Intermediate Accounting II - Test 2 (Chapter 16, 17 & 18)

What is the cost basis of an asset acquired under a capital lease? A) the sum of the gross minimum lease payments B) the present value of the minimum lease payments plus executory costs C) the present value of the minimum lease payments less the present value of executory costs D) the present value of the minimum lease payments excluding executory costs

D) the present value of the minimum lease payments excluding executory costs

Which of the following statements are correct regarding an operating lease? A) The lessor records depreciation expense and lease revenue. B) The lessee records the leased asset as a long-term asset. C) The lessee receives title to the asset at the end of the lease. D) The lessee records interest expense.

A) The lessor records depreciation expense and lease revenue.

Altima Corporation actively manages a portfolio of publicly traded stock funded with excess cash. The purpose of the portfolio is to generate gains on sales and the portfolio is reported at fair value. This method of accounting is consistent with the qualitative characteristic of ________ from the conceptual framework. A) relevance B) faithful representation C) both faithful representation and relevance D) neither representation nor relevance

A) relevance

If a capital lease contains a bargain purchase option, the depreciation period that is used by the lessee for the asset is ________. A) the useful life to the lessee B) the same period used by the lessor C) the lease term D) the statutory life for all assets in that class

A) the useful life to the lessee

Caesar Corporation reported income before taxes of $220,000 for the years 2016, 2017, and 2018. In 2019 they experienced a loss of $220,000. The company had a tax rate of 35% in 2016 and 2017, and a rate of 45% in 2018 and 2019. Assuming Caesar uses the carryback provisions for the net operating loss, by what amount will the income tax benefit reduce the net loss in 2019? A) $77,000 B) $88,000 C) $99,000 D) $220,000

A) $77,000

Ewok Enterprises recently elected the fair value option to account for its investment in Yoda Inc. Ewok purchased the shares for $203,000 and the shares are currently trading for $193,000 at year-end. What is the amount of gain or loss reported at year-end for this investment and where is this gain or loss reported? A) Unrealized Loss of $10,000, reported as part of Net Income. B) Unrealized Loss of $10,000, reported as part of Other Comprehensive Income. C) Unrealized Gain of $10,000, reported as part of Net Income. D) Unrealized Gain of $10,000, reported as part of Other Comprehensive Income.

A) Unrealized Loss of $10,000, reported as part of Net Income.

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? A) deferred tax asset of $26,000 B) deferred tax liability of $26,000 C) deferred tax asset of $65,000 D) deferred tax liability of $65,000

A) deferred tax asset of $26,000

Zenith Corporation reports its investments in debt securities at cost. This method of accounting is consistent with the qualitative characteristic of ________ from the conceptual framework. A) faithful representation B) relevance C) both faithful representation and relevance D) neither representation nor relevance

A) faithful representation

Which of the following must be disclosed for available-for-sale securities? A) the name of the investee and the percentage ownership B) amortized cost basis C) market price D) difference between the carrying value of the investment and the amount of underlying equity in net assets

B) amortized cost basis

On the statement of cash flows, the total lease payment reduces cash flow from operating activities for the operating lease. Only the ________ reduces operating cash flows under the ________ lease. Therefore, cash flows from operating activities are ________ under the finance lease each year and in total. A) liability portion; finance; lower B) interest portion; finance; higher C) liability portion; operating; lower D) interest portion; operating; higher

B) interest portion; finance; higher

Which of the following must be disclosed for held-to-maturity securities? A) the name of the investee and the percentage ownership B) net carrying amount C) total gains and losses accumulated in other comprehensive income D) difference between the carrying value of the investment and the amount of underlying equity in net assets

B) net carrying amount

Under U.S. GAAP, companies classify individual deferred tax assets or liabilities as ________. A) current or noncurrent based on the underlying asset or liability B) noncurrent only C) current only D) current or noncurrent based on the reversal date

B) noncurrent only

Blue Company's income before taxes is $410,000 and its tax rate is 40%. Blue included $50,000 of fines and penalties in the $410,000. There are no other book-tax differences. What is the effective tax rate for Blue Company? (Do not round intermediate calculations. Only round your final answer to the nearest percent.) A) 35% B) 40% C) 45% D) 51%

C) 45%

On January 1, 2019, Wynn Manufacturing leased a floor of a building for use in its North American operations from Easymoney Bank. The 9-year, noncancellable lease requires annual lease payments of $12,000, beginning January 1, 2019, and at each January 1 thereafter through 2027. The lease agreement does not transfer ownership, nor does it contain a purchase option. The floor of the building has a fair value of $85,000 and an estimated remaining life of 10 years. Easymoney Bank's implicit rate of 11% is known to Wynn. What is the type of lease for the lessee? A) sales-type lease B) operating lease C) finance lease D) direct financing lease

C) finance lease

Kataran Company enters into a 4-year lease transaction, with payments due at the beginning of each year. The lease payments are $78,000 per year. The fair value of the leased asset is $290,000. The lessor's deferred initial direct costs are equal to $24,000. The lessor's estimate of the unguaranteed residual asset is $115,000. Based on the above information, what is the implicit rate in the lease for Kataran? A) 11.48% B) 21.81% C) 14.77% D) 16.54%

D) 16.54%

4) Which of the following is an advantage of leasing an asset for the lessee? A) There are lower overall costs for the asset. B) Ownership automatically passes to the lessee at the end of the lease. C) The lessee absorbs the risk of obsolescence. D) Some leases are not disclosed on the lessee's balance sheet. Answer: D

D) Some leases are not disclosed on the lessee's balance sheet.

Northern Equipment leases cooling towers to Warmup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $180,000. The cost of the equipment to Northern is $170,000 and the expected life of the testing equipment is 8 years. At the end of the useful life, it is expected that the equipment will have a residual value of $20,000, although the lessee guarantees only $15,000. Northern incurs initial direct costs of $20,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Northern's implicit rate is 8% and they expect that collection of the $27,000 payments is probable. The lease is properly classified as a sales-type lease. What is the amount of the lease receivable? (Round any present value calculations to the nearest dollar, and round any percentages two decimal places, X.XX%.) A) $165,251 B) $180,000 C) $167,674 D) $172,326

A) $165,251

On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $8,500 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $44,996 and has a carrying amount on Precision's books of $30,597. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,100. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,100; collection of this guaranteed residual value and lease payments are reasonably certain. The rate implicit in the lease is 4%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. What is the balance in the net investment in the lease account after the second payment on December 31, 2019? A) $29,456 B) $23,588 C) $36,496 D) $43,536

A) $29,456

On April 1, 2018, Ellucian Corporation invested in the bonds issued by the City of Westminster on January 1, 2018. These 10-year, $700,000 bonds pay interest of 2% with semiannual payments every June 30 and December 31. Ellucian paid par value plus accrued interest. What is the amount of accrued interest paid at the time of purchase? A) $3,500 B) $14,000 C) $4,666.67 D) $7,000

A) $3,500

Mega Corporation leases machinery on January 1, 2016. The lease is for a period of 7 years, which is the useful life of the machinery. The implicit rate of interest is 10% and the Obligation under Capital Lease is recorded at $48,197. The lease requires annual payments of $9,000, with the first payment due at the inception of the lease. How much interest expense should be accrued on December 31, 2016? A) $3,920 B) $0 C) $9,000 D) $4,820

A) $3,920

On April 1, 2018, Ellucian Corporation invested in the bonds issued by the City of Westminster on January 1, 2018. These 10-year, $300,000 bonds pay interest of 2% with semiannual payments every June 30 and December 31. Ellucian paid par value plus accrued interest. What is the total amount paid by Ellucian for the City of Westminster bonds? A) $301,500 B) $300,000 C) $298,500 D) $303,000

A) $301,500

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $540,000. Included in this amount is $15,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $140,000 and are treated the same for book and tax purposes. What is Greenville's taxable income? A) $385,000 B) $400,000 C) $525,000 D) $540,000

A) $385,000

HdG, Inc. accepts a $200,000, 8% note from Aberdeen Unlimited on April 1, 2019, and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning March 31, 2020. The market rate on the date of issuance of this note was 8%. HdG has a fiscal year end of December 31. How much Interest Revenue will HdG record on March 31, 2020, the first annual installment payment date? A) $4,000 B) $16,000 C) $1,333 D) $8,000

A) $4,000

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $77,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,900 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,900, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 7% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,200. Assuming that this is classified as an operating lease, what is the amount of the lease liability on January 1, 2019 before the lease payment? A) $47,821 B) $45,892 C) $44,692 D) $64,200

A) $47,821

Illusions Inc. just completed its second year of operations and has a deferred tax asset of $43,700 related to a net operating loss of $115,000 from the previous year. In the current year Illusions generates $390,000 in revenues and incurs $260,000 in expenses. There are no permanent or temporary book-tax differences. Assuming the same tax rate as last year, what amount will Illusions record for Income Tax Payable in the current year? A) $5,700 B) $49,400 C) $148,200 D) Cannot be determined from the information provided.

A) $5,700

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $6,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 10%. Initial direct costs of $1,100 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $41,608. Collection of all lease payments is reasonably assured. What is the reduction in the lease liability recorded with the first and second lease payments, respectively? A) $6,000; $2,545 B) $4,165; $4,165 C) $36,499; $2,350 D) $4,055; $3,650

A) $6,000; $2,545

In 2018, its first year of operations, Neuro Inc. experienced a $214,000 net operating loss and recorded a deferred tax asset of $81,320. Neuro decides that it is more likely than not that it will only be able to generate $195,000 of taxable income during the carryforward period. As a result, without generating additional future taxable income it will not be able to fully realize the NOL carryforward benefit. In order to account for this, what amount will Neuro Inc. record as a valuation allowance, assuming that the tax rate is unchanged? A) $7,220 B) $4,476 C) $30,902 D) Cannot be determined with the information provided.

A) $7,220

Bosworth Corporation accepted a 5-year note receivable from Steelman Company on January 1, Year 1. The maturity value of the note is $800,000. The note has a stated interest rate of 10%. However, the prevailing market interest rate is 12%. The note requires interest payments on June 30 and December 31. What is the present value of this note at inception A) $741,119 B) $446,716 C) $800,000 D) $1,035,523

A) $741,119

In 2017, Squirrel Corp. recorded book income of $165,000. It has one temporary difference which relates to a $30,000 warranty expense that it 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% and 2020: 36%, respectively. Under U.S. GAAP, what deferred tax amount should Squirrel Corp. record for this temporary difference? A) $8,550 B) $7,800 C) $9,300 D) $10,050

A) $8,550

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $590,000. Included in this amount is $80,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $180,000 and are treated the same for book and tax purposes. What is Greenville's book basis in the installment sale receivable? A) $80,000 B) $0 C) $40,000 D) $180,000

A) $80,000

Elton Electronics leases testing equipment to Startup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $103,000. The cost of the equipment to Elton is $98,000 and the expected life of the testing equipment is 8 years. Elton incurs initial direct costs of $10,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Elton's implicit rate is 8% and they expect that collection of the $13,000 lease payments is probable. What is the principal balance in the Net Investment in Lease — Sale Type account at the commencement of the lease? A) $80,683 B) $67,683 C) $98,000 D) $60,098

A) $80,683

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $500,000. Included in this amount is $75,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $140,000 and are treated the same for book and tax purposes. Assuming a 35% tax rate, what is Greenville's income tax payable? A) $99,750 B) $126,000 C) $148,750 D) $175,000

A) $99,750

Plessings Company leased a piece of machinery to Banana, Inc. on January 1, 2019. The lease is correctly classified as a sales-type lease. Plessings will receive three annual lease payments of $20,100, with the first one received on January 1, 2019. There is no guaranteed or unguaranteed residual value. The fair value of the machine is $50,000 and Plessings incurs initial direct costs of $5,000. What is the implicit rate assuming the initial direct costs are expensed? A) 22.22% B) 9.97% C) 4.74% D) 9.98%

A) 22.22%

Kravitz Corporation had income before taxes of $890,000 and a tax rate of 45%. Included in the income are $40,000 in municipal bond interest and $20,000 in fines and penalties. There are no other book-tax differences. Refer to Kravitz Corporation. What is Kravitz's effective income tax rate? (Do not round intermediate calculations. Only round your final answer to the nearest tenth percent.) A) 44% B) 46% C) 45% D) 48%

A) 44%

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's book-tax difference? A) Book income that is $60,000 greater than taxable income B) Book income that is $70,000 greater than taxable income C) Taxable income that is $10,000 greater than book income D) Taxable income that is $60,000 greater than book income

A) Book income that is $60,000 greater than taxable income

How will a change in statutory tax rates affect prior period financial statements and current year income tax expense? A) Changes in statutory tax rates affect current year income tax expense but do not affect prior period financial statements. B) Changes in statutory tax rates affect both current year income tax expense and prior period financial statements. C) Changes in statutory tax rates do not affect current year income tax expense or prior period financial statements. D) Changes in statutory tax rates do not affect current year income tax expense but do affect prior period financial statements.

