Questions and Answers of Financial And Managerial Accounting The Basis For Business Decisions

Jane Miller is the proprietor of a small manufacturing business. She is consider¬ing the possibility of joining in partnership with Mary Bracken, whom she consid¬ers to be thoroughly competent and
Scott has land having a book value of $50,000 and a fair market value of $80,000 and a building having a book value of $70,000 and a fair market value of $60,000.The land and building become
Allen and Baker are considering forming a partnership. What do you think are the two most important factors for them to include in their partnership agree¬ment? LO5
Partner X withdraws $25,000 from a partnership during the year. When the financial statements are prepared at the end of the year, X’s share of the partner¬ship income is $15,000. Which amount
What factors should be considered in drawing up an agreement as to the way in which income shall be shared by two or more partners? LO5
Shirley Bray and Carl Carter are partners who share profits and losses equally.The current balances in their capital accounts are: Bray, $50,000; Carter, $35,000.If Carter sells his interest in the
What is meant by the term mutual agency? LO5
If C is going to be admitted to the partnership of A and B, why is it first necessary to determine the current fair market value of the assets of the partnership of A and B? LO5
Describe how a dissolution of a partnership may differ from a liquidation of a partnership. LO5
What measure can you suggest to prevent a partnership from having insufficient cash available to pay the estate of a deceased partner without disrupting the operation of the business? LO5
What factors should be considered when comparing the net income figure of a partnership to that of a corporation of similar size? LO5
Upon the death of Robert Bell, a partner in the firm of Bell, Cross, and Davis, Charles Bell, the son of Robert Bell, demanded that he replace his father as a member of the partnership. Can Charles
The partnership of X and Y is being dissolved. After the assets had been sold at a loss, the cash balance was $38,000. All creditors’ claims, amounting to $14,000, were then paid. The capital
Why are large corporations often said to be publicly owned? LO7
Distinguish between corporations and partnerships in terms of the following characteristics: LO7 a Owners’ liability b Transferability of ownership interest c Continuity of existence d Federal
What are the basic rights of the owner of a share of corporate stock? In what way are these basic rights commonly modified with respect to the owner of a share of preferred stock? LO7
Explain the meaning of the term double taxation as it applies to corporate profits. LO7
Distinguish between paid-in capital and retained earnings of a corporation. Why is such a distinction useful? LO7
If the Retained Earnings account has a debit balance, how is it presented in the balance sheet and -yvhat is it called? LO7
Describe the usual nature of the following features as they apply to a share of preferred stock: (a) cumulative, (b) convertible, and (c) callable. LO7
Why is noncumulative preferred stock considered a very unattractive form of investment? LO7
When stock is issued by a corporation in exchange for assets other than cash, accountants face the problem of determining the dollar amount at which to record the transaction. Discuss the factors
State the classification (asset, liability, stockholders’ equity, revenue, or expense)of each of the following accounts: LO7 a Subscriptions receivable f Paid-in capital in b Organization costs
What does book value per share of common stock represent? Does it represent the amount common stockholders would receive in the event that the corporation were liquidated? Explain briefly. LO7
How is book value per share of common stock computed when a company has both preferred and common stock outstanding? LO7
What would be the effect, if any, on book value per share of common stock as a result of each of the following independent events: (a) a corporation obtains a bank loan; (b) a dividend is declared
A professional baseball team received as a gift from the city the land upon which to build a stadium. What effect, if any, will the receipt of this gift have upon the baseball team’s balance sheet
Explain the following terms: LO7 a Stock transfer agent d Minutes book b Stockholders’ ledger e Stock registrar c Underwriter
Why is the reporting of the results of operations so important to users of financial statements? LO8
Define a segment of a business and extraordinary items for purposes of reporting the results of operations.LO8
Give some examples of segments of a business and extraordinary losses.LO8
Briefly describe how each of the following should be reported in the income statement for the current year.LO8 a Write-off of a large account receivable from a bankrupt customer b Large loss from
How should the effect of a material event or transaction which is either unusual in nature or occurs infrequently, but not both, be disclosed?LO8
Explain what is meant by the cumulative effect on prior years’ income of a change in accounting method. How and when is this item presented in a company s finan¬ cial statements?LO8
Briefly define each of the following:LO8 a Price-earnings ratio b Primary earnings per share c Fully diluted earnings per share
Explain the significance of the following dates relating to dividends: date of declaration, date of record, date of payment, ex-dividend date.LO8
Distinguish between a stock split and a stock dividend. Is there any reason for the difference in accounting treatment of these two events?LO8
What are prior period adjustments? How are they presented in financial state¬ ments?LO8
What is the purpose of an appropriation of retained earnings? What are the arguments for and against the use of such appropriations?LO8
What type of transaction most frequently appears as a deduction in a statement of retained earnings?LO8
What is treasury stock? Why do corporations purchase their own shares? Is treas¬ury stock an asset? How should it be reported in the balance sheet?LO8
In many states, the corporation law requires that retained earnings be restricted for dividend purposes to the extent of the cost of treasury shares. What is the reason for this legal rule?LO8
If a statement of retained earnings consisted of only four items, what would these four items most probably be?LO8
What is the most effective method of disclosing in financial statements the fact that a portion of the retained earnings is restricted by the terms of a long-term debt agreement and therefore not
“In a long-established, successful corporation the Cash account would normally have a dollar balance equal to or larger than the Retained Earnings account.”Do you agree with this quotation?
