4th Edition

ISBN: 9781259934773

Author: SPICELAND

Publisher: MCG

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Chapter 7, Problem 7.8APEM

Earnings Management

Edward L. Vincent is CFO of Energy Resources, Inc. The company specializes in the exploration and development of natural gas. It’s near year-end, and Edward is feeling terrific. Natural gas prices have risen throughout the year, and Energy Resources is set to report record-breaking performance that will greatly exceed analysts’ expectations. However, during an executive meeting this morning, management agreed to “tone down” profits due to concerns that reporting excess profits could encourage additional government regulations in the industry, hindering future profitability.

Edward decides to adjust the estimated service life of development equipment from 10 years to 6 years. He also plans to adjust estimated residual values on development equipment to zero as it is nearly impossible to accurately estimate residual values on equipment like this anyway.

Required:

1. Explain how the adjustment of estimated service life from 10 years to 6 years will affect depreciation expense and net income.

2. Explain how the adjustment of estimated residual values to zero will affect depreciation expense and net income.

3. In addition to heading off additional government regulations, why might Energy Resources haw an incentive to report lower profits in the current period?

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Chapter 7, Problem 7.7APWC

Chapter 8, Problem 1RQ

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JH, Inc., is a calendar year, accrual basis corporation with Joe as its sole shareholder (basis in his stock is $90,000). On January 1 of the current year, JH Corporation has accumulated E & P of $200,000. Before considering the effect of the distribution described below, the corporation’s current E & P is $50,000. On November 1, JH distributes an office building to Joe. The office building has an adjusted basis of $80,000 (fair market value of $100,000) and is subject to a mortgage of $110,000. Assume that the building has been depreciated using the ADS method for both income tax and E & P purposes. What are the tax consequences of the distribution to JH and to Joe? (In your answer, be sure to describe the effects on taxable income for both JH and Joe, the impact of the distribution on JH’s E & P, and Joe’s basis in the building.)

Joe is the sole shareholder of JH Corporation. Joe sold his stock to Ethan on October 31 for $150,000. Joe’s basis in JH stock was $50,000 at the start of the year. JH distributed land to Joe immediately before the sale. JH’s basis in the land was $20,000 (fair market value of $25,000). On December 31, Ethan received a $75,000 cash distribution from JH. During the year, JH has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000. Which of the following statements is true? a. Joe recognizes a $110,000 gain on the sale of his stock. b. Joe recognizes a $100,000 gain on the sale of his stock. c. Ethan receives $5,000 of dividend income.d. Joe receives $20,000 of dividend income. e. None of the above.

Chapter 7 Solutions

FINANCIAL ACCOUNTINGLL W/CONNECT >IC<

Ch. 7 - Prob. 1RQ Ch. 7 - What are the two major categories of long-term...Ch. 7 - Prob. 3RQ Ch. 7 - Prob. 4RQ Ch. 7 - Prob. 5RQ Ch. 7 - Prob. 6RQ Ch. 7 - Equipment includes machinery used in manufacturing...Ch. 7 - Prob. 8RQ Ch. 7 - Prob. 9RQ Ch. 7 - Prob. 10RQ

Ch. 7 - Prob. 11RQ Ch. 7 - How do we decide whether to capitalize (record as...Ch. 7 - Explain the usual accounting treatment for repairs...Ch. 7 - Prob. 14RQ Ch. 7 - How is the dictionary definition different from...Ch. 7 - What factors must we estimate in allocating the...Ch. 7 - Prob. 17RQ Ch. 7 - Prob. 18RQ Ch. 7 - Prob. 19RQ Ch. 7 - Assume that Little King Sandwiches uses...Ch. 7 - Assume Little King Sandwiches depreciates a...Ch. 7 - Prob. 22RQ Ch. 7 - Prob. 23RQ Ch. 7 - What is book value? How do we compute the gain or...Ch. 7 - Prob. 25RQ Ch. 7 - Prob. 26RQ Ch. 7 - Prob. 27RQ Ch. 7 - Prob. 28RQ Ch. 7 - Determine the initial cost of land (LO71) Fresh...Ch. 7 - Prob. 7.2BE Ch. 7 - Prob. 7.3BE Ch. 7 - Compute research and development expense (LO72)...Ch. 7 - Prob. 7.5BE Ch. 7 - Explain the accounting definition of depreciation...Ch. 7 - Prob. 7.7BE Ch. 7 - Prob. 7.8BE Ch. 7 - Prob. 7.9BE Ch. 7 - Account for the sale of long-term assets (LO76)...Ch. 7 - Account for the exchange of long-term assets...Ch. 7 - Account for the exchange of long-term assets...Ch. 7 - Prob. 7.13BE Ch. 7 - Determine the impairment loss (LO78) Vegetarian...Ch. 7 - Prob. 7.15BE Ch. 7 - McCoys Fish House purchases a tract of land and an...Ch. 7 - Orion Flour Mills purchased a new machine and made...Ch. 7 - Prob. 7.3E Ch. 7 - Prob. 7.4E Ch. 7 - Prob. 7.5E Ch. 7 - Prob. 7.6E Ch. 7 - Prob. 7.7E Ch. 7 - Prob. 7.8E Ch. 7 - Prob. 7.9E Ch. 7 - Determine depreciation for the first year under...Ch. 7 - Deformine depreciation under three methods (LO74)...Ch. 7 - Determine straight-line depreciation for partial...Ch. 7 - Determine straight-line depreciation for partial...Ch. 7 - Prob. 7.14E Ch. 7 - Prob. 7.15E Ch. 7 - Prob. 7.16E Ch. 7 - Record the sole of equipment (L076) Abbott...Ch. 7 - Prob. 7.18E Ch. 7 - Prob. 7.19E Ch. 7 - Prob. 7.20E Ch. 7 - Complete the accounting cycle using long-term...Ch. 7 - The Italian Bread Company purchased land as a...Ch. 7 - Prob. 7.2AP Ch. 7 - Prob. 7.3AP Ch. 7 - Prob. 7.4AP Ch. 7 - Determine depreciation under three methods (LO74)...Ch. 7 - Prob. 7.6AP Ch. 7 - Compute depreciation, amortization, and book value...Ch. 7 - Prob. 7.8AP Ch. 7 - Calculate and interpret ratios (LO77) Sub Station...Ch. 7 - Calculate and interpret ratios (LO77) University...Ch. 7 - Prob. 7.1BP Ch. 7 - Determine the acquisition cost of equipment (LO71)...Ch. 7 - Prob. 7.3BP Ch. 7 - Prob. 7.4BP Ch. 7 - Determine depreciation under three methods (LO74)...Ch. 7 - Prob. 7.6BP Ch. 7 - Prob. 7.7BP Ch. 7 - Record the disposal of equipment (LO76) Flip Side...Ch. 7 - Calculate and Interpret ratios (LO77) Papas Pizza...Ch. 7 - Calculate and interpret ratios (LO77) Barry...Ch. 7 - Prob. 7.1APCP Ch. 7 - Prob. 7.2APFA Ch. 7 - Prob. 7.3APFA Ch. 7 - Prob. 7.4APCA Ch. 7 - Prob. 7.5APE Ch. 7 - Written Communication At a recent luncheon, you...Ch. 7 - Earnings Management Edward L. Vincent is CFO of...

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Solution Summary: The author explains how the adjustment of estimated service life from 10 years to 6 years will affect depreciation expense and net income.

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