A) Changes in statutory tax rates affect current year income tax expense but do not affect prior period financial statements.

On 1/1/19, Lantana Loan Co., a calendar-year company, accepts a 6%, $300,000 three-year loan that pays interest semi-annually on 6/30 and 12/31 from Diamond Distributors, when the market rate of interest was 10%. In exchange for the note, Diamond agrees to make semi-annual interest payments and repay the full $300,000 at maturity. What is the amount of discount amortized and the amount of Interest Revenue recorded on 6/30/19, the date of the first interest payment? (Round any intermediate calculations and your final answer to the nearest dollar.) A) Discount Amortized, $4,477; Interest Revenue, $13,477 B) Discount Amortized, $4,477; Interest Revenue, $9,000 C) Discount Amortized, $9,000; Interest Revenue, $13,477 D) Discount Amortized, $9,000; Interest Revenue, $9,000

A) Discount Amortized, $4,477; Interest Revenue, $13,477

Keller Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. At the time of the acquisition, the book value of Angel's net assets equals their fair market value. Angel declared Net Income of $2,250,000 for the year. How will Angel's Net Income impact Keller's books? A) Keller will increase the Investment account and Income from the Investment for $675,000. B) Keller will increase Cash and increase Income from Investment for $675,000. C) Keller will increase Cash and decrease the Investment Account for $675,000. D) Keller will increase the Investment Account and increase Cash for $675,000.

A) Keller will increase the Investment account and Income from the Investment for $675,000.

Packer Publications purchased $160,000 of the outstanding 400,000 shares of Bear Homes. How should Packer account for this investment? A) Packer should account for this investment using the equity method, as Packer has significant influence over the investee. B) Packer has control over Bear, so it must consolidate all financial statements. C) Packer should classify this investment as an equity investment with no determinable fair value. D) Packer should classify this investment as an equity investment with no significant influence.

A) Packer should account for this investment using the equity method, as Packer has significant influence over the investee.

On January 1 of the current year, Jenkins Company signed a 6-year lease for equipment having a 9-year economic life. The present value of the monthly lease payments equaled 75% of the fair value of the equipment. No bargain purchase option or transfer of title was included. How will this lease be reflected on Jenkins' current year income statement? A) Rent expense equal to the current year lease payments. B) Rent expense equal to the current year lease payments less interest expense. C) Interest expense and depreciation expense. D) Lease amortization equal to one-sixth of the equipment's fair value.

A) Rent expense equal to the current year lease payments

Which of the following is true if a lease includes both a bargain purchase option and a residual value? A) The bargain purchase option takes precedence in all computations. B) The lessee will depreciate the property over the life of the lease without considering the bargain purchase option. C) The lessee adds the present value of the residual value to the amount recorded for the lease. D) The lessee subtracts the present value of the bargain purchase option from the present value of the minimum lease payments.

A) The bargain purchase option takes precedence in all computations.

If a capital lease has a guaranteed residual value, how should the lessee account for it at the inception of the lease? A) The initial asset and liability should be increased by the present value of the residual value. B) The initial asset and liability should be increased by the amount of the residual value. C) The initial asset and liability should be decreased by the present value of the residual value. D) The initial asset and liability should be decreased by the amount of the residual value.

A) The initial asset and liability should be increased by the present value of the residual value.

How is a guaranteed residual value accounted for when computing minimum lease payments? A) The present value of the guaranteed residual value is added in to determine the minimum lease payments. B) It is ignored. C) The future value of the guaranteed residual value is added in to determine the minimum lease payments. D) The excess of guaranteed residual value over estimated residual value is added in to determine the minimum lease payments.

A) The present value of the guaranteed residual value is added in to determine the minimum lease payments.

Which of the following is not among the criteria used by a lessee to classify a lease as a capital lease? A) The present value of the minimum lease payments is greater than or equal to 75% of the fair market value of the asset. B) The noncancellable lease term is greater than or equal to 75% of the estimated economic life of the asset. C) The lease specifies that ownership of the asset transfers to the lessee. D) The lease contains a bargain purchase option.

A) The present value of the minimum lease payments is greater than or equal to 75% of the fair market value of the asset.

Brightney purchased common shares of Company A and B for $7,000 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. Brightney does not have significant influence over the investees. Assuming an existing $1,100 debit balance in Fair Value Adjustment - Equity Investments, what is the unrealized gain or loss for these securities and how is it reported? A) Unrealized Gain of $3,900, reported as part of Net Income B) Unrealized Gain of $5,000, reported as part of Net Income C) Unrealized Gain of $3,900, reported as part of Other Comprehensive Income D) Unrealized Gain of $5,000, reported as part of Other Comprehensive Income

A) Unrealized Gain of $3,900, reported as part of Net Income

Can impairment losses recorded on held-to-maturity debt investments be reversed at a later date? A) Yes, prior unrealized losses can be reversed, but the reversal is limited to the balance in the account, Allowance for Credit Loss: Held-to-Maturity Debt Investment. B) No, impairment losses cannot be reversed. C) Yes, but only non-credit losses recorded in Other Comprehensive Income. D) Yes, but only credit losses recorded in Other Comprehensive Income.

A) Yes, prior unrealized losses can be reversed, but the reversal is limited to the balance in the account, Allowance for Credit Loss: Held-to-Maturity Debt Investment

Pink Partners holds equity investment with a carrying value of $39,000. The investment has no readily determinable value. The current fair value of the investment is $24,000. There is objective evidence of an impairment. Should an impairment loss be recorded? How much of this loss should be classified in net income and how much should be classified in other comprehensive income? A) Yes, the $15,000 impairment loss should be reported as part of net income. B) No, an impairment loss should not be recorded because this is an equity investment. C) Yes, the $15,000 impairment loss should be split evenly between net income and other comprehensive income. D) Yes, there is an impairment loss of $15,000 which should be reported as Other Comprehensive Income.

A) Yes, the $15,000 impairment loss should be reported as part of net income.

Grey Co. holds a held-to-maturity debt investment at an amortized cost of $50,000. At 12/31/18, the fair value of the investment is $49,000 and the present value of the future cash flows is $48,000. Has an impairment loss occurred? If so, how much is the impairment loss to be recorded? A) Yes, the present value of future cash flows are less than the amortized cost, so an impairment loss for the difference must be recorded, $2,000. B) Yes, the present value of future cash flows are less than the amortized cost, however, the loss cannot be calculated without knowing if this difference is temporary or other-than-temporary. C) No, the fair value of the investment is less than its amortized cost, so an impairment has not occurred. D) There is not enough information to determine if an impairment loss has occurred.

A) Yes, the present value of future cash flows are less than the amortized cost, so an impairment loss for the difference must be recorded, $2,000.

Olympic Corporation purchased a debt security for $500,000 on July 1, 2020 and properly classified it as a trading security. As of the last day of 2020, the fair value of the security was $494,000. The proper journal entry on this date includes ________. A) a credit to Fair Value Adjustment - Trading Debt Investments for $6,000 B) a debit to Fair Value Adjustment - Trading Debt Investments for $494,000 C) a debit to Unrealized Loss - Net Income for $494,000 D) a credit to Unrealized Loss - Net Income for $6,000

A) a credit to Fair Value Adjustment - Trading Debt Investments for $6,000

Which of the following is not a component of a minimum lease payment? A) an unguaranteed residual value B) the minimum rental payments C) a bargain purchase option D) a penalty for failure to extend or renew the lease

A) an unguaranteed residual value

For a lessor to classify a lease as a capital lease, ________. A) any one of the lessee criteria must be met; collectibility of the required minimum lease payments must be reasonably assured; and there must be no material uncertainties regarding the amount of future nonreimbursable costs to be incurred by the lessor under the terms of the lease B) all four of the lessee criteria must be met; and collectibility of the required minimum lease payments must be reasonably assured OR there must be no material uncertainties regarding the amount of future nonreimbursable costs to be incurred by the lessor under the terms of the lease C) any one of the lessee criteria must be met; and collectibility of the required minimum lease payments must be reasonably assured OR there must be no material uncertainties regarding the amount of future nonreimbursable costs to be incurred by the lessor under the terms of the lease D) all four of the lessee criteria must be met; collectibility of the required minimum lease payments must be reasonably assured; and there must be no material uncertainties regarding the amount of future nonreimbursable costs to be incurred by the lessor under the terms of the lease

A) any one of the lessee criteria must be met; collectibility of the required minimum lease payments must be reasonably assured; and there must be no material uncertainties regarding the amount of future nonreimbursable costs to be incurred by the lessor under the terms of the lease

Investments in debt securities that cannot be readily classified in two reporting categories are classified as ________. A) available-for-sale securities B) trading securities C) held-to-maturity securities D) minority securities

A) available-for-sale securities

A lessee's option to purchase a leased asset at a price that is substantially lower than the asset's fair value is referred to as a(n) ________. A) bargain purchase option B) guaranteed purchase option C) early purchase option D) residual purchase option

A) bargain purchase option

The amount of income a company reports in its financial statements is known as ________. A) book income B) net operable income C) taxable income D) revenue income

A) book income

What type of account is Discount on Notes Receivable? A) contra-Asset account B) contra-revenue account C) liability account D) expense account

A) contra-Asset account

On January 1, 2019, Wynn Manufacturing leased a floor of a building for use in its North American operations from Easymoney Bank. The 9-year, noncancellable lease requires annual lease payments of $12,000, beginning January 1, 2019, and at each January 1 thereafter through 2027. The lease agreement does not transfer ownership, nor does it contain a purchase option. The floor of the building has a fair value of $85,000 and an estimated remaining life of 10 years. Easymoney Bank's implicit rate of 11% is known to Wynn. At the end of 2019, which of the following journal entries will be used by Wynn to record Interest Expense? A) debit to Interest Expense and credit to Interest Payable B) debit to Interest Expense and Lease Liability and credit to Cash C) debit to Lease Liability and credit to Interest Expense D) No entry — payment is made on January 1, 2020.

