ACC 312

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The following information is taken from the accounts of Milar Company after its first year of operations: Income before taxes $100,000 Federal income taxes payable $41,600 Deferred income tax (1,600) Income tax expense 40,000 Net income $ 60,000 Milar estimates its annual warranty expense as a percentage of sales. The amount charged to warranty expense on its books was $38,000. No other differences existed between accounting and taxable income. Assuming a 40% income tax rate, what amount was actually paid this year on the Company's warranty? A. $34,000. B. $38,000. C. $40,000. D. $42,000.

A 1,600 / .4 = 4000 38,000 - 4,000 = 34,000

Presented below is pension information related to Durkin, Inc. for the year 2020: Actual return on plan assets $ 8,000 Interest on vested benefits 5,000 Service cost 10,000 Interest on projected benefit obligation 7,000 Amortization of prior service cost due to increase in benefits 6,000 The amount of pension expense to be reported for 2020 is A. $15,000 B. $20,000 C. $23,000 D. $31,000

A 10,000 + 7,000 + 6,000 - 8,000 = 15,000

Sandy Company deducts insurance expense of $21,000 for tax purposes in 2020, but the expense is not yet recognized for accounting purposes. In 2021, 2022 and 2023 taxable income will be higher than financial income because no insurance expense will be deducted for tax purposes, but $7,000 of insurance expense will be reported for accounting purposes in each of these years. Sandy Company has a tax rate of 45% and income taxes payable of $18,000 at the end of 2020. There were no deferred taxes at the beginning of 2020. Assuming that income taxes payable for 2021 is $24,000, the income tax expense for 2021 would be what amount? A. $20,850 B. $24,000 C. $27,150 D. $33,450

A 2020: (21,000-0)*.45 = 9450 2021: (21,000-7,000)*.45 = 6300 Deferred tax: 9450 - 6300 = 3150 Income tax expense: 24000 - 3150 = 20850

A net operating loss occurs for tax purposes in a year when tax-deductible expenses exceed taxable revenues. Under certain circumstances the federal tax laws permit taxpayers to use the losses of one year to offset the profits of other years. For what period of time can net operating losses be offset against prior or future years' profits? Loss Carryback Loss Carryforward A. 0 years Indefinitely B. 2 years 20 years C. 3 years 15 years D. 15 years 3 years

A A company can only carry the net operating loss forward indefinitely. In the past (as described in appendix 19B) the correct answer would have been (B), a company could carry the net operating loss back two years and receive refunds for income taxes paid in those years. The loss was then applied to the earliest year first and then subsequently to the second year. Any loss remaining after the two-year carryback could have been carried forward up to 20 years to offset future taxable income. A company was also able elect the loss carryforward only, offsetting future taxable income up to 20 years

A A journal entry is necessary only for the current year to update the accounts to their corrected status. No journal entries are made in the books for previous years

An essential element of a lease conveyance is that the: A. lessor conveys less than his or her total interest in the property. B. lessee provides a sinking fund equal to one year's lease payments. C. property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement. D. term of the lease is substantially equal to the economic life of the leased property.

A A lease is a contractual agreement conveying the rights to use property from one party to another. A lease does not by definition transfer ownership. Such arrangements can be written into a lease agreement, but the transfer of ownership is not part of all lease agreements.

Schroeder Company uses the indirect method in computing net cash provided by operating activities. How would reported net income be adjusted for the following items? Loss on Sale of Machinery Increase in Inventories A. Added To Deducted From B. Deducted From Added To C. Added To Added To D. Deducted From Deducted From

A A loss on the sale of machinery is a deduction from net income without a corresponding outflow of cash from operations. Thus, the loss would be added back to net income in computing net cash provided by operating activities. The increase in inventories indicates that cost of goods sold on an accrual basis would be less than it would have been if it were computed on a cash basis. In converting to the cash basis, the increase in inventory would be subtracted from net income to arrive at net cash provided by operating activities.

Kubitz Company reported the following items on its income statement for the year ended December 31, 2020. Interest received on municipal bonds $16,000 Fines from a violation of law 11,000 For Kubitz Company the amount of temporary differences used to measure deferred income taxes amount to: A. $0 B. $11,000 C. $16,000 D. $27,000

A All the the differences listed are permanent differences

Which of the following lease arrangements would most likely be accounted for as a finance lease by the lessee? A. The lessee rents the truck for $1,000 a month for 10 years and after 10 years has an option to continue renting the truck for an additional 10 years at $50 per month, and the estimated life of the truck is 15 years. B. At the end of the lease term, the lessor has another use for the asset that was specially created for the lessee. C. The present value of the minimum lease payments is $32,000 and the fair value of the lease property is $40,000. D. The lease agreement runs 5 years and the economic life of the lease property is 10 years.

A Alternative A presents a bargain renewal option, thus the company should include in the lease term any bargain renewal periods—which then exceeds the estimated life of the asset. Alternative B does not pass the alternative use test which states that if the lessor does not have an alternative use for the asset, the lessee should classify the lease as a finance lease. Alternative C does not meet the 90% FASB guideline for the present value test. Alternative D does not meet the 75% guideline for the lease term test.

Which of the following is not considered a direct effect of a change in accounting principle? A. An employee profit-sharing plan based on net income when a company uses the percentage-of-completion method. B. The inventory balance as a result of a change in the inventory valuation method. C. An impairment adjustment resulting from applying the lower-of-cost-or-market test to the adjusted inventory balance. D. Deferred income tax effects of an impairment adjustment resulting from applying the lower-of-cost-or-market test to the adjusted inventory balance.

A An employee profit sharing plan based on net income when a company uses the percentage-of-completion method is considered an indirect effect of a change in accounting principle. All the other answers are considered direct effects.

In a sale-leaseback transaction, the seller-lessee retains the right to substantially all of the remaining use of the equipment sold. The gain or loss should be recognized by the lessee when the lease is classified as a(n): Finance Operating Lease Lease A. No Yes B. No No C. Yes No D. Yes Yes

A In a sale-leaseback transaction, if the seller-lessee continues to control the asset, it should not record a sale nor recognize a gain or loss on the financing transaction (failed sale). In essence, the seller-lessee is borrowing money from the borrower-lessor.

In general, financing activities as used in the statement of cash flows refer to: A. liability and owners' equity items and include (a) obtaining cash from creditors and repaying the amounts borrowed and (b) obtaining capital from owners and providing them with a return on, and a return of, their investment. B. transactions involving long-term assets and include (a) making and collecting loans and (b) acquiring and disposing of investments and productive long-lived assets. C. only debt transactions that result from long-term borrowings from financial institutions. D. the cash effect of transactions that enter into the determination of net income and, thus, help finance the operations of the business through the generation of cash.

A Liability and owners' equity items which include borrowing money from creditors and owners and repaying the borrowings along with a return on the borrowings represent financing activities. Alternative B refers to investing activities as defined by the statement of cash flows, and alternative D is a partial explanation of operating activities

statement of cash flows for Jeannie Western Stores, Inc.: Jeannie Western Stores, Inc. Comparative Balance Sheets December 31, Assets 2019 2020 Current Assets: Cash $ 180,000 $ 230,000 Accounts Receivable (net) 360,000 520,000 Merchandise Inventory 420,000 650,000 Prepaid Expense 105,000 117,000 Total Current Assets 1,065,000 1,517,000 Long-Term Investments 75,000 Fixed Assets: Property, Plant & Equipment 480,000 730,000 Accumulated Depreciation (90,000) (150,000) Total Fixed Assets 390,000 580,000 Total Assets $1,455,000 $2,172,000 Equities Current Liabilities: Accounts Payable $ 365,000 $ 425,000 Accrued Expenses 94,000 103,000 Dividends Payable ________ 67,000 Total Current Liabilities 459,000 595,000 Long-Term Notes Payable 275,000 Stockholders' Equity: Common Stock 800,000 1,000,000 Retained Earnings 196,000 302,000 Total Equities $ 1,455,000 $2,172,000 Jeannie Western Stores, Inc. Comparative Income Statements December 31 2019 2020 Net Credit Sales $1,251,000 $2,340,000 Cost of Goods Sold 627,000 1,305,000 Gross Profit 624,000 1,035,000 Expenses (including Income Tax) 458,000 862,000 Net Income $ 166,000 $ 173,000 Additional Information: a. Accounts receivable and accounts payable relate to merchandise held for sale in the normal course of business. The allowance for bad debts was the same at the end of 2020 and 2019, and no receivables were charged against the allowance. Accounts payable are recorded net of any discount and are always paid within the discount period. The amount to be shown on the cash flow statement as cash outflows from investing activities would total what amount? A. $(325,000) B. $(265,000) C. $(250,000) D. $( 75,000)

A Long-term invest -75,000 PPE - 250,000 Cash outflows from investing = 325,000

In accounting for a defined benefit pension plan: A. an appropriate funding pattern must be established to insure that enough monies will be available at retirement to meet the benefits promised. B. the employer's responsibility is simply to make a contribution each year based on the formula established in the plan. C. the expense recognized each period is equal to the cash contribution. D. the liability is determined based upon known variables that reflect future salary levels promised to employees.

A The accounting for a defined benefit plan is complex. Because the benefits are defined in terms of uncertain future variables, an appropriate funding pattern must be established to insure that enough monies will be available at retirement to meet the benefits promised.

Of the following components of pension expense, which is most likely to result in a decrease in pension expense? A. Actual return on plan assets. B. Amortization of unrecognized prior service cost. C. Interest on the liability. D. Service cost.

A The actual return on plan assets (assuming the return is positive) serves to decrease pension expense as the return represents an amount earned on the investment of plan assets. This return is the increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. It generally follows that such return should decrease the pension expense

Debbie Company leased equipment to the Trant Company on July 1, 2021, for a non cancelable, ten-year period expiring June 30, 2031 (Debbie and Trant both have a year end of December 31). Equal annual payments under the lease are $50,000 and are due on July 1 of each year. The first payment was made on July, 1 2021. The implicit interest rate contemplated by Debbie and Trant is 9%. The cash selling price of the equipment is $356,098.65 and the cost of the equipment on Debbie's accounting records was $316,000; and there is a guaranteed residual value of $15,000 (which is less than the expected residual value of the equipment at the end of the lease). The interest revenue on the lease receivable recorded by Trant Company at year end, December 31, 2021 is A. $13,774.44 B. $16,024.44 C. $27,548.88 D. $32,048.88

A The amount of interest revenue for the first year would be calculated by multiplying the lease receivable (present value of the balance of the lease receivable ) by the implicit interest rate of 9%, which is $3,545.95 (($356,098.65 - $50,000) X 9%) for $27,548.88. Since a half a year has passed since the sale on July 1, the interest revenue to be recognized would be $13,774.44 ($27,548.88/2).

In 2020 the Flynn Company has changed from the percentage-of completion method to the completed-contract method for long-term construction contracts. The difference in pre-tax income prior to 2020 is a decrease of $60,000 and for 2020 is a decrease of $20,000. The estimated tax effect is 40%. The journal entry made by Flynn Company should include a: A. Debit to Deferred Tax Liability of $24,000. B. Credit to Deferred Tax Liability of $32,000. C. Debit to Deferred Tax Liability of $32,000. D. Credit to Deferred Tax Liability of $24,000.

A The change in accounting principles from percentage-of-completion method to completed-contract method for long-term construction contracts would result in a direct effect adjustment to deferred taxes. Because income decreased, there would be a 40% decrease in Deferred Tax Liability which is done with a debit entry. The amount is calculated by multiplying the difference in pre-tax income prior to 2020 by 40%. 60,000 * .40 = 24,000

Schoen Company experienced a change in accounting principle which it accounted for in the following manner: opening balances were not adjusted and no attempt was made to allocate charges or credits for prior events. This method of recording an accounting change is known as handling the change: A. prospectively. B. currently. C. retrospectively. D. haphazardly.

A The company has handled its accounting change prospectively. This method is required to be used for changes in accounting estimates. When a change is handled currently, the cumulative effect of the use of the new method on the financial statements at the beginning of the period is computed. This adjustment is then reported in the current year's income statement as an irregular item. A retrospective adjustment of the financial statements is made by recasting the financial statements of prior years on a basis consistent with the newly adopted principle and any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented. There is no haphazard treatment advocated for accounting changes.

