Reference no: EM13494425
Income Taxes
Which of the following creates a permanent difference between financial income and taxable income?
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a.
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Interest received on municipal bonds
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b.
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Completed contract method of recognizing construction revenue
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c.
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Unearned rent revenue
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d.
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Accelerated cost recovery on plant and equipment
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Which of the following is the most likely item to result in a deferred tax asset?
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a.
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Using accelerated depreciation for tax purposes but straight-line depreciation for accounting purposes
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b.
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Using the completed-contract method of recognizing construction revenue tax purposes, but using percentage-of-completion method for financial reporting purposes
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c.
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Prepaid expenses
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d.
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Unearned revenues
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Dodger Corporation reported a loss for both financial reporting purposes and tax reporting purposes of $231,000 in 2011. For financial reporting purposes, Dodger reported income before taxes for years 2008-2010 as listed below:
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2008 ............................
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$ 66,000
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2009 ............................
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99,000
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2010 ............................
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132,000
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Assuming Dodger's tax rate is 30 percent in all periods, and that the company uses the carryback provisions, what amount should appear in Dodger's statements for financial reporting purposes as a net loss in 2011?
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a.
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$0
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b.
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$69,300
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c.
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$161,700
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d.
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$234,300
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In 2011 Taggart Inc. reported pretax financial income of $750,000. Included in that pretax financial income was $80,000 of nontaxable life insurance proceeds received as a result of the death of an officer; $100,000 of warranty expenses accrued but unpaid as of December 31, 2011; and $40,000 of life insurance premiums for a policy for an officer. Assuming that no income taxes were previously paid during the year and assuming an income tax rate of 35 percent, the amount of income taxes payable on December 31, 2011, would be
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a.
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$255,500.
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b.
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$283,500.
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c.
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$311,500.
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d.
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$213,500.
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An example of a "deductible temporary difference" occurs when
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a.
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the installment sales method is used for tax purposes, but the accrual method of recognizing sales revenue is used for financial reporting purposes.
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b.
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accelerated depreciation is used for tax purposes but straight-line depreciation is used for accounting purposes.
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c.
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warranty expenses are recognized on the accrual basis for financial reporting purposes but recognized as the warranty conditions are met for tax purposes.
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d.
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the completed-contract method of recognizing construction revenue is used for tax purposes, but the percentage-of-completion method is used for financial reporting purposes.
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A deferred tax liability arising from the use of an accelerated method of depreciation for tax purposes and the straight-line method for financial reporting purposes would be classified on the balance sheet as
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a.
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a current liability.
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b.
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a noncurrent liability.
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c.
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a current liability for the portion of the temporary difference reversing within a year and a noncurrent liability for the remainder.
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d.
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an offset to the accumulated depreciation reported on the balance sheet.
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The Roberts Corporation reported a $75,000 operating loss in 2011. In the preceding three years, Roberts reported the following income before taxes and paid the indicated income taxes:
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Year
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Income
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Taxes
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Tax Rate
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2008
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$40,000
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$12,000
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30%
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2009
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28,000
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9,800
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35%
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2010
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52,000
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18,200
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35%
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The amount of tax benefit to be reported in 2011 arising from the tax carryback provisions of the current tax code would be
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a.
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$40,000.
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b.
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$28,000.
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c.
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$21,800.
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d.
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$26,250.
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Pensions and Postretirement Benefits
Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?
a. Vested benefit obligation
b. Accumulated benefit obligation
c. Projected benefit obligation
d. Restructured benefit obligation
The computation of pension expense includes all the following except
a. service cost component measured using current salary levels.
b. interest on projected benefit obligation.
c. expected return on plan assets.
d. All of these are included in the computation.
A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the
a. projected benefit obligation exceeds the fair value of the plan assets.
b. fair value of the plan assets exceeds the projected benefit obligation.
c. amount of employer contributions exceeds the pension expense.
d. amount of pension expense exceeds the amount of employer contributions
When a company amends a pension plan, for accounting purposes, prior service costs should be
a. treated as a prior period adjustment because no future periods are benefited.
b. amortized in accordance with procedures used for income tax purposes.
c. recorded in other comprehensive income (PSC).
d. reported as an expense in the period the plan is amended.
Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the operation of the plan for the year 2013.
Service cost $ 250,000
Contributions to the plan 220,000
Actual return on plan assets 180,000
Projected benefit obligation (beginning of year) 2,400,000
Fair value of plan assets (beginning of year) 1,600,000
The expected return on plan assets and the settlement rate were both 10%. The amount of pension expense reported for 2013 is
a. $250,000.
b. $310,000.
c. $330,000.
d. $490,000.
Leases
In a lease that is recorded as an operating lease by the lessee, the equal monthly rental payments should be
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a.
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allocated between interest expense and depreciation expense.
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b.
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allocated between a reduction in the liability for leased assets and interest expense.
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c.
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recorded as a reduction in the liability for leased assets.
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d.
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recorded as rental expense.
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Johnson Institute leased a new machine having an expected useful life of 12 years. The noncancelable lease term is 10 years, and Johnson may exercise a purchase option at the end of the noncancelable term. The machine should be capitalized by Johnson and depreciated over
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a.