A) debit to Interest Expense and credit to Interest Payable

Fair values and subsequent growth of an investment are not relevant for reporting for which category of investments? A) held-to-maturity B) securities accounted for under the equity method C) trading D) available-for-sale

A) held-to-maturity

Sumner leases equipment to Butler Corporation. Butler records the first payment as prepaid rent. This implies that the lease ________. A) is an operating lease B) is a sales-type lease C) is a direct-finance lease D) has a bargain purchase option

A) is an operating lease

Which of the following is not an advantage of leasing an asset for the lessee? A) lower overall costs B) risk of obsolescence is reduced C) potential tax benefits D) improved cash flows

A) lower overall costs

A lessee normally computes the liability on a lease as the ________. A) present value of minimum lease payments B) fair market value of the leased asset C) future value of the minimum lease payments D) sum of the cash payments over the term of the lease

A) present value of minimum lease payments

If title does not pass from the lessor to the lessee under the terms of a lease, ________. A) the present value of the residual amount will be deducted by the lessor before computing the amount to be recovered through periodic lease payments B) the present value of the residual amount will be added by the lessor before computing the amount to be recovered through periodic lease payments C) the lessor will increase the basis of the asset by the residual value D) the residual value will be ignored

A) the present value of the residual amount will be deducted by the lessor before computing the amount to be recovered through periodic lease payments

Pepper Company owns 40% of the common stock and exercises significant influence over Salt Company. Pepper Company ________. A) would decrease its investment account when Salt Company declares dividends B) would record goodwill as investment income each year C) would record dividends received from Salt Company as investment revenue D) would file a consolidated financial statement with Salt Company

A) would decrease its investment account when Salt Company declares dividends

The appropriate asset value that a lessee reports on its balance sheet for an operating lease is ________. A) zero, unless a prepayment or accrual is involved B) the historical cost of the asset being leased C) the sum of the minimum lease payments D) the present value of the minimum lease payments

A) zero, unless a prepayment or accrual is involved

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $77,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,900 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,900, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 6% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,100. Assuming that this is classified as an operating lease, what is the annual lease expense reported on the income statement? A) $10,900 B) $13,300 C) $12,000 D) $11,120

B) $13,300

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $500,000. Included in this amount is $85,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $170,000 and are treated the same for book and tax purposes. Assuming a 40% tax rate, what is Greenville's income tax expense? A) $98,000 B) $132,000 C) $166,000 D) $200,000

B) $132,000

Betta Group's net income is $400,000 and its tax rate is 25%. Assuming no book-tax differences, what is Betta's taxes payable? (Round your answer to the nearest whole dollar.) A) $100,000 B) $133,333 C) $1,600,000 D) $533,333

B) $133,333

Lyon Group's income before taxes is $420,000 and its tax rate is 40%. Lyon included $30,000 in fines and penalties in the $420,000. There are no other book-tax differences. What is income tax payable for Lyon Group? A) $168,000 B) $180,000 C) $156,000 D) $12,000

B) $180,000

Greene Co. has pretax book income for the year ended December 31, 2018 in the amount of $315,000 and has a tax rate of 30%. Depreciation for tax purposes exceeded book depreciation by $10,500. What should Greene Co. record as its deferred tax liability for 2018? A) $0 B) $3,150 C) $91,350 D) $94,500

B) $3,150

On July 1, Year 1, Fairfield Company purchased $5 million of Hampton Corporation's 6% bonds for $3,932,522. The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities. The bonds mature in 25 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? (Round all calculations to the nearest cent, and your final answer to the nearest dollar.) A) $4,232,522 B) $3,939,823 C) $3,947,124 D) $3,925,221

B) $3,939,823

S & C Company reported $220,000 depreciation on its 2018 tax return. However, they reported $40,000 depreciation expense on their 2018 income statement. The difference in depreciation is a temporary difference that will reverse over time. Assuming S & C's tax rate is constant at 20%, what amount should be added to the deferred income tax liability in S & C's December 31, 2018, balance sheet? A) $8,000 B) $36,000 C) $44,000 D) $52,000

B) $36,000

On January 7, 2018, Webb Industries purchased 1,000 shares of Class A common stock in Bloomberg Corporation for $50,000. Webb does not have significant influence or control over Bloomberg. Although Class A shares are not actively traded, Class B shares are traded and are nearly identical aside from being publicly traded. At the end of 2018, Class B shares are trading for $54 per share. If Webb makes the appropriate election to measure the investment based on observable price changes for similar securities, what Fair Value Adjustment should be made at the end of 2018? A) $0 B) $4,000 debit C) $4,000 credit D) $8,000 credit

B) $4,000 debit

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $7,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 11%. Initial direct costs of $1,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $46,813. Collection of all lease payments is reasonably assured. What is the amortization of the right-of-use asset recorded in 2019 and 2020, respectively? A) $7,000; $2,737 B) $4,676; $4,676 C) $4,480; $2,520 D) $5,033; $4,480

B) $4,676; $4,676

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $580,000. Included in this amount is $60,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $100,000 and are treated the same for book and tax purposes. What is Greenville's book income? A) $420,000 B) $480,000 C) $520,000 D) $580,000

B) $480,000

Starboard Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $73,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Starboard will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Starboard made a lease payment of $10,300 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,300, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Starboard. Starboard guarantees a residual value of $3,000 and incurs initial direct costs of $1,700. Assuming that this is classified as an operating lease, what is the amount of the lease liability on January 1, 2019 before the lease payment? A) $47,688 B) $50,154 C) $45,854 D) $60,100

B) $50,154

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $8,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 6%. Initial direct costs of $1,400 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $63,468. Collection of all lease payments is reasonably assured. What is the amount of the lease liability recorded by Nace at the lease's commencement? A) $58,881 B) $62,414 C) $63,468 D) $64,868

B) $62,414

On January 3, 2019, Sheppard Corporation purchased 25% of Meredith Corporation's common stock for $64,000. The net asset's book value is equal to the fair market value. Meredith's net income for the years ended December 31, 2019 and 2020 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2019; however, during 2020, the company declared a $70,000 dividend. On December 31, 2019, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $71,000; in 2020, it increased again to $76,000. What would be the balance in the investment account as of December 31, 2020? A) $64,000 B) $65,000 C) $71,000 D) $76,000

B) $65,000

On January 3, 2019, Sheppard Corporation purchased 25% of Meredith Corporation's common stock for $65,000. The net asset's book value is equal to the fair market value. Meredith's net income for the years ended December 31, 2019 and 2020 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2019; however, during 2020, the company declared a $70,000 dividend. On December 31, 2019, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $72,000; in 2020, it increased again to $80,000. What would be the balance in the investment account as of December 31, 2019? A) $65,000 B) $69,500 C) $72,000 D) $80,000

B) $69,500

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $600,000. Included in this amount is $20,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $200,000 and are treated the same for book and tax purposes. Assuming a 35% tax rate, what is the amount of Greenville's deferred tax asset or liability? A) $7,000 deferred tax asset B) $7,000 deferred tax liability C) $4,000 deferred tax asset D) $4,000 deferred tax liability

B) $7,000 deferred tax liability

StatMed Corporation leases medical equipment under a five-year capital lease. The terms of the lease call for five equal payments of $26,000, with the first payment due at the inception. The interest rate implicit in the lease is 11%. At what value is Obligation under Capital Lease recorded at the end of the first year? A) $115,537 B) $71,791 C) $89,537 D) $106,664

B) $71,791

Nice Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $9,500, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have a $2,000 residual value at the end of the lease term on December 31, 2028, which is guaranteed by Nice. Nice's incremental borrowing rate is 7%. Initial direct costs of $2,500 are incurred on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $64,012. Collection of all lease payments is reasonably assured. What is the amount of the lease liability recorded by Nice at the lease's commencement? A) $67,741 B) $72,412 C) $74,912 D) $22,500

B) $72,412

Lawson leased equipment from Tirado on January 1 of the current year. The lease is a 6-year lease with annual payments of $215,000 due on each January 1, beginning with the current year. Lawson's incremental borrowing rate is 8%; Lawson knows that Tirado's implicit interest rate is 6%. What is the balance of Lawson's lease liability at December 31 or the current year? A) $815,019 B) $905,658 C) $713,735 D) $840,154

B) $905,658

On January 7, 2018, Webb Industries purchased an equity investment in Bloomberg Corporation for $540,000. Webb does not have significant influence or control over Bloomberg. Bloomberg Corporation stock is not actively traded and does not have a readily determinable fair value. At December 31, 2018, a Level 2 fair value of $493,000 is available based on a comparable security in the same industry as Bloomberg Corporation. At December 31, 2018, a Level 3 fair value of $528,000 is available based on a cash flow model of Bloomberg Corporation. On December 12, 2019, Webb Industries sells the Bloomberg stock for $638,000. What is the gain that is reported on the sale of Bloomberg Corporation in 2019? A) $0 B) $98,000 C) $47,000 D) $35,000

B) $98,000

On March 1 of the current year, Hill Corporation leased sound equipment from McEntire Company. The equipment has a life of 8 years. There is no bargain purchase option or passage of title. For the lease to be considered a capital lease, it must have a term of at least ________. A) 5 years B) 6 years C) 3 years D) 8 years

B) 6 years

If the lease term must be greater than or equal to ________, the lessee will record the lease as a capital lease. A) 50% of the expected economic life of the leased property B) 75% of the expected economic life of the leased property C) 80% of the expected economic life of the leased property D) 90% of the expected economic life of the leased property

B) 75% of the expected economic life of the leased property

Swanson Corporation is leasing a machine from Gray, Inc. Swanson's incremental borrowing rate is 13%. The prime rate of interest is currently 7%. Gray's implicit rate in the lease is 9%; Swanson knows this rate. At what interest rate should the minimum lease payments be computed? A) 7% B) 9% C) 11% D) 13%

B) 9%

Northern Equipment leases cooling towers to Warmup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $180,000. The cost of the equipment to Northern is $170,000 and the expected life of the testing equipment is 8 years. At the end of the useful life, it is expected that the equipment will have a residual value of $20,000, although the lessee guarantees only $15,000. Northern incurs initial direct costs of $20,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Northern's implicit rate is 8% and they expect that collection of the $30,000 payments is probable. The lease is properly classified as a sales-type lease. What is Northern's implicit rate for the lease? (Round any intermediate calculations to the nearest dollar, and round your final percentage two decimal places, X.XX%.) A) 9.64% B) 9.85% C) 7.6% D) 7.33%

B) 9.85%

When must a company generally elect the fair value option for reporting financial assets? A) A company can elect the fair value option at any point in the asset's life, but cannot then revert back to accounting for those assets at cost. B) A company must typically elect the fair value option at acquisition. C) A company can typically choose the cost or fair value for each asset each year at the balance sheet date. D) Companies may not account for assets at fair value. GAAP requires these be recorded at cost.

B) A company must typically elect the fair value option at acquisition.

Sheehan & Co. purchased 35% of the outstanding shares of Jules & Associates. Jules then declared dividends at year end. How will these dividends effect the investment account for Sheehan? A) Dividends received will increase the investment account. B) Dividends received will reduce the investment account. C) Dividends received will have no impact on the investment account; it will increase Cash and Dividend Revenue. D) Dividends received will have no impact on the investment account; it will increase Realized Gain - Net Income.

B) Dividends received will reduce the investment account.

Which of the following statements regarding available-for-sale debt securities is true? A) Fair value adjustments are treated as adjustments to net income. B) Fair value adjustments are treated as adjustments to other comprehensive income. C) Available-for-sale securities are valued on the balance sheet at historical cost. D) Interest revenue and fair value adjustments are netted to determine the effect on net income.

B) Fair value adjustments are treated as adjustments to other comprehensive income.

