FAR CPA F6

MCQ-08608 A company leases a machine from Leasing, Inc., on January 1, Year 1. The lease terms include a $100,000 annual payment beginning January 1, Year 1. The machine's fair value is $500,000, and the residual value is estimated at $20,000. The company guarantees the residual value. The useful life of the machine is 6 years, and the lease term is 5 years. The implicit rate of interest is 6% and is known by the company. The following present value factors are provided: 5 years:Present value of $1 at 6%: .7473 Present value of an annuity due at 6%: 4.4651 Present value of an ordinary annuity at 6%: 4.2124 6 years: Present value of $1 at 6%: .7050 Present value of an annuity due at 6%: 5.2124 Present value of an ordinary annuity at 6%: 4.9173 What is the value of the machine in the company's balance sheet at lease inception? A. $535,340 B. $446,510 C. $520,000 D. $461,456

$461,456 A lease is classified as a capital lease if the lease term is 75% or more of the estimated economic life of the leased asset [the lease term is 83.33% (5/6) of the useful life]. The lessee records a capital lease on the balance sheet as an asset and an obligation at an amount equal to the present value of the minimum lease payments. *The amount of guaranteed residual value to be included in the lessee's minimum lease payments is the maximum amount the lessee is obligated to pay.* *Thus, minimum lease payments for the lessee include periodic lease payments of $100,000 to be paid annually over a 5-year period starting from 1/1/Year 1 and a single amount of $20,000 for guaranteed residual value to be paid at the end of the lease term (after 5 years).* The implicit rate of 6% is used in calculating the present value of the minimum lease payments. The first periodic lease payment is made at the inception of the lease. Accordingly, the present value factor of an annuity due is used to calculate the present value of periodic annual payments. The machine is recognized in the lessee's balance sheet at $461,456 [($100,000 × 4.4651) + ($20,000 × 0.7473)].

M6-MCQ-00857 Dodd Corp. is preparing its December 31 financial statements and must determine the proper accounting treatment for the following situations: For the year ended December 31, Dodd has a loss carry forward of $180,000 available to offset future taxable income. However, there are no temporary differences. On December 30, Dodd received a $200,000 offer for its patent. Dodd's management is considering whether to sell the patent. The offer expires on February 28 of the next year. The patent has a carrying amount of $100,000 at December 31. Assume a current and future income tax rate of 21 percent. In its income statement, Dodd should recognize an increase in net income of: A. $0 B. $37,800 C. $79,000 D. $142,200

A. $0 *The sale of the patent isn't a sure thing. You cant say it's probable since management is only THINKING about selling it. You don't recognize (book) anything. It would be nice to book thoughts, but we can't think of it that way. For a loss, losses aren't carried forward. Why? They're on the income statement and the income statement closes and all accounts reset to zero. The answer is zero.* or They have a DTA offset future taxable income, but there wasn't any determination that the company would actually earn taxable income in the future, so they must create the valuation allowance and reduce the DTA to 0 until either they actually earn income in future years (in which case they will reverse part of the valuation allowance and use however much of the DTA their income allows for) or have a clear projection of being able to earn future taxable income. Can't use potential asset sales as proof of future taxable income.. or else their "buddy" who owns his own business can "offer" 1 billion dollars for the patent, but hate absolutely no plan to actually buy it, allowing the dude with the DTA to pay like no taxes that year.

M2-MCQ-00569 Winn Co. manufactures equipment that is sold or leased. On December 31, Year 1, Winn leased equipment to Bart for a five-year period ending December 31, Year 6, at which date ownership of the leased asset will be transferred to Bart. Equal payments under the lease are $22,000 and are due on December 31 of each year. The first payment was made on December 31, Year 1. Collectibility of the remaining lease payments is reasonably assured, and Winn has no material cost uncertainties. The normal sales price of the equipment is $77,000, and cost is $60,000. For the year ended December 31, Year 1, what amount of income should Winn realize from the lease transaction? A. $17,000 B. $22,000 C. $23,000 D. $33,000

A. $17,000 This is a finance lease to the lessor because ownership is transferred to the lessee. There is no interest revenue in Yr 1 because the lease inception and the balance sheet date are the same. The first payment, thus, includes no interest. The lease is a sales-type lease to the lessor because the normal selling price of $77,000 exceeds the cost of $60,000. The difference of $17,000 is the dealer profit to be recognized in Yr 1. There is no other income to be recognized in Yr 1.

M5-MCQ-00856 For the year ended March 31, Dunn Corp.'s pretax financial statement income was $700,000, and its taxable income was $600,000. The difference is due to the following: Interest on municipal bonds $30,000 Lower depreciation for financial statement 70,000 Total $100,000 Dunn's enacted income tax rate is 30%. What is Dunn's current portion of income tax expense for the year ended March 31? A. $210,000 B. $189,000 C. $180,000 D. $159,000

A. $210,000 Permanent differences do not affect the deferred tax computation. They only affect the current tax computation. Permanent differences affect only the period in which they occur. They do not affect future or taxable income. Permanent differences examples: interest income on state or municipal bonds. dividends received reduction

M6-MCQ-00839 Shear Inc. began operations in Year 1. Included in Shear's Year 1 financial statements were bad debt expenses of $1,400 and profit from an installment sale of $2,600. For tax purposes, the bad debts will be deducted and the profit from the installment sale will be recognized in Year 3. The enacted tax rates are 30% in Year 1 and 21% in Year 3. In its Year 1 income statement, what amount should Shear report as deferred income tax expense? A. $252 B. $360 C. $546 D. $780