Distinguish between the two terms in each of the following pairs: LO3 a Mortgage bond; debenture bond b Contract (or nominal) interest rate; effective interest rate c Fixed-maturity bond; serial bond
K Company has decided to finance expansion by issuing $10 million of 20-year debenture bonds and will ask a number of underwriters to bid on the bond issue.Discuss the factors that will determine the
What is a convertible bond? Discuss the advantages and disadvantages of con¬vertible bonds from the standpoint of (a) the investor and (b) the issuing corpo¬ration. LO3
The Computer Sharing Co. has paid-in capital of $10 million and retained earn¬ings of $3 million. The company has just issued $1 million in 20-year, 8% bonds. It is proposed that a policy be
The following excerpt is taken from an article in a leading business periodical:“In the bond market high interest rates mean low prices. Bonds pay out a fixed percentage of their face value,
Discuss the advantages and disadvantages of a call provision in a bond contract from the viewpoint of (a) the bondholder and (b) the issuing corporation. LO3
Explain why the effective rate of interest differs from the contract rate when bonds are issued (a) at a discount and (b) at a premium. LO3
When the effective interest method is used to amortize bond discount or pre¬mium, the amount of bond interest expense will differ in each period from that of the preceding period. Explain how the
Explain why the effective interest method of amortizing bond discount or pre¬mium is considered to be theoretically preferable to the straight-line method. LO3
Explain how the lessee accounts for an operating lease and a capital lease. Why is an operating lease sometimes called off -balance-sheet- financing? LO3
A friend of yours has just purchased a house and has incurred a $50,000, 11%mortgage, payable at $476.17 per month. After making the first monthly pay¬ment, he received a receipt from the bank
Under what conditions are loss contingencies recorded at estimated amounts in the accounting records? LO3
A lawsuit has been filed against Telmar Corporation alleging violations of federal antitrust laws and claiming damages which, when trebled, total $1.2 billion.Telmar Corporation denies the charges
With reference to question 13 above, illustrate the disclosure of the pending lawsuit which should be included in the current financial statements of Telmar Corporation. LO3
List several ways in which business owners may legally alter the amount of taxes they pay. LO3
What is meant by the expression “tax planning”? LO3
What are the four major classes of taxpayers under the federal income tax law? LO3
It has been claimed that corporate income is subject to double taxation. Ex¬plain the meaning of this expression. LO3
Taxes are characterized as progressive, proportional, or regressive with respect to any given base. Describe an income tax rate structure that would fit each of these characterizations. LO3
State whether you agree with the following statements and explain your reason¬ ing: . .a A person in a very high tax bracket who makes a cash contribution to a college will reduce his or her tax
State in equation form the federal income tax formula for individuals, beginning with total income and ending with taxable income. LO3
Avery and Baker are both high-income single taxpayers who have exactly the same amount of taxable income. However, Avery is subject to a marginal tax rate far lower than the marginal rate for Baker.