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $4,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 11%. Initial direct costs of $1,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $27,000. Collection of all lease payments is reasonably assured. What is the proper classification of the lease to Nace? A) Sales-type lease B) Finance lease C) Operating lease D) Either A or B

B) Finance lease

Each period of a finance lease, the lessee records a lease expense that includes which of the following? A) Interest expense on the lease liability, using the effective interest rate method and the discount rate it used to compute the present value of the liability at the lease commencement date; variable lease payments not included in the lease liability in the period in which the obligation for the variable payments is incurred. B) Interest expense on the lease liability, using the effective interest rate method and the discount rate it used to compute the present value of the liability at the lease commencement date; variable lease payments not included in the lease liability in the period in which the obligation for the variable payments is incurred; and changes in variable lease payments that depend on an index or rate. C) Neither A nor B is correct. D) Both A and B are correct.

B) Interest expense on the lease liability, using the effective interest rate method and the discount rate it used to compute the present value of the liability at the lease commencement date; variable lease payments not included in the lease liability in the period in which the obligation for the variable payments is incurred; and changes in variable lease payments that depend on an index or rate.

How is an unguaranteed residual value accounted for by the lessee when computing minimum lease payments? A) The present value of the guaranteed residual value is added in to determine the minimum lease payments. B) It is ignored. C) The future value of the guaranteed residual value is added in to determine the minimum lease payments. D) The excess of guaranteed residual value over estimated residual value is added in by the lessee to determine the minimum lease payments.

B) It is ignored.

________ differences between book income and taxable income result in an effective tax rate that differs from the statutory tax rate. A) Temporary B) Permanent C) Short-term D) Long-term

B) Permanent

Media Corporation incurred $25,000 in expenses associated with tax-exempt income this year. What (if any) book-tax difference will result? A) Temporary difference; book income less than taxable income. B) Permanent difference; book income less than taxable income. C) Permanent difference; book income greater than taxable income. D) Temporary difference; book income greater than taxable income.

B) Permanent difference; book income less than taxable income.

In which of the following instances would a company most likely choose the carryforward option for a net operating loss? A) The company expects lower tax rates in the future compared to the past. B) The company expects higher tax rates in the future compared to the past. C) The company expects lower earnings in the future compared to the past. D) The company expects higher losses in the future compared to the past.

B) The company expects higher tax rates in the future compared to the past.

Which of the following statements is true? A) The right-of-use asset is increased by prepaid lease payments, but reduced by lease incentives and the lessee's initial direct costs. B) The right-of-use asset is increased by prepaid lease payments and the lessee's initial direct costs, but reduced by lease incentives. C) The right-of-use asset is reduced by the lessee's initial direct costs, but increased by lease incentives and prepaid lease payments. D) The right-of-use asset is reduced by prepaid lease payments and the lessee's initial direct costs, but increased by lease incentives.

B) The right-of-use asset is increased by prepaid lease payments and the lessee's initial direct costs, but reduced by lease incentives.

Cassa & Associates purchased the bonds of JayBird. These bonds pay 6% interest semi-annually. The effective rate of interest at the date of investment was 3%. Did Cassa & Associates purchase these bonds at a discount or premium? A) These bonds were purchased at a discount because the stated rate exceeds the market rate. B) These bonds were purchased at a premium because the stated rate exceeds the market rate. C) These bonds were purchased at a discount because the market rate exceeds the stated rate. D) These bonds were purchased at a premium because the market rate exceeds the stated rate.

B) These bonds were purchased at a premium because the stated rate exceeds the market rate

Skywalker Limited purchased shares of Jedi Jewelers during 2018 for $124,000. Skywalker elected the fair value option for accounting for this investment. At year end 2018, 2019, and 2020, this investment had a fair value of $120,000, $134,000, and $137,000, respectively. What is the amount of unrealized gain or loss reported on this investment at year-end 2020? A) Unrealized Gain of $17,000 B) Unrealized Gain of $3,000 C) Unrealized Loss of $10,000 D) Unrealized Gain of $14,000

B) Unrealized Gain of $3,000

L & J purchased common shares of Company A and B for $10,000 and $9,000, respectively on 12/15. L & J 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. L & J does not have significant influence over the investees. Assuming an existing $1,100 credit balance in Fair Value Adjustment - Equity Investments, what is the unrealized gain or loss for these securities and how is it reported? A) Unrealized Gain of $1,100, reported as part of Net Income B) Unrealized Gain of $6,100, reported as part of Net Income C) Unrealized Gain of $1,100, reported as part of Other Comprehensive Income D) Unrealized Gain of $6,100, reported as part of Other Comprehensive Income

B) Unrealized Gain of $6,100, reported as part of Net Income

When assessing realizability of deferred tax assets, management must consider positive and negative evidence. Which of the following would be considered negative evidence? A) existing contracts or firm sales backlog B) a carryback or carryforward period that is so brief it could limit realization of tax benefits C) taxable income in prior carryback year(s) if carryback is permitted under the tax law D) a strong earnings history exclusive of the loss that created the future deductible amount

B) a carryback or carryforward period that is so brief it could limit realization of tax benefits

Where are changes in fair value for trading debt securities reported? A) as operating income or loss on the income statement B) as income or loss from peripheral activities on the income statement C) as a component of accumulated other comprehensive income on the balance sheet D) as a prior period adjustment to retained earnings on the balance sheet

B) as income or loss from peripheral activities on the income statement

Tommy Corp. reported a net deferred tax asset balance of $176,400 resulting from an estimated warranty expense accrual for book purposes. The total book-tax difference related to the bases of the estimated warranty liability is $490,000. The enacted statutory tax rate related to this balance changed from 36% to 31%, effective immediately. By what amount will the deferred asset balance change? A) increase by $33,320 B) decrease by $24,500 C) increase by $24,500 D) decrease by $33,320

B) decrease by $24,500

On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $7,000 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $37,592 and has a carrying amount on Precision's books of $22,000. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,000. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,000; collection of this guaranteed residual value and lease payments are reasonably certain. The rate implicit in the lease is 6%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. What is the proper classification of this lease for Precision Pumps? A) sales-type lease B) direct financing lease C) operating lease D) finance lease

B) direct financing lease

Lessees often incur costs related to the ownership of the leased asset. These costs, referred to as, ________ include items such as property tax, insurance, and maintenance. A) expenses B) executory costs C) overhead costs D) All of the above

B) executory costs

In cases where the standalone price is highly variable or uncertain, the lessee may use what type of method for determining standalone prices? A) market method B) residual method C) component method D) Both A and C are correct.

B) residual method

When a company pays taxes that were previously recorded as a deferred tax liability, the temporary difference ________. A) originates B) reverses C) increases D) decreases

B) reverses

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, then the lessor classifies the lease as a(n) ________. A) operating lease; direct financing lease; sales-type lease B) sales-type lease; direct financing lease; operating lease C) standalone price lease; sales-type lease; direct financing lease D) direct financing lease; operating lease; sales-type lease

B) sales-type lease; direct financing lease; operating lease

The amount of income that a company reports on its tax return is known as ________. A) refundable income B) taxable income C) deductible income D) net income

B) taxable income

A deferred tax asset exists when ________. A) the book basis of assets is greater than the tax basis of assets B) the book basis of liabilities is greater than the tax basis of liabilities C) the book basis of assets is equal to the tax basis of assets D) the book basis of liabilities is less than the tax basis of liabilities

B) the book basis of liabilities is greater than the tax basis of liabilities

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $78,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,700 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,700, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $2,000. Assuming that this is classified as an operating lease, how much interest expense is recorded in 2019?

D) $1,554

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $76,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 6% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,100. In addition to the information provided above, assume that Bumble provided a $6,000 incentive. Assuming that this is classified as an operating lease, what is the annual lease expense reported on the income statement? A) $10,000 B) $12,220 C) $11,100 D) $11,020

D) $11,020

Kelemen Asset Management invested in the bonds of DEF Co. on 1/1/19. Kelemen intends to hold the bonds until maturity. These 5-year bonds had a face value of $500,000, pay 5% interest on 6/30 and 12/31 of each year, and were issued when the market rate of interest was 6%, resulting in a cost of $478,674. How much interest revenue will Kelemen record on 6/30/19? A) $11,967 B) $12,500 C) $25,000 D) $14,360

D) $14,360

Hyde Company leased equipment to Pittman Corporation under a six year lease agreement that qualifies as a direct-finance lease. The asset cost $1,780,000. The lease contains a bargain purchase option that is effective at the end of the sixth year. The asset has an expected economic life of 10 years and is expected to have a residual value of $4000 at the end of the 10th year. Assuming that straight-line depreciation is used, what would be the annual depreciation? (Round your final answer to the nearest whole dollar.) A) $8000 B) $355,200 C) $178,000 D) $177,600

D) $177,600

Ivy Group reported income from continuing operations before taxes of $648,000 and income from discontinued operations of $224,000. Ivy also reported $78,000 of unrealized gains from available-for-sale debt investments (fair value accounting adjustments) recorded as other comprehensive income. The company is subject to a 28% tax rate and reports no permanent differences. How much income tax expense does Ivy report as a line item directly below "Income from Continuing Operations before Taxes"? A) $266,000 B) $244,160 C) $203,280 D) $181,440

D) $181,440

Ewok Enterprises recently elected the fair value option to account for its investment in Yoda Inc. Ewok purchased the shares for $204,000 and the shares are currently trading for $190,000 at year-end. What is the carrying value of this investment on the balance sheet of Ewok? A) $204,000 B) $14,000 C) $394,000 D) $190,000

D) $190,000

Nace Manufacturing Company leased a piece of nonspecialized equipment for use in its operations from Righteous Leasing on January 1, 2019. The 10-year lease requires lease payments of $4,000, beginning on January 1, 2019, and at each December 31 thereafter through 2027. The equipment is estimated to have a 10-year life, is depreciated on the straight-line basis and will have no residual value at the end of the lease term. Nace's incremental borrowing rate is 9%. Initial direct costs of $1,000 are incurred by the lessee on January 1, 2019. Righteous Leasing acquired the asset just prior to the lease term at a cost of $29,035. Collection of all lease payments is reasonably assured. What is the value of the right-of-use asset to Nace at the lease's commencement? A) $30,035 B) $26,981 C) $26,671 D) $28,981

D) $28,981

Eagle Exporters purchased 80,000 of the 200,000 outstanding shares of Giant Distributors for $3,000,000. Eagle has significant influence over Giant and will account for this investment using the equity method. During the year, Giant declared dividends of $100,000 and reported Net Income of $780,000. What is the balance in the Investment in Giant account at year end? A) $2,648,000 B) $2,728,000 C) $3,352,000 D) $3,272,000

D) $3,272,000

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? A) $405,000 B) $430,000 C) $25,000 D) $380,000

D) $380,000

Bosworth Corporation accepted a 5-year note receivable from Steelman Company on January 1, Year 1. The maturity value of the note is $750,000. The note has a stated interest rate of 10%. However, the prevailing market interest rate is 12%. The note requires interest payments on June 30 and December 31. What will be the interest revenue recorded on June 30, Year 1? A) $37,500 B) $45,000 C) $75,000 D) $41,688

D) $41,688

HdG, Inc. accepts a $800,000, 7% note from Aberdeen Unlimited on April 1, 2019, and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning March 31, 2020. The market rate at the date of issuance of this note was 7%. How much Interest Revenue will HdG record on December 31, 2019, the end of its fiscal year? A) HdG will not record Interest Revenue until it receives the first installment payment on this note on March 31, 2020. B) $28,000 C) $56,000 D) $42,000

D) $42,000

Price Enterprises invested in the bonds of Greater Gloucester on January 1, 2018. These 60 year, $600000 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 purchase price of these bonds? A) $600,000 B) $582,000 C) $624,000 D) $463,934

D) $463,934

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? (Round your answer to the nearest whole dollar.) A) $72,000 B) $240,000 C) $800,000 D) $560,000