A. $252 Deferred tax expense or benefit is the net change during the year in the entity's deferred tax liabilities and assets. The deductible temporary difference related to bad debt expense gives rise to a future deductible amount of $1,400 and a deferred tax asset of $294 ($1,400 × 21% applicable tax rate). The taxable temporary difference related to the installment sale gives rise to a future taxable amount of $2,600 and a deferred tax liability of $546 ($2,600 × 21% applicable tax rate). Hence, the entity's deferred tax asset has increased by $294 ($294 - $0) and its deferred tax liability by $546 ($546 - $0) in the first year of operations. The net change is $252 ($546 deferred tax liability increase - $294 deferred tax asset increase), which is the amount of the deferred income tax expense. or Bad Debt Expense is considered as a DTA and the Profit from Installment Sales as a DTL. So, 2,600 - 1,400 = 1,200 x 21% = $294 Accrued basis on the book, and Installment on tax, Accrued basis will recognize more income from the book earlier than installment on tax, those early income from book will be a deferred tax liability because it is taxable in the future for sure. Same as percent-completed contract on book, and completed contract on tax, income from book will recognized earlier than tax income.

M2-MCQ-00400 Glade Co. leases computer equipment to customers under U.S. GAAP direct-financing leases. The equipment has no residual value at the end of the lease and the leases do not contain written purchase options. Glade wishes to earn 8 percent interest on a five-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8 percent for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease? A. $51,600 B. $75,000 C. $129,360 D. $139,450

A. $51,600 If PV = annual rent x annuity due factor, then annual rent = PV / annuity due factor, and annual rent = 323,400 / 4.312 = 75,000 Gross investment = 75,000 per year x 5 years = 375,000 Interest revenue = gross investment - net investment = 375,000 - 323,400 = 51,600

M4-MCQ-01594 Shore Co. records its transactions in U.S. dollars. A sale of goods resulted in a receivable denominated in Japanese yen, and a purchase of goods resulted in a payable denominated in euros. Shore recorded a foreign exchange gain on collection of the receivable and an exchange loss on settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar. Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates? Yen exchanged for $1 -- Euros exchangeable for $1 A. Increase -- Increase B. Decrease -- Decrease C. Increase -- Decrease D. Increase -- Decrease

A. ) Let's first try to explain transaction for receivable in "yen" Assume transaction is for 1000 yen and $100 = 1000 yen thus, $1 = 10 yen On settlement date, there is a foreign exchange gain on the receipt of 1000 yen ( Shore received yen, not dollars). It means when Shore would exchange these 1000 yen, it should receive more dollars. Let's assume, when Shore Co. exchanged 1000 yen, it received $120 Thus, now $120 = 1000 yen It means $1 = 8.33 yen Thus, yen exchangeable for $1 decreases. B.) Transaction for payable in "French francs" Assume transaction is for 1000 French francs and $80 = 1000 French francs thus, $1 = 12.5 francs On settlement date, there is a foreign exchange loss on the payment of 1000 francs ( Shore paid francs, not dollars). It means when Shore would exchange these 1000 francs, it should pay more dollars. Let's assume, when Shore Co. exchanged 1000 francs, it paid $100 Thus, now $100 = 1000 francs It means $1 = 10 francs Thus, the amount of francs exchangeable for $1 decreases.

M6-MCQ-00843 Ram Corp. prepared the following reconciliation of income per books with income per tax return for the year ended December 31, Year 1: Book income before income taxes $ 750,000 Add temporary difference: construction contract revenue which will reverse in Year 5 100,000 Deduct temporary difference: depreciation expense that will reverse in equal amounts in each of the next four years (400,000) Taxable income $450,000 Ram's effective income tax rate is 34% for Year 1. What amount should Ram report in its Year 1 income statement as the current provision for income taxes? A. $255,000 B. $153,000 C. $34,000 C. $289,000

B) $153,000 The current provision for income tax, also called the tax liability for the year, is the current tax rate multiplied by taxable income: .34 × $450,000 = $153,000.

M6-MCQ-00830 Dunn Co.'s income statement reported $90,000 income before provision for income taxes. To compute the provision for federal income taxes, the following data are provided: Rent received in advance $16,000 Income from exempt municipal bonds $20,000 Depreciation deducted for income tax purposes in excess of depreciation reported for financial statement purposes $10,000 Enacted corporate income tax rate 30% What amount of current income tax liability should be reported in Dunn's December 31 balance sheet? A. $18,000 B. $22,800 C. $25,800 D. $28,800

B. $22,800 To determine the current federal tax liability, book income $90,000 must be adjusted for any temporary or permanent differences to determine taxable income. Book income $ 90,000 Rent received in advance +16,000 Municipal interest (20,000) Excess tax depreciation (10,000) Taxable income $ 76,000 Rent received in advance (temporary difference ) is added to book income because rent is taxable when received, but is not recognized as book revenue until earned causing BI < TI = DTA. Municipal interest (permanent difference) is subtracted from book income because it is excluded from taxable income. The excess tax depreciation (temporary difference) is subtracted because this excess amount is an additional tax deduction beyond accounting depreciation. The excess depreciation expense for tax purposes only causes BI > TI = DTL The current tax liability is computed by multiplying taxable income by the tax rate ($76,000 x 30% = $22,800).

