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com

Distinguish between a firm's explicit costs and its implicit costs and between a firm's accounting
profit and its economic profit.

Why is money you receive at some future date worth less to you than money you receive today?
If the interest rate rises, what effect does this have on the present value of payments you receive
in the future?

Briefly explain how international trade increases a country's consumption.

An economic analysis of a proposal to impose a quota on steel imports into the United States
indicated that the quota would save 3,700 jobs in the steel industry but cost about 35,000 jobs in
other U.S. industries. Why would a quota on steel imports cause employment to decline in other
industries? Which other industrie

Give the formula for calculating the present value of a bond that will pay a coupon of $100 per
year for 10 years and that has a face value of $1,000.

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According to an editorial in the Washington Post, "Sugar protectionism is a burden on consumers

and a job-killer." a. In what sense does the United States practice "sugar protectionism"? b. In
what way is sugar protectionism a burden on consumers? In what way is it a job-killer? c. If
sugar protectionism has the bad

A political commentator makes the following statement: The idea that international trade should
be based on the comparative advantage of each country is fine for rich countries like the United
States and Japan. Rich countries have educated workers and large quantities of machinery and
equipment. These advantages allow

On June 19, 2015 the closing price of a share of Facebook stock was $82.51. About 21.5 million
shares of stock were traded on this date. Go to wsj. com for a recent trading day and use
Facebook's stock symbol (FB) to find the following. a. The closing price of Facebook stock b.
The market value of the shares traded

Briefly explain whether you agree with the following statement: "The total value of the shares of
Microsoft stock traded on the NASDAQ last week was $250 million, so the firm actually
received more revenue from stock sales than from selling software."

The following table shows the hourly output per worker in two industries in Chile and Argentina.
a. Explain which country has an absolute advantage in the production of hats and which country
has an absolute advantage in the production of beer. b. Explain which country has a comparative
advantage in the production of
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What is the difference between a firm's assets and its liabilities? Give an example of an asset and
an example of a liability.

Briefly explain whether you agree with the following statement: "International trade is more
important to the U.S. economy than it is to most other economies."

Figure 7.7 on page 236 shows that the Congressional Budget Office forecasts that only about 10
percent of future increases in spending on Medicare as a percentage of GDP will be due to the
aging of the population. What factors explain the other 90 percent of the increase?

What is meant by a country specializing in the production of a good? Is it typical for countries to
be completely specialized? Briefly explain.

Suppose you originally invested in a firm when it was small and unprofitable. Now the firm has
grown to be large and profitable. Would you be better off if you had bought the firm's stock or
the firm's bonds? Briefly explain.

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Suppose that eLake, an online auction site, is paying a dividend of $2 per share. You expect this
dividend to grow 2 percent per year, and the interest rate is 10 percent. What is the most you
would be willing to pay for a share of stock in eLake? If the interest rate is 5 percent, what is the
most you would be willing

Why is a bond considered to be a loan but a share of stock is not? Why do corporations issue
both bonds and shares of stock?

What is the key difference between a firm's income statement and its balance sheet? What is
listed on the left side of a balance sheet? What is listed on the right side?

Compare the formula for calculating the present value of the payments you will receive from
owning a bond to the formula for calculating the present value of the payments you will receive
from owning a stock. What are the key similarities? What are the key differences?

The following data summarize the trade between Canada and the United States in 2013 and
2014. In each year, the value of Canada's exports to the United States exceeded the value of U.S.
exports to Canada. Can we conclude that foreign trade between the two countries benefited
Canada more than it benefited the United St

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An article discussing the reasons that the Connecticut state legislature passed a general
incorporation law observes that prior to the passage of the law, investors were afraid that large
businesses "were not a safe bet for their money." Briefly explain the author's reasoning.

Paolo and Alfredo are twins who both want to open pizza restaurants. Their parents have always
liked Alfredo best, and they buy two pizza ovens and give both to him. Unfortunately, Paolo
must buy his own pizza ovens. Does Alfredo have a lower cost of producing pizza than Paolo
does because Alfredo received his pizza ov

Is free trade likely to benefit a large, populous country more than a small country with fewer
people? Briefly explain.

A winner of the Pennsylvania Lottery was given the choice of receiving $18 million at once or
$1,440,000 per year for 25 years. a. If the winner had opted for the 25 annual payments, how
much in total would she have received? b. At an interest rate of 10 percent, what would be the
present value of the 25 payments? c

In 2015, several U.S. paper manufacturers asked the federal government to impose tariffs on
paper imported from China, Indonesia, Brazil, Portugal, and Australia. According to an article in
the Wall Street Journal, firms in these countries were accused of "dumping certain types of
uncoated paper on the U.S. market, inc

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What is the difference between the average cost of production and the marginal cost of
production?

What events led to the General Agreement on Tariffs and Trade (GATT)? Why did the WTO
eventually replace the GATT?

Maya spends her $50 budget on two goods, cans of tuna and bottles of ginger ale. Initially, the
marginal utility per dollar she spends on tuna is equal to the marginal utility per dollar she
spends on ginger ale. Then the price of ginger ale decreases, while her income and the price of
tuna do not change. Briefly expla

An article in the Wall Street Journal noted that as a result of lower gasoline prices, sales
"improved notably over the last two months at Back Yard Burgers, a dining chain based in
Nashville, Tenn." A student is asked to use an indifference curve and budget constraint graph to
show the effect on a consumer of lower ga

What is an indifference curve? What is a budget constraint?

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Distinguish between a firm's fixed costs and variable costs and give an example of each.
Suppose that Jacob's allowance in problem 10A.4 climbs from $5 to $10 per week. a. Show how
the increased allowance alters Jacob's budget constraint. b. Draw a set of indifference curves
showing how Jacob's choice of ice cream cones and cans of Lemon Fizz changes when his
allowance increases. Assume that both goods a

When the price of pizza falls in the Super Bowl example, both the income effect and the
substitution effect cause you to want to consume more pizza. If pizza were an inferior good, how
would the analysis be changed? In this case, is it possible that a lower price for pizza might lead
you to buy less pizza? Briefly expl

Joe has $16 to spend on Twinkies and Ho-Hos. Twinkies have a price of $1 per pack, and Ho-
Hos have a price of $2 per pack. Use the information in these graphs to determine the number of
Twinkies and Ho-Hos packs Joe should buy to maximize his utility. Briefly explain your
reasoning.

What are network externalities? For what types of products are network externalities likely to be
important? What is path dependence?

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The United States produces beef and also imports beef from other countries. a. Draw a graph
showing the demand and supply of beef in the United States. Assume that the United States can
import as much as it wants at the world price of beef without causing the world price of beef to
increase. Be sure to indicate on you

According to the U.S. Energy Information Administration, the average price of heating oil fell to
under $3.00 a gallon during the winter of 2014-2015, the lowest price in more than four years.
About 6.2 million U.S. households in the Northeast rely on the fuel to heat their homes. For the
following questions, assume th

Draw a graph that shows the usual relationship between the marginal product of labor and the
average product of labor. Why do the marginal product of labor and the average product of labor
curves have the shapes you drew?

In early 2015, gasoline prices in many parts of the United States had fallen to below $2.00 per
gallon, which a news story called "one of the swiftest declines on record." Is gasoline likely to be
an inferior good or a normal good for most people? Is your answer important for predicting how
much the quantity of gasolin

Considering only the income effect, if the price of an inferior good declines, would a consumer
want to buy a larger quantity or a smaller quantity of the good? Does your answer mean that the
demand curves for inferior goods should slope upward? Briefly explain.