D) $560,000

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 $100,000, 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 $114,720 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 method. A) $9,178 B) $8,000 C) $6,000 D) $6,883

D) $6,883

Starboard Industries enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $73,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Starboard will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Starboard made a lease payment of $10,400 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,400, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 5% and is known by Starboard. Starboard guarantees a residual value of $4,500 and incurs initial direct costs of $1,600. Assuming that this is classified as an operating lease, what is the value of the right-of-use asset at the lease's commencement? A) $45,027 B) $46,627 C) $59,278 D) $62,804

D) $62,804

Elton Electronics leases testing equipment to Startup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $118,000. The cost of the equipment to Elton is $113,000 and the expected life of the testing equipment is 8 years. Elton incurs initial direct costs of $10,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Elton's implicit rate is 5% and they expect that collection of the $14,500 lease payments is probable. What is the principal balance in the Net Investment in Lease — Sale Type account after the second payment on December 31, 2019? A) $98,402 B) $83,902 C) $113,000 D) $73,597

D) $73,597

On January 3, 2019, Sheppard Corporation purchased 15% of Meredith Corporation's common stock for $62,000. Meredith's net income for the years ended December 31, 2019 and 2020 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2019; however, during 2020, the company declared a $70,000 dividend. On December 31, 2019, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $74,000; in 2020, it increased again to $76,000. What will be the balance in the investment account at the end of December 31, 2019? A) $62,000 B) $92,000 C) $76,000 D) $74,000

D) $74,000

On January 3, 2019, Sheppard Corporation purchased 15% of Meredith Corporation's common stock for $62,000. Meredith's net income for the years ended December 31, 2019 and 2020 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2019; however, during 2020, the company declared a $70,000 dividend. On December 31, 2019, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $73,000; in 2020, it increased again to $79,000. What will be the carrying value of the investment at the end of December 31, 2020? A) $62,000 B) $73,000 C) $135,000 D) $79,000

D) $79,000

What is the proper accounting treatment to record improvements to leased property for a lessee? A) Expense in the year in which expenses are incurred and increase basis of asset. B) Capitalize and depreciate over the greater of the life of the improvement or lease term. C) Expense in the year in which expenses are incurred. D) Capitalize and depreciate over the lesser of the life of the improvement or lease term. Answer: D

D) Capitalize and depreciate over the lesser of the life of the improvement or lease term.

Which of the following statements regarding trading debt securities is false? A) If a trading debt security is purchased at a premium, the premium must be amortized on a periodic basis. B) Fair value adjustments are treated as adjustments to net income. C) If the fair value of trading debt securities is less than the amortized cost, the fair value adjustment account will have a credit balance. D) Fair value adjustments are treated as adjustments to other comprehensive income.

D) Fair value adjustments are treated as adjustments to other comprehensive income.

Skywalker Limited purchased an equity investment in Jedi Jewelers during 2018 for $131,000. Skywalker has significant influence over Jedi. Skywalker elected the fair value option for accounting for this investment. At year-end 2018, 2019, and 2020, this investment had a fair value of $120,000, $130,000, and $138,000, respectively. How will this investment be reported on the Balance Sheet at year-end, 2020? A) Investment in Jedi - $138,000 B) Investment in Jedi - $130,000, plus Fair Value Adjustment - Fair Value Option - $7,000 C) Investment in Jedi - $131,000 D) Investment in Jedi - $131,000, plus Fair Value Adjustment - Fair Value Option - $7,000

D) Investment in Jedi - $131,000, plus Fair Value Adjustment - Fair Value Option - $7,000

JayBird Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. At the time of the acquisition, the book value of Angel's net assets equals their fair market value. Angel declared dividends of $276,000 during the year. How will JayBird record the last transaction? A) JayBird will increase the investment account by $82,800. B) JayBird will increase Dividend Revenue by $82,800. C) JayBird will increase Dividend Revenue by $276,000. D) JayBird will decrease the investment account by $82,800

D) JayBird will decrease the investment account by $82,800.

PM Distributors began Year 2 with Equity Investments of $8,100 (which consisted of a single investment) as well as a debit balance of $1,000 in the Fair Value Adjustment - Equity Investments account. PM does not have significant influence over the investee, and the investment has a readily determinable fair value. This trading security was sold for $9,100 during Year 2. How much was the gain or loss for the sale of this investments and how is it recorded? A) No gain or loss reported, as the investment was sold for the adjusted fair value B) Unrealized Gain of $1,000, reported as part of Other Comprehensive Income C) Realized Loss of $1,000, reported as part of Net Income D) Realized Gain of $1,000, reported as part of Net Income

D) Realized Gain of $1,000, reported as part of Net Income

How does a sales-type lease differ from a direct-finance lease? A) The lessor depreciates the property over a longer period under a sales-type lease. B) The lessor uses a higher interest rate on a sales-type lease than on a direct-finance lease. C) The lessor receives less interest than on a direct-finance lease. D) The lessor receives a manufacturer's or dealer's profit.

D) The lessor receives a manufacturer's or dealer's profit.

If a company elects the fair value option to account for equity securities, what will be recorded differently when there is no significant influence? A) Unrealized Gains and Losses will now be reported as part of Net Income instead of Other Comprehensive Income. B) Dividends received from the investee will now be credited to Dividend Revenue instead of as a reduction to the investment account. C) A proportionate share of net income will no longer need to be recorded for these equity securities. D) There is no difference in accounting for equity securities with no significant influence as these are already accounted for using the fair value method.

D) There is no difference in accounting for equity securities with no significant influence as these are already accounted for using the fair value method.

Rhoads purchased common shares of Company A and B for $10,000 and $10,000, 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 $18,000, respectively. Assuming Rhoads has no significant influence over the investee companies, what is the unrealized gain or loss for these securities and how is it reported? A) Unrealized Loss of $1,000, Unrealized Gain of $8,000, both reported as part of Net Income B) Unrealized Gain of $7,000, reported as part of Other Comprehensive Income C) Unrealized Loss of $1,000, Unrealized Gain of $8,000, both reported as part of Other Comprehensive Income D) Unrealized Gain of $7,000, reported as part of Net Income

D) Unrealized Gain of $7,000, reported as part of Net Income

Which of the following would not be disclosed for trading securities? A) aggregate fair value B) gross realized gains and losses C) amortized cost basis D) any impairment loss and where reported

D) any impairment loss and where reported

In instances where there is not an observable standalone selling price, the lessor must use an estimate of the standalone selling price and allocate it based on which of the following methods? A) adjusted market assessment approach B) expected-cost-plus-a-margin approach C) residual approach D) any of the above approaches

D) any of the above approaches

All of the following are examples of facts that may create temporary book-tax differences except ________. A) contingent liabilities B) depreciation C) product warranty costs D) payment of premiums for life insurance

D) payment of premiums for life insurance

All of the following are examples of situations that may create temporary book-tax differences except ________. A) amortization of goodwill B) writing off bad debt C) installment sales D) receipt of municipal bond interest

D) receipt of municipal bond interest

Accounting for uncertain tax positions under U.S. GAAP involves a two-step approach: ________. A) measurement and classification B) recognition and qualification C) classification and computation D) recognition and measurement

D) recognition and measurement

For an operating lease, the lessee will record a(n) ________ and an associated lease liability on the balance sheet. A) intangible asset B) capital adjustment C) contra-liability account D) right-of-use asset

D) right-of-use asset

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 ________. A) sales-type; finance; revenue B) operating; net investment in lease-sales-type; cost of goods sold C) finance; gross investment in lease-sales-type; cost of goods sold D) sales-type; net investment in lease-sales-type; cost of goods sold

D) sales-type; net investment in lease-sales-type; cost of goods sold

When a lessor records a sales-type lease, the transaction is similar to ________. A) selling a fixed asset B) exchanging assets C) purchasing merchandise on account D) selling merchandise on account

D) selling merchandise on account

Northern Equipment leases cooling towers to Warmup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $180,000. The cost of the equipment to Northern is $170,000 and the expected life of the testing equipment is 8 years. At the end of the useful life, it is expected that the equipment will have a residual value of $20,000, although the lessee guarantees only $15,000. Northern incurs initial direct costs of $20,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Northern's implicit rate is 8% and they expect that collection of the $22,000 payments is probable. The lease is properly classified as a sales-type lease. What amount will be recorded for cost of goods sold? (Round any present value calculations to the nearest dollar, and round any percentages two decimal places, X.XX%.) A) $134,270 B) $180,000 C) $167,744 D) $172,256

C) $167,744

On January 1 of the current year, Beta Company paid $200,000 for 10,000 shares of Gamma Company common stock. Beta owns 10% of Gamma Company. Gamma reported net income of $66,000 for December 31 of the current year. The fair value of the Gamma stock on that date was $27. What amount will be reported in Beta's balance sheet for the investment in Gamma at December 31? A) $204,000 B) $266,000 C) $270,000 D) $336,000

C) $270,000

On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $7,000 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $39,675 and has a carrying amount on Precision's books of $26,979. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,500. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,500; collection of this guaranteed residual value and lease payments are reasonably certain. The rate implicit in the lease is 4%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. What is the balance in the net investment in the lease account after the first payment? A) $26,982 B) $19,426 C) $32,675 D) $38,368

C) $32,675

Crush Enterprises purchased 200,000 of the 400,000 outstanding shares of Carly Casualties for $4,400,000 on 1/1/19. On the date of the investment, Carly had net assets with a book value of $9,500,000 and fair value of $10,000,000. This difference is the result of equipment (remaining 10 year life) with a higher fair value than book value. Crush has significant influence over Carly and will account for this investment using the equity method. During the year, Carly declared dividends of $125,000 and reported Net Income of $1,200,000. What is the balance in the Investment in Carly account at year end? A) $4,937,500 B) $4,975,000 C) $4,912,500 D) $4,962,500

C) $4,912,500

On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $9,000 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $41,627 and has a carrying amount on Precision's books of $28,306. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $15,000. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $15,000; collection of this guaranteed residual value and lease payments are reasonably certain. The rate implicit in the lease is 10%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. What amount of Sales Revenue is recorded at commencement of the lease? A) $36,000 B) $31,382 C) $41,627 D) $28,306

C) $41,627

On January 1, 2019, Precision Pumps leases nonspecialized pumping equipment to Mega Construction. The equipment is delivered on January 1. The lease term is 4 years with no renewal or purchase options, and title to the leased asset is retained by the lessor at the end of the lease term. The lease requires annual fixed rental payments of $9,000 per year beginning on January 1, 2019, and then December 31 of each year starting on December 31, 2019. The fair value of the equipment is $44,859 and has a carrying amount on Precision's books of $30,504. The equipment has a remaining life of 8 years. The estimated residual value of the equipment is $14,900. The lessee does not guarantee the residual value, but Precision secured an unrelated third party to guarantee $14,900; collection of this guaranteed residual value and lease payments are reasonably certain. The rate implicit in the lease is 6%. There are no prepaid rentals, and neither party to the agreement pays initial direct costs. What amount is recorded for net investment in the lease at commencement of the lease? A) $36,000 B) $33,057 C) $44,859 D) $30,504

C) $44,859

Elton Electronics leases testing equipment to Startup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $98,000. The cost of the equipment to Elton is $93,000 and the expected life of the testing equipment is 8 years. Elton incurs initial direct costs of $10,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Elton's implicit rate is 8% and they expect that collection of the $12,500 lease payments is probable. How much interest will Elton record for 2019? A) $12,500 B) $7,294 C) $5,206 D) $6,206

C) $5,206

On January 7, 2018, Webb Industries purchased an equity investment in Bloomberg Corporation for $520,000. Webb does not have significant influence or control over Bloomberg. Bloomberg Corporation stock is not actively traded and does not have a readily determinable fair value. At December 31, 2018, a Level 2 fair value of $470,000 is available based on a comparable security in the same industry as Bloomberg Corporation. At December 31, 2018, a Level 3 fair value of $507,000 is available based on a cash flow model of Bloomberg Corporation. On December 12, 2019, Webb Industries sells the Bloomberg stock for $621,000. What is the amount of the fair value adjustment on December 31, 2018?

