Mary and Bill Markson purchased a house in 2011. The Marksons rented this property from June 2011 until August 2014 at which time they occupied the property as their principal residence. The house was acquired for $300,000 and the Marksons claimed $30,000 of cost recovery deductions during the 38 month rental period. The property was sold in March 2020 for $450,000. The property was used for a total of 105 months, with the last 67 months of use as the Markson’s principal residence.

What amount of gain will be recognized by the Marksons from the sale of this property?

Sam Corporation operates under ideal conditions of certainty. It acquired its sole asset (a pen making machine) on January 1, 2018. The asset will yield $500 cash for 2 years at the end of year 2019 and 2020. Salvage value or disposal costs are expected to be zero. The interest rate in the economy is 6%. Purchase of the asset was financed by the issuance of common shares. Flamenco Corporation will pay no dividend at the end of each year.

Required

a.     Prepare a balance sheet and income statement as at the end of December 31, 2019.

Kant asserts that there is a crucial distinction between Acting from Duty and Merely Acting in Accord with Duty, says that only the former has genuine moral worth, and that the former requires not acting solely out of inclination.

1. Why would a contractualist like Glaucon disagree with these claims?

2. Why would Hume disagree with these claims?

During 2020, Mr. Hopkins realized a $20,000 long-term capital loss on a sale of ABC Inc. stock. Mr. Hopkins also owns 2,100 shares of XYZ Inc. stock with a basis of $70 per share and a current market value of $90 per share. Mr. Hopkins purchased this stock six months ago. Mr. Hopkins plans to hold his XYZ stock until 2024, at which time he expects to sell the stock for $135 per share. Mr. Hopkins is considering selling just enough of his XYZ shares to fully utilize his capital loss in 2020, and immediately repurchasing the XYZ shares the following day at the same price ($90) so as to maintain his investment in XYZ. He will then sell his XYZ stock, including the original shares acquired for $70 and the repurchased shares acquired for $90, in 2024 as originally planned.

Alternatively, Mr. Hopkins is considering simply holding his XYZ stock until selling it in 2024. Mr. Hopkins’ ordinary income tax rate is 25% and his long-term capital gains tax rate is 15%. He uses a discount rate of 5% in his NPV calculations.

Using the above information, which alternative (i.e., the sale/repurchase strategy or simply holding the stock until 2024) maximizes Mr. Hopkins’ post-tax cash flows from his XYZ stock?

The accompanying data represent the total compensation for 12randomly selected chief executive officers​ (CEO) and the​ company's stock performance in a recent year. Complete parts​ (a)through​ (d) below.

1. One would think that a higher stock return would lead to a higher compensation. Based on​ this, what would likely be the explanatory​ variable?

*Compensation

*Stock return

Draw a scatter diagram of the data. Use the result from part​ (a) to determine the explanatory variable.

c) Determine the linear correlation coefficient between compensation and stock return.

r equals=

​(Round to three decimal places as​ needed.)

The linear correlation coefficient is close to ______so ________linear relation exists between compensation and stock return. It appears that stock performance plays _____role in determining the compensation of a CEO.

The cash account for Corey’s Construction Company at August 31, 2020, indicated a book balance of $19,885. The bank statement received by the company indicated a balance of $39,473.63 as at August 31, 2020. A comparison of the bank statement and the accompanying cancelled cheques and memos with the records revealed the following:

1. A deposit of $6,794.62 was received by the bank on August 31 after the bank statement was prepared.

2. Cheques #251 for $1,200 and #260 for $1,333.25 were not presented to the bank for encashment as at August 31, 2020.
3. The bank erroneously debited a cheque drawn Corey’s Construction as $16,000 instead of $1,600.

4. The company’s accountant recorded a $3,500.00 cheque for payment of accounts payables as $35,000

5. The bank credited a deposit of $200 as $2,000 to Corey’s Construction account.
6. A cheque for $13,500 from a customer Ali Woods was returned for insufficient funds. The bank charged $50 for Wood’s NSF cheque. The company’s policy states that the bank charges associated with NSF cheques are to be recovered from the customer.
7. A note was collected by the bank of $21,000 on August 31 which included interest of $1,500.