The following information relates to the De Maet Company's pension plan: Projected benefit obligation $870,000 Plan assets 920,000 Cumulative unrecognized net loss 320,000 Average remaining service life of all active employees 5 years Based on the above information, and use of the corridor test, what is the minimum amortization of the loss for the current period? A. $ 45,600 B. $ 64,000 C. $228,000 D. $233,000

A The corridor amount is 10% of the greater of the projected benefit obligation or plan assets 920,000 * .10 =92,000 320,000 - 92,000 = 228,000 228,000/5 = 45,600

Which of the following is a permanent difference that is recognized for tax purposes but not for financial reporting purposes? A. The deduction for dividends received from U.S. corporations. B. Interest received on state and municipal bonds. C. Premiums paid for life insurance carried by the company on key officers. D. A litigation accrual.

A The deduction for dividends received from U.S. corporations is a permanent difference that is recognized for tax purposes but not for financial reporting purposes. (B) Interest received on state and municipal bonds and (C) premiums paid for life insurance carried by the company on key officers are recognized for financial reporting purposes but not for tax purposes. (D) A litigation accrual is a temporary difference that is classified as an expense or loss that is deductible after it is recognized in financial income.

Hyasaki Company provided the following information on selected transactions during 2020: Purchase of land by issuing bonds $200,000 Proceeds from sale of equipment 300,000 Proceeds from issuing bonds 600,000 Purchases of inventories 800,000 Purchases of treasury stock 400,000 Loans made to affiliated corporations 500,000 Dividends paid to preferred stockholders 100,000 Proceeds from issuing preferred stock 700,000. The net cash provided (used) by financing activities during 2020 is: A. $800,000 B. $500,000 C. $300,000 D. $(1,100,000)

A The net cash provided by financing activities during 2020 of $800,000 is the result of the proceeds from issuing bonds, $600,000, the purchase of the treasury stock, $(400,000), the payment of dividends to preferred stockholders $(100,000) and the proceeds from issuing preferred stock, $700,000. 600,000 - 400,000 - 100,000 + 700,000 = 800,000

The method used to compute net cash provided by operating activities that adjusts net income for items that affected reported net income but did not affect cash is known as the: A. Indirect method. B. Direct method. C. Adjustment method. D. Income statement method.

A The question reflects the definition of the indirect method

Which of the following is not one of the commonly discussed advantages of lease for the lessor? A. The lessor has the right of first priority to use the leased asset since the lessor is still the owner of the asset. B. It often provides profitable interest margins. C. It can provide a high residual value to the lessor upon return of the property at the end of the lease term. D. It often provides tax benefits to various parties in the lease

A The terms of a lease agreement generally conveys the right to use the property to the lessee, therefore the lessor usually does not have a right to the use of the property.

Wilson Company has a machine with a cost of $250,000 which also is its fair market value on the date the machine is leased to Berger Company. The lease is for 6 years and the machine is estimated to have a residual value of zero. If the lessor's implicit interest rate is 6%, the six beginning-of the-year lease payments would be: A. $47,962.92 B. $50,840.70 C. $55,639.51 D. $60,223.43

A Using Table 6-5 for Present Value of an Annuity Due of 1 at 6 periods at 6% yields a factor of 5.21236. The amount of the six beginning-of-the-year lease payments is $47,962.92 ($250,000/5.21236)

When a defined benefit plan is amended and credit is given to employees for years of service provided before the date of amendment: A. both the accumulated benefit obligation and the projected benefit obligation are usually greater than before. B. both the accumulated benefit obligation and the projected benefit obligation are usually less than before. C. the expense and the liability should be recognized at the time of the plan change. D. the expense should be recognized immediately, but the liability may be deferred until a reasonable basis for its determination has been identified.

A When a plan is amended both the accumulated benefit obligation and the projected benefit obligation are usually greater because employees have been given more benefits. The employer provides credit for past years of service expecting to receive benefits in the future. Therefore, prior service is amortized over the remaining service lives of employees.

Nolan Company sells its product on an installment basis, earning a $450 pretax gross profit on each installment sale. For accounting purposes the entire $450 is recognized in the year of sale, but for income tax purposes the installment method of accounting is used. Assume Nolan makes one sale in 2019, another sale in 2020, and a third sale in 2021. In each case, one-third of the gross sales price is collected in the year of sale, one-third in the next year, and the final installment in the third year. If the tax rate is 50%, what amount of deferred tax liability should Nolan Company show on its December 31, 2021 balance sheet: A. $150. B. $225. C. $300. D. $450.

B 2019 2020 2021 Tax Expense $225 $225 $225 Tax Liability 75 150 225 Deferred Tax (+/-) 150 75 -0- Deferred Tax Liability $150 $225 $225

Martin Marty, Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/20 and 12/31/21 contained the following errors: 2020 2021 Ending inventory $5,000 overstatement $8,000 understatement Deprec expense $2,000 understatement $4,000 overstatement. Assume that no correcting entries were made at 12/31/20 or 12/31/21 and that no additional errors occurred in 2022. By how much will 2022 income before income taxes be overstated or understated? A. $7,000 overstatement. B. $8,000 overstatement. C. $3,000 understatement. D. $10,000 understatement.

B Effect on 2022 net income 2021 End Inv $8,000 under 8,000 over

On January 1, 2020, Sanders Co. has the following balances: Projected benefit obligation $1,400,000 Fair value of plan assets 1,200,000 The settlement rate is 10%. Other data related to the pension plan for 2020 are: Service cost $120,000 Amortization of unrecognized prior service costs 40,000 Contributions 200,000 Benefits paid 70,000 Actual return on plan assets 158,000 Amortization of unrecognized net gain 12,000 The fair value of plan assets at December 31, 2020 is: A. $1,476,000 B. $1,488,000 C. $1,500,000 D. $1,620,000

B 1,200,000 + 158,000 + 200,000 - 70,000 = 1488,000

Heybach Company is leasing a truck from Jessica Company that commences on January 1, 2021 and is non-cancelable with a term of four years. The truck cost $100,000 and has an estimated economic life of ten years and residual value at the end of the lease of $40,000 (unguaranteed). The truck reverts to Jessica at the termination of the lease. The implicit rate of Jessica is 5% and is known by Heybach. Jessica determined the rental payments using the 5% rate of return. What amounts should Heybach record on January 1, 2021 for the right-of-use asset and the lease liability? A. $ 49,967.81 B. $ 68,316.40 C. $ 73,394.36 D. $100,000.00

B 100,000 - (40,000 * .79209(PVF4,.5%) = 68,316.40

In 2020, Delaney Company had revenues of $180,000 for book purposes and $150,000 for tax purposes. Delaney also had expenses of $100,000 for both book and tax purposes. If Delaney has a 35% tax rate, what are Delaney's income taxes payable for 2020? A. $10,500 B. $17,500 C. $28,000 D. $35,000

B 150,000 - 100,000 = 50.000 * .35 = 17.500

Malikowski Company had the fair value of its plan assets increase by $620,000 during 2020. During 2020 Malikowski Company contributed $280,000 to the pension plan and had benefits of $167,000 paid to retired employees. Based on these facts, the actual return on plan assets for Malikowski Company during 2020 is: A. $620,000 B. $507,000 C. $340,000 D. $173,000

B 280,000 - 167,000 = 113,000 620,000 - 113,000 = 507,000

statement of cash flows for Jeannie Western Stores, Inc.: Jeannie Western Stores, Inc. Comparative Balance Sheets December 31, Assets 2019 2020 Current Assets: Cash $ 180,000 $ 230,000 Accounts Receivable (net) 360,000 520,000 Merchandise Inventory 420,000 650,000 Prepaid Expense 105,000 117,000 Total Current Assets 1,065,000 1,517,000 Long-Term Investments 75,000 Fixed Assets: Property, Plant & Equipment 480,000 730,000 Accumulated Depreciation (90,000) (150,000) Total Fixed Assets 390,000 580,000 Total Assets $1,455,000 $2,172,000 Equities Current Liabilities: Accounts Payable $ 365,000 $ 425,000 Accrued Expenses 94,000 103,000 Dividends Payable ________ 67,000 Total Current Liabilities 459,000 595,000 Long-Term Notes Payable 275,000 Stockholders' Equity: Common Stock 800,000 1,000,000 Retained Earnings 196,000 302,000 Total Equities $ 1,455,000 $2,172,000 Jeannie Western Stores, Inc. Comparative Income Statements December 31 2019 2020 Net Credit Sales $1,251,000 $2,340,000 Cost of Goods Sold 627,000 1,305,000 Gross Profit 624,000 1,035,000 Expenses (including Income Tax) 458,000 862,000 Net Income $ 166,000 $ 173,000 Additional Information: a. Accounts receivable and accounts payable relate to merchandise held for sale in the normal course of business. The allowance for bad debts was the same at the end of 2020 and 2019, and no receivables were charged against the allowance. Accounts payable are recorded net of any discount and are always paid within the discount period, What amount of cash was collected from 2020 accounts receivable? A. $1,090,000 B. $2,180,000 C. $2,340,000 D. $2,500,000

B 360,000 + 2,340,000 - 52,,000 = 2,180,000

The following facts relate to the Muno Co. postretirement benefits plan for 2020: Service cost $ 45,000 Discount rate 10% APBO, 1/1/20 350,000 EPBO, 1/1/20 500,000 Benefit payments to employees 34,000 The amount of postretirement expense for 2020 is: A. $74,000 B. $80,000 C. $84,000 D. $90,000

B 45,000 + (350,000 * .10) 45,000 + 35,000 = 80,000

Maureen Corporation reports income before taxes of $500,000 in its income statement, but because of timing differences taxable income is only $200,000. If the tax rate is 45%, what amount of net income should the corporation report? A. $337,500. B. $275,000. C. $225,000. D. $ 90,000.19

B 500.000 - (500,000*.45) = 275.000

The basis recommended by the FASB for the statement of cash flows is "cash and cash equivalents." As described by GAAP, cash equivalents are: A. All current assets that have no realization problems associated with them. B. Short-term, highly liquid investments that are both readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in interest rates. C. All cash and near cash items that will be turned into cash within one operating period or one year, whichever is shorter. D. All cash and investments in short-term securities that have a maturity of three months or less from the date of the financial statements.

B Alternative (B) is the definition of "cash and cash equivalents." The definition also includes the requirement that only investments with original maturities of three months or less qualify as cash equivalents.

Kielty Company purchased machinery that cost $300,000 on January 1, 2018. The entire cost was recorded as an expense. The machinery has a nine-year life and a $12,000 residual value. Kielty uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2020. Ignore income tax considerations. Before the correction was made and before the books were closed on December 31, 2020, retained earnings was understated by: A. $300,000. B. $236,000. C. $224,000. D. $221,333

B Corrections of errors are treated as prior period adjustments and are reported in the financial statements as an adjustment to the beginning balance of retained earnings. The company should have taken $32,000 for each year [($300,000 - $12,000)/9 = $32,000]. Therefore, $64,000 ($32,000 × 2) should have been taken as depreciation expense and $300,000 should not have been recorded as an expense; therefore, the net effect is that retained earnings was understated by $236,000 ($300,000 - $64,000).

Annette Company made the following journal entry in late 2020 for rent on property it leases to Hrubec Corporation. Cash 80,000 Unearned Rent 80,000 The payment represents rent for the years 2021 and 2022, the period covered by the lease. Annette Company is a cash basis taxpayer. Annette has income taxes payable of $123,000 at the end of 2020, and its tax rate is 38%. Assuming the taxes payable at the end of 2021 is $136,000, which journal entry would Annette Company use to record its tax expense for 2021? A. Income Tax Expense 166,400 Deferred Tax Asset 30,400 Income Taxes Payable 136,000 B. Income Tax Expense 151,200 Deferred Tax Asset 15,200 Income Taxes Payable 136,000 C. Income Tax Expense 105,600 Deferred Tax Asset 30,400 Income Taxes Payable 136,000 D. Income Tax Expense 120,800 Deferred Tax Asset 15,200 Income Taxes Payable 136,000

B Deferred tax expense: 30,400 - 15,200 = 15,200 Income Tax Expense: 15,200 + 136,000 = 151,200

Martin Marty, Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/20 and 12/31/21 contained the following errors: 2020 2021 Ending inventory $5,000 overstatement $8,000 understatement Depreciation expense $2,000 understatement $4,000 overstatement. Assume that the 2020 errors were not corrected and that no errors occurred in 2019. By what amount will 2020 income before income taxes be overstated or understated? A. $3,000 overstatement. B. $7,000 overstatement. C. $3,000 understatement. D. $7,000 understatement.