C) $50,000

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $71,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,500. Compute the present value of the lease payments in order to determine if the lease meets the fourth Group I criterion. Calculate the present value of each payment individually. Assuming that this is classified as an operating lease, what is the value of the right-of-use asset at the lease's commencement? A) $44,518 B) $46,018 C) $57,799 D) $47,799

C) $57,799

StatMed Corporation leases medical equipment under a five-year capital lease. The terms of the lease call for five equal payments of $25,000, with the first payment due at the inception. The interest rate implicit in the lease is 8%. The first year's interest expense will be ________. (Do not round interim calculations and round your final answer to the nearest whole dollar.) A) $0 B) $1000 C) $6624 D) $2000

C) $6624

On March 1 of the current year, Stafford Corporation leased equipment under a six-year noncancellable lease. The estimated economic of the equipment is nine years. The fair value of the equipment is $780,000. The lease does not contain a bargain purchase option or a transfer of title. Stafford must classify this lease as a capital lease if the present value of the minimum lease payments is at least ________. A) $390,000 B) $585,000 C) $702,000 D) $780,000

C) $702,000

TNT Corporation's income tax payable is $230,000 and its tax rate is 30%. Assuming no book-tax differences, what is TNT's income before taxes? (Round your answer to the nearest whole dollar.) A) $69,000 B) $230,000 C) $766,667 D) $328,571

C) $766,667

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? A) $910,000 B) $820,000 C) $830,000 D) $900,000

C) $830,000

StatMed Corporation leases medical equipment under a five-year capital lease. The terms of the lease call for five equal payments of $21,000, with the first payment due at the inception. The interest rate implicit in the lease is 10%. At what value is the leased equipment recorded at the inception of the lease? A) $21,000 B) $105,000 C) $87,567 D) $79,607

C) $87,567

On February 1 of the current year, Greenstein Corporation leased equipment under a six-year noncancellable lease. The estimated economic of the equipment is ten years. The fair value of the equipment is $1,100,000. The lease does not contain a bargain purchase option or a transfer of title. Greenstein must classify this lease as a capital lease if the present value of the minimum lease payments is at least ________. A) $825,000 B) $880,000 C) $990,000 D) $1,100,000

C) $990,000

) S & C Company's income before taxes is $410,000, and income tax expense is $115,000. S & C has a deferred tax asset of $100,000 and records a valuation allowance of $25,000. What is S & C's effective tax rate before and after recording the valuation allowance? (Do not round intermediate calculations. Round your final answer to the nearest whole percent.) A) 28% and 22% respectively B) 22% and 34% respectively C) 28% and 34% respectively D) There would not be a change in ETR because these are due to temporary differences.

C) 28% and 34% respectively

Which of the following statements regarding a bargain purchase option is true? A) The bargain purchase option is included in the minimum lease payments for the lessee but not the lessor. B) The lessee subtracts the present value of the bargain purchase option from the present value of the minimum rental payments to determine the lease obligation. C) A bargain purchase option reduces the amount of the investment that the lessor must recover from the minimum lease payments. D) The lessor subtracts the present value of the bargain purchase option from the present value of the rental payments to determine the lease receivable.

C) A bargain purchase option reduces the amount of the investment that the lessor must recover from the minimum lease payments.

Which of the following is(are) the primary effect(s) of amortizing a discount on notes receivable? A) It increases the interest revenue so that the corporation's effective rate of return is brought up to the higher market rate. B) It reduces the discount and increases the carrying value of the note receivable until the carrying value is equal to the face value of the note. C) Both A and B are the primary effects of amortizing a discount. D) None of the above are accurate.

C) Both A and B are the primary effects of amortizing a discount.

Caesar Corporation reports municipal interest income on their financial statements. What (if any) book-tax difference will result? A) Temporary difference; book income greater than taxable income. B) Temporary difference; taxable income greater than book income. C) Permanent difference; book income greater than taxable income. D) No difference; municipal interest is taxable income.

C) Permanent difference; book income 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? A) Temporary difference; book income less than taxable income. B) Permanent difference; book income less than taxable income. C) Permanent difference; book income greater than taxable income. D) Temporary difference; book income greater than taxable income

C) 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? A) Temporary difference; book income less than taxable income. B) Permanent difference; book income greater than taxable income. C) Permanent difference; book income less than taxable income. D) No difference; fines and penalties are tax deductible.

C) Permanent difference; book income less than taxable income.

Which of the following statements is incorrect in regard to the equity method of accounting for investments? The fair value option approach is not used. A) The investment account is increased by the percentage of the investee's net income. B) The investment account is decreased by the percentage of the investee's dividends declared. C) The investment account is adjusted to fair value at the end of the reporting period. D) The investment account is decreased by the percentage of the investee's net loss.

C) The investment account is adjusted to fair value at the end of the reporting period.

When should a company use the equity method to account for an investment in another company's common stock? A) The investor intends to hold the common stock for an indefinite period. B) The investor has voting control over the investee. C) The investor exerts significant influence over the investee. D) The investor exerts managerial control over the investee.

C) The investor exerts significant influence over the investee.

If a note's stated interest rate is equal to the prevailing market rate of interest, which of the following is true? A) The note's face value is less than the note's present value. B) The note's face value is more than the note's present value. C) The note's face value and present value are equal. D) There is not enough information provided to make this determination.

C) The note's face value and present value are equal.

How do the total expenses over the life of a capital lease compare with the total expenses over the life of an operating lease? A) The expenses of a capital lease are greater for a capital lease than for an operating lease. B) The expenses of an operating lease are greater than for a capital lease. C) There is no difference between total expenses for an operating lease and a capital lease. D) The total expenses cannot be compared.

C) There is no difference between total expenses for an operating lease and a capital lease.

Goo Goo Enterprises invested in the bonds of Greater Glouster. These bonds pay interest of 2%. The effective rate of interest for similar bonds on the date of investment was 6%. Did Goo Goo purchase the bonds at a discount or premium? A) These bonds were purchased at a discount because the stated rate exceeds the market rate. B) These bonds were purchased at a premium because the stated rate exceeds the market rate. C) These bonds were purchased at a discount because the market rate exceeds the stated rate. D) These bonds were purchased at a premium because the market rate exceeds the stated rate.

C) These bonds were purchased at a discount because the market rate exceeds the stated rate.

If a company has elected the fair value option, where are gains and losses resulting from adjusting these accounts to fair value reported? A) Unrealized Gains are reported as part of Other Comprehensive Income while Unrealized losses are reported as part of Net Income. B) Unrealized Gains are reported as part of Net Income, while Unrealized Losses are reported as part of Other Comprehensive Income. C) Unrealized Gains and Losses are both reported as part of Net Income. D) Unrealized Gains and Losses are both reported as part of Other Comprehensive Income.

C) Unrealized Gains and Losses are both reported as part of Net Income.

As of 12/31/20, XYZ Inc. had available-for-sale debt investments with a fair value of $505,000, an amortized cost of $542,000, and a debit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,200. 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? A) Unrealized Loss of $37,000, reported as part of Other Comprehensive Income. B) Unrealized Loss of $44,200, reported as part of Net Income. C) Unrealized Loss of $44,200, reported as part of Other Comprehensive Income. D) Unrealized Loss of $37,000, reported as part of Net Income.

C) Unrealized Loss of $44,200, reported as part of Other Comprehensive Income.

An intraperiod tax allocation ________. A) results when different income statement items are taxed at different rates B) occurs when certain revenues and expenses appear in the financial statements either before or after they are included in the income tax return C) allocates income tax expense to different sections of the comprehensive income statement D) deals with allocation of taxes between current and future periods

C) allocates income tax expense to different sections of the comprehensive income statement

Where are changes in fair value for available for sale securities reported? A) as operating income or loss on the income statement B) as income or loss from peripheral activities on the income statement C) as a component of accumulated other comprehensive income on the balance sheet D) as a prior period adjustment to retained earnings on the balance sheet

C) as a component of accumulated other comprehensive income on the balance sheet

When a company depreciates a fixed asset at a faster rate for tax purposes than book purposes, this creates a ________. A) deferred tax asset B) higher tax basis than book basis of assets in the early years C) deferred tax liability D) lower tax basis than book basis of liabilities in the early years

C) 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 nonoperating lease results in the recognition of ________, rather than ________ revenue. A) standalone price; sales-type; fair value of the leased asset; financing income; unearned B) standalone; operating; fair value of the leased asset; interest income; rent C) direct financing; sales-type; net investment in the lease; interest income; rent D) direct financing; operating; net investment in the lease; financing income; unearned

C) direct financing; sales-type; net investment in the lease; interest income; rent

In subsequent measurement of a direct financing lease, the lessor computes interest revenue using the ________ method. The lessor allocates lease payments first to cover the ________ and then to ________ the NIL-DF. The interest revenue, which is reported on the income statement, is the amount that produces a constant periodic discount rate on the remaining balance of the NIL-DF. A) straight-line interest; interest; reduce B) straight-line interest; interest; increase C) effective interest rate; interest; reduce D) effective interest rate; interest; increase

C) effective interest rate; interest; reduce

Sidekick Services leases several computer servers from Lycoming Computing Company. The lease agreement includes consulting and training updates. The standalone prices charged by Lycoming for each separate component are $750,000 for the servers and $250,000 for the consulting and training updates. The lease is a 5-year lease with fixed payments of $400,000 per year. There are also variable payments required amounting to $7,000 per year, on average, based on the metered usage of the servers. There is no minimum charge included in the contract. 1) Using the above information, the total consideration in this contract ________ the variable payments. A) increases B) decreases C) excludes D) includes

C) excludes

When using the discounted cash flow approach to lease capitalization, how is the off-balance sheet lease obligation estimated? A) present value of the replacement cost of the leased asset B) rent expense times capitalization rate C) present value of the future minimum lease payments D) present value of the historical cost of the leased asset

C) present value of the future minimum lease payments

Woods Company reports income before taxes in the amount of $925,000. The current tax expense is $365,375 and the effective tax rate is 27%. What is the conservatism ratio for Woods Company? A) 0.68 B) 0.19 C) 0.45 D) 0.40

A) 0.68

Under U.S. GAAP, if a firm writes down inventory for obsolescence, which of the following is created? A) a deferred tax asset B) a deferred tax liability C) a book basis of assets that is greater than the tax basis D) a book basis of liabilities that is less than the tax basis

A) a deferred tax asset

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? A) land B) services associated with the lease C) fully depreciated assets D) All of the above

A) land

Investments in equity securities whereby the investor does not have significant influence over the investees require ________ percentage of ownership in the investees. A) less than 20% B) 20% to 50% C) 51% to 74% D) 75% or greater

A) less than 20%

Bonds are priced in the market so that their ________ is the same as the market rate of interest. A) yield B) stated rate C) par value D) discount

A) yield

Trader Trust accepts a $500,000 non-interest bearing 10-year note from Coffee Co. in exchange for Cash on 1/1/19. Coffee Co. promises to repay $500,000 at maturity. The market rate on 1/1/19 was 4%. How much Interest Revenue will Trader Trust record on this note in 2019? A) $0, this is a non-interest bearing note receivable. B) $13,511 C) $20,000 D) $13,891

B) $13,511

) Plessings Company leased a piece of machinery to Banana, Inc. on January 1, 2019. The lease is correctly classified as a sales-type lease. Plessings will receive three annual lease payments of $20,700, with the first one received on January 1, 2019. There is no guaranteed or unguaranteed residual value. The fair value of the machine is $50,000 and Plessings incurs initial direct costs of $5,000. What is the implicit rate assuming the initial direct costs are deferred? A) 26.5% B) 13.51% C) 6.33% D) 11.67%

B) 13.51%

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.? (Do not round intermediate calculations. Only round your final answer to the nearest percent.) A) 27% B) 28% C) 30% D) 32%

B) 28%

Under the equity method, cash dividends received by the investor from the investee should be treated as ________. A) an adjustment to other comprehensive income B) a reduction in the investment account C) an increase in the investment account D) dividend income

B) a reduction in the investment account

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? A) $114,000 B) $78,750 C) $108,600 D) $119,400

C) $108,600

Initial direct costs are expensed at the inception of the lease in ________. A) an operating lease B) a direct-finance lease C) a sales-type lease D) a capital lease

C) a sales-type lease

If a company chooses to carryback a net operating loss (NOL), but is not able to fully offset the loss, they will ________. A) forgo the carryback option and carryforward the entire NOL B) forfeit the unused amount C) carry forward the remaining balance D) both A & C are viable options

D) both A & C are viable options

All of the following are key questions that must be addressed when accounting for investments in debt and equity securities except ________.