M6-MCQ-05077 Erika's Surf Shop had taxable income in Year 2 of $500,000 and pretax financial income of $600,000. The company had a cumulative $200,000 difference between its taxable income and pretax financial statement income at December 31, Year 1. These differences were solely related to accelerated depreciation methods used for income tax purposes. The enacted tax rate increased to 30 percent in Year 2 compared to an enacted rate of 20 percent in the prior year. At December 31, Year 2, the company would record a deferred tax expense of: A. $40,000 B. $50,000 C. $90,000 D. $150,000

B. $50,000 I think the easiest way to do this is through a T-account for the deferred tax asset/liability. It has a beginning credit balance of $40,000 ($200,000 cumulative difference * 20% PY rate). Two things are going to be added to the beginning balance to reach the ending balance, the first is this year's temporary difference of $100,000 (pretax financial income-taxable income) times this year's rate of 30%, so $30,000. This is a liability because taxable income is less than pretax income, so that $100,000 difference will eventually be taxed in the future. The second item that is added to the liability balance is the change in beginning balance due to the rate change. The new rate is 30%, meaning the existing DTL would actually be worth $200,000 x 30%, which is $60,000. Subtracting the beginning balance from this, you get a change equal to $20,000 (60,000-40,000). In total, the DTL account increases by $30,000+20,000=$50,000, which is the deferred expense. or At the end of Year 1, you have a deferred tax liability of 40k (200 x 20% tax rate). But, the enacted tax rate is increased to 30% in year 2 and you have another 100k of temporary differences. So, your end of year DTL is 90k (300 x 30%). The difference (90k - 40k) is your deferred tax expense for year 2.

M2-MCQ-00609 On December 1 of the current year, Clark Co. leased office space for five years at a monthly rental of $60,000. On the same date, Clark paid the lessor the following amounts: First month's rent $60,000 Last month's rent 60,000 Security deposit (refundable at lease expiration) 80,000 Installation of new walls and offices 360,000 Assuming that the lease is treated as an operating lease, what should be Clark's current year expense relating to utilization of the office space? A. $60,000 B. $66,000 C. $120,000 D. $140,000

B. $66,000 During Year 4, this operating lease was effective only for the month of December. The Year 4 expenses therefore include the $60,000 monthly rent plus the $360,000 cost of the installation of the new walls and offices allocated over the 60 months of the rental agreement. Thus, the total December expense equals $66,000 [$60,000 + ($360,000 ÷ 60 months)].

M6-MCQ-00666 On December 30, Hale Corp. paid $400,000 cash and issued 80,000 shares of its $1 par value common stock to its unsecured creditors on a pro rata basis pursuant to a reorganization plan under Chapter 11 of the bankruptcy statutes. Hale owed these unsecured creditors a total of $1,200,000. Hale's common stock was trading at $1.25 per share on December 30. Ignoring income taxes, as a result of this transaction, Hale's total stockholder's equity had a net increase of: A. $100,000 B. $800,000 C. $80,000 D. $1,200,000

B. $800,000 I'm not 100% sure where you're getting confused, but think about it in terms of balancing the accounting equation is A=L+E. They're asking you to determine the change in equity. You know that both sides of the equation (A and L+E) have to change by the same amount in order to stay in balance. They give up $400,000 of cash, so assets are reduced by $400,000.They get rid of $1,200,000 of debt, so liabilities decrease by $1,200,000Now your equation reads -400,000 = -1,200,000 + E Solve for E... in order to keep your equation (books) balanced, equity has to increase by $800,000. That makes sense because it's also the sum of the gain from giving creditors $500,000 worth of consideration to pay off $1,200,000 worth of debt (gain = increase in retained earnings) PLUS the additional stock issued (increase in paid-in capital). What changes equity? Changes in retained earnings and/or changes in paid-in-capital.

M4-MCQ-01281 On October 1, Velec Co., a U.S. company, contracted to purchase foreign goods requiring payment in euros one month after their receipt at Velec's factory. Title to the goods passed on December 15. The goods were still in transit on December 31. Exchange rates were one dollar to 22 euros, 20 euros, and 21 euros on October 1, December 15, and December 31, respectively. Velec should account for the exchange rate fluctuation as: A. A loss included in net income before discontinued operations. B. A gain included in net income before discontinued operations. C. A gain reported net of tax after discontinued operations. D. A loss reported net of tax after discontinued operations.

B. A gain included in net income before discontinued operations. The requirement is to determine how Velec should account for the exchange rate fluctuation in year 1. A foreign currency transaction is a transaction denominated in a currency other than the entity's functional currency. Denominated means that the balance is fixed in terms of the number of units of a foreign currency, regardless of changes in the exchange rate. When a US company buys or sells to an unrelated foreign company, and the US company agrees either to pay for goods or receive payment for the goods in foreign currency units, this is a foreign currency transaction from the point of view of the US company (the functional currency is the US dollar). In these situations, the US company has crossed currencies and directly assumes the risk of fluctuating foreign exchange rates of the foreign currency units. As exchange rates fluctuate, a company will record an ordinary gain or loss on their income statement, not an extraordinary gain or loss. Velec has an accounts payable denominated in a foreign currency (Qatari riyals) as of December 15, the date the title to the goods passes to Velec. As the value of the riyal per dollar rises above twenty riyals per dollar, Velec Co. will have to come up with less dollars to pay off the payable, as of December 31, year 1, than they would have on December 15, year 1. This creates a foreign exchange transaction gain. As shown numerically, if 4000 riyals are assumed as being payable, on December 15 you would need $200 (4000/20) to pay off the payable. However, on December 31, $190 would be needed (4000/21). The difference between $200 and $190 represents the gain. A foreign exchange transaction gain should be included in net income, not a loss.

