Question: The required accounting for deferred taxes delays

> When the total amount of cash that a firm expects to collect from a customer is highly uncertain, the cost recovery method seems more appropriate than the installment method.” Explain.

> Rather than pay you $1,000 a month for the next 20 years, the person who injured you in an automobile accident is willing to pay a single amount now to settle your claim for injuries. Would you rather use an interest rate of 6% or 12% in computing the pr

> Does the present value of a given amount to be paid in 10 years increase or decrease if the interest rate increases? Suppose that the amount is due in 5 years? 20 years? Does the present value of an annuity to be paid for 10 years increase or decrease if

> Inventory computations require cost-flow assumptions only because specific identification of items sold is costly. Specific identification is theoretically superior to any cost-flow assumption and eliminates the possibility of income manipulation availab

> The allowance method of accounting for uncollectible accounts receivable involves the creation of a contra account that shows the estimated amount of uncollectible receivables. Why would financial statement users want to know both this number and the gro

> Distinguish between the discounted present value of a stream of future payments and their net present value. If there is no distinction, then so state.

> Distinguish between simple and compound interest.

> How does interest equate cash flows over time?

> Data related to sales on account of Heath Company appear next. Heath Company began operating in 2011. Heath Company estimates that 3% of sales on account will ultimately become uncollectible. Uncollectible accounts generally occur within three years of

> Campbell Incorporated reported the following information in their consolidated income statement for the years ended December 31, 2012 and 2013 a. What was Campbell’s basic earnings per share in 2012 and 2013? b. What was Campbell&acir

> Describe the implicit interest rate for a series of cash flows and a procedure for finding it.

> Distinguish between an annuity due and an ordinary annuity.

> Identify the underlying principle that guides the measurement of the acquisition cost of inventories. What is the rationale for this accounting principle?

> The accounting for a multiple-element contract separates the contract with a customer into pieces (components or deliverables) and assigns each component a portion of the total contract revenue. The percentage-of-completion method of accounting for a lon

> The cost recovery method and the completed contract method of recognizing revenues are similar in that both methods delay the recognition of income even if a firm collects cash. In what ways do the two methods differ?

> A firm that sells inventory for more than its acquisition cost realizes an economic gain that accountants include in net income, but a firm that sells treasury stock for more than its acquisition cost realizes an economic gain that accountants exclude fr

> Compare the position of a shareholder who receives a cash dividend, a property dividend, and a stock dividend.

> The accounting for stock options, stock dividends, and treasury stock clouds the distinction between capital transactions and income transactions.” Explain.

> Stock option valuation models indicate that the value of a stock option increases with the volatility of the stock, increases with the time between the grant date and the expected exercise date, and decreases with increases in the discount rate. Explain.

> Compare and contrast a stock option, a stock right, and a stock warrant. How does the accounting for these three differ?

> The terms of sale “2/10, net/30” mean that the buyer can take a discount of 2% from gross invoice price by paying the invoice within 10 days; otherwise, the buyer must pay the full amount within 30 days. a. Write an expression for the implicit annual rat

> A firm contemplates issuing 10,000 shares of $100 par value preferred stock. The preferred stock promises a $4 per share annual dividend. The firm considers making this preferred stock callable or convertible. Will the issue price be the same in the two

> Consider the following statement: “When a firm repurchases its shares, the shares disappear.” Do you agree?

> Distinguish between minority investments in other companies and the non controlling, or minority, interest in a consolidated subsidiary.

> Accounting for an investment in a subsidiary using the equity method and not consolidating it yields the same net income as consolidating the subsidiary. Total assets will differ depending on whether the investor consolidates the subsidiary.” Explain.

> Why is the outcome of applying the equity method sometimes described as a one-line consolidation? Consider both the balance sheet and the income statement in your response.

> Describe the rationale for why an investor using the equity method must eliminate any intercompany profit or loss on transactions between the investor and the investee.

> Distinguish between significant influence and control, and describe how these concepts relate to the method of accounting for inter corporate investments.

> Under what circumstances might majority share ownership of another entity not serve as an indicator of control?