B Effect on 2020 Income Ending inventory $5,000 over $5,000 - over Depreciation expense $2,000 under 2,000 - over 5,000 + 2,000 = 7,000 over

For the lessee, a finance lease differs from an operating lease because: A. The lessee still records a right-of-use asset and lease liability at commencement and still uses the effective interest method to calculate the lease expense. B. The lessee still records a right-of use asset and lease liability at commencement but records the same amount for lease expense each period over the lease term. C. The lessee does not record a right-of-use asset and lease liability at commencement but still uses the effective interest method to calculate the lease expense. D. The lessee does not record a right-of-use asset and lease liability at commencement and records the same amount for lease expense each period over the lease term.

B For leases classified as operating, the lessee records a right-of-use asset and lease liability at commencement of the lease, similar to the finance lease approach; however, unlike a finance lease, the lessee records the same amount for lease expense each period over the lease term (often referred to as the straight-line method for expense measurement).

Which of the following is not a characteristic of a defined contribution pension plan? A. The employer's contribution each period is based on a formula. B. The benefits to be received by employees are defined by the terms of the plan. C. The accounting for a defined contribution plan is straightforward and uncomplicated. D. The benefit of gain or the risk of loss from the assets contributed to the pension fund are borne by the employee.

B If the benefits that the employee will receive are defined by the plan, then it is a defined benefit plan rather than a defined contribution plan. The characteristics described in alternatives A, C, and D are representative of a defined contribution plan.

The difference between a contributory pension plan and a noncontributory pension plan is: A. contributory plans tend to be fully funded, whereas noncontributory plans are based on "pay-as-you-go" funding. B. in contributory plans employees bear part of the cost of stated benefits or voluntarily make payments to the plan, whereas the costs of noncontributory plans are borne by the employer. C. noncontributory plans are dependent upon a company's ability to consistently earn a net income for pension payments, whereas contributory plans are not dependent upon operating results. D. in a contributory plan contributions are made, but in a noncontributory plan no contributions are made.

B In a contributory pension plan, the employees bear part of the cost of the benefits or make voluntary contributions. In a noncontributory plan, the employer bears the entire cost.

In its first year of operations Trumbo Company reported net income of $257,000. Total sales, all on account, amounted to $486,000, and collections of receivables during the year totaled $396,500. Trumbo uses the allowance method in accounting for bad debts expense and during the year recorded bad debt expense of $21,000. Based on these facts alone, what is the net cash provided by operating activities? A. $146,500 B. $188,500 C. $236,000 D. $325,500

B Increase in receivables (sales) $486,000 Decrease in receivables (collections) - 396,500 Net increase in receivables = $ 89,500 Net income $257,000 Increase in receivables (89,500) Bad debt expense 21,000 Cash flow from operations = $188,500

On January 1, 2021, Kinney Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for Kinney to make annual payments of $20,000 at the beginning of each year for five years with title to pass to Kinney at the end of this period. The machinery has an estimated useful life of 7 years and no guaranteed residual value. Kinney uses the straight-line method of depreciation for all of its fixed assets. Kinney accordingly accounts for this lease transaction as a finance lease. The present value of the lease payments were determined to have a present value of $90,919 at an implicit interest rate of 5%. Kinney includes the following entry to record the lease on its books: A. a debit to Lease Liability of $90,919 B. a credit to Lease Liability of $90,919 C. a debit to Right-of-Use Asset of $100,000 D. a debit to Deferred Lease Expense of $9,081

B Kinney records the lease on its books as follows: Right-of-Use Asset 90,919 Lease Liability 90,919

Pension cost should be accounted for on the: A. cash basis of accounting, recognizing the amount paid as the pension expense for the period. B. accrual basis, in a manner similar to other costs and expenses. C. current value basis, because employees need to be aware of the value of the retirement benefits they will receive. D. prospective basis, because even though the expense is a current period item, the benefits and the related liability belong to future periods.

B Pension cost should be accounted for on the accrual basis. Most accountants recognize that accounting for pension plans requires measurement of the cost and its identification with the appropriate time periods, which involves application of accrual, deferral, and estimation concepts in the same manner that they are applied in the measurement and the time-period identification of other costs and expenses.

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income? A. Advance rental receipts. B. Product warranty liabilities. C. Depreciable property. D. Fines and expenses resulting from a violation of law.

B Product warranty liabilities are temporary differences normally classified as expenses or losses that are deductible after they are recognized in financial income. (A) Advance rental receipts are temporary differences that are normally classified as revenues or gains that are taxable before they are recognized in financial income. (C) Depreciable property is a temporary difference that is normally classified as expenses or losses that are deductible before they are recognized in financial income. (D) Fines and expenses resulting from a violation of law are permanent differences that are normally recognized for financial reporting purposes but not for tax purposes.

Which of the following is not a part of applying the current and prospective approach in accounting for a change in an estimate? A. Report current and future financial statements on a new basis. B. Restate prior period financial statements. C. Disclose in the year of change the effect on net income and earnings per share data for that period only. D. Make no adjustments to current period opening balances for purposes of catch-up.

B Restating prior period financial statements is a part of the application of the retrospective approach. That approach is not appropriate for changes in accounting estimates. Alternatives A, C, and D represent the appropriate treatment for the current and prospective approach as applied to accounting for a change in an estimate.

Sandy Company deducts insurance expense of $21,000 for tax purposes in 2020, but the expense is not yet recognized for accounting purposes. In 2021, 2022 and 2023 taxable income will be higher than financial income because no insurance expense will be deducted for tax purposes, but $7,000 of insurance expense will be reported for accounting purposes in each of these years. Sandy Company has a tax rate of 45% and income taxes payable of $18,000 at the end of 2020. There were no deferred taxes at the beginning of 2020. What journal entry should be made for the income tax expense at the end of 2020? A. Income Tax Expense 18,000 Income Tax Liability 18,000 B. Income Tax Expense 27,450 Income Tax Liability 18,000 Deferred Tax Liability 9,450 C. Income Tax Expense 26,100 Income Tax Liability 18,000 Deferred Tax Liability 8,100 D. Income Tax Expense 30,450 Income Tax Liability 21,000 Deferred Tax Liability 9,450

B Taxes due and payable are credited to Income Taxes Payable; the increase in deferred taxes is credited to Deferred Tax Liability; and the sum of those two items is debited to Income Tax Expense

There are different views on the capitalization of leases. Which of the following has been adopted by the FASB? A. Capitalize firm leases where the penalty for nonperformance is substantial. B. Capitalize all long-term leases. C. Do not capitalize any leased assets. D. Capitalize leases that a similar to installment purchases.

B The FASB has adopted the approach to capitalize all long-term leases. The FASB indicates that the right to use property under the terms of the lease agreement is an asset, and the lessee's commitment to make payments under the lease is a liability.

According to the FASB, which approach is required for reporting changes in an accounting principle? A. Currently B. Retrospectively C. Prospectively D. Futuristically

B The FASB requires that companies use the retrospective approach for reporting changes in accounting principles.

On January 1, 2021, Kinney Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for Kinney to make annual payments of $20,000 at the beginning of each year for five years with title to pass to Kinney at the end of this period. The machinery has an estimated useful life of 7 years and no guaranteed residual value. Kinney uses the straight-line method of depreciation for all of its fixed assets. Kinney accordingly accounts for this lease transaction as a finance lease. The present value of the lease payments were determined to have a present value of $90,919 at an implicit interest rate of 5%. With respect to this finance lease, for the year ended 2021 Kinney should record: A. lease expense of $20,000 B. interest expense of $3,545.95 and depreciation expense of $12,988.43 C. interest expense of $4,545.95 and depreciation expense of $12,988.43 D. interest expense of $5,000.00 and depreciation expense of $18,183.80

B The amount of interest expense would be calculated by multiplying the lease obligation (present value of the lease payments) by the implicit interest rate of 5%, which is $3,545.95 (($90,919 - $20,000) X 5%). Because the lease agreement reflects transfer ownership of the asset to the lessee, depreciation of the leased equipment is based on the economic life of the asset. Therefore, using the straight-line method, the depreciation expense for the year would be $12,988.43 ($90,919/7).

Heybach Company is leasing a truck from Jessica Company that commences on January 1, 2021 and is non-cancelable with a term of four years. The truck cost $100,000 and has an estimated economic life of ten years and residual value at the end of the lease of $40,000 (unguaranteed). The truck reverts to Jessica at the termination of the lease. The implicit rate of Jessica is 5% and is known by Heybach. Jessica determined the rental payments using the 5% rate of return. At December 31, 2021, how much amortization of the right-of-use asset should Heybach record? A. $0 B. $15,850.20 C. $17,079.10 D. $18,348.59

B The annual payment to be made by Heybach to Jessica is $18,348.59 ($68,316.40 X 3.72325 (PVF-AD 4,5%)). The amount of the interest on the liability for the first year is $2,498.39 (($68,316.40 - $18,348.59) X 5%). Therefore the amortization of the right-of-use asset is $15,850.20 ($18,348.59 - $2,498.39).

The financial statement disclosures related to a pension plan should include: Expected benefit payments for next 5 years Rates used in measuring benefit amounts A schedule of all major components of pension expense A. Yes Yes No B. Yes Yes Yes C. No No No D. No Yes Yes

B The current financial statement disclosure requirements for pension plans are as follows: a. A schedule showing all the major components of pension expense. b. A reconciliation showing how the projected benefit obligation and the fair value of the plan assets changed from the beginning to the end of the period. c. A disclosure of the rates used in measuring the benefit amounts (discount rate, expected return on plan assets, rate of compensation). d. A table indicating the allocation of pension plan assets by category (equity securities, debt securities, real estate, and other assets), and showing the percentage of the fair value to total plan assets. e. Expected benefit payments to be paid to current plan participants for each of the next five years and in the aggregate for the five fiscal years thereafter. f. The nature and amount of changes in plan assets and benefit obligations recognized in net income and other comprehensive income of each period. g. The accumulated amount of changes in plan assets and benefit obligations that have been recognized in other comprehensive income and that will be recycled into net income in future periods. h. The amount of estimated net actuarial gains and losses and prior service costs and credits that will be amortized from accumulated other comprehensive income into net income over the next fiscal year.

The first step in the preparation of the statement of cash flow requires the use of information included in which comparative financial statements? A. Statements of Cash Flows. B. Balance Sheets. C. Income Statements. D. Statements of Retained Earnings.

B The first step in the preparation of the statement of cash flows is to compute the change in cash. The change can be determined by a comparison of comparative balance sheets which would show the beginning and ending cash balances.

The amortization of bond premium on long-term debt should be presented in a statement of cash flows (using the indirect method for operating activities) as a(n): A. Addition to net income. B. Deduction from net income. C. Investing activity. D. Financing activity.

B When a bond premium exists the amortization causes the bond interest expense reported on the income statement to be smaller than the interest paid or becoming payable. Thus, because the cash outflow is larger than the deduction in arriving at net income, a deduction from net income is necessary to determine cash provided by operating activities under the indirect approach.

Which of the following financial statement characteristics is adversely affected by accounting changes? A. Usefulness. B. Consistency. C. Timeliness. D. Relevance.

B While the characteristics of usefulness and relevance may be enhanced by changes in accounting, the characteristic of consistency is adversely affected. Consistent financial statements and historical 5 and 10 year summaries particularly can be distorted by changes in accounting. When changes in accounting occur, proper treatment and full disclosure should enable readers of financial statements to comprehend and assess the effects of such changes. The timeliness of financial statements should be unaffected by accounting changes

on January 1, 2020, Sanders Co. has the following balances: Projected benefit obligation $1,400,000 Fair value of plan assets 1,200,000 The settlement rate is 10%. Other data related to the pension plan for 2020 are: Service cost $120,000 Amortization of unrecognized prior service costs 40,000 Contributions 200,000 Benefits paid 70,000 Actual return on plan assets 158,000 Amortization of unrecognized net gain 12,000 The balance of the projected benefit obligation at December 31, 2020 is: A. $1,558,000 B. $1,570,000 C. $1,590,000 D. $1,790,000

C 1,400,000 + 120,000 +140,000 - 70,000 = 1,590,000

If the pension expense for a pension plan for a particular year amounts to $14,000 and the amount funded amounts to $11,000 for the same year, Pension Asset/Liability account would be: A. unaffected. B. debited for $3,000. C. credited for $3,000. D. either debited or credited, but the amount cannot be determined from the data given.

