industry has undergone significant changes since the 1960s. Originally, companies such as Paramount Pictures had to rely solely on domestic and foreign screenings of their movies for their revenues. The birth of the television industry
> Many business organizations have been concerned with providing for the retirement of employees since the end of WWII. This concern has resulted in the establishment of private pension plans in many companies. The substantial growth of these plans, both
> Earnings as defined in SFAC No. 5 are consistent with the current operating performance concept of income. Comprehensive income is consistent with the all‐inclusive concept of income. Required: a. Discuss the current operating performance concept of inco
> Morgan Company grows various crops and then processes them for sale to retailers. Morgan has changed its depreciation method for its processing equipment from the double‐declining‐balance method to the straight‐line method effective January 1 of this yea
> Sometimes a business entity changes its method of accounting for certain items. The change may be classified as a change in accounting principle, a change in accounting estimate, or a change in reporting entity. Following are three independent, unrelated
> APB Opinion No. 20 was concerned with accounting changes. SFAS No. 154 (see FASB ASC 250) changes the accounting treatment for some accounting changes. Required: a. Define, discuss, and illustrate each of the following in such a way that one can be disti
> Recent pronouncements of the FASB indicate that the FASB is moving away from historical cost accounting toward the use of current, or fair, value. In your debate on this issue, support your position with references to the conceptual framework and to conc
> FASB ASC 320 (generally effective until 2018) requires companies to assign their portfolio of investment securities into 1. Trading securities 2. Securities available for sale 3. Held‐to‐maturity securities Required: a. Define each of these categories of
> Short‐term deferrals (prepaids and unearned revenues) are classified as current assets and current liabilities. As such, they are included in working capital. Required: a. Some argue that prepaids will not generate cash and hence are not liquid assets. i
> The theoretical valuation of receivables is the present value of expected future cash flows. However, trade receivables are not discounted owing to materiality considerations; hence, their net realizable value is the closest practical approximation to th
> Specific identification is sometimes said to be the ideal method for assigning cost to inventory and to cost of goods sold. Required: a. List the arguments for and against the foregoing statement. b. FIFO, weighted average, and LIFO methods are often use
> Duffner Corporation is a medium-sized manufacturer of paperboard containers and boxes. The corporation sponsors a noncontributory, defined benefit pension plan that covers its 250 employees. Sid Caesar has recently been hired as president of Duffner Corp
> At the end of the first year of operations, Key Company had a current equity securities portfolio classified as available‐for‐sale securities with a cost of $500,000 and a fair value of $550,000. At the end of its second year of operations, Key had a cur
> On December 31, 2016, Carme Company had significant amounts of accounts receivables as a result of credit sales to its customers. Carme uses the allowance method based on credit sales to estimate bad debts. Based on experience, 1 percent of credit sales
> Accountants generally follow the lower of cost or market (LCM) basis of inventory valuations. Required: a. Define cost as applied to the valuation of inventories. b. Define market as applied to the valuation of inventories. c. Why are inventories valued
> Anth Company has significant amounts of trade accounts receivable. Anth uses the allowance method to estimate bad debts. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible
> Steel Company, a wholesaler that has been in business for two years, purchases its inventories from various suppliers. During the two years, each purchase has been at a lower price than the previous purchase. Steel uses the lower of FIFO cost or market m
> Cost for inventory purposes should be determined by the inventory cost‐flow method most clearly reflecting periodic income. Required: a. Describe the fundamental cost‐flow assumptions of the average cost, FIFO, and LIFO inventory cost‐flow methods. b. Di
> Entre Preneur found a site for his new haute cuisine restaurant. The site has a vacant gasoline station. He purchased the property for $900,000 and had the station demolished at a cost of $30,000. A government regulation required that he spend $40,000 to
> MVP Corp uses LIFO to value its inventory. The 2016 inventory records disclose the following: On December 26, 2016, the company had a special, nonrecurring opportunity to purchase 40,000 units at $17 per unit. The purchase can be made and the units deliv
> The statement of cash flows is intended to provide information about the investing, financing, and operating activities of an enterprise during an accounting period. In a statement of cash flows, cash inflows and outflows for interest expense, interest r
> What is the total cash the Ayer Corporation would receive if it issues 1,000 shares of $.02 par value per share common stock at a $9 market price per share? Issue 2 The Waltham Corporation is authorized to issue a total of 10,000 shares of $.10 par value
> The recent emphasis on capital maintenance concepts of income as seen in the FASB’s support for “comprehensive income” implies that balance sheet measurement should determine measures of income. That is, accrual accounting is to focus on measurements in
> Presenting information on cash flows has become an important part of financial reporting. Required: a. What goals are attempted to be accomplished by the presentation of cash‐flow information to investors? b. Discuss the following terms as they relate t
> The measurement of assets and liabilities on the balance sheet was previously a secondary goal to income determination. As a result, various measurement techniques arose to disclose assets and liabilities. Required: Discuss the various measurement techni
> The argument among accountants and financial statement users over the proper valuation procedures for assets and liabilities resulted in the release of SFAS No. 115 (see FASB ASC 320‐19). The statement requires current‐value disclosures for all investmen
> The following financial statement was prepared by employees of your client, Linus Construction Company. The statement is not accompanied by footnotes, but you have discovered the following: • The average completion period for the compan
> SFAS No. 95 (see FASB ASC 230) requires companies to prepare a statement of cash flows. Required: Describe how the FASB’s Conceptual Framework eventually led to the requirement that companies issue statements of cash flows.