8. A debit memo from the bank showed service charge amounting to $2,500 as at August 31, 2020.

Required:

1. Prepare the necessary journal entries for Corey’s Construction Company at August 31, 2020.

2. Prepare Corey’s Construction Company adjusted cash book to be included in the balance sheet for August 31^st. 2020.

3. Prepare Corey’s Construction Company bank reconciliation statement for August 31, 2020

The Thompson Corporation, a manufacturer of steel products, began operations on October 1, 2019. The accounting department of Thompson has started the fixed-asset and depreciation schedule presented below. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company's records and personnel: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
2. Land A and Building A were acquired from a predecessor corporation. Thompson paid $772,500 for the land and building together. At the time of acquisition, the land had a fair value of $103,200 and the building had a fair value of $756,800.
3. Land B was acquired on October 2, 2019, in exchange for 2,600 newly issued shares of Thompson’s common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $21 per share. During October 2019, Thompson paid $10,000 to demolish an existing building on this land so it could construct a new building.
4. Construction of Building B on the newly acquired land began on October 1, 2020. By September 30, 2021, Thompson had paid $170,000 of the estimated total construction costs of $260,000. Estimated completion and occupancy are July 2022.
5. Certain equipment was donated to the corporation by the city. An independent appraisal of the equipment when donated placed the fair value at $14,400 and the residual value at $1,600.
6. Equipment A’s total cost of $102,000 includes installation charges of $510 and normal repairs and maintenance of $10,600. Residual value is estimated at $5,000. Equipment A was sold on February 1, 2021.
7. On October 1, 2020, Equipment B was acquired with a down payment of $3,600 and the remaining payments to be made in 10 annual installments of $3,600 each beginning October 1, 2021. The prevailing interest rate was 7%.

Required:
Supply the correct amount for each answer box on the schedule. (Round your intermediate calculations and final answers to the nearest whole dollar.)

Case 19-7

Accounting for Contingent Payments to Employees or Selling Shareholders in a Business Combination

Company G (G), an SEC registrant, is a global financial advisory and asset management firm. Company P (P), a private company, offers advisory services for (1) mergers, acquisitions, and divestitures; (2) capital structure (including initial public offerings); (3) government advisory, including strategic, finance and capital markets related policy considerations; and (4) restructurings.

Case Facts

On September 18, 20X8, (the “Closing”), G and P executed an acquisition agreement (the “Agreement”) whereby G acquired 100 percent of the outstanding shares of P (the “Acquisition”). At the time of close, P had 10 employees that had over 200 combined years of financial and strategic advisory experience. Company P was owned as follows:

• Founder — 85 percent.

• Senior advisor — 10 percent.

• Other employees (four in total) — 5 percent.

  The purchase price was calculated using a revenue multiple that was established using market data at the midpoint and transferred in exchange for 100 percent of the outstanding shares to the Founder ÷ employees who owned 100 percent of P (collectively, the “Shareholders”) on a pro rata basis. The total purchase price comprised the following:

  • Cash = $1 million.

  • Shares = 100,000 shares in G (worth $3.3 million).

  • Delayed Consideration = 120,000 G shares, but issued to the Shareholders under the terms below (value assuming a 4-year vesting restriction = $5 million; assuming a 10-year vesting restriction = $4 million).

o Delayed consideration is held by an independent third party (Exchange Co) and on the fourth anniversary of the Closing, Exchange Co shall release the Delayed Consideration to the Shareholders, subject to the Shareholder being employed on such date.

o If a Shareholder is no longer employed on the fourth anniversary, the Delayed Consideration issued to such Shareholder will continue to be held by Exchange Co until the tenth anniversary of the Closing, at which point Exchange Co shall release the Delayed Consideration to the Shareholders.

Copyright 2019 Deloitte Development LLC All Rights Reserved.

Case 19-7: Accounting for a Contingent Payments to Employees or
Selling Shareholders in a Business Combination Page 2

• Earnout Consideration = Up to 600,000 shares (valued at total of $20 million).

o The Earnout Consideration will be contingent upon achievement of revenue hurdles over a period beginning on September 18, 20X8, and ending on December 31, 20X2 (“Earnout Period”).

o To the extent the performance targets below are achieved, Exchange Co shall deliver the relevant Earnout Shares to the Shareholders on a pro rata basis. However, if and to the extent certain performance targets described below are not achieved, in whole or in part, no Earnout Consideration will be paid.

•  First Earnout Consideration — If revenue exceeds $10 million in the Earnout Period, the Shareholders will be entitled to 200,000 shares.

•  Second Earnout Consideration — If revenue exceeds $20 million in the Earnout Period, the Shareholders will be entitled to an additional 200,000 shares.