A) How long does management intend to hold the investment?

Initial direct costs are capitalized as part of the lease receivable with ________. A) a direct-finance lease B) an operating lease C) a sales-type lease D) an installment lease

A) a direct-finance lease

Jackson Corporation leases equipment to Andrews Company for a five-year period. At the beginning of the lease, Jackson records sales revenue. The lease to Andrews must ________. A) be a sales-type lease B) be a direct-finance lease C) have a bargain renewal option D) be an operating lease

A) be a sales-type lease

On January 7, 2018, Webb Industries purchased 1,000 shares of Class A common stock in Bloomberg Corporation for $50,000. Webb does not have significant influence or control over Bloomberg. Although Class A shares are not actively traded, Class B shares are traded and are nearly identical aside from being publicly traded. At the end of 2018, Class B shares are trading for $59 per share. Webb makes the appropriate election to measure the investment based on observable price changes for similar securities. On December 12, 2019, Webb Industries sells the Bloomberg stock for $63,000. What is the gain that is reported on the sale of Bloomberg Corporation in 2019? A) $0 B) $13,000 C) $4,000 D) $9,000

B) $13,000

Elton Electronics leases testing equipment to Startup Corporation. The equipment is not specialized and is delivered on January 1, 2019. The fair value of the equipment is $78,000. The cost of the equipment to Elton is $73,000 and the expected life of the testing equipment is 8 years. Elton incurs initial direct costs of $10,000, which they elect to expense. The lease term for the equipment is 8 years, with the first payment due upon delivery, and seven subsequent annual payments beginning on December 31, 2019 and ending on December 31, 2025. Elton's implicit rate is 12% and they expect that collection of the $10,500 lease payments is probable. What is the principal balance in the Net Investment in Lease — Sale Type account after the first payment? A) $58,419 B) $47,919 C) $73,000 D) $43,169

B) $47,919

On January 1, 2019, Wynn Manufacturing leased a floor of a building for use in its North American operations from Easymoney Bank. The 9-year, noncancellable lease requires annual lease payments of $12,000, beginning January 1, 2019, and at each January 1 thereafter through 2027. The lease agreement does not transfer ownership, nor does it contain a purchase option. The floor of the building has a fair value of $85,000 and an estimated remaining life of 10 years. Easymoney Bank's implicit rate of 10% is known to Wynn. At what amount is the lease liability recorded at lease commencement? A) $81,108 B) $76,019 C) $108,000 D) $85,735

B) $76,019

Trader Trust accepts a $500,000 non-interest bearing 20-year note from Coffee Co. in exchange for Cash on 1/1/19. Coffee Co. promises to repay $500,000 at maturity. The market rate on 1/1/19 was 4%. What is the carrying value of this note on the balance sheet on 12/31/19? A) $500,000 B) $228,193 C) $237,321 D) $262,679

C) $237,321

A company may carry back a tax loss for ________ years and carry forward a tax loss for ________ years. A) 20; 2 B) 1; 15 C) 2; 20 D) 15; 1

C) 2; 20

Which of the following costs are excluded from a minimum lease payment? A) a guaranteed residual value B) a bargain purchase option C) executory costs D) a penalty for failure to renew the lease

C) executory costs

Swanson Corporation is leasing a machine from Gray, Inc. Swanson's incremental borrowing rate is 13%. The prime rate of interest is currently 7%. Gray's implicit rate in the lease is 9%; Swanson does not know this rate. At what interest rate should the minimum lease payments be computed? A) 7% B) 9% C) 11% D) 13%

D) 13%

Bateman Enterprises invested in the bonds of Greater Gloucester on January 1, 2018. These 10-year, $300,000 bonds pay interest of 3% with semiannual payments 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? A) $4,500 B) $9,000 C) $3,750 D) $5,250

A) $4,500

On April 1, 2018, Ellucian Corporation invested in the bonds issued by the City of Westminster on January 1, 2018. These 10-year, $600,000 bonds pay interest of 2% with semiannual payments every June 30 and December 31. Ellucian paid par value plus accrued interest. Ellucian's fiscal year ends on December 31. What is Ellucian's net interest revenue for 2018? A) $9,000 B) $12,000 C) $3,000 D) $6,000

A) $9,000

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. A) lease inception; lease commencement B) lease consideration; lease commencement C) lease inception; lease finalization D) Both A and B are correct

A) lease inception; lease commencement

TLR Productions has book income of $450,000, and a tax rate of 35%. Assuming there are no book-tax differences, what is TLR's income tax expense? A) $144,000 B) $157,500 C) $189,000 D) $292,500

B) $157,500

Which of the following statements best describes the effective tax rate? A) It is the legally imposed rate in a given taxing jurisdiction. B) It can be calculated by dividing income tax expense by book income before taxes. C) It changes annually based on provisions from Congress. D) It is calculated as book income divided by taxable income.

B) It can be calculated by dividing income tax expense by book income before taxes.

Uncertain tax positions may result in a ________. A) tax deferral B) tax contingency C) tax refund D) tax asset

B) tax contingency

Which of the following costs is a nonlease component for the lessee? A) insurance B) taxes C) maintenance D) All of the above

C) maintenance

On the books of a lessor, a lease may be classified as either ________. A) operating, capital, or direct-finance B) direct-finance or sales type C) operating, direct-finance, or sales type D) operating, sales type or indirect-finance

C) operating, direct-finance, or sales type

Bosworth Corporation accepted a 5-year note receivable from Steelman Company on January 1, Year 1. The maturity value of the note is $800,000. The note has a stated interest rate of 10%. However, the prevailing market interest rate is 12%. The note requires interest payments on June 30 and December 31. What will be the note balance at December 31, Year 1? A) $741,119 B) $745,586 C) $800,000 D) $750,321

D) $750,321

Which of the following is not a consideration for a company in determining whether to disclose more detail by security type? A) geographic concentration B) economic characteristic C) business sector D) total return on investment to date

D) total return on investment to date

On December 31 of the current year, Johnson Corporation leased equipment to Kennedy Company for a five-year period. The annual lease payment is $40,585; the discount rate for this lease is 9%. Lease payments are due on December 31 of each year, and the first payment was made at the inception of the lease. The normal cash price for this type of equipment is $180,000; the cost to Johnson was $170,000. The expected life of the equipment is five years. For December 31 of the current year, what will be the increase to Johnson's pretax earnings due to this lease? A) $11,834 B) $15,300 C) $16,200 D) $11,647

A) $11,834

S & C Inc.'s income tax payable is $290,000 and its tax rate is 30%. Assuming no book-tax differences, what is S & C's net income? (Round your answer to the nearest whole dollar.) A) $676,667 B) $87,000 C) $377,000 D) $966,667

A) $676,667

Sumner leases a copier from Jenks Corporation under an operating lease. Which of the following statements is correct? A) Jenks records depreciation and lease revenue. B) Jenks records profit at the inception of the lease. C) Sumner will receive title at the end of the lease. D) Sumner records depreciation and interest expense.

A) Jenks records depreciation and lease revenue

Which of the following is not an impairment indicator for investment securities? A) fluctuating stock prices B) deterioration of earnings C) decline in credit rating D) adverse changes in the economy

A) fluctuating stock prices

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 carryback provisions for the net operating loss, what amount should be reported as Income Tax Refund Receivable in 2019? A) $71,750 B) $164,000 C) $204,500 D) $225,000

B) $164,000

The contra-asset to the Deferred Tax Asset account is called ________. A) Income Tax Benefit B) Valuation Allowance for Deferred Tax Asset C) Deferred Tax Liability D) Allowance for Doubtful Accounts

B) Valuation Allowance for Deferred Tax Asset

When a company adjusts the balance of a deferred tax account to reflect changes in their tax rate, this impacts ________. A) income tax expense B) income tax payable C) effective tax rate D) both A and C

D) both A and C

As of 12/31/20, XYZ Inc. had available-for-sale debt investments with a fair value of $509,000, an amortized cost of $530,000, and a credit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,200. 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? A) Unrealized Loss of $13,800 reported as part of Other Comprehensive Income. B) Unrealized Loss of $28,200, reported as part of Net Income. C) Unrealized Loss of $28,200, reported as part of Other Comprehensive Income. D) Unrealized Loss of $13,800, reported as part of Net Income.

A) Unrealized Loss of $13,800 reported as part of Other Comprehensive Income.

If the valuation allowance for a deferred tax asset is decreased, there is a(n) ________ to income tax expense, which is a(n) ________ to income tax benefit. A) decrease; increase B) increase; increase C) increase; decrease D) decrease; decrease

A) decrease; increase

A direct-finance lease is classified in the lessor's balance sheet as ________. A) a liability B) an asset C) interest revenue D) a contra account to lease liability

B) an asset

Which of the following would not be disclosed for available-for-sale securities? A) aggregate fair value B) date of acquisition C) amortized cost basis D) any impairment loss and where reported

B) date of acquisition

On the balance sheet, the right-of-use asset under an operating lease is ________. A) amortized by straight line B) reduced to present value C) amortized later than with a finance lease D) not included

C) amortized later than with a finance lease

If the present value of the minimum lease payments is be greater than or equal to ________, the lessee will record the lease as a capital lease. A) 75% of the cost of the asset B) 75% of the fair market value of the asset C) 90% of the cost of the asset D) 90% of the fair market value of the asset

D) 90% of the fair market value of the asset

Elliott Brothers enters into a lease agreement with Central Leasing for a piece of equipment. The terms of the 5-year lease state that payments of $22,500 will be made annually on January 1, commencing with the date that the lease begins. The lease contains a provision that Elliott Brothers may purchase the equipment at the end of the lease period for $16,000, which is well below the expected fair value at the end of the lease. As such, it is expected that Elliott Brothers will exercise this option. The implicit rate in the lease is 10%. If this lease is treated as a finance lease for Elliott Brothers, at what value will the right-of-use asset be recorded? A) $103,757 B) $9,935 C) $93,822 D) $85,293

A) $103,757

With an operating lease, ________. A) the lessee records rent expense and the lessor records rent revenue B) the lessee records interest expense and the lessor records interest revenue C) the lessee records rent expense and the lessor records interest revenue D) the lessee records depreciation expense and the lessor records rent revenue