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Suppose that you are a big fan of the Harry Potter books. You would love to own a copy of the
very first printing of the first book, but unfortunately you can't find it for sale for less than
$5,000. You are willing to pay at most $200 for a copy but can't find one at that price until one
day in a used bookstore you se

The following graph illustrates the combination of apples and oranges (point A) that maximizes
Yolanda's total utility, given her budget. Suppose the price of oranges doubles, while the price of
apples and Yolanda's income both stay the same. a. Draw a new budget constraint to reflect the
increase in the price of oran

Marty and Ann discussed the rule of equal marginal utility per dollar spent, a topic that was
recently covered in the economics course they were both taking: Marty: "When I use my
calculator to divide the marginal utility of pizza by a price of zero, I don't get an answer. This
result must mean that if pizza were bein

Sally looks at her college transcript and asks you, "How is this possible? My grade point average
for this semester's courses is higher than my grade point average for last semester's courses, but
my cumulative grade point average still went down from last semester to this semester." Explain
to Sally how this is possib

Writing about a trip to Switzerland in an article in the New York Times, economist Daniel
Hamermesh noted that electrical outlets in Switzerland use an unusual three-prong plug.
Adapters for that type of plug are not typically included in adapter sets, so he and his wife
weren't able to plug their computers into their

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If consumers should allocate their income so that the last dollar spent on every product gives
them the same amount of additional utility, how should they decide the amount of their income
to save?

Sunsweet decides that prune juice has a bad image, so it launches a slick advertising campaign to
convince young people that prune juice is very hip. The company hires Taylor Swift, Jay-Z, and
Trick Daddy to endorse its product. The campaign works! Prune juice sales soar, even though
Sunsweet hasn't cut the price. Draw

Which of the following are examples of a firm experiencing positive technological change? a. A
fall in the wages it pays its mechanics leads United Airlines to lower its ticket prices. b. A
training program makes a firm's workers more productive. c. An exercise program makes a firm's
workers healthier and more produ

Joe has $55 to spend on apples and oranges. Given the information in the following table, is Joe
maximizing utility? Briefly explain.
In which of the following situations are social influences on consumer decision making likely to
be greater: choosing a restaurant for dinner or choosing which brand of toothpaste to buy?
Briefly explain.

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In studying the consumption of very poor families in China, Robert Jensen and Nolan Miller
found that in both Hunan and Gansu, "Giffen behavior is most likely to be found among a range
of households that are poor (but not too poor or too rich)." a. What do Jensen and Miller mean by
"Giffen behavior"? b. Why would the

How do consumers choose the optimal consumption bundle?

What are the two assumptions economists make about consumer preferences?

According to an article in Forbes, the cost of materials in Apple's iPhone 6 with 16 gigabytes of
memory was estimated to be $227. Apple was selling the iPhone 6 for $650. Most phone
carriers, like AT&T and Verizon, made payments to Apple that reduced the price to consumers
to $200. Can we conclude from this informatio

At one time, Eastman Kodak was the world's largest producer of photographic film, employing
nearly 145,000 workers worldwide, including thousands at its headquarters in Rochester, New
York. The firm eventually laid off most of those workers because its sales declined as it failed to
adjust to digital photography as qui

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Political commentator B. Bruce-Briggs once wrote the following in the Wall Street Journal:
"This is not to say that the case for international free trade is invalid; it is just irrelevant. It is an
'if only everybody ... argument.... In the real world almost everybody sees benefits in economic
nationalism." What do you

Does the law of diminishing marginal utility hold true in every situation? Is it possible to think of
goods for which consuming additional units, at least initially, will result in increasing marginal
utility?

An article in the New York Times about J.C. Penney's pricing strategy under former CEO Ron
Johnson observes, "Penney had pulled up the anchor, only to see many of its customers sail
away." a. In behavioral economics, what is an "anchor"? b. In what sense did Penney "pull up the
anchor"? c. Why did Penney follow this

Consider two goods: pizza and Coke. Along an individual's demand curve for pizza, as the price
of pizza falls, does the marginal utility per dollar spent on pizza always equal the marginal utility
per dollar spent on Coke? In other words, does the rule of equal marginal utility per dollar spent
hold as the price change
Suppose that Uber decides that its strategy of using surge pricing during times of high demand is
causing the company to receive too much bad publicity. It decides that it will maintain its regular
prices even during periods of high demand. a. If you are trying to get a ride through Uber at the
end of a football game

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What is the economic definition of utility? Is it possible to measure utility?

What is dumping? Who benefits and who loses from dumping? What problems arise when anti-
dumping laws are implemented?

The Economist offered the following two options for subscribing: 1. $56 per year for an online-
only subscription 2. $125 per year for print plus online access subscription A large majority of
subscribers chose option 1. But the magazine would have preferred to sell more $125
subscriptions because it can charge highe

While running for the 2016 Democratic nomination for president, Vermont Senator Bernie
Sanders opposed the Trans- Pacific Partnership in part because he believed that as a result of the
agreement, "the U.S. will lose more than 130,000 jobs to Vietnam and Japan alone." Do you
agree that reducing barriers to trade reduce

What is the law of diminishing returns? Does it apply in the long run?

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What is globalization? Why are some people opposed to globalization?

How does a change in the price of a product cause both a substitution effect and an income
effect?

According to an opinion column in the New York Times, because of attempts to make it more
difficult to import catfish into the United States, during 2015 many Vietnamese businesses that
export catfish shifted from exporting to the United States to exporting to China. Briefly explain
who gained and who lost as a result

Suppose you are explaining the benefits of free trade and someone states, "I don't understand all
the principles of comparative advantage and gains from trade. I just know that if I buy something
produced in America, I create a job for an American, and if I buy something produced in Brazil,
I create a job for a Brazili

The Washington National Football League team paid a very high price to select Baylor
quarterback Robert Griffin III in the 2012 player draft. In addition to paying Griffin a high
salary, the team made a trade with the St. Louis team in which they had to give up the rights to
select several other highly ranked players.
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The Statistical Abstract of the United States was published for many years by the U.S. Census
Bureau. The Abstract provided a summary of business, economic, social, and political statistics.
It was available for free online, and a printed copy could also be purchased from the U.S.
Government Printing Office for $39. Be

What is anchoring? How might a firm use anchoring to influence consumer choices so as to
increase sales?

An article in the New York Times notes that classic rock star Tom Petty likes to perform in
smaller venues that don't have as many seats as large venues such as Madison Square Garden in
New York. According to the article, Petty insists that tickets to his concert be sold "below market
price." The author of the article

What is meant by a consumer's budget constraint? What is the rule of equal marginal utility per
dollar spent?

LaToya is buying corn chips and soda. She has 4 bags of corn chips and 5 bottles of soda in her
shopping cart. The marginal utility of the fourth bag of corn chips is 10, and the marginal utility
of the fifth bottle of soda is also 10. Is LaToya maximizing utility? Briefly explain.

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Briefly explain whether you agree with the following observation: "Technological change refers
only to the introduction of new products, so it is not relevant to the operations of most firms."

Small business owner Jay Goltz described several decisions he made to reduce the fixed costs of
his businesses, including replacing halogen lamps with LED lamps. Goltz noted, "I'm guessing
that many business owners could save a lot more than pennies on their fixed costs, and those
savings ... fall right to the bottom l

Rob Neyer is a baseball writer for sbnation.com. He has described attending a Red Sox game at
Fenway Park in Boston and having a seat in the sun on a hot, humid day: "Granted, I could have
moved under the overhang and enjoyed today's contest from a nice, cool, shady seat. But when
you paid forty-five dollars for a tick

Marvin visits his aunt and uncle who live in Milwaukee. The Milwaukee Bucks basketball team
is scheduled to play a home game against the Golden State Warriors during Marvin's visit. An
online broker has a ticket for sale in Section 212 of the arena where the game will be played but
the price, $75, is more than Marvin i

Suppose the market for ice cream cones is made up of three consumers: Tiago, Terrell, and Tim.
Use the information in the following table to construct the market demand curve for ice cream
cones. Show the information in a table and in a graph.
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Andrea grew up enjoying her Italian grandmother's home-cooked meals. Chicken and pasta with
meatballs were her favorite foods. But after Andrea graduated from college, found a job, and got
married, she became a vegetarian and no longer ate chicken or meatballs. Briefly explain which
of the following statements provides

The following table shows the quantity of workers and total output for a local pizza parlor.
Answer the following questions based on this table: Quantity of Workers Total Output
0...........................................................0 1...........................................................5 2...........

