Exam 2 Intermidiate financial acct 2

In connection with a lease of more than 12 months, the lessee will always record each of the following except:

interest revenue.

According to GAAP for accounting for income taxes, when a company has a net operating loss carryforward:

A deferred tax asset is recorded along with any applicable valuation allowance.

When tax rates are changed subsequent to the creation of a deferred tax asset or liability, GAAP requires that:

All deferred tax accounts be adjusted to reflect the new tax rates.

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

Contra asset.

At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A footnote reveals that the entire $400,000 will be earned in the next year. In the absence of other temporary differences, in the balance sheet one would also expect to find a:

Deferred tax asset.

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.

Which of the following would never require reporting deferred tax assets or deferred tax liabilities?

Life insurance proceeds.

Abhijit Co. leased equipment from Barua Corp. on July 1, 2021, for an 8-year period expiring June 30, 2029. Equal annual payments on July 1 of each year are $120,000. The first payment was made on July 1, 2021. The rate of interest contemplated by Abhijit and Barua is 10%. The cash selling price of the equipment is $704,000, and the cost of the equipment on Barua's accounting records is $560,000. The lease is appropriately recorded as a sales-type lease. What is the amount of selling profit on the sale and interest revenue that Barua will record for the year ended December 31, 2021? Selling Profit Interest Revenue a. $9,000 $29,200 b. $9,000 $35,200 c. $144,000 $29,200 d. $144,000 $35,200

Option C

The appropriate asset value reported in the balance sheet by the lessee for an operating lease at lease inception is:

Present value of the lease payments.

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

Subscriptions collected in advance.

If it is "reasonably certain" that the lessee will exercise a purchase option:

The lease is classified as a finance/sales-type lease. Both the lessee and the lessor consider the exercise price of the option to be an additional cash payment. It's assumed that the lease term ends on the date that the option is expected to be exercised.

If the lessee and lessor use different interest rates to account for a finance/sales-type lease, then:

The lessee is unaware of the lessor's implicit rate.

In connection with an operating lease, the lessor would not record:

a liability.

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

accrued warranty expense.

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs incurred by the lessee are:

added to the right-of-use asset and expensed over an amortization period.

Recognizing tax benefits in a loss year due to a net operating loss carryforward requires

creating a deferred tax asset.

Apex is a Lessee in a finance lease and guarantees a $20,000 residual value. It is probable that the asset will be worth $8,000 at the end of the lease. What amount should Apex include in its required lease payments?

$12,000

During the current year, Stern Company had pretax accounting income of $41 million. Stern's only temporary difference for the year was rent received for the following year in the amount of $17 million. Stern's taxable income for the year would be:

$58 million.

J Corp. is a lessee that entered into an operating lease in February of Year 1. The company's statement of cash flows for the year ending December 31, Year 1 will report:

A cash outflow from operating activities.

During the current year, Stern Company had pretax accounting income of $45 million. Stern's only temporary difference for the year was rent received in advance for the following year in the amount of $15 million. Stern's taxable income for the year would be:

45 + 15 = $60 million.

One of the five criteria for a finance lease specifies that the lease term be equal to or greater than _____ percent of the useful life of the leased asset.

75

One of the five criteria for a finance lease specifies that the present value of the lease payments be equal to or greater than _______ percent of the fair market value of the leased asset.

90

P Corp. leased an asset to L Corp. using an operating lease in February of Year 1. P Corp.'s statement of cash flows for the year ending December 31, Year 1 will report:

A cash inflow from operating activities.

J Corp. is a lessee that entered into a finance lease in February of Year 1. The company's statement of cash flows for the year ending December 31, Year 1 will report:

A cash outflow from operating activities and a cash outflow from financing activities

A magazine publisher collects one year in advance for subscription revenue. In the year of providing the magazines to customers, the company would record:

A decrease in a deferred tax asset.

In reconciling net income to taxable income, interest earned on municipal bonds is:

A permanent difference.

Barr Corp. is the lessee in a finance lease. Barr would record:

A right-of-use asset.