> The FASB requires that financial statements report comprehensive income. Team Debate: Team 1: Defend comprehensive income. Your defense should relate to the conceptual framework and to the concept of capital maintenance where appropriate. Team 2: Oppose
> The all‐inclusive and current operating performance concepts of income represent opposing views regarding the inclusion of items to be reported in earnings on the income statement. Team Debate: Team 1: Defend the all‐inclusive concept of income. Team 2:
> According to SFAS No. 34, interest on self‐constructed assets should be capitalized. Team Debate: Team 1: Present arguments in favor of capitalizing interest. Tie your arguments to the concepts and definitions found in the conceptual framework. Team 2: C
> Under current U.S. GAAP, assets that have been donated to a company are recorded at fair value. Team Debate: Team 1: Argue that donated assets should not be reported in a company’s balance sheet. Base your arguments on the conceptual framework. You might
> The transactions listed below relate to Rice Inc. You are to assume that on the date on which each of the transactions occurred, the corporation's accounts showed only common stock ($100 par) outstanding, a current ratio of 2.7:1, and a substantial net i
> On January 1, 2017, Bostock Corporation lends Locker Company $100,000 at 7% interest with the principal payable on December 31, 2020. Interest is payable each December 31. The loan is not secured by collateral subject to foreclosure in the event Locker C
> On June 30, 2016, your client, Steinfield Company, was granted two patents covering plastic cartons that it had been producing and marketing profitably for the past 3 years. One patent covers the manufacturing process, and the other covers the related pr
> Furyk Co. is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this new product. As of year-end (December 31, 2017), the new product has not been manufactured for resale
> Garcia Co. has the following available-for-sale securities outstanding on December 31, 2016 (its first year of operations). Cost Fair Value Rossi Corp. Stock $20,000 $19,000 Barker Company Stock 9,500 8,800 Boliva Company Stock 20,000
> Newatit Company spent a substantial amount of money organizing and getting ready for business. These costs are considered organization costs. Required: a. Does the incurrence of organization costs meet the definition of assets found in the Conceptual Fra
> Fowler Corporation is a public company with a reporting unit operating in the telecommunications industry. In its qualitative screen, Fowler Corporation determined the following: • The fair value of the reporting unit in the prior year’s quantitative an
> SFAS No. 115 (see FASB ASC 320) was issued in response to concerns by regulators and others regarding the recognition and measurement of investments in debt securities. For the following debate, you may consider tying your arguments to theories of capita
> Under current U.S. GAAP, companies may opt to report financial assets and liabilities at fair value. Team Debate: Team 1: Present arguments in favor of the fair value option for financial assets and liabilities. Team 2: Present arguments against the fair
> Under current U.S. GAAP, goodwill is recorded when purchased. For the following debate, you may consider tying your arguments to theories of capital maintenance and/or the conceptual framework. Team Debate: Team 1: Present arguments in favor of the capit
> The use of derivative financial instruments by companies to manage risk or speculate has increased during the past several years. However, using derivative financial instruments also involves exposure to various types of risk. Required: Define the follow
> ASU 2013-07 required to use the requires organizations to use the liquidation basis for preparing financial statements when liquidation is “imminent.” Required: a. How is liquidation defined in this release? b. When is liquidation considered imminent c.
> Smyle Kaufman Company recently issued bonds with associated bond issue costs of $4.5 million. Required: How should these bond issue costs be accounted for and classified in Kaufman’s financial statements?
> Part I. The appropriate method of amortizing a premium or discount on issuance of bonds is the effective–interest method. Required: a. What is the effective-interest method of amortization and how is it different from and similar to the straight–line
> On March 1, 2017, Morgan Company sold its 5-year, $1,000 face value, 9% bonds dated March 1, 2017, at an effective annual interest rate (yield) of 11%. Interest is payable semiannually, and the first interest payment date is September 1, 2017. Morgan use
> Under what conditions of bond issuance does a discount on bonds payable arise? Under what conditions of bond issuance does a premium on bonds payable arise?