For Jill Johnson's pizza restaurant, explain whether each of the following is a fixed cost or a
variable cost: a. The payment she makes on her fire insurance policy b. The payment she makes
to buy pizza dough c. The wages she pays her workers d. The lease payment she makes to the
landlord who owns the building wher

In the following budget constraint-indifference curve graph, Nikki has $200 to spend on blouses
and skirts. a. What is the price of blouses? What is the price of skirts? b. Is Nikki making the
optimum choice if she buys 4 blouses and 2 skirts? Explain how you know this.

UPS has reorganized the routes its drivers take to deliver packages to homes. According to an
article in the Wall Street Journal, "The company can save $50 million a year by reducing by one
mile the average aggregated daily travel of its drivers." a. Briefly explain whether this cost
saving is due to technological cha

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Richard Thaler, an economist at the University of Chicago, is the person who first used the term
endowment effect to describe placing a higher value on something already owned than would be
placed on the object if not currently owned. According to an article in the Economist: Dr. Thaler,
who recently had some expensiv

What is protectionism? Who benefits and who loses from protectionist policies? What are the
main arguments people use to justify protectionism?

How is the market demand curve derived from consumers' individual demand curves?

The chapter states that "when the price of an inferior good falls, the income effect and
substitution effect work in opposite directions." Explain what this statement means.

What are implicit costs? How are they different from explicit costs?

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If the marginal product of labor is rising, is the marginal cost of production rising or falling?
Briefly explain.

How does the fact that consumers apparently value fairness affect the pricing decisions that
businesses make?

Steven Landsburg, an economist at the University of Rochester, wrote the following in an article
in the Wall Street Journal: Free trade is not only about the right of American consumers to buy at
the cheapest possible price; it's also about the right of foreign producers to earn a living.
Steelworkers in West Virginia

A student looks at the numbers in Table 11.3 and draws this conclusion: The marginal product of
labor is increasing for the first two workers hired, and then it declines for the next four workers. I
guess each of the first two workers must have been hard workers. Then Jill must have had to
settle for increasingly bad

Briefly explain whether you agree with the following argument: Adam Smith's idea of the gains
to firms from the division of labor makes a lot of sense when the good being manufactured is
something complex like automobiles or computers, but it doesn't apply in the manufacturing of
less complex goods or in other sectors

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What is the difference between the short run and the long run? Is the amount of time that
separates the short run from the long run the same for every firm?

Using symbols, we can write that the marginal product of labor is equal to ΔQ/ΔL. Marginal
cost is equal to ΔC/ΔQ. Because fixed costs by definition don't change, marginal cost is also
equal to ΔC/Δ¬Q. If Jill Johnson's only variable cost (ΔC) is labor cost, then her variable cost
equals the wage multiplied by t

Every year, the Gallup poll asks a sample of people in the United States whether they believe
foreign trade provides "an opportunity for economic growth through increased U.S. exports," or
whether they believe foreign trade represents "a threat to the economy from foreign imports."
The table shows the responses for two

You have six hours to study for two exams tomorrow. The following table shows the relationship
between hours of study and test scores: a. Use the rule for determining optimal purchases to
decide how many hours you should study each subject. Treat each point on an exam as 1 unit of
utility and assume that you consider

Use the numbers from problem 3.4 to draw one graph that shows how total output increases with
the quantity of workers hired and a second graph that shows the marginal product of labor and
the average product of labor.
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Someone who owns a townhouse wrote to a real estate advice columnist to ask whether he
should sell his townhouse or wait and sell it in the future, when he hoped that prices would be
higher. The columnist replied: "Ask yourself: Would you buy this townhouse today as an
investment? Because every day you don't sell it, y

Las Vegas is one of the most popular tourist destinations in the United States. Several years ago,
the Rio Hotel and Casino in Las Vegas dropped the price of its breakfast buffet to $5.99 for local
residents, while keeping the regular price of $14.99 for nonlocals. When setting the price for a
meal, why would it matter

Is it possible for technological change to be negative? If so, give an example.

Define behavioral economics. What are the three common mistakes that consumers often make?
Give an example of each mistake.

According to an opinion survey, Snoopy is the most appealing celebrity endorser. The beagle
from the popular Peanuts comic strip appears in commercials for the insurance company
MetLife. What advantages and disadvantages are there in using Snoopy, rather than a real
person, to endorse a product?

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What is the difference between technology and technological change?

What would need to be true for a demand curve to be upward sloping?

Suppose that Bill owns an automobile collision repair shop. The following table shows how the
quantity of cars Bill can repair per month depends on the number of workers he hires. Assume
that he pays each worker $4,000 per month and his fixed cost is $6,000 per month. Using the
information provided, complete the follow

Marilou and Hunter both purchase milk and doughnuts at the same Quik Mart. They have
different tastes for milk and doughnuts and different incomes. They both buy some milk and
some doughnuts, but they buy considerably different quantities of the two goods. Can we
conclude that their marginal rate of substitution betwee

A study analyzed the costs to a pharmaceutical firm of developing a prescription drug and
receiving government approval. An article in the Wall Street Journal noted that included in the
firm's costs was "the return that could be gained if the money [used to develop the drug] were
invested elsewhere." Briefly explain wh

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A student makes the following argument: Tariffs on imports of foreign goods into the United
States will cause the foreign companies to add the amount of the tariff to the prices they charge
in the United States for those goods. Instead of putting a tariff on imported goods, we should ban
importing them. Banning import

Which of the following products are most likely to have significant network externalities?
Briefly explain. a. Smartwatches b. Dog food c. Board games d. LCD televisions e. 3D
televisions

Explain why the marginal cost curve intersects the average total cost curve at the level of output
where average total cost is at a minimum.

In an article in the Quarterly Journal of Economics, Ted O'Donoghue and Matthew Rabin make
the following observation: "People have self-control problems caused by a tendency to pursue
immediate gratification in a way that their 'long-run selves' do not appreciate." What do they
mean by a person's "long-run self"? Give

Suppose China decides to pay large subsidies to any Chinese company that exports goods or
services to the United States. As a result, these companies are able to sell products in the United
States at far below their cost of production. In addition, China decides to bar all imports from the
United States. The dollars th

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The following graph shows the effect on consumer surplus, producer surplus, government tariff
revenue, and economic surplus of a tariff of $1 per unit on imports of plastic combs into the
United States. Use the areas denoted in the graph to answer the following questions. a. Which
area shows the losses to U.S. consume

Explain how a downward-sloping demand curve results from consumers adjusting their
consumption choices to changes in price.

Fill in the missing values in the following table.

Dave has $300 to spend each month on DVDs and CDs. DVDs and CDs both currently have a
price of $10, and Dave is maximizing his utility by buying 20 DVDs and 10 CDs. Suppose Dave
still has $300 to spend, but the price of a DVD rises to $12, while the price of a CD drops to $6.
Is Dave better or worse off than he was bef

When Congress was considering a bill to impose quotas on imports of textiles, shoes, and other
products, the late Milton Friedman, a Nobel Prize-winning economist, made the following
comment: "The consumer will be forced to spend several extra dollars to subsidize the producers
[of these goods] by one dollar. A straigh

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Does using rules of thumb increase or decrease the likelihood of a consumer making an optimal
choice? Briefly explain.

