ACCT340 Exam 2
On July 1, Year 1, Fairfield Company purchased $2 million of Hampton Corporation's 6% bonds for $1,731,590. The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities. The bonds mature in 10 years and pay interest annually on July 1. Assuming that Fairfield uses the effective interest method of amortization, what amount should it report for its investment in bonds on December 31, Year 1?
$1,740,854
Ryan Corporation purchased 10,000 shares of Acme Stock. It plans to hold them for a short time and then sell them at a gain. It should classify these securities as _______________
trading securities
Bateman Enterprises invested in the bonds of Greater Glouster on January 1, 2015. These 10-year, $100,000 bonds pay interest of 3% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the semi-annual interest payment received by Bateman for these bonds?
$1,500
TLR Productions reported income before taxes of $205,000 for the years 2016, 2017, and 2018. In 2019 they experienced a loss of $500,000. TLR had a tax rate of 35% in 2016 and 2017, and a rate of 45% in 2018 and 2019. Assuming the company uses the carry back provisions for the net operating loss, what amount should be reported as Income Tax Refund Receivable in 2019?
$164,000 Explanation: (205,000 x 35%) + (205,000 x 45%)
TNT Corporation's income tax payable is $240,000 and its tax rate is 30%. Assuming no book-tax differences, what is TNT's Net Income?
$560,000
Kravitz Corporation had income before taxes of $900,000 and a tax rate of 45%. Included in the income are $80,000 in municipal bond interest and $10,000 in fines and penalties. There are no other book-tax differences. Refer to Kravitz Corporation. What is Kravitz's taxable income?
$830,000
A company may carry back a tax loss for _________ years and carry forward a tax loss for ________ years.
2; 20
On September 30, 2016, Angel Outfitters invested in 10-year, $200,000, 5% bonds of ABC Co. These bonds were dated January 1,2016, and pay interest annually on December 31. Angel paid face value plus accrued interest for these bonds, and intends to hold these bonds until maturity. Which of the following is the correct journal entry to record the investment?
Held-to-Maturity Deb Investment - Cost: 200,000 (Debit) Interest Receivable: 7,500 (Debit) Cash: 207,500 (Credit)
All of the following are key questions that must be addressed when accounting for investments in debt and equity securities except which one?
How is the return on equity impacted by this investment?
Greene Co. has book income of $425,000 and a tax rate of 30%. Assuming there are no book-tax differences, what will the journal entry be to record the income tax expense?
Income tax expense: 127,500 (Debit) Income tax payable: 127,500 (Credit)
Which of the following statements best describes the effective tax rate?
It can be calculated by dividing income tax expense by book income after taxes
_________________ differences between book income and taxable income result in an effect tax rate that differs from the statutory tax rate
Permanent
How are transfers between portfolios (i.e. from trading to available-for-sale) accounted for?
Transfers between portfolios are accounted for at fair value on the date of the transfer
Under the Equity method, cash dividends received by the investor from the invested should be treated as ______________
a reduction in the investment account
Where are changes in fair value for available for sale securities reported?
as a component of accumulated other comprehensive income on the balance sheet
Which of the following assets is always considered a separate lease component in a lease, unless the impact on the financial statements of not separating it from the other asset(s) is insignificant?
land
Unrealized gains and losses on investments in equity securities are reported for an investment in another company when the percentage of ownership in another company is
less than 20%
All of the following are examples facts that may create temporary book-tax differences EXCEPT
payment of premiums for life insurance
On the balance sheet, the lease liability is measured as __________________
the present value of the lease payments plus the present value of the guaranteed residual value if the lessee guarantees it (if any)
Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $560,000. Included in this amount is $25,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $120,000 and are treated the same for book and tax purposes. What is Greenville's tax basis in the installment sale receivable?
$0
Greene Co. has pretax book income for the year ended December 31, 2018 in the amount of $285,000 and has a tax rate of 40%. Depreciation for tax purposes exceeded book depreciation by $13,500. What should Greene Co. record as its federal income tax liability for 2018?