C 14,000 - 11,000 = 3,000 credited

Fesmire Co. had a deferred tax liability balance due to a temporary difference at the beginning of 2019 related to $200,000 of excess depreciation. In December of 2019, a new income tax act is signed into law that raises the corporate rate from 35% to 40%, effective January 1, 2021. If taxable amounts related to the temporary difference are scheduled to be reversed by $100,000 for both 2020 and 2021, Fesmire should increase or decrease deferred tax liability by what amount? A. Decrease by $10,000. B. Decrease by $5,000. C. Increase by $5,000. D. Increase by $10,000

C 200,000*.35 = 70,000 100,000*.35 = 35,000 100,000*.40 = 40,000 35,000 + 40,000 = 75,000 - 70,000 = increase of 5,000

C 80,000 - 0 = 80,000*.38 = 30,400 123,000 - 30,400 = 92,600

McDonough, Inc. received the following information from its pension plan trustee concerning the operation of the company's defined benefit pension plan for the year ended December 31, 2020. 1/1/20 12/31/20 Market-related asset value $5,000,000 $5,750,000 Projected benefit obligation 9,500,000 9,800,000 Accumulated benefit obligation 2,000,000 2,300,000 Unrecognized net (gains) and losses -0- 200,000 The service cost component of pension expense for 2020 is $700,000 and the amortization unrecognized prior service cost is $150,000. The settlement rate is 10% and the expected rate of return is 8%. What is the amount of pension expense for 2020? A. $1,200,000 B. $1,340,000 C. $1,400,000 D. $1,430,000

C 9,500,000 * .110 = 950,000 5,000,000 * .08 = 400,000 700,000 + 950,000 - 400,000 + 150,000 = 1,400,000

On December 31, 2020, accrued wages in the amount of $6,500 were not recognized by Shwenk Company. What effect would this error have on the following account balances at 12/31/20? Expenses Retained Earnings Liabilities Assets A. No Effect Overstate Overstate No Effect B. Overstate Understate No Effect Overstate C. Understate Overstate Understate No Effect D. No Effect Overstate No Effect Understate

C A failure to record accrued wages is a failure to make the following journal entry: Wages Expense 6,500 Wages Payable 6,500 Thus, the expenses would be understated and the liabilities would be understated. The retained earnings would be overstated because the expense was not recorded. Assets would be unaffected by the failure to record this entry.

Which of the following is not one of the commonly discussed advantages of leasing for the lessee? A. Leasing permits 100% financing at fixed rates. B. Leasing permits changes in equipment more easily thus reducing the risk of obsolescence. C. Leasing improves financial ratios by increasing assets without a corresponding increase in debt. D. Lease agreements may contain less restrictive provisions than other debt agreements.

C A lease agreement does not improve financial ratios. For the lessee, all long-term leases have an asset recorded along with a corresponding liability.

According to GAAP, a deferred tax liability: Results from a Past Transaction Is a Present Obligation Represents Future Sacrifice A. Yes No Yes B. Yes Yes No C. Yes Yes Yes D. No No No

C According to GAAP a deferred tax liability meets the definition of a liability. Thus, (a) it results from a past transaction, (b) it is a present obligation, and (c) it represents a future sacrifice.

How should significant noncash transactions (purchase of equipment in exchange for common stock) be reported in the statement of cash flows according to GAAP? A. They should be incorporated in the statement of cash flows in a section labeled, "Significant Noncash Transactions." B. Such transactions should be incorporated in the section (operating, financing, or investing) that is most representative of the major component of the transaction. C. These noncash transactions are not to be incorporated in the statement of cash flows. They may be summarized in a separate schedule at the bottom of the statement or appear in a separate supplementary schedule to the financials. D. They should be handled in a manner consistent with the transactions that affect cash flows

C According to GAAP, significant noncash transactions are not included in the statement of cash flows. The FASB indicates that such transactions can be summarized at the bottom of the statement of cash flows or appear in a separate schedule as a part of the financial statements.

On January 1, 2021, Kinney Corporation signed a five-year noncancelable lease for certain machinery. The terms of the lease called for Kinney to make annual payments of $20,000 at the beginning of each year for five years with title to pass to Kinney at the end of this period. The machinery has an estimated useful life of 7 years and no guaranteed residual value. Kinney uses the straight-line method of depreciation for all of its fixed assets. Kinney accordingly accounts for this lease transaction as a finance lease. The present value of the lease payments were determined to have a present value of $90,919 at an implicit interest rate of 5%. With respect to this finance lease, for the year ended 2022 Kinney should record: A. lease expense of $20,000 B. interest expense of $4,545.95 and depreciation expense of $12,988.43 C. interest expense of $2,723.25 and depreciation expense of $12,988.43 D. interest expense of $5,000.00 and depreciation expense of $18,183.80

C After the 2021 and 2022 payments, the new lease obligation is $54,464.95. This is calculated by subtracting the difference between the annual lease payment ($20,000) and the amount of interest expense ($3,545.95) of $16,454.05 from the previous lease obligation of $70,919. The 2022 interest expense is therefore $2,723.25 (5% of $54,464.95), and depreciation expense is again $12,988.43 ($90,919/7).

Which of the following is not one of the benefits investors and creditors can expect as a result of the presentation of the statement of cash flows? A. Assess the enterprise's ability to meet its obligations, its ability to pay dividends, and its need for external financing. B. Assess the effects on an enterprise's financial position of both its cash and noncash investing and financing transactions during a period. C. Assess the enterprise's ability to expand its operating facilities through the issuance of long-term debt. D. Assess the reasons for differences between net income and associated cash receipts and payments.

C Alternatives (A), (B), and (D) are examples of the information an investor or creditor derives from use of the statement of cash flows. Alternative (C) requires a greater amount of in-depth information that is not available in the statement of cash flows alone.

If a lease arrangement meets a sales-type lease, but payments by the lessee are determined as not probable, then A. the lessor records the lease as an operating lease. B. the lessor records the lease as a finance lease but makes a disclosure as to the improbability of payments. C. the lessor does not record a receivable and does not derecognize the leased asset, but instead records any receipt of lease payments as a deposit liability. D. the lessor records the lease as a finance lease at the amount determined to be collected as probable.

C Although not part of the classification tests, the lessor must also determine whether the collectability of payments from the lessee is probable. If payments are not probable, the lessor does not record a receivable and does not derecognize the leased asset. Instead, receipt of any lease payments is recorded as a deposit liability.

Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income? A. Subscriptions received in advance. B. Prepaid royalty received in advance. C. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes. D. Interest received on a municipal obligation.

C An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income. (A) Subscriptions received in advance and (B) a prepaid royalty received in advance are temporary differences classified as revenues or gains that are taxable before they are recognized in financial income. (D) Interest received on a municipal obligation is a permanent difference that is recognized for financial reporting purposes but not for tax purposes.

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

C As its name implies, the projected benefit obligation bases the computation of the deferred compensation amount on both vested and nonvested services using future salaries. Vested benefit obligation and accumulated benefit obligation use current salary levels in computing the deferred compensation amount. There is no such concept as the restructured benefit obligation.

A change in accounting principle is evidenced by: A. a change from the historical cost principle to current value accounting. B. adopting the allowance method in estimating bad debts expense when a credit sales policy is instituted. C. changing the basis of inventory pricing from weighted-average cost to LIFO. D. a change from current value accounting to the historical cost principle.

C Because current value accounting is not GAAP, alternatives A and D cannot be correct. A change in accounting principle is defined as a change from one GAAP to another GAAP. Alternative B is incorrect because adopting a principle for a new transaction does not constitute a change in accounting principle.

statement of cash flows for Jeannie Western Stores, Inc.: Jeannie Western Stores, Inc. Comparative Balance Sheets December 31, Assets 2019 2020 Current Assets: Cash $ 180,000 $ 230,000 Accounts Receivable (net) 360,000 520,000 Merchandise Inventory 420,000 650,000 Prepaid Expense 105,000 117,000 Total Current Assets 1,065,000 1,517,000 Long-Term Investments 75,000 Fixed Assets: Property, Plant & Equipment 480,000 730,000 Accumulated Depreciation (90,000) (150,000) Total Fixed Assets 390,000 580,000 Total Assets $1,455,000 $2,172,000 Equities Current Liabilities: Accounts Payable $ 365,000 $ 425,000 Accrued Expenses 94,000 103,000 Dividends Payable ________ 67,000 Total Current Liabilities 459,000 595,000 Long-Term Notes Payable 275,000 Stockholders' Equity: Common Stock 800,000 1,000,000 Retained Earnings 196,000 302,000 Total Equities $ 1,455,000 $2,172,000 Jeannie Western Stores, Inc. Comparative Income Statements December 31 2019 2020 Net Credit Sales $1,251,000 $2,340,000 Cost of Goods Sold 627,000 1,305,000 Gross Profit 624,000 1,035,000 Expenses (including Income Tax) 458,000 862,000 Net Income $ 166,000 $ 173,000 Additional Information: a. Accounts receivable and accounts payable relate to merchandise held for sale in the normal course of business. The allowance for bad debts was the same at the end of 2020 and 2019, and no receivables were charged against the allowance. Accounts payable are recorded net of any discount and are always paid within the discount period. What amount of cash was paid on accounts payable to suppliers during 2020? A. $1,245,000 B. $1,365,000 C. $1,475,000 D. $1,535,000

C Begin Inv 420,000 plus purchases ? less end inv (650,000) COGS = 1,305,000 purchases = 1.305.000 -420,000 + 650,000 = 1,535,000 sub purchases balances 365,000 + 1,535,000 - 425,000 = 1,475,000

To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by: A. re-recording all income statement transactions that directly affect cash in a separate cash flow journal. B. estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to the entire array of income statement transactions. C. eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash. D. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.

C By eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash, the accrual based net income is changed to a cash basis. This procedure includes items that have no impact on cash, like depreciation, and items that have a future impact on cash, like sales on account.

A deferred tax account is classified on the balance sheet as: A. either a current or a noncurrent liability. B. a net current amount. C. a net noncurrent amount. D. it should never appear on the balance sheet.

C Companies should classify deferred tax accounts as a net noncurrent amount on the balance sheet.

The use of accelerated depreciation for tax purposes and straight-line depreciation for accounting purposes results in: A. a larger amount of depreciation expense shown on the tax return than on the income statement over the asset's useful life. B. the asset being fully depreciated for tax purposes in half the time it takes to become fully depreciated for accounting purposes. C. a larger amount of depreciation expense shown on the income statement than on the tax return in the last year of the asset's useful life. D. a loss on the sale of the asset in question if it is sold for its book value before its useful life expires.

C Depreciation expense under an accelerated depreciation method will be larger in the early years of an asset's life and smaller in the later years. When compared to depreciation expense calculated under the straight-line method, the expense calculated under the accelerated method will be greater in the early years and less in the later years of an asset's useful life

With respect to the computation of the present value of the lease liability by the lessee, how are the following items handled in the computation? Expected residual value Expected residual value Equal or greater than less than Guaranteed Guaranteed Unguaranteed Residual Value Residual Value Residual Value A. Included Excluded Excluded B. Included Included Included C. Excluded Included Excluded D. Excluded Excluded Included

C If it is probable that the expected residual value is equal to or greater than the guaranteed residual value, the lessee should not include the guaranteed residual value in the computation of the lease liability. If it is probable that the expected residual value is less than the guaranteed residual value, the difference between the expected and guaranteed residual values should be included in the computation of the lease liability. The lessee does not include an unguaranteed residual value in the computation of the lease liability.

The use of a formula in developing the parameters of a pension fund is used when the plan is a Defined Benefit Plan Defined Contribution Plan A. Yes No B. No Yes C. Yes Yes D. No No

C In a defined contribution plan, the employer agrees to contribute to a pension trust a certain sum each period based on a formula. This formula considers such things as age, length of employee service, employer's profits, and compensation level. A defined benefit plan defines the benefits that the employee will receive at the time of retirement. A formula is typically used to provide for the benefits which basically are a function of the employee's years of service and an employee's compensation level when he or she nears retirement

In a statement of cash flows, the cash flows from investing activities section should report: A. the issuance of common stock in exchange for legal services. B. a stock split. C. the assignment of accounts receivable. D. a payment of dividends.