Bridgadoon Consulting bought a building and the land on which it is located for $182,000 cash.
The land is estimated to represent 70 percent of the purchase price. The company paid $22,000
for building renovations before it was ready for use. Required: 1. Explain how the renovation
costs should be accounted for. 2.

Norwest Aviation received its charter during January 2014. The charter authorized the following
shares: Preferred shares: 8 percent: no par value authorized shares Common shares: no par value:
authorized 50,000 shares During 2014, the following transactions occurred in the order given: a.
Issued a total of 40,000 c

Jacob receives an allowance of $5 per week. He spends all his allowance on ice cream cones and
cans of Lemon Fizz soda. a. If the price of ice cream cones is $0.50 per cone and the price of
cans of Lemon Fizz is $1 per can, draw a graph showing Jacob's budget constraint. Be sure to
indicate on the graph the maximum nu

What is the definition of marginal utility? What is the law of diminishing marginal utility? Why
is marginal utility more useful than total utility in consumer decision making?

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Suppose that Calvin considers Pepsi and Coke to be perfect substitutes. They taste the same to
him, and he gets exactly the same amount of enjoyment from drinking a can of Pepsi or a can of
Coke. a. Will Calvin's indifference curves showing his trade-off between Pepsi and Coke have
the same curvature as the indifferen

Assume that, as of February 1, 2014, Tim Hortons had $100,000 of Notes Receivable due before
January 31, 2015, $1,268,000 of Accounts Receivable, and $249,000 in its Allowance for
Doubtful Accounts (all related to accounts receivable). How should these accounts be reported
on a balance sheet prepared following ASPE? Wh

P & K Consultants has provided business consulting services for several years. The company
uses the percentage of credit sales method to estimate bad debts for internal monthly reporting
purposes. At the end of each quarter, the company adjusts its records using the aging of accounts
receivable method. The company ente

During 2014, Bhumika Company disposed of two different assets. On January 1, 2014, prior to
the assets' disposal, the accounts reflected the following: The machines were disposed of in the
following ways: a. Machine A: Sold on January 2, 2014, for $8,200 cash. b. Machine B: On
January 2, 2014, this machine suffered i
Academy Driving School reported the following in its financial statements: Calculate 2014 EPS
and ROE. Another driving school in the same city reported a higher net income ($45,000) in
2014, yet its EPS and ROE ratios were lower than those for the Academy Driving School.
Explain how this apparent inconsistency could o

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From 2013 to 2014, Colossal Company's current ratio increased and its quick ratio decreased.
What does this imply about the level of inventory and prepaids?

Prior to recording the following, E. Perry Electronics, Incorporated, had a credit balance of
$2,000 in its Allowance for Doubtful Accounts. Required: Prepare journal entries for each
transaction. a. On August 31, 2014, a customer balance for $300 from a prior year was
determined to be uncollectable and was written

Doulane Marine obtained a charter from the province in January 2014 that authorized 1,000,000
common shares. During the first year, the company earned $429,000 and the following selected
transactions occurred in the order given: a. Issued 700,000 common shares at $54 cash per share.
b. Reacquired and cancelled 25,000

Lynn Company has outstanding 60,000 common shares of $10 par value and 25,000 preferred
shares of $20 par value (8 percent). On December 1, 2014, the board of directors voted an 8
percent cash dividend on the preferred shares and a 10 percent stock dividend on the common
shares. At the date of declaration, the common s

Canadian Golf Corporation operates over 110 golf courses throughout the country. For each of
the following items, enter the correct letter to show whether the cost should be capitalized (C) or
expensed (E). Transactions 1. Purchased a golf course in Kelowna, British Columbia. 2. Paid a
landscaping company to clear 1

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1. Calculate, to two decimal places, the company's quick ratio using amounts reported in its
financial statements for the years ended December 29, 2013, and December 30, 2012. What do
the changes in this ratio suggest about the company's ability to quickly pay its liabilities? 2.
Calculate, to two decimal places, the

Kreiser Company had three intangible assets at the end of 2014 (end of the accounting year): a.
A patent was purchased from J. Miller on January 1, 2014, for a cash cost of $5,640. When
purchased, the patent had an estimated life of 15 years. b. A trademark was registered with the
federal government for $10,000. Mana

Americana Inc. reported the following shareholders' equity account balances on January 1, 2014.
The company entered into the following transactions during 2014. Jna.15 ........... Issued 5,000
common shares for $50,000 cash. Feb.15 ........... Reacquired and cancelled 3,000 common shares
for $33,000 cash. Mar. 15 .

On May 9, 2011, finance.yahoo.com/bonds quoted a bond price of 129.7 for Ford Motor
Company's 9.3 percent bonds maturing on March 1, 2030. Were the bonds selling at a discount
or premium? Does this mean the market interest rate for comparable bonds was higher or lower
than 9.3 percent?

Use the information in E13-3 to complete the following requirements. Refer to E13-3, Assume
the average cost of computer equipment fell 20.9 percent between 2012 and 2013. Let's see
whether these changes are reflected in the income statement of Computer Tycoon Inc. for the
year ended December 31, 2013. Required 1.

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Grondy's Restaurant Company (GRC) entered into the following transactions during a recent
year. April 1 ......... Purchased a new food locker for $5,000 by paying $1,000 cash and signing a
$4,000 note. April 2 ......... Installed an air-conditioning system in the food locker at a cost of
$3,000, purchased on account.

Lucky Lake Oil Company (LLOC) paid $3,000,000 for an oil reserve estimated to hold 50,000
barrels of oil. Oil production is expected to be 10,000 barrels in year 1, 30,000 barrels in year 2,
and 10,000 barrels in year 3. LLOC expects to begin selling barrels from its oil inventory in year
2. Required: Assuming these

A press release contained the following announcement: Castleton Sask April 30, 2014 Ridgeton
Corporation announced today that its Board of Directors declared a quarterly cash dividend of
$0.12 per share of the Corporation's outstanding common shares, payable June 26, 2014, to
shareholders of

From 2013 to 2014, Mechanic International reported that its Net Sales increased from $300,000
to $400,000, and its Gross Profit increased from $90,000 to $130,000. Was the Gross Profit
increase caused by (a) an increase in sales volume only, (b) an increase in gross profit per sale
only, or (c) a combination of both? E

Bryanger Company sells a wide range of inventories that are initially purchased on account.
Occasionally, a short-term note payable is used to obtain cash for current use. The following
transactions were selected from those occurring during 2014: a. On January 10, 2014, purchased
merchandise on credit for $18,000. The

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1. Does the company report Accounts Receivable or an Allowance for Doubtful Accounts in its
financial statements? Explain why it does or does not. 2. Based on your observations for
requirement 1, describe the usefulness of the receivables turnover ratio and days to collect
analyses for companies that are involved in

A local phone company had a customer who rang up $300 in charges during September 2013,
but did not pay. Despite reminding the customer of this balance, the company was unable to
collect in October, November, or December. In March 2014, the company finally gave up and
wrote off the account balance. What amount of Sales

Assume that for the 2013 fiscal year, AstroCo reported sales revenue of $2.8 billion and cost of
goods sold of $1.6 billion. Required Assuming that all sales are on credit, compute the current
ratio (rounded to two decimal places), inventory turnover ratio (rounded to one decimal place),
and accounts receivable turn-

At the beginning of the year, CCZ Corporation bought three used machines from Pequita
Compression Incorporated. The machines immediately were overhauled, installed, and started
operating. Because the machines were different from each other, each was recorded separately in
the accounts. By the end of the first year, ea

How do industry practices and cost-benefit constraints impact financial reporting?