M6-MCQ-04683 Miro Co. began business on January 2, Year 1. Miro used the double-declining balance method of depreciation for financial statement purposes for its building, and the straight-line method for income taxes. This was the only difference between tax and financial statement accounting. On January 16, Year 3, Miro elected to switch to the straight-line method for both financial statement and tax purposes. The building, which cost $240,000 in Year 1, had a useful life of 15 years and no salvage value. Data related to the building is as follows: Yr -- DDB depreciation -- Straight-line depreciation Year 1 -- $30,000 -- $16,000 Year 2 -- $20,000 -- $16,000 Miro's tax rate is 40%. Which of the following statements is correct? A. There should be no reduction in Miro's deferred tax liability. B. There should be no increase in Miro's deferred tax asset. C. Miro's deferred tax asset should be reduced by $7,200 in Year 3. D. Miro's deferred tax asset should be increased by $7,200 in Year 3.

B. There should be no increase in Miro's deferred tax asset. My understanding is: 1) Year 0 and Year 1, Total temporary difference due to the different depreciation is $18,000 ($50,000-$32,000) Which created Deferred Tax Assets: $18,000 x 40% = $7,200 2) in Year 2, the company switch to using straight linefor both income tax and financial reporting purpose. Remember, Double Decline and Straight line are allowabledepreciation methods under GAAP, therefore, on financialreporting side, they will treat it like change inestimates. No retro adjustments needed. Then, depreciation on Financial report is ($240,000 -$50,000)/13 = $14,615 Tax depreciation is $16,000 Temporary difference = $1,385 Therefore, in Year 02, there is no additional DTA created, and the DTA will be reversed by $1,385 x 40% = $554 3) Then, the balance sheet still carries DTA with debitbalance at the amount of $7,200 - $554 =$6,646 Even this DTA will eventually be fully reversed in thefuture years, but not happened in year 2 only. Therefore, B is the best answer.

Deferred Tax Asset

BI < TI = DTA Created when taxes payable are greater than income tax expense; POST-EMPLOYMENT BENEFITS, WARRANTY EXPENSES AND TAX LOSS CARRYFORWARDS ARE MOST COMMON CAUSES; Must be reduced if it is unlikely to be used under GAAP

Deferred Tax Liability

BI > TI = DTL Created when income tax expense is greater than taxes payable; MOST COMMON REASON IS USING DIFFERENT DEPRECIATION METHODS ON TAX RETURN AND INCOME STATEMENT

M6-MCQ-00781 On its December 31, Year 2, balance sheet, Shin Co. had income taxes payable of $13,000 and a deferred tax asset of $20,000 before determining the need for a valuation account. Shin had reported a deferred tax asset of $15,000 at December 31, Year 1. No estimated tax payments were made during Year 2. At December 31, Year 2, Shin determined that it was more likely than not that 10% of the deferred tax asset would not be realized. In its Year 2 income statement, what amount should Shin report as total income tax expense? A. $8,000 B. $8,500 C. $10,000 D. $13,000

C. $10,000 I know this is an old post but it's possible it may help someone in the future. I finally figured this out by doing JE's... First I populated everything that the problem provided and then just plugged in. We know from the problem: DR Deferred Tax Asset 5,000 (this is the increase that occurred from 12.31.Yr 1 to 12.31.Yr 2) CR Income Tax Expense 5,000 (which is the other side of the DTA entry) DR Income Tax Expense 2,000 CR Valuation Account 2,000 (this is the 10% of the Current DTA that will not be realized 20,000 x 10%) Combine the above with income taxes payable we get: DR Plug - Income Tax Expense 13,000 DR Income Tax Expense 2,000 DR Deferred Tax Asset 5,000 CR Income Tax Expense 5,000 CR Income Taxes Payable 13,000 CR Valuation Account 2,000 So the plug is 13,000 for Income Tax Expense. Now, when I do T account to calculate the Income Tax Expense, I get 13,000 + 2,000 MINUS 5,000, I get 10,000 as the income tax expense. The current DTA of 5,000 reduces the current tax expense.