> Distinguish between the non controlling, or minority, interest in net income of a consolidated subsidiary and the non controlling, or minority, interest in net assets of a consolidated subsidiary.

> Define the concept of an economic entity and explain its importance in preparing consolidated financial statements of a parent company with its controlled subsidiaries.

> Berman Company purchased a plot of land for possible future development. The land had fair value of $86,000. Berman Company gave a 3-year interest-bearing note. The note had face value of $100,000 and provided for interest at a stated rate of 8%. The not

> Suggest reasons why a firm would acquire a derivative and not treat it as an accounting hedge.

> Both U.S. GAAP and IFRS require the immediate recognition in net income of unrealized gains and losses on derivatives classified as fair value hedges. Both U.S. GAAP and IFRS delay recognition in net income of unrealized gains and losses on derivatives c

> Recognizing a derivative classified as a fair value hedge of a firm commitment as an asset but not recognizing the commitment that the derivative is hedging as a liability is inconsistent.” Do you agree? Why or why not?

> Distinguish between a fair value hedge and a cash flow hedge.

> When is a derivative also an accounting hedge? When is it not also an accounting hedge?

> Reporting marketable available-for-sale securities at fair value on the balance sheet but not including the unrealized gains and losses in income is inconsistent and provides an opportunity for earnings management.” Do you agree? Why or why not?

> What is the reasoning for including unrealized gains and losses on trading securities in income but including unrealized gains and losses on available-for-sale securities in Other Comprehensive Income?

> Distinguish between the following pairs of terms: a. Debt securities classified as “held-to-maturity” versus “available for sale.” b. Equity securities classified as “trading” versus “available for sale.” c. Amortized cost versus fair value of debt secur

> When an employer firm recognizes the change in either a pension asset or pension liability for a period, the offsetting credit or debit required by U.S. GAAP is usually to Other Comprehensive Income. Why doesn’t this amount immediately affect pension exp

> Under what circumstances would an employer firm report both a net pension asset and a net pension liability on its balance sheet? Why don’t U.S. GAAP and IFRS permit the firm to net these amounts and show only a single net pension asset or net pension li

> During 2013, Pandora Company wrote off $2,200 of accounts receivable as uncollectible. Pandora Company collected no cash during 2013 for amounts it had written off in previous years. The balance in the Allowance for Uncollectible Accounts account on the

> Over sufficiently long periods of time, why is the total amount of an employer’s pension expense equal to the cash the employer pays into a pension plan, instead of the cash the pension plan pays retired employees?

> The principal accounting issue involving deferred compensation relates to when firms recognize compensation cost as an expense.” Explain.

> What role does a special purpose entity or variable interest entity serve in achieving off balance-sheet financing involving the sale of receivables?

> Recognizing rights and obligations embodied in all executory contracts would eliminate a means of off-balance-sheet financing.” How might such an action confuse and possibly mislead financial statement users?

> Compare and contrast the financial statement effects of achieving off-balance-sheet financing through an executory contract versus an asset sale in which the seller of the assets will reimburse the buyer for any shortfall in collections from the purchase

> Of what value is information about the components of deferred tax assets and deferred tax liabilities, given that firms calculate income tax expense on income before taxes and not on individual revenues and expenses?

> Under what circumstances will a firm report a deferred tax asset on the balance sheet? Under what circumstances will a firm report a deferred tax liability on the balance sheet?

> One might view a deferred tax liability as an interest-free loan from the government.” Do you agree? Why or why not?

> Describe the U.S. GAAP rationale for reducing pension expense for the return on pension investments.