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During 2014, Jesse Jericho Enterprises Corporation recorded credit sales of $650,000. At the
beginning of the year, Accounts Receivable, Net of Allowance was $50,000. At the end of the
year, after the Bad Debt Expense adjustment was recorded but before any bad debts had been
written off, Accounts Receivable, Net of All

Avery's Rentals, Inc., and Rent-A-Matic, Inc., are two publicly traded rental companies. They
reported the following in their 2013 financial statements (in millions of dollars, except per share
amounts and share prices): Required: 1. Compute the 2013 ROE for each company. Express
ROE as a percentage rounded to one de

Metro Chocolate Corp. produces chocolate bars and snacks under the brand names Blast and
Soothe. A press release contained the following information: March 5, 2014-Metro Chocolate
Corp. today announced that its Board of Directors has declared a special "one-time" cash
dividend of $1.00 per share on its one million out

Assume you recently obtained a job with Perfumania, the largest specialty retailer of discounted
fragrances in the United States. Your job is to estimate the amount of write-down required to
value inventory at the lower of cost and net realizable value. The cost of inventory is calculated
using the weighted average cos

Like many start-up companies, DomainCo struggled with cash flows as it developed new
business opportunities. A student found a financial statement for DomainCo that stated that the
increase in dividends in arrears on preferred shares this year was $264,000. The student who read
the note suggested that the DomainCo pre

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Carlos Company had the following shares outstanding and Retained Earnings at December 31,
2014: On December 31, 2014, the board of directors is considering the distribution of a cash
dividend to the common and preferred shareholders. No dividends were declared during 2012 or
2013. Three independent cases are assumed:

Shelby Corporation was organized in January 2014 by ten shareholders to operate an air-
conditioning sales and service business. The charter issued by the province authorized the
following shares: Common shares: no par value: 200,000 shares Preferred shares: no par value: 6
percent: 50,000 shares During January and

The Peg Corporation (TPC) issued bonds and received cash in full for the issue price. The bonds
were dated and issued on January 1, 2014. The stated interest rate was payable at the end of each
year. The bonds mature at the end of four years. The following schedule has been prepared
(amounts in thousands): Required:

Using data from PB10-1, complete the following requirements. Refer tp PB10-1, TigerCom
completed the following transactions during 2014. The annual accounting period ends December
31, 2014. Jan. 3......Purchased merchandise on account at a cost of $24,000. (Assume a perpetual
inventory system.) 27 ......... Paid fo

David Eltner is the CEO of Aquatic Gear Enterprises, a seven-year-old manufacturer of boats.
After many long months of debate with the company's board of directors, David obtained the
board's approval to expand into water ski sales. David firmly believed that Aquatic Gear could
generate significant profits in this mark

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Assume that Caterpillar, Inc., reported the following accounts and amounts (in millions) in its
December 31, 2014, year-end financial statements. Prepare the current assets section of a
classified balance sheet. Assume that the Allowance for Doubtful Accounts relates to Accounts
Receivable rather than Notes Receivable.

Assume that EZ Curb completed the following transactions during 2014. The annual accounting
period ends December 31, 2014. Jan. 8 .... Purchased merchandise on account at a cost of
$14,000. (Assume a perpetual inventory system.) 17 .......... Paid for the January 8 purchase. Apr.
1 ... Received $40,000 from Nationa

1. As of December 29, 2013, how many shares were authorized? How many shares were issued?
What does this suggest to you about the number of shares outstanding? 2. According to the
Statement of Changes in Equity, what was the total dollar amount of cash dividends paid during
the year ended December 29, 2013? 3. Accord

According to one report, Kraft Foods Inc. sells enough Kool-Aid® mix to make 4,500 litres of
the drink every minute during the summer and over 2.5 billion litres each year. At December 31,
2013, the company reported no short-term investments but did report the following amounts (in
millions) in its financial statement

Superior Corporation has the following shares outstanding: Preferred shares: 6 percent: par
$15;8,000 outstanding shares Common shares par $8, 30, 000 outstanding shares On October 1,
2014, the board of directors declared dividends as follows: Preferred shares: Full cash preference
amount, payable December 20, 2014

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TechCo is a U.S. company that uses the LIFO inventory method. You plan to compare its ratios
to Euroten, but you are concerned because Euroten uses IFRS. What accounting policy
difference is certain to exist between the two companies? Of the ratios in Exhibit 13.5, name five
that will be affected by this difference.

Greener Pastures Corporation borrowed $1,000,000 on November 1, 2014. The note carried a 6
percent interest rate with the principal and interest payable on June 1, 2015. Show the accounting
equation effects and prepare the journal entries for (a) the note issued on November 1, and (b)
the interest accrual on December 3

During the year ended December 31, 2014, Kelly's Camera Equipment had sales revenue of
$170,000, of which $85,000 was on credit. At the start of 2014, Accounts Receivable showed a
$10,000 debit balance, and the Allowance for Doubtful Accounts showed an $800 credit balance.
Collections of accounts receivable during 2014

PlasticWorks Corporation bought a machine at the beginning of the year at a cost of $12,000.
The estimated useful life was five years, and the residual value was $2,000. Assume that the
estimated productive life of the machine is 10,000 units. Expected annual production was: year
1, 3,000 units; year 2, 3,000 units; ye

TigerCom completed the following transactions during 2014. The annual accounting period ends
December 31, 2014. Jan. 3......Purchased merchandise on account at a cost of $24,000. (Assume
a perpetual inventory system.) 27 ......... Paid for the January 3 purchase. Apr. 1 ... Received
$80,000 from Atlantic Bank after

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Refer to M11-2. Assume the issued shares have no par value. Analyze the accounting equation
effects and record the journal entry for the issuance of the no-par value shares at $75. Do the
effects on total assets, total liabilities, and total shareholders' equity differ from those in M11-2?
Refer to M11-2, To expand o

On January 1, 2014, Applied Tech Corporation (ATC) issued $600,000 in bonds that mature in
10 years. The bonds have a stated interest rate of 10 percent. When the bonds were issued, the
market interest rate was 10 percent. The bonds pay interest once per year on December 31.
Required: 1. Determine the price at which

RiteSide Limited was issued a charter on January 15, 2014, that authorized the following shares:
Common shares: no par vales: 100,000 shares: one vote per share Preferred shares: 7 percent: no
par value $10 per share: 5,000 shares: nonvoting During 2014, the following selected
transactions were completed in the orde

For each transaction listed in E8-1, indicate the amount and direction (+ or −) of effects on the
financial statement accounts and on the overall accounting equation. Information from E8-1, At
the end of 2014, Blackberry Hill Productions, Inc., used the aging of accounts receivable method
to estimate that its Allow

J. Bartley Pools Inc. reported the following in its financial statements for the quarter ended
March 31, 2014. During the quarter ended March 31, 2014, Bartley reported Net Income of
$5,000 and declared and paid cash dividends totalling $5,000. Required: 1. Calculate earnings
per share (EPS) and return on equity (R

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On January 1, 2013, Loop de Loop Raceway issued 600 bonds, each with a face value of $1,000,
a stated interest rate of 5 percent paid annually on December 31, and a maturity date of
December 31, 2015. On the issue date, the market interest rate was 6 percent, so the total
proceeds from the bond issue were $583,950. Loo

At the end of 2014, Blackberry Hill Productions, Inc., used the aging of accounts receivable
method to estimate that its Allowance for Doubtful Accounts should be $19,750. The account
had an unadjusted credit balance of $10,000 at December 31, 2014. Required: Prepare journal
entries for each transaction. a. The appr

In 2013, Rec Room Sports reported earnings per share of $8.50 when its share price was
$212.50. In 2014, its earnings increased by 20 percent. If the P/E ratio remains constant, what is
the price of the shares? Explain.