•  Third Earnout Consideration — If revenue exceeds $30 million in the Earnout Period, the Shareholders will be entitled to an additional 200,000 shares.

o The Shareholders are still entitled to the Earnout Consideration in the event that targets are met, but they are not employees of G at the time the Earnout Consideration is earned.

Other Key Facts

• Company P meets the definition of a business under ASC 805.

• Each employment agreement executed by G and the Shareholders contains compensation that is commensurate with the service each respective Shareholder is providing to G.

• The Shareholders have at-will employment agreements with G.

• If the Shareholders were to leave, G would be able to replace them with an existing G investment banker; therefore, the Shareholders are not integral to the future success of the acquired business.

• The fair value of P was determined to be $24 million.

• The Earnout Consideration is not being treated as compensation expense for tax purposes.

Required:

Does the Delayed Consideration represent purchase consideration in exchange for the Acquisition or compensation for postcombination services? Is it contingent consideration? How much of the Delayed Consideration (if any) should be consideration for postcombination services?

Case 19-7

Accounting for Contingent Payments to Employees or Selling Shareholders in a Business Combination

Company G (G), an SEC registrant, is a global financial advisory and asset management firm. Company P (P), a private company, offers advisory services for (1) mergers, acquisitions, and divestitures; (2) capital structure (including initial public offerings); (3) government advisory, including strategic, finance and capital markets related policy considerations; and (4) restructurings.

Case Facts

On September 18, 20X8, (the “Closing”), G and P executed an acquisition agreement (the “Agreement”) whereby G acquired 100 percent of the outstanding shares of P (the “Acquisition”). At the time of close, P had 10 employees that had over 200 combined years of financial and strategic advisory experience. Company P was owned as follows:

• Founder — 85 percent.

• Senior advisor — 10 percent.

• Other employees (four in total) — 5 percent.

  The purchase price was calculated using a revenue multiple that was established using market data at the midpoint and transferred in exchange for 100 percent of the outstanding shares to the Founder ÷ employees who owned 100 percent of P (collectively, the “Shareholders”) on a pro rata basis. The total purchase price comprised the following:

  • Cash = $1 million.

  • Shares = 100,000 shares in G (worth $3.3 million).

  • Delayed Consideration = 120,000 G shares, but issued to the Shareholders under the terms below (value assuming a 4-year vesting restriction = $5 million; assuming a 10-year vesting restriction = $4 million).

o Delayed consideration is held by an independent third party (Exchange Co) and on the fourth anniversary of the Closing, Exchange Co shall release the Delayed Consideration to the Shareholders, subject to the Shareholder being employed on such date.

o If a Shareholder is no longer employed on the fourth anniversary, the Delayed Consideration issued to such Shareholder will continue to be held by Exchange Co until the tenth anniversary of the Closing, at which point Exchange Co shall release the Delayed Consideration to the Shareholders.

Copyright 2019 Deloitte Development LLC All Rights Reserved.

Case 19-7: Accounting for a Contingent Payments to Employees or
Selling Shareholders in a Business Combination Page 2

• Earnout Consideration = Up to 600,000 shares (valued at total of $20 million).

o The Earnout Consideration will be contingent upon achievement of revenue hurdles over a period beginning on September 18, 20X8, and ending on December 31, 20X2 (“Earnout Period”).

o To the extent the performance targets below are achieved, Exchange Co shall deliver the relevant Earnout Shares to the Shareholders on a pro rata basis. However, if and to the extent certain performance targets described below are not achieved, in whole or in part, no Earnout Consideration will be paid.

•  First Earnout Consideration — If revenue exceeds $10 million in the Earnout Period, the Shareholders will be entitled to 200,000 shares.

•  Second Earnout Consideration — If revenue exceeds $20 million in the Earnout Period, the Shareholders will be entitled to an additional 200,000 shares.

•  Third Earnout Consideration — If revenue exceeds $30 million in the Earnout Period, the Shareholders will be entitled to an additional 200,000 shares.

o The Shareholders are still entitled to the Earnout Consideration in the event that targets are met, but they are not employees of G at the time the Earnout Consideration is earned.

Other Key Facts

• Company P meets the definition of a business under ASC 805.

• Each employment agreement executed by G and the Shareholders contains compensation that is commensurate with the service each respective Shareholder is providing to G.

• The Shareholders have at-will employment agreements with G.