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs incurred by the lessor are expensed at the beginning of the lease in:

A sales-type lease with selling profit.

A sales-type lease is reported in the lessor's balance sheet as:

An asset.

Jacobs Eatery leased restaurant equipment from Gamma Leasing. Gamma earns interest under such arrangements at a 6% annual rate. The lease term is eight months with monthly payments of $20,000 due at the end of each month. Jacobs Eatery elected the short-term lease option. What is the effect of the lease on Jacobs Eatery's earnings during the eight-month term (ignore taxes)?

An expense of $20,000 at the end of each of the 8 months.

In 2011, Magic Table Inc. decides to add a 36-month warranty on its new product sales. Warranty costs are tax deductible when claims are settled. In its financial statements for 2011, Magic Table Inc incurs:

An increase in a deferred tax asset.

If the lessor records deferred lease revenue at the beginning of a lease term, the lease must:

Be an operating lease.

On January 1, 2021, Wellburn Corporation leased an asset from Tabitha Company. The asset originally cost Tabitha $420,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1, 2021, in the amount of $43,000. The other three remaining payments will be made on January 1 of each subsequent year. Which of the following journal entries should Tabitha record on January 1, 2021?

Cash 43,000 deffered rev 43000

Matt Co. is the lessor in connection with an operating lease. Matt Co. would record:

Depreciation expense.

T/F A net operating loss (NOL) carryforward creates a deferred tax liability.

False

T/F Future taxable amounts result in deferred tax assets.

False

T/F Revenues from installment sales of property reported on financial statements in prior years and currently reported in the tax return create deferred tax assets.

False

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 to the Lessee?

Finance

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs incurred by the lessor are deferred and expensed over the lease term:

In both an operating lease and a sales-type lease with no selling profit.

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

Included as part of lease payments at present value.

On January 1, 2021, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a sales-type lease. Calloway paid $310,000 for the machine and is leasing it to Zone for $34,000 per year, an amount that will return 7% to Calloway. The present value of the lease payments is $310,000. The lease payments are due each January 1, beginning in 2021. What is the appropriate interest entry on December 31, 2021? Hint: Note that the payments are made on January 1, but interest accrues over time so think about the appropriate adjusting entry to be made on December 31, 2021.

Interest receivable 19320 Interest revenue 19320

The valuation allowance account that is used in conjunction with deferred taxes relates:

Only to deferred tax assets.

The lessee normally measures the lease liability to be recorded as the:

Present value of the lease payments.

A noncancelable lease contains an option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably certain. The fair value of the asset exceeds the lessor's cost of the asset. Therefore, the lease will be accounted for by the lessor as a(n):

Sales-type lease.

Which of the following statements characterizes an operating lease?

The lessor records depreciation and lease revenue.

T/F A temporary difference originates in one period and reverses, or turns around, in one or more later periods.

True

T/F Expenditures currently deducted in the tax return but not included with expenses in the income statement until subsequent years create deferred tax liabilities (e.g., MACRS depreciation).

True

T/F MACRS depreciation typically creates deferred tax liabilities early in the life of an asset.

True

T/F Rent collected in advance results in deferred tax assets.

True

On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2026. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.Reagan's lease amortization schedule appears below: Dec. 31PaymentsInterest Decrease inBalanceOutstandingBalance 2020 $519,115 2020$90,000 $90,000 429,115 2021$90,000 $17,165 72,835 356,280 2022$90,000. 14,251 75,749 280,531 2023$90,000 11,221 78,779 201,752 2024$90,000 8,070 81,930 119,822 2025$90,000 4,793. 85,207 34,615 2026$36,000 1,385 34,615. 0 In this situation, Reagan:

is the lessee in a finance lease.

In an operating lease, the amortization of the right-of-use asset in the third year is:

less than in the fourth year.

ABC Books is the lessor in a lease agreement. From the perspective of the lessor, the lease may be classified as:

operating or sales-type.

In a finance lease:

the lessee records an asset and a liability for the present value of lease payments.

In an operating lease:

the lessee records an asset and a liability for the present value of lease payments.