C In a statement of cash flows, an assignment of accounts receivable is classified as an investing activity. The issuance of common stock in exchange for legal services and a stock split (A and B) are noncash transactions that would not be reported on the statement of cash flows. A payment of dividends (D) is classified as a financing activity.

Which of the following is a condition in which retrospective application is not impracticable? A. The company cannot determine the effects of retrospective application. B. Retrospective application requires assumptions about management's intent in a prior period. C. The company has changed auditors. D. Retrospective application requires significant estimates for a prior period, and the company cannot objectively verify the necessary information to develop these estimates.

C Retrospective application is still practicable even though a company has changed auditors. All the other answers would make retrospective application impracticable.

With respect to the computations of costs of goods sold, sales revenue, and gross profit for the lessor in a sales-type lease, how are the amounts recorded for guaranteed residual value and unguaranteed residual value different or the same? Cost of Goods Sales Gross Sold Revenue Profit A. Same Different Same B. Different Same Different C. Different Different Same D. Same Different Different

C The amounts recorded for sale revenue and cost of goods sold are different between guaranteed and unguaranteed situations. However, given that the amount subtracted from sales revenue and cost of goods sold is the same for an unguaranteed residual value, the gross profit computed will still be the same amount as when a guaranteed residual value exists.

Which plus or minus signs for lease prepayments and incentives correctly identifies the adjustments to be made to the lease liability balance to properly report the right-of-use asset by the lessee? Prepaid Lease Initial Lease Incentives Direct Payments Received Costs A. + + + B. -- + + C. + -- + D. + + --

C The following equation identifies the adjustment made to the lease liability balance to determine the proper amount to report for the right-of-use asset. Initial Measurement Prepaid Lease Initial Right- of Lease + Lease -- Incentives + Direct = ofUse Liability Payments Received Costs Asset

Debbie Company leased equipment to the Trant Company on July 1, 2021, for a non cancelable, ten-year period expiring June 30, 2031 (Debbie and Trant both have a year end of December 31). Equal annual payments under the lease are $50,000 and are due on July 1 of each year. The first payment was made on July, 1 2021. The implicit interest rate contemplated by Debbie and Trant is 9%. The cash selling price of the equipment is $356,098.65 and the cost of the equipment on Debbie's accounting records was $316,000; and there is a guaranteed residual value of $15,000 (which is less than the expected residual value of the equipment at the end of the lease). The gross profit on the sale by Trant Company is: A. $0 B. $25,098.65 C. $40,098.65 D. $55,098.65

C The gross profit is the sales revenue of $356,098.65 less the cost of goods sold of $316,000.

Debbie Company leased equipment to the Trant Company on July 1, 2021, for a non cancelable, ten-year period expiring June 30, 2031 (Debbie and Trant both have a year end of December 31). Equal annual payments under the lease are $50,000 and are due on July 1 of each year. The first payment was made on July, 1 2021. The implicit interest rate contemplated by Debbie and Trant is 9%. The cash selling price of the equipment is $356,098.65 and the cost of the equipment on Debbie's accounting records was $316,000; and there is a guaranteed residual value of $15,000 (which is less than the expected residual value of the equipment at the end of the lease). The lease meets the criteria for classification by Debbie Company as a(n) A. finance lease B. operating lease C. sales-type lease D. direct financing lease

C The lease meets the criteria as a sales-type lease by Debbie Company and a finance lease by Trant Company because (1) the present value of the lease payments is equal to the fair value of the asset, and (2) the lease term is equal to the economic life of the asset. That is, Trant Company will consume substantially the entire underlying asset over the lease term.

The primary difference between a direct financing lease and a sales-type lease is the: A. manner in which rental receipts are recorded as rental income. B. amount of depreciation recorded each year by the lessor. C. the recognition of profit by the lessor. D. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.

C The manner in which rental receipts are recorded, the amount of depreciation recorded, and the allocation of initial direct costs are not primary differences in applying the financing method to a direct financing lease or a sales-type lease. The primary difference is in recognition of profits because in a direct financing lease the profit is deferred and recognized over the life of the lease.

Hyasaki Company provided the following information on selected transactions during 2020: Purchase of land by issuing bonds $200,000 Proceeds from sale of equipment 300,000 Proceeds from issuing bonds 600,000 Purchases of inventories 800,000 Purchases of treasury stock 400,000 Loans made to affiliated corporations 500,000 Dividends paid to preferred stockholders 100,000 Proceeds from issuing preferred stock 700,000. The net cash provided (used) by investing activities during 2020 is: A. $300,000 B. $100,000 C. $(200,000) D. $(400,000)

C The net cash used by investing activities during 2020 of $(200,000) is the result of the proceeds from the sale of equipment, $300,000, and the loans made to affiliated corporations, $(500,000). 300,000 - 500,000 = -200,000

Crabbe Company reported $80,000 of selling and administrative expenses on its income statement for the past year. The Company had depreciation expense and an increase in prepaid expenses associated with the selling and administrative expense for the year. Assuming use of the direct method, how would these items be handled in converting the accrual based selling and administrative expense to the cash basis? Depreciation Increase in Prepaid Expenses A. Deducted From Deducted From B. Added To Added To C. Deducted From Added To D. Added To Deducted From

C The noncash depreciation charge should be deducted from the selling and administrative expense in converting it to the cash basis. The increase in the prepaid expense would be added to selling and administrative expense as it represents a cash outflow that was not charged to an expense account.

Tang Corporation has a change in accounting that requires Tang to restate the financial statements of all prior periods presented and disclose in the year of change the effect on net income and earnings per share data for all prior periods presented. This change is most likely the result of a: A. change in depreciation methods. B. change in accounting estimate. C. change in reporting entity. D. change in estimated recoverable mineral reserves.

C The question describes most closely the accounting and disclosure requirements necessary for a change in reporting entity. Alternatives A, B and D are all changes in according estimates and do not require the disclosures indicated in the question.

Of the following questions, which one would not be answered by the statement of cash flows? A. Where did the cash come from during the period? B. What was the cash used for during the period? C. Were all the cash expenditures of benefit to the company during the period? D. What was the change in the cash balance during the period?

C The statement of cash flows, like the balance sheet and income statement, reflects the results of transactions entered into by the entity during the preceding year. The statement of cash flows could include the results of some cash flow transactions that were of great benefit and some that were of little benefit. The purpose of the statement is to reflect cash inflows and cash outflows, not to evaluate the benefits derived from the transactions. A great deal of additional information would have to be included in the statement of cash flows for a reader to evaluate the benefit of each cash receipt or expenditure recorded.

C To adjust the financial records for the change from FIFO to average cost, previous year differences are accumulated as follows: Net Income Year FIFO Average Cost Difference in Income 2016 $35,000 $33,000 $(2,000) 2017 63,000 67,000 4,000 2018 74,000 75,000 1,000 2019 79,000 78,000 (1,000) 2020 93,000 94,000 1,000 Total at beginning of 2021 $ 3,000 Therefore the journal entry for Skaggs should be as follows: Inventory 3,000 Retained Earnings 3,000

In computing the present value of the payments under the present value test, the lessee must use a discount rate. Normally, use of the lessee's incremental borrowing rate is appropriate unless: A. the lessee's incremental borrowing rate exceeds the prime interest rate on the date of the lease agreement, in which case the prime interest rate should be used. B. the incremental borrowing rate is less than two-thirds of the prime interest rate, in which case the prime interest rate should be used. C. the lessee knows the implicit rate of the lessor. D. the lessee's incremental borrowing rate is double the LIBOR rate.

C To determine whether the present value of the payments equals or exceeds 90% of the fair value of the leased asset, a lessee should compute the present value of the lease payments using the implicit interest rate. This rate is defined as the discount rate that, at commencement of the lease, causes the aggregate present value of the lease payments and unguaranteed residual value to be equal to the fair value of the leased asset. If it is impracticable to determine the implicit rate, then the incremental borrowing rate can be used.

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be: A. handled retroactively in accordance with the guidance related to changes in accounting principles. B. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset. C. reported as an adjustment to tax expense in the period of change. D. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.

C When a change in the tax rate is enacted into law, its effect on deferred income tax should be recorded immediately. The effects are reported as an adjustment to tax expense in the period of the change.

Which of the following is not a change in accounting principle? A. A change from completed-contract to percentage-of-completion. B. A change from FIFO to average cost. C. Using a different method of depreciation for new plant assets. D. A change from LIFO to FIFO for inventory valuation.

C When a company uses a different method of depreciation for new plant assets, this is not considered a change in accounting principle. A, B, and D are all considered changes in accounting principle.

Which of the following is not one of the provisions of The Employee Retirement Income Security Act of 1974 (ERISA)? A. Plan administrators are required to publish a comprehensive description and summary of their plans and detailed annual reports accompanied by supplementary schedules and statements. B. An employer must fund the pension plan in accordance with an actuarial funding method that over time will be sufficient to pay for all pension obligations. C. The Pension Benefit Guarantee Corporation, established by ERISA, can impose a lien against an employer's assets for up to 85% of corporate net worth when the present value of guaranteed vested benefits exceeds the pension fund assets. D. Required reports, statements, and supplementary schedules pertaining to the pension plan must be subjected to audit by independent public accountants.

C While the Pension Benefit Guarantee Corporation is empowered by ERISA to administer terminated pension plans and impose liens on assets, the maximum lien amount that can be imposed is 30% of net worth.

Martin Marty, Inc., is a calendar-year corporation. Its financial statements for the years ended 12/31/20 and 12/31/21 contained the following errors: 2020 2021 Ending inventory $5,000 overstatement $8,000 understatement Deprec expense $2,000 understatement $4,000 overstatement. Assume that no correcting entries were made at 12/31/20, or 12/31/21. Ignoring income taxes, by how much will retained earnings at 12/31/21 be overstated or understated? A. $7,000 overstatement. B. $8,000 overstatement. C. $3,000 understatement. D. $10,000 understatement.

D Effect on 2020 net income 2020 End Inv $5,000 over 0 2021 End Inv $8,000 under 8,000 under 2020 Deprec exp $2,000 under 2,000 over 2021 Deprec exp $4,000 over 4,000 under 0 - 8,000 + 2,000 - 4,000 = - 10,000 or 10,000 under

D 21,000 - 0 = 21,000 * .45 = 9,450

A company that reports changes retrospectively would: A. report the cumulative effect in the current year's income statement as an irregular item. B. not change any prior-year financial statements. C. make changes prospectively. D. show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented.

D A company that reports changes retrospectively would adjust prior years' statements on a basis consistent with the newly adopted principle. In addition the company should show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented.

Which of the following lease arrangements would most likely be accounted for as an operating lease by the lessee? A. The lease agreement runs 16 years and the economic life of the lease property is 20 years. B. The present value of the minimum lease payments is $55,600 and the fair value of the leased property is $60,000. C. The lease agreement allows the lessee the right to purchase the leased asset for $1.00 when half of the asset's economic useful life has expired. D. The lessee may renew the two-year lease for an additional two years at the same rental.

D Alternative A meets the 75% FASB guideline for the lease term test. Alternative B meets the 90% FASB guideline for the present value test. Alternative C appears to be a bargain purchase option. Thus, these situations all describe a finance lease because they meet one of the five lease classification tests. Alternative D might violate the lease term test, but we are not given the economic life of the asset—so it is most likely an operating lease as in comparison to the alternatives.

When preparing a statement of cash flows, an increase in accounts receivable during the period would cause which one of the following adjustments in determining cash flows from operating activities? Direct Method Indirect Method A. Increase Decrease B. Decrease Increase C. Increase Increase D. Decrease Decrease

D An increase in accounts receivable during the period would indicate that the amount of cash received during the period was less than the amount of sales reported as earned; therefore, under both the direct and indirect methods, there would be an adjustment decreasing the cash flows from operating activities

The unexpected gains or losses that result from changes in the projected benefit obligation are called: Asset Gains & Losses Liability Gains & Losses A. Yes Yes B. No No C. Yes No D. No Yes

D Asset gains and losses occur when the expected return on plan assets differs from the actual return on plan assets. Asset gains occur when the actual return exceeds the expected return. Asset losses occur when the expected return exceeds the actual return. The unexpected gains and losses resulting from changes in the projected benefit obligation are called liability gains and losses. Liability gains result from unexpected decreases in the liability balance, and liability losses result from unexpected increases

The general rule for differentiating between a change in an estimate and a correction of an error is: A. based on the materiality of the amounts involved. Material items are handled as a correction of an error, whereas immaterial amounts are considered a change in an estimate. B. if a generally accepted accounting principle is involved, it's usually a change in an estimate. C. if a generally accepted accounting principle is involved, it's usually a correction of an error. D. a careful estimate that later proves to be incorrect should be considered a change in an estimate.