A) the lessee records rent expense and the lessor records rent revenue

Revenue for a direct financing lease is calculated as ________. A) 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 B) the higher 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 C) the lower of (1) the residual value of the asset or (2) the sum of the lease receivable and any lease payments paid before the lease commencement date D) None of the above

A) 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

Which of the following is a debt security for which management has both the positive intent and ability to hold the debt investment until all principal and interest is fully paid? A) trading security B) held-to-maturity security C) available-for-sale security D) Not enough information to classify this security

A) trading security

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? A) $25,000 B) $0 C) $12,500 D) $120,000

B) $0

HdG, Inc. accepts a $500,000, 5% note from Aberdeen Unlimited on April 1, 2019, and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning March 31, 2020. The market rate at the date of issuance of this note was 5%. What is the annual payment that HdG will receive for this note? A) $25,000 B) $115,487 C) $6,250 D) $109,988

B) $115,487

On July 1, Year 1, Walters Corporation purchased as a short-term investment a $2 million face amount Kempff 6% bond for $1,792,146 plus accrued interest to yield 8%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 5, the bonds had a fair value of $1,810,000. On March 1, Year 6, Walters sold the bond for $1,830,000. At what amount should Walters report the bond in its December 31, Year 5 balance sheet if it is classified as an available-for-sale security? A) $1,792,146 B) $1,830,000 C) $1,810,000 D) $2,000,000

C) $1,810,000

Tetra Corp. recorded book income of $215,000 in 2018. It does not have any permanent differences and the only temporary difference relates to $36,000 unearned income that it recorded for book purposes. Tetra anticipates satisfying this liability equally over the following three years. The current enacted tax rate is 36%. The enacted tax rates for the following three years are 33%, 38%, and 43%, respectively. Under U.S. GAAP, what deferred tax amount should Tetra Corp. record for this temporary difference? A) $12,840 B) $12,960 C) $13,680 D) $15,480

C) $13,680

A noncancellable lease contains a bargain purchase option. The fair value of the asset is greater than the lessor's cost. Collectability of the lease payments is reasonably assured, and no material uncertainties about future costs exist. How will the lessor account for the lease? A) direct-finance lease B) operating lease C) sales-type lease D) guaranteed lease

C) sales-type lease

With regard to deferred tax items, a company must disclose all of the following except ________. A) the amount and expiration of carryforwards for net operating losses and unused tax credits B) the amount of the valuation allowance or any change in valuation allowance C) the individual components of all significant deferred tax assets and deferred tax liabilities D) All of the above must be disclosed.

C) the individual components of all significant deferred tax assets and deferred tax liabilities

Cox Corporation invested in the bonds of Latif Industries on January 1, 2018. These 10 year, $100,000 bonds pay interest of 6% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds? A) $100,000 B) $94,000 C) $104,000 D) $116,351

D) $116,351

Jules & Associates purchased the bonds of Jay Bird Retailers during the year. Jules intends to hold onto these bonds to collect all principal and interest, but due to financial constraints, will most likely have to sell this investment on the open market within the next year. How should Jules classify this investment? A) held-to-maturity debt investment B) available-for-sale equity investment C) trading debt investment D) available-for-sale debt investment

D) available-for-sale debt investment

On the books of a lessee, a lease may be classified as either ________. A) direct financing or sales-type B) capital or direct financing C) direct financing or operating D) capital or operating

D) capital or operating

The Wolf Group recorded a deferred tax asset of $60,000 due to a book-tax difference in warranty liabilities. Management has assessed that it is more likely than not that the firm will not realize 30% of the deferred tax asset. After recording the valuation allowance, Wolf's net income will ________ and assets will ________. A) increase by $18,000; decrease by $60,000 B) increase by $18,000; increase by $18,000 C) decrease by $60,000; increase by $18,000 D) decrease by $18,000; decrease by $18,000

D) decrease by $18,000; decrease by $18,000

When using the multiplier approach to lease capitalization, which of the following is not a factor that must be estimated? A) depreciation expense B) interest expense C) rent expense D) fair value of the leased asset

D) fair value of the leased asset

Zeng Jewelers purchased 6,000,000 of the outstanding 20,000,000 shares of Angel & Associates. Zeng has significant influence over Angel, so Zeng will account for this investment using the equity method. On the purchase date, Angel had net assets with a book value of $7,300,000 and a fair value of $7,800,000. The difference in fair value is a result of the higher fair value of equipment than its book value. The remaining useful life of this equipment is 25 years. Assuming this investment was purchased on 1/1, how will Zeng record the difference in net assets for this investment on 12/31? A) The higher fair value will allow Zeng to increase the Investment account and Income from Investment by $20,000 each year. B) The additional depreciation expense will decrease the Income from Investment as well as the Investment account by $6,000. C) The higher fair value will allow Zeng to increase the Investment account and Income from Investment by $6,000 each year. D) The additional depreciation expense will decrease the Income from Investment as well as the Investment account by $20,000.

The additional depreciation expense will decrease the Income from Investment as well as the Investment account by $6,000.

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $80,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,800 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,800, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 4% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,100. Assuming that this is classified as an operating lease, how much amortization is recorded on the right-of-use asset in 2019? A) $11,612 B) $0 C) $13,180 D) $1,568

A) $11,612

A deferred tax liability is created when ________. A) the book basis of assets is greater than the tax basis of assets B) the book basis of liabilities is greater than the tax basis of liabilities C) the book basis of assets is equal to the tax basis of assets D) the book basis of assets is less than the tax basis of liabilities

A) the book basis of assets is greater than the tax basis of assets

Revenue for a sales-type lease is the lower of ________. A) the fair value of the leased asset or the sum of the lease receivable and any lease payments paid before the lease commencement date B) the present value of the leased asset or the sum of the lease payable and any lease payments paid before the lease commencement date C) the fair value of the leased asset or the sum of the lease receivable and lease payments paid after the lease commencement date D) the present value of the leased asset or the sum of the lease payable and any lease payments paid after the lease commencement date

A) the fair value of the leased asset or the sum of the lease receivable and any lease payments paid before the lease commencement date

The net investment in the lease for a sales-type lease reflects the assets related to the lease transaction and is comprised of the following: ________. A) the lease receivable and the present value of any unguaranteed residual asset B) the lease receivable and the present value of any guaranteed residual asset C) the lease receivable and the future value of any unguaranteed residual asset D) the lease receivable and the future value of any guaranteed residual asset

A) the lease receivable and the present value of any unguaranteed residual asset

On the balance sheet, the lease liability is measured as ________. A) the present value of the lease payments plus the present value of the guaranteed residual value if the lessee guarantees it(if any) B) the present value of the lease payments less the present value of the guaranteed residual value (if any) C) the future value of the lease payments plus the future value of the guaranteed residual value (if any) D) the present value of the lease payments plus the future value of the guaranteed residual value (if any)

A) the present value of the lease payments plus the present value of the guaranteed residual value if the lessee guarantees it(if any)

Which of the following is a debt security that a company intends to hold only for the short term? A) trading security B) available-for-sale security C) held-to-maturity security D) Not enough information to classify this security.

A) trading security

Which of the following is a disclosure that a lessee must make within its financial statements? A) aggregated lease payments on both capital and operating leases for the next five years B) the original amounts of debt associated with each lease C) rent expense for the three-year period covered by the income statement D) the original cost of assets leased under operating leases

C) rent expense for the three-year period covered by the income statement

At the end of a lease, if the actual residual value exceeds the residual value guaranteed by the lessee, ________. A) the lessor must compensate the lessee for the difference B) the lessee must compensate the lessor for the difference C) the lessor has no obligation to compensate the lessee for the excess D) the lessee will record miscellaneous income

C) the lessor has no obligation to compensate the lessee for the excess

When a note receivable is issued at a discount, ________. A) the face value of the note equals the proceeds B) the carrying value of the note decreases over the life of the note receivable C) the market rate of interest exceeds the stated rate D) the amount of discount amortized decreases each year over the life of the note

C) the market rate of interest exceeds the stated rate

Net investment in the lease for a direct financing lease (NIL-DF) is comprised of ________. A) the lease receivable, the future value of any unguaranteed residual asset and a reduction for any deferred profit B) the lease receivable, the present value of any unguaranteed residual asset, and a reduction for any deferred profit C) the lease receivable, the future value of any unguaranteed residual asset, and an addition for any deferred profit D) the lease receivable, the present value of any unguaranteed residual asset, and an addition for any deferred profit

B) the lease receivable, the present value of any unguaranteed residual asset, and a reduction for any deferred profit

Trader Trust accepts a $600,000 non-interest bearing 20-year note from Coffee Co. in exchange for cash on 1/1/19. Coffee Co. promises to repay $600,000 at maturity. The market rate on 1/1/19 was 4%. How much cash will Trader loan Coffee in exchange for this note? A) $600,000 B) $24,000 C) $277,193 D) $273,832

D) $273,832

Companies are required to disclose the amount of income tax expense that is ________. A) current B) noncurrent C) allocated to financial statement elements that are not part of income from continuing operations D) All of the above are disclosed

D) All of the above are disclosed.

Which of the following items are not examples of initial direct lease costs? A) commissions B) legal fees resulting from the execution of the lease C) costs to prepare documents after the execution of the lease D) All of the above are examples of indirect lease costs.

D) All of the above are examples of indirect lease costs.

When assessing realizability of deferred tax assets, management must consider positive and negative evidence. All of the following would be considered positive evidence except ________. A) taxable income in prior carryback year(s) if carryback is permitted under the tax law B) future reversals of existing taxable temporary differences C) unsettled circumstances that could adversely affect future operations D) an excess of appreciated asset value over the tax basis of the entity's net assets

C) unsettled circumstances that could adversely affect future operations

On 1/1/19, Lantana Loan Co., a calendar-year company, accepts a 4%, $200,000 three-year loan that pays interest semi-annually on 6/30 and 12/31 from Diamond Distributors, when the market rate of interest was 6%. In exchange for the note, Diamond agrees to make semi-annual interest payments and repay the full $200,000 at maturity. How much cash will Diamond receive in exchange for this note? A) $200,000 B) $196,000 C) $189,308 D) $189,166

D) $189,166

Miller Company leases office equipment from Swanson Company. The fair value of the equipment exceeds Swanson's cost. Collectability of the lease payments is reasonably assured; there are no material uncertainties surrounding the lease. Additionally, there is a bargain purchase option. Swanson will account for the lease as a(n) ________. A) guaranteed lease B) direct-finance lease C) operating lease D) sales-type lease

D) sales-type lease

Which of the following is a financial disclosure that a lessee must make on its financial statements? A) the amount of actual interest expense for capital leases B) a specific description for each lease contract C) future minimum lease payments for the next ten years D) the leased assets included in property, plant, and equipment

D) the leased assets included in property, plant, and equipment

The cost of a leasehold improvement is depreciated over which of the following time periods? A) the term of the lease B) the life of the improvement C) a time period determined by management D) the shorter of the physical life of the asset or the lease term

D) the shorter of the physical life of the asset or the lease term

Which of the following statements is incorrect? A) If the investor has significant influence over the investee, the investor must use the equity method of accounting for the investment. B) If the investor has control over the investee, financial statements for the two companies must be consolidated. C) If the investor has no significant influence over the investee, and can readily determine the fair value of the investment, the investor should report the investment at fair value. D) If the investor has no significant influence over the investee company, and the investment has no readily determinable fair value, the investment is reported at cost with unrealized gains and losses reported as part of other comprehensive income

If the investor has no significant influence over the investee company, and the investment has no readily determinable fair value, the investment is reported at cost with unrealized gains and losses reported as part of other comprehensive income. Answer: D