Assume that on December 1, 2014, your company borrowed $14,000, a portion of which is to be
repaid each year on November 30. Specifically, your company will make the following principal
payments: 2015, $2,000; 2016, $3,000; 2017, $4,000; and 2018, $5,000. Show how this loan will
be reported in the December 31, 2015 and
Use the information for Suncor Energy Inc. in E13-1 to complete the following requirements.
Refer to E13-1, The average price of a litre of gas in 2011 jumped $0.17 (16 percent) from $1.04
in 2010 to $1.21 in 2011. Let's see whether these changes are reflected in the income statement
of Suncor Energy Inc. for the ye

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At the end of 2013, Donnelly Fitness Centre has adjusted balances of $800,000 in Accounts
Receivable and $55,000 in Allowance for Doubtful Accounts. On January 2, 2014, the company
learns that certain customer accounts are not collectable, so management authorizes a write-off
of these accounts totalling $5,000. a. Sho

During 2014, Ly Company disposed of two different assets. On January 1, 2014, prior to
disposal of the assets, the accounts reflected the following: The machines were disposed of in the
following ways: a. Machine A: Sold on January 1, 2014, for $5,750 cash. b. Machine B: On
January 1, 2014, this machine suffered irr

Beamsley Corporation was organized in 2014 to operate a financial consulting business. The
charter authorized 12,000 common shares, no par value. During the first year, the following
selected transactions were completed: a. Issued 6,000 shares of common shares for cash at $20
per share. b. Issued 2,000 shares of comm

On January 1, 2013, Surreal Manufacturing issued 600 bonds, each with a face value of $1,000, a
stated interest rate of 3 percent paid annually on December 31, and a maturity date of December
31, 2015. On the issue date, the market interest rate was 4 percent, so the total proceeds from the
bond issue were $583,352. Su

Buck's Coffee Shop is famous for its large servings of hot coffee. After a famous case involving
McDonald's, the lawyer for Buck's warned management (during 2009) that it could be sued if
someone were to spill hot coffee and be burned. "With the temperature of your coffee, I can
guarantee that it's just a matter of tim

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At the beginning of the year, McCoy Company bought three used machines from Colt, Inc. The
machines immediately were overhauled, installed, and started operating. Because the machines
were different, each was recorded separately in the accounts. By the end of the first year, each
machine had been operating 8,000 hours

Two music companies reported the following in their 2014 financial statements (in thousands of
dollars, except earnings per share amounts and share prices): Required 1. Compute the 2014
ROE for each company (express ROE as a percentage rounded to one decimal place). Which
company appears to generate greater returns o
Refer to the information in E10-14 and assume Selton Corporation accounts for the bond using
the simplified effective-interest method shown in Supplement 10C. Refer to E10-14, On January
1, 2014, when the market interest rate was 9 percent, Selton Corporation com- pleted a $200,000,
8 percent bond issue for $187,163.

Two magazine companies reported the following in their 2014 financial statements (in thousands
of dollars, except earnings per share amounts and share prices) Required: 1. Compute the 2014
ROE for each company (express ROE as a percentage rounded to one decimal place). Which
company appears to generate greater return

On December 31, 2013, the shareholders' equity section of the balance sheet of R & L
Corporation reflected the following: On February 1, 2014, the board of directors declared a 12
percent stock dividend to be issued April 30, 2014. The market value of the shares on February
1, 2014, was $18 per share. Required 1. Fo

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At December 31, 2014, the records of Seacrest Enterprises provided the following selected and
incomplete data: Required 1. Complete the following: Shares issued ___________ Shares
outstanding ___________ 2. Earnings per share is $___________. Round your answer to two
decimal places. 3. Total dividends paid on com

Fleet Events Corporation has provided event-planning services for several years. The company
uses the percentage of credit sales method to estimate bad debts for internal monthly reporting
purposes. At the end of each quarter, the company adjusts its records using the aging of accounts
receivable method. The company en

What is the going-concern assumption? What is a going-concern problem? What factors can
contribute to such a problem?

Conover Corp. ordered a machine on January 1, 2014, at a purchase price of $30,000. On the
date of delivery, January 2, 2014, the company paid $8,000 on the machine and signed a note
payable for the balance. On January 3, 2014, it paid $250 for freight on the machine. On January
5, Conover paid installation costs relat

Innovations Corp (IC) uses the percentage of credit sales method to estimate bad debts each
month and then uses the aging method at year-end. During November 2014, IC sold services on
account for $100,000 and estimated that 1⁄2 of one percent of those sales would be
uncollectable. At its December 31 year-end, total A

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Macier Company completed the salary and wage payroll for March 2014. The payroll pro- vided
the following details: Required: 1. Considering both employee and employer payroll taxes, use
the preceding information to calculate the total labour cost for the company. Employer CPP
equals employee CPP. Employer EI equals

The 2014 annual report for Sneer Corporation disclosed that the company declared and paid
preferred dividends in the amount of $119.9 million in 2014. It also declared and paid dividends
on common shares in the amount of $2 per share. During 2014, Sneer had 1,000,000,000
common shares authorized; 387,570,300 shares had

The average price of a litre of gas in 2011 jumped $0.17 (16 percent) from $1.04 in 2010 to
$1.21 in 2011. Let's see whether these changes are reflected in the income statement of Suncor
Energy Inc. for the year ended December 31, 2011 (amounts in billions). Required 1. Conduct a
horizontal analysis by calculating th

Loonie Corporation stores feature quality merchandise at low prices to meet the needs of
middle-, low-, and fixed-income families. For the year ended January 30, 2014, the company
reported average inventories of $1,352 (in millions) and an inventory turnover of 5.47. Average
total fixed assets were $1,272 (in millions)

To expand operations, Artagon Consulting issued 100,000 shares of previously unissued

common shares with a par value of $1. The share price was $75 per share. Analyze the
accounting equation effects and record the journal entry for the share issuance. Would your
answer be different if the par value was $2 per share? If

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During 2014, Rayon Corporation disposed of two different assets. On January 1, 2014, prior to
disposal of the assets, the accounts reflected the following: The machines were disposed of in the
following ways: a. Machine A: Sold on January 2, 2014, for $33,500 cash. b. Machine B: On
January 2, 2014, this machine suff

In October 2014, Nicole of Nicole's Getaway Spa (NGS) eliminated all existing inventory of
cosmetic items. The trouble of ordering and tracking each product line had exceeded the profits
earned. In December, a supplier asked her to sell a prepackaged spa kit. Feeling she could
manage a single product line, Nicole agree

1. Did The Home Depot have more or fewer authorized common shares than Rona Inc. at the
beginning of the fiscal year-end 2013? 2. From the Retained Earnings column in the Statement of
Shareholders' Equity, what total amount of cash dividends did The Home Depot declare during
the year ended February 2, 2014? Compared t

1. Calculate, to two decimal places, the companies' quick ratios using amounts reported in each
of the financial statements for the 2013 fiscal year-end. What do the changes in this ratio suggest
about the companies' ability to quickly pay their liabilities? Does it appear that Rona Inc. or The
Home Depot is in a less
At December 31, 2014, the records of Kozmetsky Corporation provided the following selected
and incomplete data: Common shares: no changes during 2014 Shares authorized 5,000,000.
Shares issued, _____?______ issue price $1 per share. Net income for 2014: $4,800,000
Common Shares account: $1,500,000. Dividends dec

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On January 1, 2014, InnoSolutions, Inc., issued $200,000 in bonds at face value. The bonds have
a stated interest rate of 6 percent. The bonds mature in 10 years and pay interest once per year on
December 31. Required: 1. Prepare the journal entry to record the bond issuance. 2. Prepare the
journal entry to record t

Winnebago is a familiar name on vehicles travelling Canadian highways. The company

manufactures and sells large motor homes for vacation travel. These motor homes can be quickly
recognized because of the company's "flying W" trademark. A July 2, 2007, press release
contained the following information: Winnebago Indust