M6-MCQ-05653 Lion Co.'s income statement for its first year of operations shows pretax income of $6,000,000. In addition, the following differences existed between Lion's tax return and records: Tax return -- Accounting records Uncollectible accounts expense $220,000 -- $250,000 Depreciation expense 860,000 -- 570,000 Tax-exempt interest revenue 0 -- 50,000 Lion's current year tax rate is 30% and the enacted rate for future years is 40%. What amount should Lion report as deferred tax expense in its income statement for the year? A. $148,000 B. $124,000 C. $104,000 D. $78,000

C. $104,000 Deferred tax expense or benefit is the net change during the year in the entity's deferred tax liabilities and assets. In the first year of operations, no previous deferred tax liability or asset exists. Furthermore, the tax-exempt interest revenue is a permanent difference and does not result in a deferred tax liability or asset. However, the following deferred tax amounts must be recognized: (1) a taxable temporary difference for an excess of tax depreciation over accounting depreciation ($860,000 - $570,000 = $290,000DTL) BI > TI = DTL and (2) a deductible temporary difference for the excess of uncollectible accounts expense over the corresponding tax deduction ($250,000 - $220,000 = $30,000DTA). BI < TI = DTA These differences result in the recognition of a deferred tax liability of $116,000 ($290,000 taxable temporary difference × 40% future rate) and a deferred tax asset of $12,000 ($30,000 deductible temporary difference × 40% future tax rate). Thus, the deferred tax expense is $104,000 [($116,000 deferred tax liability - $0) - ($12,000 deferred tax asset - $0)].

M6-MCQ-00789 Mobe Co. reported the following operating income (loss) for its first three years of operations: Year 1 $ 300,000 Year 2 (700,000) Year 3 1,200,000 For each year, there were no deferred income taxes (before Year 1), and Mobe's effective income tax rate was 21 percent. In its Year 3 income statement, what amount should Mobe report as total income tax expense? A. $84,000 B. $105,000 C. $168,000 D. $252,000

C. $168,000 Year 2 Debit (Dr) Credit (Cr) Inc. Tax Refund Rec. ($300,000 × 21%) $63,000 Deferred Tax Asset ($400,000 × 21%) 84,000 Income Tax Benefit $ 147,000 Year 3 Debit (Dr) Credit (Cr) Income Tax Expense $ 252,000 Income Tax Payable $ 240,000 Deferred Tax Asset 120,000 Y2. We no longer have 300,000 NI, we have 0 NI now. so we have refund 300,000 x .21 = 63,000. The rest 400,000 of 700,000 is temp difference result in DTA of 400,000 x .21 = 84,000. Total benefit 147k, 63k used, 84k carryover. Y3. Originally we have income expense 1,200,000 x 0.21 =252,000, there is no temp difference this year so current tax expense is all. We use 84k DTA to offset the expense we gonna pay. So we only have to pay 168,000. Note that Y3 we have no temp diff so total tax expense is just 1,200,000 x 0.21 = 252,000. The expense is not gonna decrease by DTA, only payable would.

M6-MCQ-00787 For the year ended December 31, Tyre Co. reported pretax financial statement income of $750,000. Its taxable income was $650,000. The difference is due to accelerated depreciation for income tax purposes. Tyre's effective income tax rate is 30%, and Tyre made estimated tax payments during the year of $90,000. What amount should Tyre report as current income tax expense on December 31? A. $105,000 B. $135,000 C. $195,000 D. $225,000

C. $195,000 Income tax expense must be reported in two components: the amount currently payable (current portion) and the tax effects of temporary differences (deferred portion). The current portion is computed by multiplying taxable income by the current enacted tax rate ($650,000 x 30% = $195,000). The deferred portion is $30,000 ($100,000 temporary difference x 30%). The estimated tax payments ($90,000) do not affect the amount of tax expense, although the payments would decrease taxes payable.

M2-MCQ-06500 Oak Co. leased equipment for its entire nine-year useful life, agreeing to pay $50,000 at the start of the lease term on December 31, Year 1, and $50,000 annually on each December 31 for the next eight years. Oak paid $3,000 in initial direct costs at lease inception. The present value on December 31, Year 1, of the nine lease payments over the lease term, using the rate implicit in the lease which Oak knows to be 10 percent was $316,500. On December 31, Year 1, the present value of the lease payments using Oak's incremental borrowing rate of 12 percent was $298,500. Oak accounts for the finance lease under GAAP and uses straight-line depreciation. What amount should Oak report as ROU asset on its December 31, Year 2, balance sheet? A. $265,333 B. $281,333 C. $284,000 D. $319,500

C. $284,000 There are two components when you record the entry for Capital lease in the books of the lesse. Since, it is a capital lease you have to create an asset in the books, which you depreciate over the useful life or the lease term given the conditions/terms of the lease. The second component is you record the liability for the asset since you will be making payments on it. *1. The recorded asset will be depreciated each year and will reduce the asset value. Remember only depreciation reduces an asset, therefore you will only subtract depreciation every year from the ASSET.* 2. The second component is the recorded liability which will be reduced by the payments you make (after taking out interest expense) Example - Entry on lease initiation Leased Asset Dr. 319500 Lease Liability 319500 (Since, Payment made on initiation) Lease liability Dr. 50,000 Cash Cr. 50,000 2nd year Depreciation Expense 35000 Accumulated Depreciation 35000 Lease liability 23,050 (plug) Interest Expense 26,950 [(319,500 - 50,000) x 10%] Cash 50,000 I hope this helps.

