ACC 3120 study cards WITHOUT calculated problem

A reconciliation of pretax financial statement income to taxable income is shown below for Shaw-Anderson Industries for the year ended December 31, 2018, its first year of operations. The company offers quality-assurance warranties that extend six months after goods are purchased. The income tax rate is 40%. Pretax accounting income (income statement)$640,000 Interest revenue on municipal securities (20,000) Warranty expense in excess of deductible amount 45,000 Depreciation in excess of financial statement amount (120,000) Taxable income (tax return)$545,000 What amount should Shaw-Anderson report as a current item related to deferred income taxes on its 2018 balance sheet?

$0 current deferred tax asset or liability. All deferred tax assets and liabilities are classified as non-current.

Which of the following changes should be accounted for using the retrospective approach?

A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed.

Which of the following changes should not be accounted for using the retrospective approach?

A change in the estimated useful life of a depreciable asset.

Which of the following is a change in estimate?

A change in the termination rate of employees under a pension plan.

Early in 2021, Benton Well Supplies discovered that a five-year insurance premium payment of $50,000 at the beginning of 2018 was debited to insurance expense. The correcting entry would include (ignore taxes):

A credit to retained earnings of $20,000. The correcting entry would include a debit to prepaid insurance for $20,000 and a credit to retained earnings for $20,000 since there are two years remaining on the insurance policy.

Using straight-line depreciation for financial reporting purposes and MACRS for tax purposes creates:

A deferred tax liability.

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2021. The manufacturing cost of the computers was $12 million.This noncancelable lease had the following terms: Lease payments: $2,466,754 semiannually; first payment at January 1, 2021; remaining payments at June 30 and December 31 each year through June 30, 2025. Lease term: five years (10 semiannual payments). No residual value; no purchase option. Economic life of equipment: five years. Implicit interest rate and lessee's incremental borrowing rate: 5% semiannually. Fair value of the computers at January 1, 2021: $20 million. Technoid would account for this as:

A sales-type lease with selling profit.

Of the following temporary differences, which one ordinarily creates a deferred tax asset?

Accrued warranty expense.

Pyramid Properties entered a lease that contains a bargain purchase option. When calculating the amount to capitalize as a right-of-use asset at the beginning of the lease term, the payment called for by the bargain purchase option should be:

Added at its present value.

The PBO is increased by:

An increase in the average life expectancy of employees.

Which of the following creates a deferred tax liability?

An unrealized gain from recording investments at fair value.

Which of the following is not a change in accounting principle that usually is accounted for by retrospectively revising prior financial statements?

Change from SYD to DDB depreciation.

Which of the following is accounted for prospectively?

Change in the percentage used to determine warranty expense.

The valuation allowance account that is used in conjunction with deferred tax assets is a(an):

Contra asset.

Amortizing prior service cost for pension plans will

Decrease retained earnings.

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?

Depreciation early in the life of an asset.

Minnetonka Company leases an asset. Information regarding the lease: -Fair value of the asset: $400,000. -Useful life of the asset: 6 years with no salvage value. -Lease term is 5 years. -Annual lease payments are $60,000 -Implicit interest rate: 11%. -Minnetonka can purchase the asset at the end of the lease period for $50,000. What type of lease is this?

Finance. The 5-year lease term is for the major part of the asset's 6-year life making this a finance lease.

By the lessee, a lessee-guaranteed residual value at the beginning of a finance lease should be:

Included as part of lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.

Powell Company had the following errors over the last two years:2019: Ending inventory was overstated by $30,000 while depreciation expense was overstated by $24,000.2020: Ending inventory was understated by $5,000 while depreciation expense was understated by $4,000.By how much should retained earnings be adjusted on January 1, 2021? (Ignore taxes)

Increase by $25,000. Accounting error Retained earnings effect 2019 EI Overstatement self-corrected in 2020$0 2019 Depreciation expense overstated$24,000 2020 EI understated; CGS overstated 5,000 2020 Depreciation expense understated (4,000) Net increase to retained earnings$25,000

Accumulated other comprehensive income:

Is a shareholders' equity account.

On January 1, 2021, Walter Scott Co. leased non-specialized machinery under a 6-year lease. The machinery has a 9-year economic life. The present value of the monthly lease payments is determined to be 80% of the machinery's fair value. The lease contract includes neither a transfer of title to Scott nor a bargain purchase option. What amount should Scott report in its 2021 income statement?

Lease expense equal to the 2021 lease payments.

In a ten-year finance lease, the portion of the annual lease payment in the lease's third year that represents interest is:

Less than in the second year.

Temporary differences arise when expenses are reported in the income statement: After they are before they are deductible for deductible for tax purposes tax purposes a.YesYes b.YesNo c.NoNo d.NoYes

Option a

The beginning of a six-year finance lease is December 31, 2021. The agreement specifies equal annual lease payments on December 31 of each year. For the lessee, the first payment on December 31, 2021, includes: Interest Reduction of the Expense Lease Liability a. No Yes b. Yes No d. No No

Option a

If a finance lease contains a bargain purchase option, the lessee should amortize the leased asset:

Over the economic life of the asset.

An underfunded pension plan means that the:

PBO exceeds plan assets.

Which of the following usually results in an increase in a deferred tax liability?

Prepaid operating expenses, currently deductible.

A change in the residual value of equipment is accounted for:

Prospectively.

Which of the following creates a deferred tax asset?

Rent collected in advance.

When a finance lease is first recorded at the beginning of the lease, the lessee typically debits:

Right-of-use asset.

The three components of pension expense that are present most often are:

Service cost, interest cost, and expected return on plan assets.

Which of the following leases would least likely be classified as an operating lease by the lessee?

The agreement permits the lessee to buy the leased asset for one dollar at the end of the lease term.

If the lessor retains title to leased property under the terms of the lease:

The amount to be recovered through periodic lease payments is reduced by the present value of any residual amount.

The five criteria provided in GAAP for distinguishing a finance lease from an operating lease do not include:

The collectibility of the lease payments must be reasonably predictable.

The accounting for defined contribution pension plans is easy because each year:

The employer records pension expense equal to the annual contribution.

Which of the following statements typifies defined contribution plans?

The employer's obligation is satisfied by making the periodic contribution to the plan.

In an employer-sponsored defined benefit pension plan, the interest cost included in the pension expense represents:

The increase in the projected benefit obligation due to the passage of time.

Which of the following is not a sufficient criterion for a lessee to classify a lease as a finance lease?

The lease term is greater than two-thirds of the economic life of the asset.

Which of the following statements characterizes a sale-leaseback arrangement?

The lessee also is the seller.

Which of the following is not a sufficient criterion for a lessor to classify a lease as a sales-type lease?

The present value of the lease payments is greater than the carrying value of the leased asset.

Pension gains related to plan assets occur when:

The return on plan assets is higher than expected.

A company overstated its liability for warranties by $220,000. Its tax rate is 30%. As a result of this error, income tax expense is:

Understated by $66,000. $220,000 × 0.30 = $66,000 tax reduction

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?

Unrealized loss from recording inventory impairments. Correct

In its income statement, a company should report the service cost component of pension expense:

as part of its total compensation costs.

A statement of comprehensive income does not include:

return on plan assets.