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9 years.
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b.
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12 years.
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c.
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10 years.
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d.
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10 or 12 years at Johnson's option.
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The lessee's balance sheet liability for a capital lease would be periodically reduced by the
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a.
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minimum lease payment.
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b.
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minimum lease payment plus the amortization of the related asset.
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c.
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minimum lease payment less the amortization of the related asset.
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d.
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minimum lease payment less the portion of the minimum lease payment allocable to interest.
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A lease contains a bargain purchase option. In determining the lessee's capitalizable cost at the beginning of the lease term, the payment called for by the bargain purchase option would be
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a.
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subtracted at its present value.
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b.
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added at its exercise value.
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c.
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added at its present value.
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d.
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subtracted at its exercise price.
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Which of the following statements characterizes a sales-type lease?
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a.
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The lessor recognizes only interest revenue over the life of the asset.
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b.
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The lessor recognizes only interest revenue over the lease term.
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c.
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The lessor recognizes a dealer's profit at lease inception and interest revenue over the lease term.
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d.
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The lessor recognizes a dealer's profit at lease inception and interest revenue over the asset life.
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On January 1, Twix Company as lessee signed a ten-year noncancelable lease for a machine with annual payments of $60,000. The first payment was also made on January 1. Twix appropriately treated this transaction as a capital lease. The ten lease payments have a present value of $405,000 at January 1, based on implicit interest of 10 percent. For the first year, Twix should record interest expense of
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a.
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$0.
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b.
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$6,000.
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c.
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$34,500.
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d.
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$40,500.
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Allied Package Express Service properly capitalized at $93,598 a large truck it had leased on January 1, 2011. The truck has a 14-year useful life. Title to the truck passes to Allied at the end of the 12-year lease term. Allied depreciates other similar trucks on the straight-line method with no salvage value. The lease agreement calls for annual payments of $11,500 at the beginning of each year of the lease term. The interest rate implicit in the lease (which is known by the lessee) is 8%.
How much depreciation and interest expense should Allied record for 2012?
Depreciation Interest
Expense Expense
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a.
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$7,803 $6,568
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b.
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$6,686 $6,568
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c.
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$7,830 $6,173
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d.
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$6,686 $6,173
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Changes and Error Analysis
Which of the following is not a change in accounting principle?
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a.
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A change from FIFO to LIFO for inventory valuation
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b.
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A change from completed-contracts to percentage-of-completion
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c.
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A change from eight years to five years in the useful life of a depreciable asset
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d.
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A change from double-declining-balance to straight-line depreciation
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A company changes from an accounting principle that is not generally accepted to one that is generally accepted. The effect of the change should be reported as a
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a.
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change in accounting principle.
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b.
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change in accounting estimate
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c.
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correction of an error.
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d.
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change of accounting estimate effected by a change in accounting principle.
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Which of the following is the proper time period in which to record a change in accounting estimate?
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a.
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Current period and future periods
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b.
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Current period and retroactively
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c.
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Retroactively only
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d.
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Current period only
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Wolverine Corporation purchased a machine for $132,000 on January 1, 2008, and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2011, Wolverine determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $12,000. A change in estimate was made in 2011 to reflect these additional data. What amount should Wolverine record as the balance of the accumulated depreciation account for this machine at December 31, 2011?
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a.
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$73,000
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b.
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$77,000
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c.
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$61,250
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d.
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$63,600
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Which of the following types of errors will not self-correct in the next year?
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a.
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Accrued expenses not recognized at year-end
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b.
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Accrued revenues that have not been collected not recognized at year-end
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c.
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Depreciation expense overstated for the year
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d.
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Prepaid expenses not recognized at year-end
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Statement of Cash Flows
Choose the combination that best reflects the appropriate classification of cash received from operating, investing and financing activities.
Operating Investing Financing
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a.
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Cash paid by customers Sale of operational assets Issuance of bonds payable
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b.
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Dividends received Cash paid by customers Issuance of bonds payable
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c.
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Sale of operational assets Dividends received Cash paid by customers
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d.
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Issuance of bonds payable Sale of operational assets Dividends received
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Which of the following is a non-cash transaction that should be disclosed in a schedule accompanying the statement of cash flows?
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a.
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Sale of an investment for cash
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b.
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Purchase of a machine for cash
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c.
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Issuance of common stock in exchange for land
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d.
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Declaration and payment of a cash dividend on common stock
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Which of the following is not classified as an operating activity?
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a.
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Interest received
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b.
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Interest paid
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c.
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Dividends received
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d.
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Dividends paid
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The amortization of patents should be presented in a statement of cash flows prepared using the indirect method as a(n)
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a.
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inflow and outflow of cash.
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b.
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outflow of cash.
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c.
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addition to net income in the adjustments to reconcile net income to cash from operating activities.
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d.
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deduction from net income in the adjustments to reconcile net income to cash from operating activities.
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Cash inflows from investing activities would include all of the following except
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a.
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proceeds from sale of operating assets.