$108,600 Explanation: (285,000 - 13,500) x 0.4
On January 1, year 1, Gibson Corporation purchased bonds issued by Williamson Company. These bonds were classified as held-to-maturity securities. The face value of these bonds is $200,000, pay 8% interest and were purchased to yield 6%. The bonds mature in 10 years and pay interest on an annual basis. If Gibson Corporation paid $229,439 for these bonds, how much interest revenue should it report on the bonds at December 31, Year 1? Assume that Gibson used the effective interest rate method.
$13,776
Lyon Group's income before taxes is $420,000 and its tax rate is 40%. Lyon included $30,000 in fines & penalties in the $420,000. There are no book-tax differences. What is income tax payable for Lyon Group?
$180,000 Explanation: (420,000 + 30,000) x 0.4
Purrfect Pet Industries' income before taxes is $810,000 and its tax rate is 50%. Purrfect Pet included $50,000 of fully deductible inter-corporate dividends received in the $810,000. There are no other book-tax differences. What is the income tax payable for Purrfect Pet?
$380,000 Explanation: (810,000 - 50,000) x 0.5
The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 30% for both years. 2018 information: Sales on Account in the amount of $650,000 Warranty Expense and associated liability in the amount of $105,000 No other expenses incurred 2019 information: Sales on account in the amount of $225,000 Warranty repairs made in the amount of $68,000 No expenses incurred What is MK's taxable income for 2018?
$650,000
In 2017, Squirrel Corp. recorded book income of $165,000 It has one temporary difference which relates to a $30,000 warranty expense that is recorded for book purposes, and no permanent differences. Squirrel anticipates satisfying this liability equally over the following two years. The current enacted tax rate is 36%. The enacted tax rates for the following years are 2017: 26%, 2018: 31%, 2019: 26%, 2020: 36%, respectively. Under U.S. GAAP, what differed tax amount should Squirrel Corp. record for this temporary difference?
$8,550 Explanation: (15,000 x 31%) + (15,000 x 26%)
Kravitz Corporation had income before taxes of $900,000 and a tax rate of 25%. Included in the income are $70,000 in municipal bond interest and $10,000 in fines and penalties. There are no other book-tax differences. Refer to Kravitz Corporation. What is the net amount of Kravitz book-tax difference?
Book income that is $60,000 greater than taxable income
Olympics Inc. recorded a dividends received deduction on their tax return this year. What (if any) book-tax difference will result?
Permanent Difference; book income greater than taxable income
Dante Inc. reported fines and penalties on their income statement this year. What (if any) book-tax difference will result?
Permanent difference; book income less than taxable income
Rhoads purchased common shares of Company A and B for $10,000 and $12,000, respectively on 12/15. Rhoads intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $15,000, respectively. Assuming this is the first trading investment for Rhoads, what is the unrealized gain or loss for these securities and how is it reported?
Unrealized gain of $2,000, reported as part of Net Income.
Brightney purchased common shares of Company A and B for $10,000 and $12,000, respectively on 12/15. Brightney intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $15,000, respectively. Assuming an existing $1,500 debit balance in Fair Value Adjustment - Trading Equity Securities, what is the unrealized gain or loss for these securities and how is it reported?
Unrealized gain of $500, reported as part of Net Income
Laurent invested $19,000 in shares of DEF during year 1, classifying the investment as available-for-sale. The fair value of this investment was $17,500 and $22,000 at the end of the Year 1 and Year 2, respectively. What is the unrealized gain or loss for this investment at the end of Year 1 and how is it reported?
Unrealized loss of $1,500, reported as part of Other Comprehensive Income.
As of 12/31/17, XYZ Inc. had Available-for-sale debt investments with a fair value of $522,000, an amortized cost of $535,000, and a debit of balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,500. What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported?
Unrealized loss of $20,500, reported as Other Comprehensive Income
Prior to 2019, lessees did not include the right-of-use asset and the lease liability for operating leases on their balance sheet. Both FASB and IASB wrote new standards to require the lessee nearly always report an asset and liability on their balance sheets when they engage in a lease transaction. This accounting results in which of the following?
a more faithful representation of the rights and obligations arising from leases.