D Distinguishing between a change in an estimate and a correction of an error is not necessarily determined by a GAAP being involved. Also, materiality is not one of the criteria to be used in differentiating between a change in an estimate and a correction of an error. The best basis for differentiating between a change in one estimate and a correction of an error is to follow the general rule that "careful estimates that later prove to be incorrect should be considered a change in an estimate."

Which of the following differences would result in future taxable amounts? A. Expenses or losses that are tax deductible after they are recognized in financial income. B. Revenues or gains that are taxable before they are recognized in financial income. C. Revenues or gains that are recognized in financial income but are never included in taxable income. D. Expenses or losses that are tax deductible before they are recognized in financial income.

D Expenses or losses that are tax deductible before they are recognized in financial income would result in future taxable amounts. Alternatives A and B are temporary differences which result in future deductible amounts. Alternative C is a permanent difference that does not result in either future taxable or deductible amounts.

In 2021, Skaggs Co., changed from FIFO to average cost for recording its inventory. The following information shows the differences in income for Skaggs since it began business in 2013. Net Income Year FIFO Average Cost 2016 35,000 33,000 2017 63,000 67,000 2018 74,000 75,000 2019 79,000 78,000 2020 93,000 94,000 2021 87,500 89,000. If Skaggs presents comparative statements for 2019, 2020 and 2021, then it should: A. Change the beginning balance of retained earnings at January 1, 2016 by showing a decrease of $2,000. B. Change the beginning balance of retained earnings at January 1, 2017 by showing a decrease of $2,000. C. Change the beginning balance of retained earnings at January 1, 2018 by showing an increase of $2,000. D. Change the beginning balance of retained earnings at January 1, 2019 by showing an increase of $3,000.

D If a company changes accounting principles it must change the beginning balance of retained earnings of the earliest year presented. Since Skaggs is presenting comparative statements for 2019, 2020 and 2021, it must change the beginning balance of retained earnings at January 1, 2019. The cumulative effect of the prior years is calculated as follows: Net Income Year FIFO Average Cost Difference in Cost 2016 $35,000 $33,000 $(2,000) 2017 63,000 67,000 4,000 2018 74,000 75,000 1,000 Total at beginning of 2019 $3,000

Gleim Inc. has a deductible temporary difference of $100,000 at the end of its first year of operations. Its tax rate is 40%. Income taxes payable are $90,000. Gleim properly recorded a deferred tax asset. Later, after careful review of all available evidence, it is determined that it is more likely than not that $15,000 of the deferred tax asset will not be realized. What entry should Gleim make to record the reduction in asset value? A. Income Tax Expense 15,000 Deferred Tax Asset 15,000 B. Income Taxes Payable 15,000 Income Tax Expense 15,000 C. Allowance to Reduce Deferred Tax Asset to Expected Realizable Value 15,000 Income Tax Expense 15,000 D. Income Tax Expense 15,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value 15,000

D In the journal entry, income tax expense is increased in the current period because a favorable tax benefit is not expected to be realized for a portion of the deductible temporary difference. A valuation account is simultaneously established to recognize the reduction in the carrying amount of the deferred tax asset

Which of the following is not a factor considered in the determination of pension cost? A. Service cost. B. Interest. C. Prior service cost. D. Inflation.

D Inflation is not a component used in determining pension cost. One could argue that inflation does in fact have an impact on the other factors that go into the determination of pension cost, but it is not in and of itself a primary factor. The determination of pension cost is a function of (1) service cost, (2) interest, (3) return on plan assets, (4) prior service cost, and (5) gains and losses.

Which of the following activities is classified as an investing activity on the statement of cash flows? A. Cash received from the sale of goods and services. B. Cash paid to suppliers for inventory. C. Cash paid to lenders for interest. D. Cash received from the sale of property, plant, and equipment.

D Investing activities include (a) making and collecting loans and (b) acquiring and disposing of investments and productive assets. Thus, the cash received from the sale of property, plant, and equipment represents the disposal of productive assets

Cashman Company reported net income after taxes of $85,000 for the year ended 12/31/20. Included in the computation of net income were: depreciation expense, $15,000; amortization of a patent, $8,000; income from an investment in common stock of Linda Inc., accounted for under the equity method, $12,000; and amortization of a bond premium, $3,000. Cashman also paid a $20,000 dividend during the year. The net cash provided by operating activities would be reported at: A. $57,000. B. $73,000. C. $77,000. D. $93,000.

D Net income $ 85,000 Depreciation expense 15,000 Amortization of patent 8,000 Amortization of bond premium (3,000) Investment income (12,000) Net cash provided by operating activities $ 93,000

During 2020, Greta Company reported net income of $128,000 which included depreciation expense of $26,000. In addition, the Company experienced the following changes in the account balances listed below: Increases Accounts payable ........................................ $15,000 Inventory ............................................................. 12,000 Decreases Accounts receivable..................................... $ 4,000 Prepaid expenses ............................................. 11,000 Accrued liabilities 8,000 Based upon this information what amount will be shown for net cash provided by operating activities for 2020. A. $ 89,000. B. $ 95,000. C. $155,000. D. $164,000.

D Net income $128,000 Increase in accounts payable 15,000 Increase in inventory (12,000) Depreciation expense 26,000 Decrease in accounts receivable 4,000 Decrease in prepaid expenses 11,000 Decrease in accrued liabilities (8,000) Net cash provided by operating activities $164,000

statement of cash flows for Jeannie Western Stores, Inc.: Jeannie Western Stores, Inc. Comparative Balance Sheets December 31, Assets 2019 2020 Current Assets: Cash $ 180,000 $ 230,000 Accounts Receivable (net) 360,000 520,000 Merchandise Inventory 420,000 650,000 Prepaid Expense 105,000 117,000 Total Current Assets 1,065,000 1,517,000 Long-Term Investments 75,000 Fixed Assets: Property, Plant & Equipment 480,000 730,000 Accumulated Depreciation (90,000) (150,000) Total Fixed Assets 390,000 580,000 Total Assets $1,455,000 $2,172,000 Equities Current Liabilities: Accounts Payable $ 365,000 $ 425,000 Accrued Expenses 94,000 103,000 Dividends Payable ________ 67,000 Total Current Liabilities 459,000 595,000 Long-Term Notes Payable 275,000 Stockholders' Equity: Common Stock 800,000 1,000,000 Retained Earnings 196,000 302,000 Total Equities $ 1,455,000 $2,172,000 Jeannie Western Stores, Inc. Comparative Income Statements December 31 2019 2020 Net Credit Sales $1,251,000 $2,340,000 Cost of Goods Sold 627,000 1,305,000 Gross Profit 624,000 1,035,000 Expenses (including Income Tax) 458,000 862,000 Net Income $ 166,000 $ 173,000 Additional Information: a. Accounts receivable and accounts payable relate to merchandise held for sale in the normal course of business. The allowance for bad debts was the same at the end of 2020 and 2019, and no receivables were charged against the allowance. Accounts payable are recorded net of any discount and are always paid within the discount period. The amount to be shown on the cash flow statement as inflows from financing activities would total what amount? A. $136,000 B. $200,000 C. $275,000 D. $475,000

D Proceeds From Long-Term Note $275,000 Proceeds From Issue of Common Stock 200,000 Cash Inflows From Financing $475,000

The cash received from the sale of property, plant, and equipment at no gain or loss is classified as what type of activity on the statement of cash flows? Investing Financing Operating A. Yes Yes No B. No No Yes C. No Yes No D. Yes No No

D The cash received from the sale of property, plant, and equipment at no gain or loss is classified as an investing activity

Weaver Company changes from the LIFO method to the FIFO method in 2021. The increase in pre-tax income as a result of the difference in the two methods prior to 2019 is $ 100,000 and for the year 2019 is $40,000 and for the year 2020 is $30,000. The estimated tax effect is 40%. The entry to record the change at the beginning of 2020 should include. A. A debit to Deferred Tax Liability of $68,000. B. A credit to Deferred Tax Liability of $68,000. C. A debit to Deferred Tax Liability of $56,000. D. A credit to Deferred Tax Liability of $56,000.

D The change in accounting principle from LIFO to FIFO would result in a direct effect adjustment to deferred taxes. Because income increased, there would be a 40% increase in Deferred Tax Liability which is done with a credit entry. The amount is calculated based on the sum of the prior years of $100,000 and $40,000 multiplied by 40%. 100,000 * .40 = 40,000 40,000 * .40 = 16,000 40,000 + 16,000 = 56,000

Debbie Company leased equipment to the Trant Company on July 1, 2021, for a non cancelable, ten-year period expiring June 30, 2031 (Debbie and Trant both have a year end of December 31). Equal annual payments under the lease are $50,000 and are due on July 1 of each year. The first payment was made on July, 1 2021. The implicit interest rate contemplated by Debbie and Trant is 9%. The cash selling price of the equipment is $356,098.65 and the cost of the equipment on Debbie's accounting records was $316,000; and there is a guaranteed residual value of $15,000 (which is less than the expected residual value of the equipment at the end of the lease). The amount of the lease receivable to be recognized by Debbie Company is: A. $0 because it is an operating lease. B. $316,000.00 C. $341,098.65 D. $356,098.65

D The lease meets the criteria as a sales-type lease by Debbie Company and a finance lease by Trant Company because (1) the present value of the lease payments is equal to the fair value of the asset, and (2) the lease term is equal to the economic life of the asset. That is, Trant Company will consume substantially the entire underlying asset over the lease term.

The December 31, 2020, physical inventory of Dunn Company appropriately included $4,500 of merchandise inventory that was not recorded as a purchase until January, 2021. What effect will this error have on the following account balances at 12/31/20? COGS Liabilities Retained Earnings Assets A. Overstate Overstate Understate Understate B. No Effect Understate Understate Understate C. Understate No Effect Overstate Overstate D. Understate Understate Overstate No Effect

D The merchandise was correctly counted in the physical inventory and thus ending inventory and total assets are properly stated. The fact that the purchase was not recorded understates liabilities because accounts payable was not credited. Also, with the purchase not being recorded, the amount of merchandise available for sale is understated and results in an understatement of cost of goods sold. The understatement of cost of goods sold causes both net income and retained earnings to be overstated.

A major distinction between temporary and permanent differences is: A. permanent differences are not representative of acceptable accounting practice. B. temporary differences occur frequently, whereas permanent differences occur only once. C. once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time. D. temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

D The only correct alternative regarding temporary differences and permanent differences is alternative D. Temporary and permanent differences occur with the same general frequency. Also, permanent differences do not change in status with the passage of time.

The present value of the pension plan benefits that will have to be paid to both active and retired employees covered by a pension plan is dependent on all of the following factors except: A. the benefit provisions of the plan. B. characteristics of the employee group. C. actuarial assumptions. D. the income level of the entity setting up the plan.

D The present value of pension plan benefits is not affected by the income of the entity setting up the plan. These benefits are, however, dependent upon the benefit provisions, the employee group covered, and the actuarial assumptions employed.

Kielty Company purchased machinery that cost $300,000 on January 1, 2018. The entire cost was recorded as an expense. The machinery has a nine-year life and a $12,000 residual value. Kielty uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2020. Ignore income tax considerations. Kielty's income statement for the year ended December 31, 2020, should show that cumulative effect of this error in the amount of: A. $236,000. B. $224,000. C. $221,333. D. $ -0-.

D The profession requires that corrections of errors be treated as prior period of adjustments, be recorded in the year in which the error was discovered, and be reported in the financial statements as an adjustment to the beginning balance of retained earnings. Therefore, Kielty's income statement for the year ended December 31, 2020 will not be affected.

During 2020, Osborn Corporation, which uses the allowance method of accounting for doubtful accounts, recorded a provision for bad debt expense of $75,000 and in addition it wrote off, as uncollectible, accounts receivable of $23,000. As a result of these transactions, net cash provided by operating activities would be calculated (indirect method) by adjusting net income with a(n): A. $23,000 increase. B. $52,000 increase. C. $52,000 decrease. D. $75,000 increase.

D The provision for bad debt expense is a noncash transaction that had decreased the amount of net income (or increased the amount of net loss) by $75,000. The writeoff of the uncollectible accounts receivable did not affect net income (loss) or cash flow. Thus, to reflect the net cash provided by operating activities, $75,000 should be added back to net income.