> Selected data from the accounts of Seward Corporation appear next; the firm’s fiscal year ends on December 31. The firm makes all sales on account. There were no recoveries during the year of accounts written off in previous years. G

> A retailer leases space in a shopping center, whose buildings have a 30-year life, on a 10-year lease. The lessee pays a small fixed amount per month plus 10% of sales for the previous month. How will the retailer treat this lease under the old/current r

> Refer to the preceding two questions. Describe the circumstances under which a firm would report a net gain from its borrowing activities. Give an example and the general principle. You may find using zero coupon bonds as examples a good way to think abo

> Refer to question 6. Would your answer differ if the firm repaid the bond prior to maturity? Data from question 6: “The total effect on income before income taxes over the life of a bond that a firm repays at maturity will be the same whether the firm

> The total effect on income before income taxes over the life of a bond that a firm repays at maturity will be the same whether the firm accounts for the bond using amortized cost measurement based on the historical market interest rate or fair value meas

> Firm A issues $1,000,000 face value, 9% semiannual coupon bonds at a price to yield 8% compounded semiannually. Firm B issues $1,000,000 face value, 7% semiannual coupon bonds at a price to yield 8% compounded semiannually. Both bond issues mature in 20

> A firm issues two bonds with identical issue prices, market-required yields, and final maturity dates. One bond is a semiannual coupon bond, and the other bond is a serial bond. Will the total interest expense over the life of these two bonds be the same

> Applying the effective interest method using the historical market interest rate gives a constant amount of interest expense on bonds each period.” Do you agree? If not, how would you change the statement to make it accurate?

> Using amortized cost based on the historical market interest rate to account for bonds in periods subsequent to their initial issuance provides a carrying value for bonds that is consistent with using historical, or acquisition, cost measurements for ass

> If permitted, a lessor generally prefers to account for leases using the capital lease method for financial reporting and the operating lease method for tax reporting.” Explain.

> If permitted, a lessee generally prefers to account for leases using the operating lease method for financial reporting and the capital lease method for tax reporting.” Explain.

> Find the interest rate implicit in a loan of $100,000 that the borrower discharges with two annual installments of $55,307 each, paid at the end of each of the next two years.

> The lessor who manufactured the equipment it leases to the lessee recognizes the same amount of income (revenue minus expenses) over the term of a lease as the lessee recognizes as expenses.” Do you agree or disagree? Explain.

> In what ways is a lessee’s capital lease similar to, and different from, purchasing the equipment using the proceeds of a loan repayable in installments?

> Relate the concept of return of capital to the criterion under U.S. GAAP for deciding whether an impairment loss on long-lived assets other than non-amortized intangibles has occurred.

> A firm expects to use a delivery truck for five years. At the end of three years, the transmission wears out and requires replacement at a cost of $4,000. The firm argues that it should capitalize the expenditure because without it the useful life is zer

> An airline has depreciated its new aircraft in the past over 25 years. New fuel usage and safety standards indicate that a shorter useful life is now appropriate for all of its existing aircraft. Depending on the circumstances, the airline might (a) spre

> When Thames acquires another firm, it allocates a portion of the purchase price to brand names, some of which it amortizes and some of which it does not amortize. How does Thames likely justify this different treatment of brand names?

> Contrast the terms finite life and indefinite life as they apply to depreciation of tangible long-lived assets and amortization of intangible assets.

> What is the effect of capitalizing interest costs associated with self-constructed assets on reported income summed over all the periods of the life of a given self-constructed asset, from building through use until eventual retirement? Contrast with a p

> If Merck, a pharmaceutical firm, makes expenditures to research new drugs, it must treat the expenditures as an expense. If it acquires a patent for a new drug from its creator, it must treat the expenditure as an asset. If it acquires another firm with

> A firm that makes expenditures to self-construct a building treats the expenditures as an asset. When that same firm makes research and development expenditures to create a new patented technology, it must treat the expenditures as an expense. When that

> Dove Company’s accounts receivable show the following balances by age: Age of Accounts……………………………………….Balance Receivable Not yet due……………………………………………………………….$1,200,000 0–30 Days…………………………………………………………………….400,000 31–60 Days………………………………………………………………………90,0

> Suppose that competition among acquiring firms to make a corporate acquisition results in a valuation error, such that the acquiring firm overpays for the acquired firm. The acquiring firm will allocate the excess purchase price to goodwill, along with a

> The use of undiscounted, instead of discounted, cash flows for identifying asset impairment losses under U.S. GAAP seems to lack a conceptual basis. Explain why discounted cash flows are preferred to undiscounted cash flows in this scenario.