M6-MCQ-00846 For Year 1, Clark Corp. reported depreciation of $300,000 in its income statement. On its Year 1 income tax return, Clark reported depreciation of $500,000. Clark's income statement also included $50,000 accrued warranty expense that will be deducted for tax purposes when paid. Clark's enacted tax rates are 30% for Year 1 and Year 2, and 21% for Year 3 and Year 4. The depreciation difference and warranty expense will reverse over the next three years as follows: Depreciation difference -- Warranty expense Year 2 $80,000 -- $10,000 Year 3 70,000 -- 15,000 Year 4 50,000 -- 25,000 Total $200,000 -- $50,000 These were Clark's only temporary differences. In Clark's Year 1 income statement, the deferred portion of its provision for income taxes should be: A. $60,600 B. $45,000 C. $37,800 D. $31,500

C. $37,800 Remember, the classification of the deferred tax follows it's momma.. what gave birth to it. So depreciation arises because of fixed assets. Fixed assets are long term, or non current so your deferred tax asset/liability (asset in this case) that arose from a difference in depreciation expense will be non current. If the deferred tax asset/liability doesn't have a momma, you classify it as current or non current based on when it'll reverse. This question isn't really asking for the classification but other questions will. For this question: Book depreciation expense = 300,000 Tax depreciation expense = 500,000 when book expense < tax expense, leads to book income > tax income which is a deferred tax ASSET *use the ENACTED rate as it reverses* year 2: 80,000 * 30% = 24,000 year 3: 70,000 * 25% = 17,500 year 4: 50,000 * 25% = 12,500 24,000 + 17,500 + 12,500 = 54,000 deferred tax ASSET Book warranty expense = 50,000 Tax warranty expense = 0 when book expense > tax expense, leads to book income < tax income which is a deferred tax LIABILITY *use the ENACTED rate as it reverses* year 2: 10,000 * 30% = 3,000 year 3: 15,000 * 25% = 3,750 year 4: 25,000 * 25% = 6,250 3,000 + 3,750 + 6,250 = 13,000 deferred tax LIABILITY NET your deferred tax asset (54,000) with your deferred tax liability (13,000) and you get $41,000

M4-MCQ-01274 On September 22, Year 4, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company's local currency. On that date, the spot rate was $0.55. Yumi paid the bill in full on March 20, Year 5, when the spot rate was $0.65. The spot rate was $0.70 on December 31, Year 4. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, Year 4? A. $0 B. $500 C. $1,000 D. $1,500

D. $1,500 The FASB requires that a receivable or payable denominated in a foreign currency be adjusted to its current exchange rate at each balance sheet date. The resulting gain or loss should ordinarily be reflected in current income. It is the difference between the spot rate on the date the transaction originates and the spot rate at year-end. Thus, the Year 1 transaction loss for Yumi Corp. is $1,500 [10,000 units x ($0.55 - 0.70) . *Rule: "Translation adjustments" are not included in determining net income for the period but are disclosed and accumulated as a component of other comprehensive income in consolidated equity until disposed of.* *However, gains or losses from remeasuring the foreign subsidiary's financial statements from the local currency to the functional currency should be included in "income from continuing operations" of the parent company.*

M6-MCQ-00842 On June 30, Year 1, Ank Corp. prepaid a $19,000 premium on an annual insurance policy. The premium payment was a tax deductible expense in Ank's Year 1 cash basis tax return. The accrual basis income statement will report a $9,500 insurance expense in Year 1 and Year 2. Ank's income tax rate as 30% in Year 1 and 21% thereafter. In Ank's December 31, Year 1, balance sheet, what amount related to the insurance should be reported as a deferred income tax liability? A. $5,700 B. $3,990 C. $2,850 D. $1,995

D. $1,995 For accounting purposes, prepaid insurance is $9,500 at 12/31/Y1. For tax purposes, there was no prepaid insurance at 12/31/Y1, since the entire amount was deducted on the year 1 tax return. Therefore, the temporary difference is $9,500. This temporary difference will result in a future taxable amount in year 2, when the tax rate is 25%. Therefore, at 12/31/Y1, a deferred tax liability of $1,995 (21% x $9,500) must be reported.

M6-MCQ-00809 Venus Corp.'s worksheet for calculating current and deferred income taxes for Year 1 follows: Year 1 -- Year 2 -- Year 3 Pretax income $1,400 Temporary differences: Depreciation (800) $(1,200) $ 2,000 Warranty costs 400 (100) 1,000 --------------------------------- Taxable income (1,300) 0 1,300 Loss carryforward (300) 1,700 (1,300) --------------------------------- Total $ 0 $0 $400 Enacted rate 21% 20% 18% Venus had no prior deferred tax balances. In its Year 1 income statement, what amount should Venus report as deferred income tax expense? A. $252 B. $210 C. $84 D. $70

D. $70 The calculation of deferred taxes are based on when the temporary differences are reversing. Deferred tax liability: Depreciation reverses in year 3 so u gotta use the year 3 rate. Deferred tax asset: 100 of 400 of warranty cost reverses in year 2 (current) so use the 20% 300 of the 400 is reversed later so use 18%. Then you net them together, 800*.18 = -144 100*.20 = 20 300*.18= 44 ------------------- net = 70 deferred tax expense.

M5-MCQ-00841 At the end of its first year of operations, Gold Co. reported a deferred tax asset. Will reversal of current temporary differences result in taxable or deductible amounts, and did Gold have a Year 1 profit or loss for tax purposes? Taxable or deductible amounts -- Taxable status of Year 1 operations A. Taxable -- Profit B. Deductible -- Loss C. Taxable -- Loss D. Deductible -- Profit

D. Deductible -- Profit In this case, Gold's taxable income is greater than its financial taxable income, thus gave rise to the Deferred Tax Asset (DTA). So the reversal of the temp difference in the future would create a deductible amount for Gold...they paid for this tax already so they are entitled to a freebie (for those w/ the Becker CD ROM course - think of the Gift Certificate example). There must be a profit in the Yr 1 of operation because if Gold has a loss, there would be no DTA...cause no tax is paid when the company incurred a loss.