1. Does the company report an Allowance for Doubtful Accounts on the balance sheet or in the
notes? Explain why it does or does not. 2. Compute the company's receivables turnover ratio and
days to collect for the year ended December 29, 2013. Refer to the financial statements of Rona
Inc. in Appendix A at the back of

Refer to the information in E10-14 and assume Selton Corporation uses the effective-interest
method to amortize the bond discount. Refer to E10-14, On January 1, 2014, when the market
interest rate was 9 percent, Selton Corporation completed a $200,000, 8 percent bond issue for
$187,163. The bonds were dated January

On January 1, 2013, Methodical Manufacturing issued 100 bonds, each with a face value of
$1,000, a stated interest rate of 5 percent paid annually on December 31, and a maturity date of
December 31, 2015. On the issue date, the market interest rate was 4.25 percent, so the total
proceeds from the bond issue was $102,07

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Ritz Company had the following shares outstanding and Retained Earnings at December 31,
2014: On December 31, 2014, the board of directors is considering the distribution of a cash
dividend to the common and preferred shareholders. No dividends were declared during 2012 or
2013. Three independent cases are assumed: C

Academic Dishonesty Investigations Ltd. operates a plagiarism detection service for universities
and colleges. Required: 1. Prepare journal entries for each transaction below. a. On March 31, 10
customers were billed for detection services totalling $25,000. b. On October 31, a customer
balance of $1,500 from a pri
Conrad Inc. purchased a patent for $1,000,000 for "a specialty line of patented switch plate
covers and outlet plate covers specifically designed to light up automatically when the power
fails." Assume the switch plate patent was purchased January 1, 2014, and it is being depreciated
over a period of 10 years. Assume t

The following transactions took place for Christ-off Solutions Ltd. 2013 July 1 .........Loaned
$70,000 to an employee of the company and received back a one- year, 10 percent note. Accrued
interest on the note. 2014 July 1 ....... Received interest and principal on the note. (No interest has
been recorded since De

Assume the 2014 annual report for Sears Holding Corporation contained the following
information (in millions): A footnote to the financial statements disclosed that accounts
receivable write-offs amounted to $13 million during 2014 and $3 million during 2013. Assume
that Sears did not record any recoveries. Required

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SportChek is Canada's largest retailer of sporting goods and sports apparel and footwear, with
over 130 stores across Canada. Assume one of the SportChek stores reported current assets of
$88,000 and its current ratio was 1.75. Assume that the following transactions were completed:
a. Paid $6,000 on accounts payable.

Assume the average cost of computer equipment fell 20.9 percent between 2012 and 2013. Let's
see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the
year ended December 31, 2013. Required 1. Conduct a horizontal analysis by calculating the
year-over-year changes in each line it

The following transactions and adjusting entries were completed by Gravure Graphics
International, a paper-packaging company. The company uses straight-line depreciation for
trucks and other vehicles, double-declining-balance depreciation for buildings, and straight-line
amortization for patents. January 2, 2013 .....

Waterbahn Waterslide Company issued 25,000, 10-year, 6 percent, $100 bonds on January 1,
2014, at face value. Interest is payable each December 31. Show the accounting equation effects
and prepare journal entries for (a) the issuance of these bonds on January 1, 2014, and (b) the
interest payment on December 31, 2014.

On January 1, 2014, the records of Great Grass Corp. (GGC) showed the following regarding
production equipment: Required: Based on the data given, compute the estimated useful life of
the equipment.

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Having just graduated with a business degree, you're excited to begin working as a junior
accountant at Sunny Optics, Inc. The company supplies lenses, frames, and sunglasses to
opticians and retailers throughout the country. Sunny Optics is currently in the process of
finalizing its third quarter (Q3) operating result

On July 1, 2014, Jones Limited had the following share structure: Required: Complete the
following table based on three independent cases involving share transactions: Case 1: The board
of directors declared and issued a 10 percent stock dividend when the share price was $8 per
share. Case 2: The board of directors

On January 1, 2014, Buchheit Enterprises reported $95,000 in a liability called "Bonds Payable,
Net." This liability related to a $100,000 bond with a stated interest rate of 5 percent that was
issued when the market interest rate was 6 percent. Assuming that interest is paid December 31
each year, prepare the journal

On January 1, 2014, when the market interest rate was 9 percent, Selton Corporation completed a
$200,000, 8 percent bond issue for $187,163. The bonds were dated January 1, 2014, pay interest
each December 31, and mature in 10 years on December 31, 2023. Seton amortizes the bond
discount using the straight-line method.

During a time when the inflation rate is increasing each year for a number of years, are adaptive
expectations or rational expectations likely to give the more accurate forecasts? Briefly explain.

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An article in the Wall Street Journal about China's balance of payments contained the following
observations: "A country's balance of payments still has to add up to zero. If foreign investors
wish to acquire assets denominated in yuan, the necessary implication is that China will have to
run a trade deficit." a. Do y

What is the relationship among the current account, the financial account, and the balance of
payments?

An article in the Wall Street Journal refers to "debt-strapped emerging markets already
struggling with current-account deficits." Why might we expect that countries running current
account deficits might also have substantial foreign debts?

What was the "Volcker disinflation"? What happened to the unemployment rate during the
period of the Volcker disinflation?

In an opinion column in the New York Times, economist Justin Wolfers of the University of
Michigan noted, "Over recent years, policy makers have also worked to lower long-term interest
rates by shaping expectations about future monetary policy decisions." a. What does the Fed call
such an attempt to shape expectations
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Graph the demand and supply of U.S. dollars for euros and label each axis. Show graphically and
explain the effect on the demand and supply of dollars and the resulting change in the exchange
rate of euros for U.S. dollars if the European Central Bank takes action to increase interest rates.

In 2014, Germany had a balance of trade surplus of €217 billion and a current account surplus
of €215 billion. Explain how Germany's current account surplus could be smaller than its trade
surplus. In 2014, what would we expect Germany's balance on the financial account to have
been? Briefly explain.

What does it mean to say that workers and firms have rational expectations?

Use the information in the following table to solve for the value of the statistical discrepancy and
prepare a balance of payments account, like the one shown in Table 29.1 on page 1019. Assume
that the balance on the capital account is zero. Increase in foreign holdings of assets in the United
States ..............

Given that the Phillips curve is derived from the aggregate demand and aggregate supply model,
why do we use the Phillips curve analysis? What benefits does the Phillips curve analysis offer
compared to the aggregate demand and aggregate supply model?

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In February 2013, the Congressional Budget Office (CBO) forecast that the federal budget deficit
for fiscal year 2013 would be approximately $850 billion. In May 2013, the CBO revised down
its forecast of the budget deficit to $642 billion. The CBO stated that a major reason for the
downward revision was "factors relat

The following is from a message by President Herbert Hoover to Congress, dated May 5, 1932: I
need not recount that the revenues of the Government as estimated for the next fiscal year show a
decrease of about $1,700,000,000 below the fiscal year 1929, and inexorably require a broader
basis of taxation and a drastic r

An article in the Wall Street Journal in 2015 noted that an official of the European Union was
forecasting that "Greece faces two years of recession amid sharp budget cuts." What typically
happens to a government's budget deficit during a recession? Do governments typical respond
with budget cuts as the Greek governmen

The International Monetary Fund (IMF) publishes The World Economic Outlook. Go to
www.imf.org and find the IMF data for the cyclically adjusted budget deficit as a percentage of
potential GDP (which the IMF calls "General Government Structural Balance") for Brazil,
China, France, and Germany from 2000 to 2018 (the valu
An article in the Economist observes that "a sudden unanticipated spurt of inflation could lead to
rapid economic growth." a. Briefly explain the reasoning behind this statement. b. Does it matter
whether a spurt of inflation is unanticipated? Might different economists provide different
answers to this question? Bri

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What is the cyclically adjusted budget deficit or surplus? Suppose that real GDP is currently at
potential GDP, and the federal budget is balanced. If the economy moves into a recession, what
will happen to the federal budget?