> Why does the cash recoverability criterion apply to impairment losses on amortized intangibles but not on non-amortized intangibles under U.S. GAAP?

> The Francis W. Parker School, a private lower school, has a reporting year ending June 30. It hires teachers for a 10-month period: September of one year through June of the following year. It contracts to pay teachers in 12 monthly installments over the

> Firms should obtain as much financing as possible from suppliers through accounts payable because it is a free source of funds.” Do you agree? Why or why not?

> Compare and contrast the Merchandise Inventory account of a merchandising firm and the Finished Goods Inventory account of a manufacturing firm.

> Describe the similarities and differences between the allowance method for un collectibles (see Chapter 8) and the allowance method for warranties.

> A noted accountant once remarked that the optimal number of faulty TV sets for Sony to sell is “not zero,” even if Sony promises to repair all faulty Sony sets that break down, for whatever reason, within two years of purchase. Why could the optimal numb

> Under what circumstances will the Allowance for Uncollectible Accounts have a debit balance during the accounting period? The balance sheet figure for the Allowance for Uncollectible Accounts at the end of the period should never show a debit balance. Wh

> a. An old wisdom in tennis holds that if your first serves are always good, you are not hitting them hard enough. An analogous statement in business might be that if you have no uncollectible accounts, you probably are not selling enough on credit. Comme

> York Company’s accounts receivable show the following balances: Age of Accounts………………………………………………..Balance Receivable 0–30 Days…………………………………………………………………..$1,200,000 31–60 Days………………………………………………………………………255,000 61–120 Days………………………………………………………………………..75,

> Conceptually, what kind of account is the Deferred Gross Margin account that arises under the installment method of accounting? How is this account typically classified on balance sheets?

> Both bad debt expense and expected returns reduce income in the period of sale. How does the accounting for these two items differ and how is it similar?

> A magazine publisher offers a reduced annual subscription fee if customers pay for three years in advance. Under this subscription program, the magazine publisher receives from customers $45,000, which it credits to Advances from Customers. The estimated

> The perpetuity with growth formula involves several assumptions. Which one seems least plausible?

> Both the installment method and the cost recovery method recognize revenue when a firm collects cash. Why, then, does the pattern of income (that is, revenues minus expenses) over time differ under these two methods?

> Construction companies often use the percentage-of-completion method. Why doesn’t a typical manufacturing firm use this method of income recognition?

> Exhibit 6.12 in Chapter 6 provides a simplified statement of cash flows. For each of the transactions that follow, indicate the number(s) of the line(s) in Exhibit 6.12 affected by the transaction and the amount and direction (increase or decrease) of th

> Exhibit 6.12 in Chapter 6 provides a simplified statement of cash flows. For each of the transactions that follow, indicate the number(s) of the line(s) in Exhibit 6.12 affected by the transaction and the amount and direction (increase or decrease) of th

> Exhibit 15.9 presents the changes in common shareholders’ equity of Monk Corporation for 2013 through 2015. Monk regularly purchases shares of its common stock and reissues them in connection with stock option plans. It will usually iss

> Exhibit 15.8 presents a portion of the statement of changes in shareholders’ equity for Busch Corporation for 2013. Prepare journal entries for each of the eight transactions listed in Exhibit 15.8. Record the effect of items affecting

> Diversified Technologies opened for business on January 1, 2013. Sales on account during 2013 were $126,900. Collections from customers from sales on account during 2013 were $94,300. Diversified Technologies estimates that it will ultimately not collect

> Exhibit 15.7 presents a portion of the statement of changes in shareholders’ equity for Sirens, Inc., for 2013. Prepare journal entries for each of the six listed transactions in Exhibit 15.7. Transactions (4) and (5) were not with empl

> Exhibit 15.6 reproduces a portion of the statement of changes in shareholders’ equity for Microtel Corporation for 2013. When Microtel repurchases its common stock, it cancels the outstanding shares. Prepare journal entries for each of

> Pramble Company grants stock options to its managerial employees on December 31 of each year. Employees may acquire one share of common stock with each stock option. Pramble sets the exercise price equal to the market price of its common stock on the dat