List some differences in the tax rules for corporations in contrast to those for individuals. LO3
Helen Bame, M.D., files her income tax return on a cash basis. During the cur¬rent year she collected $12,600 from patients for medical services rendered in prior years, and billed patients $77,000
Joe Gilmore, a single man, files his income tax return on a cash basis. During the current year $800 of interest was credited to him on his savings account; he withdrew this interest on January 18 of
From an individual taxpayer’s viewpoint, it is better to have a $10,000 net long¬term capital gain than $10,000 of ordinary income; however, ordinary losses are usually more advantageous than net
Even when a taxpayer uses the accrual method of accounting, taxable income may differ from accounting income. Give four examples of differences between the tax treatment and accounting treatment of
Under what circumstances is the accounting procedure known as income tax allocation appropriate? Explain the purpose of this procedure. LO3
List some tax factors to be considered in deciding whether to organize a new business as a corporation or as a partnership. LO3
Explain how the corporate income tax makes debt financing in general more attractive than financing through the issuance of preferred stock. LO3
On September 1, Bar Company purchased a one-year fire insurance policy and re¬corded the payment of the full yearly premium of $4,800 by debiting Unexpired Insurance. The accounts were not adjusted
Mill Corporation adjusts and closes its accounts at the end of the calendar year.Prepare the adjusting entries required at December 31 based on the following infor¬mation. (Not all of these items
On Friday of each week, Ozark Company pays its sales personnel weekly salaries amounting to $100,000 for a five-day work week. LO8 a Prepare the necessary adjusting entry at year-end, assuming that
Among the ledger accounts used by Cottonwood Speedway are the following: Pre¬paid Rent, Rent Expense, Unearned Admissions Revenue, Admissions Revenue, Pre¬paid Printing, Printing Expense,
Property Management Company manages apartment buildings for various owners who wish to be relieved of this responsibility. Among the ledger accounts in use are Cash, Unearned Management Fees,
The following amounts are taken from consecutive balance sheets of Jensen Com¬pany. LO8b Cash received during Year 2 as rental revenue c Cash paid during Year 2 for interest Unexpired insurance
Milo Company closes its accounts at the end of each calendar year. The company operates on a five-day work week and pays its employees up to date each Friday. The weekly payroll is regularly $5,000.
Sierra Ski Bowl maintains its accounting records on a calendar-year basis. Using the year-end information shown below, you are to prepare all necessary adjusting jour¬nal entries at December 31.
The Foothill Music Festival uses a fiscal year ending June 30 and recognizes two types of revenue: Admissions Revenue and Concessions Revenue. The latter revenue comes from the sale of refreshments
Kingspoint Motel maintains its accounting records on the basis of a calendar year.The following information is available as a source for adjusting entries at Decem¬ber 31. LO8(1) Salaries earned by
Pension Consultants is a new firm organized January 1, 19 _ , t o help other compa¬nies to develop employee pension plans which will meet the complex legal and ac¬counting requirements imposed by
North Slope Engineering Consultants was organized January 1 to provide technical services to various oil companies in Alaska. The trial balance on page 162 was pre¬pared at June 30 after six months
Bel Air Golf Course adjusts and closes its accounts at the end of each calendar year.Revenue is obtained from greens fees and also from a contract with a concessionaire who sells refreshments on the
Research Associates is in the business of performing investigations and preparing financial analyses for business organizations and government agencies. Much of its work is done through a computer
Trade Winds Airlines provides passenger and freight service among some Pacific islands. The accounts are adjusted and closed each month. At June 30 the trial balance shown at the top of page 165 was
The following events relating to salaries occurred in King Company near December 31, the end of the fiscal year. LO8 Dec. 27 Recorded payment of regular weekly salaries of $3,000.Dec. 31 Prepared an
The accounting records of Blue Mountain Resort are maintained on the basis of a fiscal year ending April 30. The following facts are to be used for making adjusting entries at April 30. LO8(1)
Gary Smith organized Safe Storage on January 1 for the purpose of leasing a large vacant building and renting space in this building to others for storage of industrial materials. The accounting
Investors’ Advisory Service was organized on June 1, 19 - , to provide investment counseling to investors in securities. Some customers paid in advance on a subscrip¬tion basis; others were billed
Stanley Wiley organized a drafting firm on January 1. At June 30, before the ac¬counts were adjusted and closed for the first time, a trial balance was prepared as shown on page 169. LO8 Other
The four-column schedule on page 170 represents the first four columns of a 10-column work sheet to be prepared for Miller’s TV Repair Service for the month ended April 30, 19 _ (The completed
Rolling Hills Golf Course obtains revenue from greens fees and also from a contract with a concessionaire who sells refreshments on the premises. The books are closed at the end of each calendar
Oceanside Cinema closes its accounts each month. At November 30, the trial balance and other information given below and on page 172 were available for adjusting and closing the accounts. LO8 Other
Resort Flying Service was organized on June 1 to offer air service for visitors to a famous island resort. The company follows the policy of adjusting and closing its accounts each month. At December
Timothy Property Management occupies a leased building on which it has paid rent in advance. Most of the company’s revenue comes from managing office buildings and apartment buildings. Some clients

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