Changing specific subsidiaries that constitute the group of companies for which consolidated financial statements are prepared is an example of a: A. change in accounting estimate. B. change in accounting principle. C. change in segment reporting. D. change in reporting entity.

D This is an example of a change in the reporting entity. This occurs when a company makes a change from reporting as one type of entity to another type of entity. This type of change should be reported by restating the financial statements of all prior periods presented to show the financial information for the new reporting entity for all periods

On January 1, 2021, Cihla Airlines sold an airplane to an unaffiliated company for $400,000. The airplane had a book value of $360,000 and a remaining useful life of 8 years. That same day, Cihla leased back the airplane at $5,000 per month for 4 years with no option to renew the lease or repurchase the airplane. Cihla's rent expense for this airplane for the year ended December 31, 2021 should be: A. $0 B. $12,000. C. $15,000. D. $60,000

D This lease is an operating lease to Cihla because the asset does not transfer ownership back to Cihla, there is no option to renew or repurchase the airplane, the lease term is 4 years which is less than 75% of the estimated life of the aircraft and the present value of the lease payments is less than 90% of the fair value of the airplane (the lease payments without calculating present value are $240,000 ($5,000 X 12 X 4), which is less than 90% of the fair value of the plane of $360,000 (90% X $400,000). Therefore Cihla accounts for the transaction as a sale and the lease is an operating lease. The rent expense for the year is therefore $60,000 ($5,000 X 12).

Julie Company has accounted for its inventory using the NIFO (next-in, first-out) inventory method for the past two years. During the current year they changed to the FIFO inventory method at the insistence of their public accountant. The effect of this change should be reported, net of applicable income taxes, in the current: A. income statement after income from continuing operations and before discontinued operations. B. retained earnings statement after net income but before dividends. C. income statement after discontinued operations. D. retained earnings statement as an adjustment of the opening balance.

D When a company changes from an accounting principle that is not generally accepted (NIFO) to one that is generally accepted (FIFO), the change should be handled as a correction of an error. In considering this change as a correction of an error, it should be handled as a prior period adjustment. Thus, the cumulative effect at the beginning of the period of change is entered directly as an adjustment to the opening balance of retained earnings

When an employer sets funds aside for future pension benefits by making payments to a funding agency that is responsible for accumulating the assets of the pension fund and for making payments to the recipients as the benefits become due, the pension plan is said to be: A. insured. B. qualified. C. risk free. D. funded.

D When funds are set aside by an employer to accomplish the objectives of a pension plan, the plan is said to be funded. An insured plan is one that has an insurance company as the funding agency. A qualified pension plan is one that is designed in accordance with federal income tax requirements. There is no formal concept known as a risk free pension plan

T/F. A deferred tax asset represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

False A deferred tax asset represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year. A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

A lease is a contractual agreement conveying ownership of certain property from one part to another party.

False A lease is a contractual agreement conveying the rights to use property from one to another. A lease does not by definition transfer ownership. Such arrangements can be written into a lease agreement, but the transfer of ownership is not a part of all lease agreements.

A noncontributory pension plan and defined contribution plan refer to the same type of plan.

False A noncontributory pension plan is a plan wherein the employer bears the entire cost. This is different from contributory plans where the employees bear part of the cost of the stated benefits or voluntarily make payments to increase their benefits. Under a defined contribution plan, the employer agrees to contribute to a pension trust a certain sum each period based on a formula; however, oftentimes employees are also allowed to contribute.

Actual return on plan assets increases pension expense (assuming the actual return is positive).

False Actual return on plan assets reduces pension expense (assuming the actual return is positive).

A change in accounting principle results when a company adopts a new principle in recognition of events that were previously immaterial.

False Adoption of a new principle in recognition of events that were previously immaterial is not an accounting change.

T/F. An originating temporary difference is the initial difference that occurs when the book basis of an asset exceeds, but is not exceeded by, the tax basis of a liability.

False An originating temporary difference is the initial difference between the book basis and the tax basis of an asset or liability regardless of whether the tax basis of the asset or liability exceeds or is exceeded by the book basis of the asset or liability

If a change in an accounting estimate affects current net income by an amount equal to or greater than 1% of net income, the change should be handled retrospectively.

False Changes in accounting estimates must be handled prospectively, that is, no changes should be made in previously reported results. Opening balances are not adjusted and no attempt is made to catch-up for prior periods.

Companies should use retrospective application if the company cannot determine the effects of the retrospective application.

False Companies should not use retrospective application if the company cannot determine the effects of the retrospective application.

When accounts payable increase during a period, cost of goods sold on an accrual basis is lower than cost of goods sold on a cash basis.

False Cost of goods sold is the same under either basis. Even if items for which cash has not been expended are eliminated from the computation, the amount of cost of goods sold remains the same.

Counterbalancing errors are two separate errors that offset one another in the same accounting period.

False Counterbalancing errors are errors that will offset or correct themselves over two periods. For example, the failure to record accrued wages in period one will cause (1) net income to be overstated, (2) accrued wages payable to be understated, and (3) wages expense to be understated. If no attempt is made to correct this error, then in period two net income will be understated, accrued wages payable will be correct, and wages expense will be overstated. The net effect of this error for the two years (at the end of the second year) is that net income, accrued wages payable, and wages expense will be correct.

T/F. Depreciable property relates to expenses or losses that are deductible from taxable income after they are recognized in financial income.

False Depreciable property relates to expenses or losses that are deductible from taxable income before they are recognized in financial income.

Determining net cash provided by operating activities involves analysis of the income statement alone as it is the statement that reflects the amount of cash generated from operations as well as the amount of cash used to conduct the operations.

False Determining net cash provided by operating activities involves analyzing not only the current year's income statement but also comparative balance sheets as well as selected transaction data.

T/F. In computing deferred income taxes a new tax rate should be used if (a) it is probable that a future tax rate change will occur, and (b) the rate is reasonably estimable.

False Even if it is probable that future tax rate change will occur, if it is not yet enacted into law, the current rate should be used.

Once the actuary has computed the amount of money it will take to pay for all retirement benefits for both active and retired employees, a company is best advised to fund this obligation immediately.

False Funding the pension plan obligation immediately is not a wise decision as most companies would not find immediate funding an efficient use of their liquid resources.

T/F. In classifying deferred taxes on the balance sheet, an entity should net the current deferred tax asset and liability amount and net the noncurrent deferred tax asset and liability amount thus reporting only one current and one noncurrent deferred tax amount.

False GAAP requires companies to report deferred tax accounts on the balance sheet as assets and liabilities. These deferred tax accounts are to be classified only as a net noncurrent amount.

If an investor's level of influence has changed requiring the investor to change from the equity method to the fair value method, a retrospective adjustment is necessary.

False If an investor's level of influence has changed requiring the investor to change from the equity method to the fair value method, the earnings or losses that were previously recognized by the investor under the equity method should remain as part of the carrying amount of the investment with no retrospective adjustment to the new method.

If it is probable that the expected residual value is less than the guaranteed residual value, the lessee should not include the guaranteed residual value in the computation of the leased liability.

False If it is probable that the expected residual value is less than the guaranteed residual value, the difference between the expected and guaranteed residual values should be included in computation of the lease liability. If it is probable that the expected residual value is equal to or greater than the guaranteed residual value, the lessee should not include the guaranteed residual value in the computation of the leased liability

If the previously used accounting principle was not acceptable, a change to a generally accepted accounting principle is considered a change in principle.

False If the previously used accounting principle was not acceptable, a change to a generally accepted accounting principle is considered a correction of an error.

If a cash inflow and a cash outflow result from similar type transactions, such as the purchase and sale of property, plant, and equipment or the issuance and repayment of debt, they may be shown as a net amount from the two transactions in the statement of cash flows.

False Individual inflows and outflows from investing and financing activities are reported separately. Thus, cash outflow from the purchase of property, plant, and equipment is reported separately from the cash inflow from the sale of property, plant, and equipment.

direct costs incurred by the lessee are included in the cost of the lease liability but are not recorded as part of the right-of-use asset.

False Initial direct costs incurred by the lessee are included in the cost of the rightof-use asset but are not recorded as part of the lease liabi

As its name implies, the indirect method is not directly involved with the computation of accrual based net income because it results in the presentation of a condensed cash basis income statement.

False It is the direct method that results in the presentation of a condensed cash basis income statement.

Lease prepayments made by the lessee decrease the right-of-use asset.

False Lease prepayments made by the lessee increase the right-of-use asset.

In pension accounting, any portion of a net pension liability payable in the next 12 months and any portion of existing plan assets that will be used in the next 12 months would be reported as a current liability or a current asset, respectively.

False No portion of a pension asset is classified as current. Any portion of a net pension liability payable in the next 12 months that cannot be funded from existing plan assets would be reported as a current liability; otherwise, the pension liability is classified as noncurrent

T/F. A permanent difference results when the tax laws cause an item reported on the income statement to be different from that same item reported on the balance sheet.

False Permanent differences are items that (1) enter into pretax financial income but never into taxable income, or (2) enter into taxable income but never into pretax financial income.

(L.O. 4) Stock dividends and stock splits are classified as financing activities.

False Stock dividends and stock splits are significant noncash transactions that generally are not reported in conjunction with the statement of cash flows.

T/F. The alternative minimum tax (AMT) was developed by FASB to ensure that a company's reported tax expense is aligned with the cash amount paid for income taxes.

False The AMT is an IRS provision designed to curb excessive tax avoidance. Companies must pay the higher of the two tax obligations computed under the AMT and the regular tax code

The Expected Postretirement Benefit Obligation (EPBO) is the actuarial present value of the future benefits attributed to employees' services rendered to a particular date.

False The Expected Postretirement Benefit Obligation (EPBO) is the actuarial present value as of a particular date of all benefits expected to be paid after retirement to employees and their dependents.

When considering the interest rate component used in the determination of pension cost the FASB concluded that interest on the liability should be compounded quarterly.

False The FASB did not address how often to compound the interest cost. Illustrations in the text use simple interest in order to simplify computations.

When a defined benefit pension plan is amended, the expense and related liability for the prior service costs should be fully reported in the year in which the amendment was adopted.

False The FASB has taken the position that the employer would not provide credit for past years of service unless it expected to receive benefits in the future. The retroactive benefits should not be recognized as pension expense entirely in the year of amendment but should be recognized during the service periods of those employees who are expected to receive benefits under the plan

The FASB requires companies to use the prospective (in the future) approach for reporting changes in accounting principle.

False The FASB requires companies to use the retrospective approach for reporting changes in accounting principle.

The FASB takes the position that companies should retrospectively apply the indirect effects of a change in accounting principle.

False The FASB takes the position that companies should not change prior-period amounts for indirect effects of a change in accounting principle

The FASB uses 75% as the guideline to determine if the present value of the lease payments is reasonably close to the fair value of the asset under the present value test.

False The FASB uses 90% as the guideline to determine if the present value of the lease payments is reasonably close to the fair value of the asset under the present value test.

Assuming salary increases for employees covered by a pension plan, the accumulated benefit obligation will be greater than the projected benefit obligation.

False The accumulated benefit obligation does not consider future compensation levels as does the projected benefit obligation. Thus, if salaries are assumed to increase as a result of raises, the projected benefit obligation will yield the greater liability as it is based on the larger amount.

The amortization of a bond premium should be handled in the same manner as depreciation of a plant asset, that is, added to net income when determining net cash provided by operating activities.

False The amortization of bond premium reduces the amount of interest expense reported on the income statement, but it does not reduce the amount of cash flowing out of the business. Thus, the amount of premium amortization must be deducted from net income to arrive at cash provided by operating activities.

When a repair to equipment is debited to accumulated depreciation because it extends the asset's useful life, the transaction is considered neither an increase nor a decrease in cash for the period.

False The debit to accumulated depreciation as a result of an equipment repair is most likely offset by a credit to cash. Thus, such a transaction would cause a decrease in cash and be shown as an outflow on the statement of cash flows

The interest rate used to compute the projected benefit obligation should also be used as the rate of return on plan assets.

False The interest rate used to compute the projected benefit obligation need not be used as the rate of return on plan assets.

When valuing the lease liability the lessee should estimate increases or decreases to future lease payments based on variable payments that change based on increases or decreases in an index or rate.