If a company chooses to carry back a net operation loss (NOL), but is not able to fully offset the loss, they will ___________________.
both A& C are viable options
Inferno Inc. is embroiled in a lawsuit. In 2018, they recognize that a loss of $65,000 is probable. Given a tax rate of 40%, how will this be treated in the accounting records?
deferred tax asset of $26,000
When a company depreciates a fixed asset at a faster rate for tax purposes than book purposes, this creates a ______________
deferred tax liability
The lessor would most likely prefer a _____________ or _____________ lease to an operating lease. Nonoperating lease treatment would permit a financial service company lessor to remove heavy machinery and equipment, jet airlines, oceangoing vessels, and such from its balance sheet and replace it with the _____________, a financial asset compatible with the nature of its business. In addition, the non operating lease results in the recognition of ________________, rather than _____________ revenue.
direct financing; sales-type; net investment in the lease; interest income; rent
Dowell Corporation decided than an investment originally classified as available for sale should be reclassified as held to maturity. Dowell would __________________
reclassify the investment as held to maturity and recognize all unrealized gains and losses in net income
In cases where the standalone price is highly variable or uncertain, the lessee may use what type of method for determining standalone prices?
residual method
When a company pays taxes that were previously recorded as a deferred tax liability, the temporary difference _____________
reverses
For an operating lease, the lessee will record a(n) __________________ and an associated lease liability on the balance sheet.
right-of-use asset
The net investment in the lease for a sales-type lease reflects the assets related to the lease transaction and is compromised of the following:
the lease receivable and the present value of any unguaranteed residual value.
Net investments in the lease for a direct financing lease (NIL - DF) is compromised of __________________.
the lease receivable, the present value of any unguaranteed residual asset, and a reduction for any deferred profit.
Danio Inc.'s income before taxes is $550,000 and its tax rate is 30%. Danio included $30,000 of interest from municipal bonds in the $550,000. There are no other book-tax differences. What is the effective tax rate for Danio Inc.?
28% Explanation: 550,000 - 30,000 = 520,000 520,000 x 0.3 = 156,000 156,000/550,000 = 28%
In which of the following instances would a company most likely choose to carry forward option for a new operating loss?
The company expects higher tax rates in the future compared to the past.
Piper, Inc. reported a net deferred tax asset balance of $166,650 resulting from an estimated warranty expense accrual for book purposes. The total book-tax differences related to the bases of the estimated warranty liability is $505,000. The enacted statutory tax rate related to this balance changed from 33% to 28%, effective immediately. What journal entry will Piper need to make to adjust for this change in tax rates?
Income tax expense 25,250 (debit) Deffered tax asset 25,250 (credit)
During 2015, Arnold Corporation purchased $6 million of 10 year municipal bonds at face value. On December 31, 2017, the bonds had a market value of $6,600,000. Arnold reclassified the bonds from held-to-maturity to trading securities. Arnold's balance sheet and income statement for December 31, 2017 will reflect which of the following?
Investment in municipal bonds: $6,600,000 Income Statement Gain on Investments: $600,000
Jaybird Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. Jaybird has significant influence over Angel, so Jaybird will account for this investment using the equity method. Angel declared dividends of $275,000 during the year. How will Jaybird record the transaction?
Jaybird will increase the investment account by $82,500
Goo Goo Enterprises invested in the bonds of Greater Glouster. These bonds pay interest of 3%. The effective rate of interest for similar bonds on the date of investment was 4%. Did Goo Goo purchase the bonds at a discount or premium?
These bonds were purchased at a discount because the market rate exceeds the stated rate.
The ________________ date is when the lease agreement is signed. The __________________ date is the date on which the lessee is allowed to begin using the leased asset.
lease inception; lease commencement
If the lessor meets any one of the five Group I criteria, then the lessor classifies the lease as a(n) _______________. If the lessor meets both of the Group II criteria, but none of the Group I criteria, then the lessor classifies the lease as a(n) _________________. If the transaction does not meet either the Group I or Group II criteria, than the lessor classifies the lease as a(n) ___________________.
sales-type lease; direct financing lease; operating lease
For a(n) ______________ lease, a lessor recognizes revenue on the sale and records the asset, ___________________ lease. It also removes the leased asset from its accounts and records the ________________.
sales-type; net investment in lease-sales type; cost of goods sold
Revenue for a direct financing lease is calculated as ______________________.
the lower of (1) the fair value of the leased asset or (2) the sum of the lease receivable and any lease payments paid before the lease commencement date.
