332 final exam

Barr Corporation is the lessee in a finance lease. Barr would record: Multiple Choice Depreciation expense. A right-of-use asset. Lease expense. Interest revenue.

a right of use asset

decrease in earnings is affected by

interest expense AND amortization expense

going from accounting income to taxable income

- acct revenues + tax revenues + acct expenses - tax expenses

how operating leases are different

- no inception JE for lessor - credit lease revenue for all payments to lessor - calculation depreciaiton expense for every lease payment collected for LESSOR (credit accum depr) - for lessee: amortization expense = lease payable amount

Lease Classification Criteria

1) Ownership transfer 2) Purchase option 3) *major part* of Lease term length (75%) 4) *substantially all* of PV of lease payments (90%) 5) Alternative use

POTENTIAL dilutive securties

1. stock options, stock warrants, restricted stocks 2. contigent stock 3. convertible bonds 4 convertible preferred stock

Which of the following changes should be accounted for using the retrospective approach? A change in the estimated life of a depreciable asset A change from straight-line to declining balance depreciation A change to the LIFO method of costing inventories A change in accounting for long-term construction contracts by recognizing revenue over time rather than when the contract is completed

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

Barr Corporation is the lessee in a finance lease. Barr would record: Depreciation expense. A right-of-use asset. Lease expense. Interest revenue.

A right-of-use asset.

DTA's

AI < TI warranties, expenses, salaries, unearned revenue, estimated losses, subscriptions, advanced rent gen related to liabilities - debit balance

DTL's

AI> TI APDI - a/r, prepaid assets, depreciation, and installment sales gen related to assets - credit balance

ALWAYS incure dividends for cumulative preferred stock even if not DECLARED

ALWAYS incure dividends for cumulative preferred stock even if not DECLARED

Of the following temporary differences, which one ordinarily creates a deferred tax asset? A. Completed-contract method for long-term construction contracts for tax reporting. B. Installment sales for tax reporting. C. Accrued warranty expense. D. Accelerated depreciation for tax reporting.

Accrued warranty expense.

When the retrospective approach is used for a change to the FIFO method, which of the following accounts is usually not adjusted? Income taxes payable Inventory Retained earnings All of the accounts included in these answer choices are usually adjusted.

All of the accounts included in these answer choices are usually adjusted.

Which of the following transactions decreases retained earnings? A. A property dividend. B. A stock dividend. C. A cash dividend. D. All of these answer choices are correct.

All of these answer choices are correct.

The compensation associated with restricted stock under a stock award plan is: A. The book value of an unrestricted share of the same stock times the number of shares. B. The estimated fair value of a share of similar stock times the number of shares. C. Allocated to expense over the service period which usually is the vesting period. D. The book value of a share of similar stock times the number of shares.

Allocated to expense over the service period which usually is the vesting period.

In determining cash flows from operating activities (indirect method), adjustments to net income should not include: A. An addition for depreciation expense. B. An addition for bond discount amortization. C. An addition for a gain on sale of equipment. D. An addition for patent amortization

An addition for a gain on sale of equipment.

Preferred stock is called preferred because it usually has two preferences. These preferences relate to: The preemptive right and voting rights. Dividends and voting rights. Assets at liquidation and dividends. Par and dividends.

Assets at liquidation and dividends.

If a stock dividend were distributed, when calculating the current year's EPS, the shares distributed are treated as having been issued: A) At the end of the year. B) At the beginning of the year. C) On the declaration date. D) On the date of distribution.

At the beginning of the year.

Recognizing tax benefits in a loss year due to a net operating loss carryforward requires: Multiple Choice Creating a tax refund receivable. Note disclosure only. Creating a deferred tax asset. Creating a deferred tax liability.

Creating a deferred tax asset.

DONT FORGET TO RECORD AMORTIZATION EXPENSE FOR LESEEES UNDER FINANCE LEASES

DONT FORGET TO RECORD AMORTIZATION EXPENSE FOR LESEEES UNDER FINANCE LEASES

A company has cumulative preferred stock. When computing earnings per share, the current year's dividends not declared on the preferred stock should be: Deducted from earnings for the year. Deducted, net of tax effect, from earnings for the year. Added to earnings for the year. Ignored.

Deducted from earnings for the year.

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability? A. Depreciation early in the life of an asset. B. Unrealized losses from recording investments at fair value. C. Rent collected in advance. D. None of these answer choices are correct.

Depreciation early in the life of an asset.

2. When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in: A. A current liability. B. Revenue. C. Shareholders' equity. D. Paid-in capital.

a current liability

Accumulated other comprehensive income is reported: A) In the balance sheet as an asset. B) In the balance sheet as a liability. C) In the balance sheet as a component of shareholders' equity. D) In the statement of comprehensive income.

In the balance sheet as a component of shareholders' equity.