False The lessee should include variable lease payments in the value of the lease liability at the level of the index/rate at the commencement date. When valuing the lease liability, no increases or decreases to future lease payments should be assumed based on increases or decreases in the index or rate. Instead, any difference in the payments due to changes in the index or rate is expensed in the period incurred.

The difference between the vested benefit obligation and the accumulated benefit obligation concerns the use of current salaries versus future salaries in the measurement process.

False The major difference between the vested benefit obligation and the accumulated benefit obligation is that the accumulated benefit obligation includes benefits for vested and nonvested employees at current salaries, whereas, the vested benefit obligation includes benefits for only vested employees at current salaries.

Because the payment of cash dividends reduces both cash and retained earnings by a similar amount, this transaction has no effect on the statement of cash flows.

False The payment of dividends obviously has an impact on the statement of cash flows as it is an outflow of cash. Dividends are reported as an outflow in the financing activities section of the statement of cash flows.

GAAP requires that corrections of errors be handled prospectively and shown in the current operating section of the income statement in the year the correction is made.

False The profession requires that corrections of errors be treated as prior period adjustments, be recorded in the year in which the error was discovered, and be reported in the financial statements as an adjustment to the beginning balance of retained earnings. If comparative statements are presented, the prior statements affected should be restated to correct for the error

The redemption of bonds would be classified as an investing activity.

False The redemption of bonds would be classified as a financing activity

T/F. In general, the tax benefits of loss carryforwards, should not be recognized in the loss year when the benefits arise, but rather in the year they are realized.

False The tax benefits of loss carryforwards are always recognized in the current year since they represent future deductible amounts. However, if it is more likely than not that some or all of the NOL carryforward will not be realized, the deferred tax asset is reduced by a valuation account.

Instituting a policy whereby customers can now purchase merchandise on account, when in the past only cash sales were accepted, is evidence that a change in accounting principle has occurred.

False This is not a change in an accounting principle but rather a new transaction that results in the use of a principle not previously required.

Financing activities include (a) making and collecting loans and (b) acquiring and disposing of investments and productive long-lived assets.

False This is the definition of investing activities.

T/F. Deferred tax assets should not be recognized in the accounts because they fail to meet the definition of an asset.

False This statement is false because a deferred tax asset meets the three main conditions for an item to be reported as an asset: (a) It results from past transactions. (b) It gives rise to a probable benefit in the future. (c) The company controls access to the benefits.

To prepare the statement of cash flows, only comparative balance sheets and a current income statement are needed.

False To prepare the statement of cash flows, comparative balance sheets, the current income statement, and selected transaction data are needed.

Under the corridor approach, the unrecognized net gain or loss balance is considered too large and must be amortized when it exceeds 20% of the larger of the ending balances of the accumulated benefit obligation or the market-related value of the plan assets.

False Under the corridor approach, the unrecognized net gain or loss balance is considered too large and must be amortized when it exceeds 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets

When a company changes an accounting principle it should not adjust any assets or liabilities.

False When a company changes an accounting principle it adjusts the carrying amounts of assets and liabilities as of the beginning of the first year presented

If a company has two or more pension plans, the FASB requires that the company combine and net all plans to show one net overfunded or one underfunded plan on the balance sheet.

False When a company has two or more pension plans, the FASB requires that all overfunded plans be combined and reported as a pension asset on the balance sheet and that all underfunded plans be combined and reported as one amount on the balance sheet.

When a lease is classified as an operating lease, the lessee continues to report a separate interest expense.

False When a lease is classified as an operating lease, the lessee does not report a separate interest expense, instead the lessee reports interest on the lease liability as part of Lease Expense

When computing net cash provided by operating activities under the indirect method, an increase in accounts receivable (net) during the year must be added to accrual based net income because more sales were made then those reflected in the income statement.

False When accounts receivable increase during the year, revenues on an accrual basis are higher than revenues on a cash basis because goods sold on account are reported as revenues. In other words, sales for the period led to increased revenue, but not all of those sales resulted in an increase in cash

When the direct method is used in determining cash provided by operating activities, users of the statement of cash flows are unable to reconcile the net income to the net cash provided by operations because this is only provided when the indirect method is used.

Under an operating lease, the lessor generally records a Lease Receivable and eliminates the leased asset.

False When determining the present value test, the implicit rate is generally a more realistic rate to use in determining the amount to report as the asset and related liability

When determining the present value test, the incremental borrowing rate is generally a more realistic rate to use in determining the amount to report as the asset and related liability.

False When determining the present value test, the implicit rate is generally a more realistic rate to use in determining the amount to report as the asset and related liability

When it is impossible to differentiate between a change in estimate and correction of an error, companies should consider careful estimates that later prove to be incorrect as a correction of an error.

False When it is impossible to differentiate between a change in estimate and correction of an error, companies should consider careful estimates that later prove to be incorrect as a change in estimate.

T/F. When the book amount of an asset or liability differs from the tax basis as a result of a temporary difference, the future tax effects on taxable income must be reported solely in the future financial statement that the difference affects.

False When the book amount of an asset or liability differs from the tax basis as a result of a temporary difference, the future tax effects on taxable income must be reported in the current financial statements.

In a direct financing lease, the lessor recognizes the profit at the commencement of the lease.

False When there is a short-term lease, rather than recording a right-of-use asset and lease liability, lessees may elect to expense the lease payments as incurred.

Regardless of whether a lease is short-term or long-term, a lessee has to record a right-of-use asset and a lease liability

False When there is a short-term lease, rather than recording a right-of-use asset and lease liability, lessees may elect to expense the lease payments as incurred.

T/F. Deferred tax expense is the decrease in the deferred tax liability balance from the beginning to the end of the accounting period.

False Deferred tax expense is the increase in the deferred tax liability balance from the beginning to the end of the accounting period.

A bargain purchase option affects the accounting for leases in the same way as a guaranteed residual value with a probable amount to be owed.

True

A change from an accounting principle that is not generally accepted to an accounting principle that is acceptable should be treated as an accounting error.

True

A change in accounting principle results when a company changes from one GAAP to another GAAP.

True

A lessee does not include an unguaranteed residual value in the computation of the lease liability, whether it is a finance lease or an operating lease.

True

Accounting alternatives diminish the comparability of financial information between periods and between companies. They also obscure useful historical trend data.

True

An advantage of leasing for the lessee is protection against obsolescence.

True

An employer is required to present a reconciliation showing how the projected benefit obligation and the fair value of the plan assets changed from the beginning to the end of the period.

True

An understatement in ending inventory will result in a corresponding understatement of net income.

True

Cash flows from events whose effects are included in net income, but which are not related to operations, should be reported either as investing activities or as financing activities.

True

Changes in estimates must be handled prospectively.

True

Companies must recognize on their balance sheets the full overfunded or underfunded status of their defined benefit pension plans.

True

Executory costs included in the fixed payments required by the lessor should be included in lease payments for purposes of measuring the lease liability.

True

For classification purposes, a lessee includes the full amount of a residual value guarantee at the end of the lease term in the present value test.

True

For leases classified as operating, the lessee records a right-of-use asset and lease liability at commencement of the lease, similar to the finance lease approach.

True

Health care and other postretirement benefits for current and future retirees and their dependents are forms of deferred compensation earned through employee service and subject to accrual during the years an employee is working.

True

If a company records a loss on the sale of equipment, the amount of the loss must be added back to net income to determine the proper amount of net cash provided by operating activities.

True

If a counterbalancing error is discovered after the books are closed in the second year, no correcting entry is needed.

True

If a lease contains a bargain purchase option, the lessee shall classify and account for the arrangement as a finance lease.

True

If accrued wages are overlooked at the end of the accounting period, expenses and liabilities will be understated and net income will be overstated.

True

If it becomes impracticable to use retrospective application for a change in accounting principle, a company should prospectively apply the new accounting principle.

True

In a sale-leaseback arrangement, a company (the seller-lessee) transfers an asset to another company (the buyer-lessor) and then leases that asset back from the buyer-lessor.

True

Initial direct costs are incremental costs of a lease that would not have been incurred had the lease been executed.

True

Interest on the liability (or interest expense) is the interest for the period on the projected benefit obligation outstanding during the period.

True

Measuring the amount of pension obligation resulting from a pension plan is a problem involving actuarial consideration.

True

Operating activities as defined by GAAP, involve the cash effects of transactions that enter into the determination of net income.

True

Recording the purchase of land as an expense is an example of a noncounterbalancing error.

True

Some changes in working capital, although they affect cash, do not affect net income.

True

T/F. A corporation that has tax-free income has an effective tax rate that is less than the statutory (regular) tax rate.

True

T/F. A deferred tax liability is the amount of deferred tax consequences attributable to existing temporary differences that will result in net taxable amounts in future years.

True

T/F. A reversing difference occurs when a temporary difference that originated in prior periods is eliminated and the related tax effect is removed from the deferred tax account.

True

T/F. A temporary difference is the difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable amounts or deductible amounts in future years.

True

T/F. All positive and negative information should be considered in determining whether a valuation allowance is needed.

True

T/F. An objective of accounting for income taxes is to recognize deferred tax liabilities and assets for the future tax consequences of events that have already been recognized in the financial statements.

True

T/F. The concept of a deferred tax liability meets the definition of a liability established according to GAAP because it (a) results from past transactions, (b) is a present obligation, and (c) represents a future sacrifice.

True

T/F. Under the carryforward provisions of the federal tax laws a company pays no tax in a year in which it incurs a net operating loss and can carry that loss forward indefinitely in offsetting future taxable income.

True

T/F. deferred tax asset should be reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized.

True

The FASB has adopted the approach that all long-term leases should be capitalized.

True

The Pension Benefit Guaranty Corporation's purpose is to administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities.

True

The accounting for defined benefit pension plans is highly reliant upon information and measurements provided by actuaries.

True

The cash received from the sale of property, plant, and equipment at a gain, although reported in the income statement, is classified as an investing activity.

True

The conversion of net income to net cash provided by operating activities may be accomplished using either the direct method or the indirect method.

True

The direct method is more consistent with the objective of the statement of cash flows because it shows operating cash receipts and payments where the indirect method does not.

True

The employer is required to disclose in notes to the financial statements expected benefit payments to be paid to current plan participants for each of the next five years and in the aggregate for the five fiscal years thereafter.

True

The information in a statement of cash flows should help investors, creditors, and others to assess the reasons for the difference between net income and net cash flow from operating activities.

True

The lease classification tests for the lessor are identical to the tests used by the lessee to determine classification of a lease as a financing or operating lease.

True

The market-related asset value of plan assets is a either the fair value of plan assets or a calculated value that recognizes changes in fair value in a systematic and rational manner.

True

The principal advantage of the indirect method is that it focuses on the difference between net income and net cash provided by operating activities, thus providing a useful link between the statement of cash flows, the income statement, and the balance sheet.

True

The projected benefit obligation provides a more realistic measure on a going concern basis of the employer's obligation under the plan and, therefore, should be used as the basis for determining service cost.

True

The reconciling items in the work sheet are not entered in any journal or posted to any account.

True

The service cost component of a pension plan recognized in a period should be determined as the actuarial present value of benefits attributed by the pension benefit formula to employee services during that period.

True

The statement of cash flows provides information not available from other financial statements.

True

Under a sale-leaseback, if the lessor continues to control the asset, it should not record a sale nor recognize a gain or loss.

True

Unlike the other financial statements, the statement of cash flows is not prepared from the adjusted trial balance.

True

Vested benefits are those that the employee is entitled to receive even if the employee renders no additional services under the plan.

True

When a company changes an accounting principle under the retrospective approach it adjusts its financial statements for each prior period presented.

True

When a company changes an accounting principle, one of the disclosure requirements is to show the cumulative effect of the change on retained earnings as of the beginning of the earliest period presented.

True

When a company makes changes that result in different reporting entities, the company should report the change by changing the financial statements of all prior periods presented and the revised statements should show the financial information for the new reporting entity for all periods.

True

When a pension plan is funded, the company sets aside funds for future pension benefits by making payments to a funding agency that is responsible for accumulating the assets of the pension fund.

True

When the lease term is a major part of the remaining economic life of the leased asset, companies should use the finance method in accounting for the lease transaction.

True

Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, the change should be considered a change in estimate.

True

an operating lease, the lessee recognizes interest expense on the lease liability over the life of the lease using the effective-interest method and records the amortization expense on the right-of-use asset generally on a straight-line basis.

True

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