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b.
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proceeds from sale of investments accounted for by the equity method.
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c.
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interest collect on notes receivable.
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d.
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proceeds from sale of securities available for sale.
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Which of the following would not be a cash flow from financing activities for Carlton Company?
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a.
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Cash from issuance of Carlton Co. common stock
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b.
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Cash from issuance of Carlton Co. preferred stock
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c.
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Cash from issuance of Carlton Co. bonds payable
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d.
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Cash from sale of Fern Company common stock
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Financial information for Roberts Company at December 31, 2011, and for the year then ended, are presented below:
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Balance Sheet
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December 31,
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2011
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2010
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Cash
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$ 31,000
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$ 15,000
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Accounts receivable
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28,500
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30,000
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Allowance for doubtful accounts
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(2,000)
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(1,500)
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Inventory
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15,000
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10,000
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Prepaid insurance
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1,400
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2,400
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Property, plant, and equipment
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81,000
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80,000
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Accumulated depreciation
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(16,000)
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(20,000)
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Land
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81,100
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40,100
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Total assets
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$ 220,000
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$ 156,000
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Accounts payable
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$ 11,000
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$ 10,000
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Wages payable
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1,000
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2,000
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Interest payable
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1,000
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-
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Notes payable, long-term
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46,000
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20,000
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Common stock, nopar
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136,000
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100,000
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Retained earnings
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25,000
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24,000
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Total liabilities and
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stockholders' equity
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$ 220,000
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$ 156,000
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Income Statement
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Sales revenue
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$ 80,000
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Cost of goods sold
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(35,000)
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Depreciation expense
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(5,000)
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Bad debt expense
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(1,000)
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Insurance expense
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(1,000)
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Interest expense
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(2,000)
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Salaries and wages expense
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(12,000)
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Income tax expense
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(3,000)
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Remaining expenses
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(13,000)
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Loss on sale of operational assets
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(2,000)
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Net income
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$ 6,000
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Additional information:
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1.
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Wrote off $500 accounts receivable as uncollectible.
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2.
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Sold an operational asset for $4,000 cash (cost, $15,000, accumulated depreciation, $9,000).
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3.
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Issued common stock for $5,000 cash.
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4.
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Declared and paid a cash dividend of $5,000.
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5.
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Purchased land for $20,000 cash.
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6.
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Acquired land for $21,000, and issued common stock as payment in full.
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7.
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Acquired operational assets, cost $16,000; issued a $16,000, three-year, interest-bearing note payable.
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8.
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Paid a $10,000 long-term note installment by issuing common stock to the creditor.
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9.
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Borrowed cash on a long-term note, $20,000.
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Required:
Prepare the statement of cash flows using the indirect method.
Full disclosure in Financial Reporting
Which of the following subsequent events (post-balance-sheet events) would require adjustment of the accounts before issuance of the financial statements?
a. Loss of plant as a result of fire
b. Changes in the quoted market prices of securities held as an investment
c. Loss on an uncollectible account receivable resulting from a customer's major flood loss
d. Loss on a lawsuit, the outcome of which was deemed uncertain at year end.
Which of the following should be disclosed in a Summary of Significant Accounting Policies?
a. Types of executory contracts
b. Amount for cumulative effect of change in accounting principle
c. Claims of equity holders
d. Depreciation method followed
An operating segment is a reportable segment if
a. its operating profit is 10% or more of the combined operating profit of profitable segments.
b. its operating loss is 10% or more of the combined operating losses of segments that incurred an operating loss.
c. the absolute amount of its operating profit or loss is 10% or more of the company's combined operating profit or loss.
d. none of these.
On January 15, 2013, Vancey Company paid property taxes on its factory building for the calendar year 2013 in the amount of $840,000. In the first week of April 2013, Vancey made unanticipated major repairs to its plant equipment at a cost of $2,100,000. These repairs will benefit operations for the remainder of the calendar year. How should these expenses be reflected in Vancey's quarterly income statements?
Three Months Ended
3/31/13 6/30/13 9/30/13 12/31/13
a. $210,000 $9,10,000 $9,10,000 $9,10,000
b. $210,000 $2,310,000 $210,000 $210,000
c. $840,000 $1,400,000 $ -0- $ -0-
d. $735,000 $735,000 $735,000 $735,000
The following information pertains to Wamser Company:
Cash $ 40,000
Accounts receivable 125,000
Inventory 75,000
Plant assets (net) 360,000
Total assets $600,000
Accounts payable $ 75,000
Accrued taxes and expenses payable 25,000
Long-term debt 100,000
Common stock ($10 par) 160,000
Paid-in capital in excess of par 40,000
Retained earnings 200,000
Total equities $600,000
Net sales (all on credit) $1,000,000
Cost of goods sold 750,000
Net income 90,000
Instructions
Compute the following: (It is not necessary to use averages for any balance sheet figures involved.)
(a) Current ratio
(b) Inventory turnover
(c) Receivables turnover
(d) Book value per share
(e) Earnings per share
(f) Debt to total assets
(g) Profit margin on sales
(h) Return on common stock equity