Over time, the Federal Reserve Board of Governors has changed its estimate of the
nonaccelerating inflation rate of unemployment (NAIRU). The following are the board's NAIRU
estimates for selected years. Year ____________________ NAIRU (percent)
1970 .................................... 6.0 1980 ............

Briefly explain whether you agree with the following statement: "Because in 2014 national
saving was a larger percentage of GDP in the United States than in the United Kingdom,
domestic investment must also have been a larger percentage of GDP in the United States than in
the United Kingdom."

In 2015, an article in a publication of the Federal Reserve Bank of San Francisco noted, "FOMC
participants have steadily lowered their estimates of the natural rate of unemployment . . . over
the past several years." The article also noted that "a lower natural rate of unemployment also
implies a lower target policy r

The late economist Herbert Stein described the accounts that comprise a country's balance of
payments: A country is more likely to have a deficit in its current account the higher its price
level, the higher its gross [domestic] product, the higher its interest rates, the lower its barriers to
imports, and the more at

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Go to the Web site of the Federal Reserve Bank of St. Louis (FRED)
(research.stlouisfed.org/fred2) and download monthly data on the inflation rate expected by
consumers as measured by the University of Michigan's survey (MICH) for 1978 to the present.
Next, download the monthly inflation rate measured using the consume

Why do foreign households and foreign firms demand U.S. dollars in exchange for foreign
currency? Why do U.S. households and firms supply U.S. dollars in exchange for foreign
currency?

Why is it inconsistent to believe that the long-run aggregate supply curve is vertical and the long-
run Phillips curve is downward sloping?
An article in the Economist states that, "Robert Lucas . . . showed how incorporating
expectations into macroeconomic models muddled the framework economists prior to the
'rational expectations revolution' thought they saw so clearly." What economic framework did
economists change as a result of Lucas's arguments? Do a

Use the following information to draw a graph showing the short-run and long-run Phillips
curves: Natural rate of unemployment = 5 percent Current rate of unemployment = 4 percent
Expected inflation rate = 4 percent Current inflation rate = 6 percent Be sure your graph shows
the point where the short-run and long-

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Why do few economists believe it would be a good idea to balance the federal budget every
year?

An article in the Wall Street Journal notes, "For every one yen rise in the value of the dollar, Fuji
Heavy's full-year operating profit increases by ¥9.7 billion, the company says." Would Honda's
profits be likely to increase as much as a result of a rise in the value of the dollar versus the yen?
Briefly explain.

If we know the exchange rate between Country A's currency and Country B's currency and we
know the exchange rate between Country B's currency and Country C's currency, then we can
compute the exchange rate between Country A's currency and Country C's currency. a. Suppose
the exchange rate between the Japanese yen and

In a speech in September 1975, Fed Chairman Arthur Burns said the following: There is no
longer a meaningful trade-off between unemployment and inflation. In the current environment,
a rapidly rising level of consumer prices will not lead to the creation of new jobs. . . . Highly
expansionary monetary and fiscal polic

Consider the long-run Phillips curve and the short-run Phillips curve in this graph. What would
cause a movement from point A to point B? What would cause a movement from point A to
point C?

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In preparing their financial statements, U.S. firms with sales in foreign currencies have to engage
in "foreign currency translations"; that is, they have to convert foreign currency values into U.S.
dollars. In its 2014 Annual Report, IBM made the following statement: "As with all companies
with a similar global busin

What actions should the Fed take if it wants to move from a point on the short-run Phillips curve
representing high unemployment and low inflation to a point representing lower unemployment
and higher inflation?
In macroeconomics courses in the 1960s and early 1970s, some economists argued that one of
the U.S. political parties was willing to have higher unemployment in order to achieve lower
inflation and that the other major political party was willing to have higher inflation in order to
achieve lower unemployment. Why migh

An opinion column in the Wall Street Journal notes, "In a democracy, the tradeoff for a central
bank's independence is accountability to the nation's elected leadership." a. Why would a country
want to grant its central bank more independence than it grants, say, its department of agriculture
or department of educatio

If both the short-run and long-run Phillips curves are vertical, what will be the effect on the
inflation rate and the unemployment rate of an expansionary monetary policy? Use a Phillips
curve graph to illustrate your answer.

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Use a graph to show the change in the aggregate demand curve resulting from an increase in
government purchases if the government purchases multiplier equals 2. On the same graph, show
the change in the aggregate demand curve resulting from an increase in government purchases if
the government purchases multiplier equa

In the next column are four graphs and four economic scenarios, each of which would cause
either a movement along the short-run or long-run Phillips curve or a shift in the short-run or
long-run Phillips curve. Match each scenario with the appropriate graph. a. The proportion of
younger and less-skilled workers in the

On January 1, 2002, there were 15 member countries in the European Union. Twelve of those
countries eliminated their own individual currencies and began using a new common currency,
the euro. For a three-year period from January 1, 1999, through December 31, 2001, these 12
countries priced goods and services in terms o

We saw that in calculating the stimulus package's effect on real GDP, economists in the Obama
administration estimated that the government purchases multiplier has a value of 1.57. John F.
Cogan, Tobias Cwik, John B. Taylor, and Volker Wieland argue that the value is only 0.4. a.
Briefly explain how the government pur

A political columnist wrote the following: Today ... the main purpose of governments issuing
bonds is to let craven politicians launch projects they know the public, at the moment, would
rather not fully finance. The tab for these projects will not come due, probably, until after the
politicians have long since depart

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Look again at the table on prices during the early 1930s on page 1001. Was there disinflation
during 1933? Briefly explain.

Some economists and policymakers have argued in favor of a "flat tax." A flat tax would replace
the current individual income tax system, with its many tax brackets, exemptions, and
deductions, with a new system containing a single tax rate and few, or perhaps no, deductions
and exemptions. Suppose a political candidat

What is the saving and investment equation? If national saving declines, what will happen to
domestic investment and net foreign investment?

The Congressional Budget Office (CBO) provides data on the actual and cyclically adjusted
budget deficits. You can find data for the years 1965-2014 at https://www.cbo.gov/sites/default/ f
iles/114th-congress-2015-2016/reports/49892/49892 breakout-AppendixD.pdf. a. The CBO calls
the budget def icit or surplus "Def ici

What is the Phillips curve? Draw a graph of a short-run Phillips curve.

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Paul De Grauwe, an economist at the London School of Economics, wrote in the Economist that
the quantitative easing policies of the European Central Bank "will contribute to a further
weakening of the euro vis-Ã -vis other currencies such as the dollar, the pound and the yuan,
thereby increasing exports and boosting in

In an opinion column in the Wall Street Journal, Stanford University economist John Taylor,
originator of the Taylor rule, argued, "As I see it, the broader evidence in the United States and
in many other countries . . . is that a rules-based policy has worked and that discretion-
constrained or otherwise-has not." a.

An article in the Wall Street Journal has the headline "Don't Look Now, but Market Inflation
Expectations Are Falling." If inflation turns out to be lower than households and firms had
previously expected, will the actual real wage end up being higher or lower than the expected
real wage? Will employment in the short r

According to a study by Kanishka Misra of the University of Michigan and Paolo Surico of the
London Business School, "Almost half of American families did not adjust their consumption
following receipt of the ... 2008 tax rebate." Don't we expect that people will increase their
consumption if their disposable income in

Look again at Solved Problem 29.3, where the saving and investment equation S = I + NX is
derived. In deriving this equation, we assumed that national income was equal to Y. But Y only
includes income earned by households. In the modern U.S. economy, households receive
substantial transfer payments-such as Social Secur