> On January 1, 2017, Weiss Company issued for $1,085,800 its 20-year, 11% bonds that have a maturity value of $1,000,000 and pay interest semiannually on January 1 and July 1. Bond issue costs were not material in amount. Below are three presentations of
> There are a variety of reasons that companies may use derivative financial instruments. Some use derivatives so that the risk of financial operations can be controlled, whereas others attempt to manage foreign exchange rate fluctuation exposure. Speculat
> On January 1, 2017, Von Company entered into two noncancelable leases for new machines to be used in its manufacturing operations. The first lease does not contain a bargain purchase option; the lease term is equal to 80 percent of the estimated economic
> Milton Corporation entered into a lease arrangement with James Leasing Corporation for a certain machine, and neither company has early adopted the new lease standard. James’s primary business is leasing, and it is not a manufacturer or dealer. Milton wi
> Part 1: Capital leases and operating leases are the two classifications of leases described in FASB pronouncements from the standpoint of the lessee. Required: a. Describe how a capital lease would be accounted for by the lessee both at the inception of
> Canning Corporation has an uncertain tax position with a deferred tax benefit of $100,000. The likelihood of realization of this uncertain tax position is illustrated in the following probability distribution: Expected tax benefit Probabili
> Accounting Standards Update 2014-15 requires management to assess a company’s ability to continue as a going concern. This assessment involves the evaluation of whether there are conditions that give rise to substantial doubt about a company’s ability to
> On January 1, prior to the adoption of the FASB’s new lease standard, Borman Company, a lessee, entered into three non-cancelable leases for brand‐new equipment: Lease J, Lease K, and Lease L. None of the three leases transfers ownership of the equipment
> Doherty Company leased equipment from Lambert Company. The classification of the lease makes a difference in the amounts reflected on the balance sheet and income statement of both Doherty and Lambert. Neither company has early adopted the new lease stan
> On January 1, 2017, Lani Company entered into a noncancelable lease for a machine to be used in its manufacturing operations. The lease transfers ownership of the machine to Lani by the end of the lease term. The term of the lease is eight years. The min
> In the 1990 discussion memorandum “Distinguishing between Liability and Equity Instruments and Accounting for Instruments with Characteristics of Both,” the FASB presented arguments relating to the presentation and measurement of a company’s stock option
> Snappy Corporation enters into a lease agreement with Long Leasing. Long requires that the lease qualify as a sale. Snappy can fill this requirement by either guaranteeing the residual value itself or having a third party guarantee the residual value. Se
> Investors, creditors, and other users of financial statements often argue that there should be more transparency in published financial statements. This argument is based, at least to some extent, on concerns that management has too much leeway in the se
> In 2002 the SEC investigated Microsoft’s accounting practices that occurred during the late 1990s. The Commission found that Microsoft typically reported budgeted marketing expenses in its interim reports. At year‐ end, Microsoft reported actual marketin
> The proponents of neoclassical, marginal economics (see Chapter 4) maintain that mandatory accounting and auditing standards inhibit contracting arrangements and the ability to report on company operations. Opponents of this view argue that market forces
> The Fillups Company has been in the business of exploring for oil reserves. During 2017, $10 million was spent drilling wells that were dry holes. Under U.S. GAAP, Fillups has the option of accounting for these costs by the successful efforts method or t
> As discussed in Chapter 14, leases that are in‐substance purchases of assets should be capitalized—an asset and associated liability should be recorded for the fair value acquired. Mason Enterprises is considering acquiring a machine and has the option t
> Certified public accountants have imposed on themselves a rigorous code of professional conduct. Required: a. Discuss the reasons that the accounting profession adopted a code of professional conduct. b. One rule of professional ethics adopted by CPAs is
> In its 1990 discussion memorandum on distinguishing between liabilities and equity, the FASB posed the question, “Should the sharp distinction between liabilities and equity be effectively eliminated?” To do so would be consistent with the entity theory
> The Securities Act of 1933 and the Securities Exchange Act of 1934 established guidelines for the disclosures necessary and the protection from fraud when securities are offered to the public for sale. Required: a. Discuss the terms going public and bein
> The concept of adequate disclosure continues to be one of the most important issues facing accountants, and disclosure may take various forms. Required: a. Discuss the various forms of disclosure available in published financial statements. b. Discuss th
> The unaudited quarterly statements of income issued by many corporations to their stockholders are usually prepared on the same basis as annual statements—the statement for each quarter reflects the transactions of that quarter. Required: a. Why do probl