Effective Tax Rate Formula

Income Tax Expense / Pretax Accounting Income

Which of the following causes a permanent difference between taxable income and pretax accounting income? A. The installment method used for sales of property. B. MACRS depreciation method used for equipment. C. Interest income on municipal bonds. D. Percentage-of-completion method for long-term construction contracts.

Interest income on municipal bonds.

Accumulated other comprehensive income: A) Is an asset. B) Might include gains and losses on certain investments. C) Includes accumulated net income. D) Is reported between assets and liabilities.

Might include gains and losses on certain investments.

1) When a company purchases a security it considers a cash equivalent, the cash outflow is: A) Reported as an operating activity. B) Reported as an investing activity. C) Reported as a financing activity. D) Not reported on a statement of cash flows.

Not reported on a statement of cash flows.

The valuation allowance account that is used in conjunction with deferred taxes relates: A. Only to deferred tax liabilities. B. To both deferred tax assets and liabilities. C. Only to deferred tax assets. D.Only to income taxes receivable due to net operating loss carrybacks.

Only to deferred tax assets.

The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest: A. Less the present value of all future interest payments at the rate of interest stated on the bond. B. Plus the present value of all future interest payments at the rate of interest stated on the bond. C. Plus the present value of all future interest payments at the market (effective) rate of interest. D. Less the present value of all future interest payments at the market (effective) rate of interest.

Plus the present value of all future interest payments at the market (effective) rate of interest.

In order to boost its year-end sales during 2017, Target offered a promotion on its Schwinn bicycles. With every bike that was purchased, customers could receive a tire air pump by mailing in a proof-of-purchase. 20,000 bikes were sold during the promotion period at a retail value of $2,500,000. Target estimates that 50% of its customers will redeem the tire pumps that retail for $15 each. The cost to Target of the sold bicycles is $600,000, and the cost of the tire pumps expected to be redeemed is $85,000. Prepare the journal entry to record the sale of the tire pumps. (don;t do math just je modeL0

Prepare the journal entry to record the sale of the tire pumps. debit - cash credit - unearned revenue Prepare the journal entry to record the redemption of the tire pumps in 2018 debit - unearned revenue credit - sales revenue debit - cogs credit - inventory

A company should accrue a loss contingency only if the likelihood that a liability has been incurred is: More likely than not and the amount of the loss is known. Probable and the amount of the loss can be reasonably estimated. At least reasonably possible and the amount of the loss can be reasonably estimated. At least reasonably possible and the amount of the loss is known.

Probable and the amount of the loss can be reasonably estimated.

RECORD GAINS OR LOSSES FIRST FOR PROPERTY DIVIDENDS

RECORD GAINS OR LOSSES FIRST FOR PROPERTY DIVIDENDS

A $500,000 bond issue sold at 98. Therefore, the bonds: A. Sold at a discount because the stated rate of interest was lower than the effective rate. B. Sold for the $500,000 face amount less $10,000 of accrued interest. C. Sold at a premium because the stated rate of interest was higher than the yield rate. D. Sold at a discount because the effective interest rate was lower than the face rate.

Sold at a discount because the stated rate of interest was lower than the effective rate.

Which of the following circumstances creates a future taxable amount? Accrued compensation costs for future payments Service fees collected in advance from customers: taxable when received, recognized for financial reporting when earned Investment expenses incurred to obtain tax-exempt income (not tax deductible) Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting

Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset? A. Depreciation early in the life of an asset. B. Unrealized gain from recording investments at fair value. C. Subscriptions collected in advance. D. None of these answer choices are correct.

Subscriptions collected in advance.

7. Which of the following is a contingency that should be accrued? A. The company is being sued and a loss is reasonably possible and reasonably estimable. B. The company deducts life insurance premiums from employees' paychecks. C. The company offers a two-year warranty and the expenses can be reasonably estimated. D. It is probable that the company will receive $100,000 in settlement of a lawsuit.

The company offers a two-year warranty and the expenses can be reasonably estimated.

Which of the following is reported as an operating activity in the statement of cash flows? A. The payment of dividends. B. The sale of office equipment. C. The payment of interest on long-term notes. D. The issuance of a stock dividend

The payment of interest on long-term notes.

WHEN REFUNDS ARE FORFEITED ADJUSTED COGS AND INVENTORY

WHEN REFUNDS ARE FORFEITED ADJUSTED COGS AND INVENTORY

8. Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs: A. When the equipment is sold. B. When the repairs are performed. C. When payments are made to the service firm. D. Evenly over the life of the warranty.

When the equipment is sold.