M5-MCQ-00858 As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of a company's plant assets exceeded the tax basis. Assuming the company had no other temporary differences, the company should report a: A. Current tax receivable. B. Current tax payable. C. Deferred tax asset. D. Deferred tax liability.

D. Deferred tax liability. A deferred tax liability is recognized for temporary differences that will result in taxable amounts in future years. Because the book value of the assets exceeds their tax basis, the accumulated tax depreciation must now exceed accumulated depreciation. In future years, this temporary difference will reverse as periodic book depreciation amounts exceed the corresponding tax amounts. Therefore, taxable amounts will result in future years as the assets become fully depreciated for tax purposes or (on a sale) when the tax gain exceeds the book gain (due to lower carrying value). Thus, a deferred tax liability currently exists.

M1-MCQ-00566 A 20-year property lease, classified as an operating lease, provides for a 10 percent increase in annual payments every five years. In the sixth year compared with the fifth year, the lease will cause the following expenses to increase: Lease -- Interest A. No -- Yes B. Yes -- No C. Yes -- Yes D. No -- No

D. No -- No (d) When a leasing agreement is accounted for as an operating lease, the lessor and the lessee recognize rental revenue and rental expense respectively on a straight-line basis unless another systematic and rational basis more clearly reflects the time pattern in which use benefit is given (received) by the respective parties. The straight-lining of uneven lease payments includes scheduled rent increases. Even though the amount of the annual lease payment increases in year six, rental expense would not change. Interest is not an element of revenue (expense) in operating leases.

M5-MCQ-00795 In its Year 1 income statement, Cere Co. reported income before income taxes of $300,000. Cere estimated that, because of permanent differences, taxable income for Year 1 would be $280,000. During Year 1 Cere made estimated tax payments of $50,000, which were debited to income tax expense. Cere is subject to a 30% tax rate. What amount should Cere report as income tax expense? A. $34,000 B. $50,000 C. $84,000 D. $90,000

Dr. Income Tax Expense 50,000 Cr. Cash 50,000 Since they have 280,000 in taxable income, they have to pay 30% of that amount and expense the same 30% since no temporary differences mean no deferred tax items (since you always treat income tax expense as a plug, it just equals the income tax due because of the lack of deferred tax items). Since they estimated they'd owe 50,000 but actually owe 84,000 they just need to recognize the rest of the expense (34,000) and either hit income tax payable or cash (most likely payable since they'll probably pay sometime early in the following year). Debit Income Tax Expense 34,000 Credit Income Tax Payable 34,000 Total income tax expense is 84,000

M6-MCQ-00847 Cahn Co. applies straight-line amortization to its organization costs for income tax purposes, but expenses all costs as incurred for financial statement reporting. For tax purposes a 15- year period is used. Cahn has no other temporary differences, has an operating cycle of less than 1 year, and has taxable income in all years. Cahn should report both current and non- current deferred income tax assets at the end of: Year 1 -- Year 14 A. No No B. No Yes C. Yes Yes D. Yes No

For tax purposes organizational costs must be amortized over 180 months (15 years). For financial reporting purposes such costs would be expensed in the same year they were incurred. The DTA exists because right now your income tax liability is higher than your income tax expense (because your expenses under financial reporting are higher than under tax). So it's this entry: Income tax expense DR xxx DTA DR xxx Income tax liability CR xxx Over time this DTA will reverse and income tax expense will be higher than income tax liability (because that big fat expense you would have incurred in year 1 under financial reporting would not be recognized in the F/S in subsequent years, but would be recognized in the tax filings). The reversal is as follows: Income tax expense DR xxx DTA CR xxx Income tax liability CR xxx The current portion would be the portion which is expected to reverse within one year (or the operating cycle, whichever is longer). The noncurrent portion is the remainder. In year 14, there is no noncurrent portion because in year 15 the organizational expenses will have been fully amortized for tax purposes.

Foreign Currency Fluctuations

Foreign exchange transactions gains and losses are generally included in determining net income for the period in which exchange rates change. Foreign exchange translation gains and losses are generally included as a component of other comprehensive income in stockholders' equity, but foreign exchange transactions (like this one) are not.

M3-MCQ-05686 On December 1 of the current year, Bann Co. entered into an option contract to purchase 2,000 shares of Norta Co. stock for $40 per share (the same as the current market price) by the end of the next two months. The time value of the option contract is $600. At the end of December, Norta's stock was selling for $43, and the time value of the option is now $400. If Bann does not exercise its option until January of the subsequent year, which of the following changes would reflect the proper accounting treatment for this transaction on Bann's December 31, year-end financial statements? A. The option value will be disclosed in the footnotes only. B. Other comprehensive income will increase by $6,000. C. Net income will increase by $5,800. D. Current assets will decrease by $200.