• If the Shareholders were to leave, G would be able to replace them with an existing G investment banker; therefore, the Shareholders are not integral to the future success of the acquired business.

• The fair value of P was determined to be $24 million.

• The Earnout Consideration is not being treated as compensation expense for tax purposes.

Copyright 2019 Deloitte Development LLC All Rights Reserved.

Case 19-7: Accounting for a Contingent Payments to Employees or
Selling Shareholders in a Business Combination Page 3

Required:

1. Should the Earnout Consideration to Shareholders be accounted for as purchase consideration in exchange for the Acquisition or as compensation for postcombination services?

Case 19-7

Accounting for Contingent Payments to Employees or Selling Shareholders in a Business Combination

Company G (G), an SEC registrant, is a global financial advisory and asset management firm. Company P (P), a private company, offers advisory services for (1) mergers, acquisitions, and divestitures; (2) capital structure (including initial public offerings); (3) government advisory, including strategic, finance and capital markets related policy considerations; and (4) restructurings.

Case Facts

On September 18, 20X8, (the “Closing”), G and P executed an acquisition agreement (the “Agreement”) whereby G acquired 100 percent of the outstanding shares of P (the “Acquisition”). At the time of close, P had 10 employees that had over 200 combined years of financial and strategic advisory experience. Company P was owned as follows:

• Founder — 85 percent.

• Senior advisor — 10 percent.

• Other employees (four in total) — 5 percent.

  The purchase price was calculated using a revenue multiple that was established using market data at the midpoint and transferred in exchange for 100 percent of the outstanding shares to the Founder ÷ employees who owned 100 percent of P (collectively, the “Shareholders”) on a pro rata basis. The total purchase price comprised the following:

  • Cash = $1 million.

  • Shares = 100,000 shares in G (worth $3.3 million).

  • Delayed Consideration = 120,000 G shares, but issued to the Shareholders under the terms below (value assuming a 4-year vesting restriction = $5 million; assuming a 10-year vesting restriction = $4 million).

o Delayed consideration is held by an independent third party (Exchange Co) and on the fourth anniversary of the Closing, Exchange Co shall release the Delayed Consideration to the Shareholders, subject to the Shareholder being employed on such date.

o If a Shareholder is no longer employed on the fourth anniversary, the Delayed Consideration issued to such Shareholder will continue to be held by Exchange Co until the tenth anniversary of the Closing, at which point Exchange Co shall release the Delayed Consideration to the Shareholders.

Copyright 2019 Deloitte Development LLC All Rights Reserved.

Case 19-7: Accounting for a Contingent Payments to Employees or
Selling Shareholders in a Business Combination Page 2

• Earnout Consideration = Up to 600,000 shares (valued at total of $20 million).

o The Earnout Consideration will be contingent upon achievement of revenue hurdles over a period beginning on September 18, 20X8, and ending on December 31, 20X2 (“Earnout Period”).

o To the extent the performance targets below are achieved, Exchange Co shall deliver the relevant Earnout Shares to the Shareholders on a pro rata basis. However, if and to the extent certain performance targets described below are not achieved, in whole or in part, no Earnout Consideration will be paid.

•  First Earnout Consideration — If revenue exceeds $10 million in the Earnout Period, the Shareholders will be entitled to 200,000 shares.

•  Second Earnout Consideration — If revenue exceeds $20 million in the Earnout Period, the Shareholders will be entitled to an additional 200,000 shares.

•  Third Earnout Consideration — If revenue exceeds $30 million in the Earnout Period, the Shareholders will be entitled to an additional 200,000 shares.

o The Shareholders are still entitled to the Earnout Consideration in the event that targets are met, but they are not employees of G at the time the Earnout Consideration is earned.

Other Key Facts

• Company P meets the definition of a business under ASC 805.

• Each employment agreement executed by G and the Shareholders contains compensation that is commensurate with the service each respective Shareholder is providing to G.

• The Shareholders have at-will employment agreements with G.

• If the Shareholders were to leave, G would be able to replace them with an existing G investment banker; therefore, the Shareholders are not integral to the future success of the acquired business.

• The fair value of P was determined to be $24 million.

• The Earnout Consideration is not being treated as compensation expense for tax purposes.

Required:

Does the Delayed Consideration represent purchase consideration in exchange for the Acquisition or compensation for postcombination services? Is it contingent consideration? How much of the Delayed Consideration (if any) should be consideration for postcombination services?