It is an option, which is a derivative, which is required to be reported in the financial statements at fair value. Fair value of an option is made up of two components: 1) intrinsic value and 2) time value. Intrinsic value is a simple calculation that compares the current market price to the exercise price to determine the value. The time value is more complicated to calculate (which is why it is just given in the question) and relates to the potential additional value the option could have as a function of the remaining time left until it expires. C is the correct response because the option is recorded at fair value. The change in fair value will be recorded in the income statement by default, since there was no mention of hedge accounting treatment elected. The change in fair value is the change in the two components: intrinsic value and time value. Intrinsic value increased from 0 (($40 - $40)X 2,000 shares) to $6,000 (($43 - $40)X2,000). Time value decreased by $200 ($600 - $400). Therefore, the change in fair value is $6,000 - 200 = $5,800, which will be recorded in the income statement. FYI - Here are the journal entries: December 1 - Debit Derivative (current asset) $600, Credit Cash $600 (this is implied) December 31 Debit Derivative (current asset) $5,800, Credit Gain of $5,800 A is incorrect because all derivatives are recorded in the financial statements at fair value. Footnote-only disclosure is not acceptable under GAAP. B is incorrect because there was no mention of application of cash flow hedge accounting, so recording fair value changes through other comprehensive income would not be acceptable. Additionally, even if cash flow hedge accounting were elected, the question does not address how the entity will assess effectiveness and treat the time value component. D is incorrect because current assets will increase $5,800 at December 31 due to recording the gain, not $200.

M6-MCQ-00805 Taft Corp. uses the equity method to account for its 25% investment in Flame Inc. During the current year, Taft received dividends of $30,000 from Flame and recorded $180,000 as its equity in the earnings of Flame. Additional information follows: -All the undistributed earnings of Flame will be distributed as dividends in future periods. -The dividends received from Flame are eligible for the 65% dividends received deduction. -There are no other temporary differences. -Enacted income tax rates are 21% for current and future periods. In its December 31 balance sheet, what amount should Taft report for deferred income tax liability? A. $11,025 B. $7,560 C. $31,500 D. $37,800

The $30,000 is tax return income and the $180,000 is the Income Statement presentation so it includes the $30,000 div received this year and $150,000 dividends to be received in the future. $30,000 dividends received this year (19,500) 65% dividend deduction ---------------------- 10,500 taxable dividends this year $180,000 equity in earnings (117,000) 65% dividend deduction ---------------------- 63,000 total taxable dividends (current yr and future yr) (10,500) current year taxable dividend ---------------------- 52,500 future year taxable dividend 30% tax rate ---------------------- 11,025 deferred tax or The equity earnings are added to Taft Corps books for the year. They received dividends that were eligible for the DRD. The amount of Flame's earnings times the DRD rate is what Taft will eventually receive from Flame. They will get to take the DRD when they receive them. Since Flame reported $180,000 in income that they did not distribute in dividends then Taft will eventually have to pay tax on their portion of Flame's income less the DRD. Since presumably, the earnings in equity will eventually be distributed to you, you treat the equity in earnings like an unreceived dividend, and the difference between financial earnings and taxable earnings as a deferred liability.

M5-MCQ-04228 A company reported the following financial information: Taxable income for current year $120,000 Deferred income tax liability, beginning of year 50,000 Deferred income tax liability, end of year 55,000 Deferred income tax asset, beginning of year 10,000 Deferred income tax asset, end of year 16,000 Current and future years' tax rate 35% The current-year's income tax expense is what amount? A. $41,000 B. $42,000 C. $43,000 D. $53,000

Total Income Tax Expense = Current + Deferred Tax Expense. Similar to the first question, Current Tax Expense = Taxable Income x tax rate = $120,000 x 35% = $42,000. So now all we need is Deferred Tax Expense. We're given the BOY and EOY balances of the deferred tax asset (DTA) and deferred tax liability (DTL) accounts, so we can figure out deferred tax expense based on the movements of these two accounts. EOY DTA - BOY DTA = $16,000 - $10,000 = +$6,000. This means that we had a deferred income tax benefit (which is the opposite of deferred income tax expense) of $6,000 related to DTAs. Similarly, EOY DTL - BOY DTL = $55,000 - $50,000 = +$5,000. This means we had a deferred income tax expense of $5,000 related to DTLs. Deferred Income Tax Expense = Deferred Benefit from DTAs + Deferred Expense from DTLs = ($6,000) + $5,000 = $1,000 deferred tax benefit (or, ($1,000) deferred income tax expense if that's easier to picture). Now that we have both current and deferred tax expense, we just need to add them together to get total tax expense. Total Tax Expense = current tax expense + deferred tax expense = $42,000 + ($1,000) = $41,000.

M4-MCQ-01288 Certain balance sheet accounts of a foreign subsidiary of Rowan, Inc., at December 31 have been translated into U.S. dollars as follows: Translated at Current rates -- Historical rates Notes receivable, long-term $240,000 -- $200,000 Prepaid rent Patent 85,000 -- 80,000 Patent 150,000 -- 170,000 Total $475,000 -- $450,000 The subsidiary's functional currency is the currency oftotal amount should be included in Rowan's December 31 consolidated balance sheet for the above accounts? A. $450,000 B. $455,000 C. $475,000 D. $495,000

c) $475,000 Explanation: All the assets and liabilities of foreign subsidiary are translated to the presentation currency of the parent company at the foreign exchange rate which exist on the last date of the year end. In this case Rowan, Inc., will be translating the balance sheet items of its foreign subsidiary at the current rates on December 31, Year 1 and based on this as mentioned in question the balance sheets amount to be included in Rowan Inc. will be amounting to $475,000 Read more on Brainly.com - https://brainly.com/question/14367745#readmore