In January 2014, the Commonwealth of Virginia filed suit against Luna, seeking civil penalties for violations of environmental laws regulating underground gasoline storage tanks. On May 20, 2016, Luna reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $5 million will be required to cover the cost of violations. Luna believes that the ultimate settlement of this claim will not have a material adverse effect on the company what shoudl be done?

accrue loss contigency for 5 million loss litigation

4. When a deposit on returnable containers is forfeited, the firm holding the deposit will experience: A. A decrease in cost of goods sold. B. An increase in current liabilities. C. An increase in accounts receivable. D. An increase in revenue.

an increase in revenue

cost to recover

cash payment X PVAD factor

JE for when stock options/ restricted stock are fully vested

debit - PIC options credit - CS (par) - APIC

JE to record loss on early extinguishment on bonds

debit - bond payable - loss on extinguishment credit - discount - cash paid

j.e. to record the exercise of stock options?

debit - cash (exercise price X # of share) - PIC-stock options credit - CS (par value) - APIC (plug)

JE to record stock options

debit - compensation expense credit - PIC- stock options

JE to record conversion of convertible bonds

debit - convertible bonds credit - Common Stock

JE to record net operating loss carryforward

debit - deferred tax asset credit - income tax expense

JE for when a lease is sold for a profit (lessor)

debit - lease receivable - cogs (asset cost) credit - sales revenue (fair value of asset) - equipment (asset cost)

JE to record expiration of stock options

debit - pic stock options credit - PIC- expired options

5. When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes: A. A debit to a revenue and a credit to a liability account. B. A debit to a revenue and a credit to an asset account. C. A debit to an asset and a credit to a revenue account. D. A debit to a liability and a credit to a revenue account.

debit to a liability credit to a revenue account

When bonds are sold at a discount and the effective interest method is used, at each interest payment date, the interest expense: Is equal to the change in book value. Decreases. Increases. Remains the same.

interest expense increases

how to calculate the price of a bond

determine n (double if interest is paid semi-annually) i = market value interest - principal * stated/2 - mulitply by PVAD factor principal - principal * PVA factor add together

The interest rate that determines the amount of interest expense each interest date is referred to as the:

effective rate

large stock dividends

greater than OR equal to 25% use par value 2 types 1.) distribution debit - RE credit - CS 2.) split debit - PIC credit - CS

LEASES f/s statement effects

income statement - interest and amoritzation decreases for lessee balance sheet - lease payable ----> increased by lease amount -----> decreased by lease payable payments ROU ASSET --->----> increased by lease amount -----> decreased by amortization expense

effective interest rate formula

interest amount / actual amount borrowed * time of loan/bond

outstanding shares formula

issued shares - treasury stock

in operating leases the amortization expense is the same as the

lease payable amount for the lessee

right of use asset cost

lease payment X PV of annuity due factor

small stock dividends

less than 25% use fair market value debit - retained earnings credit - CS - APIC

JE for finance lease inception

lessee debit - ROU asset (PV of lease payments) credit - lease payable lessor debit - lease receivable credit - equipment

JE for second lease payment

lessee debit - interest expense - lease payable credit - cash lessor debit - cash credit - interest revenue - lease receivable

JE for first lease payment

lessee debit - lease payable credit - cash lessor debit - cash credit - lease payable no interest accrued for 1st lease payment and no payment or interest made in last year

lease classifications: lessor vs lessee

lessor - sales type lease (with or without profit) - operating lease lessee - finance lease - operating lease

cash payment formal

money to recover / PVAD

In a ten-year finance lease agreement, the portion of the periodic lease payment that represents interest in the third year is: A) the same as in the fourth year. B) the same as in the first year. C) less than in the fourth year. D) more than in the fourth year.

more than in the fourth year. interest is computed on the beginning balance of the liability account, as that balance is reduced, the interest component of subsequent payments is reduced

lowest incremental

most dilutive

At March 1, 2016, the EPA began investigating possible gas leaks at two of Luna's gas stations. The EPA has not yet completed its assessment, but management feels that it is reasonably possible a claim will occur. Luna's legal counsel advises that if a claim is made, an unfavorable settlement could be anywhere in the range of $2 to $100million

only a disclosure note - only reasonably possible - range is too wide to be estimated

JE for amortization for leases

only for lessee ROU cost/ lease term; use useful life if BPO debit - amortization expense credit - ROU asset

Issued stock refers to the number of shares: A. Outstanding plus treasury shares. B. Shares issued for cash. C. In the hands of shareholders. D. That may be issued under state law

outstanding plus treasury shares

premium vs discount stated and market rates

premium stated GREATER than market discount stated LESS than market

net income =

pretax income - income tax expense

Treasury shares are most often reported as a(n): reduction of total paid-in capital. reduction of retained earnings. reduction at the end of the shareholders' equity section. expense in the income statement.

reduction at the end of the shareholders' equity section.

what accounting changes are retrospective and which are prospective

retrospective - change in accounting principle - change in accounting entity prospective - change in accounting estimate - change to LIFO method of inventory costing

USE PVAD when cash flow

starts at beginning of the period

1. The rate of interest printed on the face of a note payable is called the: A. Yield rate. B. Effective rate. C. Market rate. D. Stated rate.

stated rate

6. A contingent loss should be reported in a disclosure note to the financial statements rather than being accrued if: A. The likelihood of a loss is remote. B. The incurrence of a loss is reasonably possible. C. The incurrence of a loss is more likely than not. D. The likelihood of a loss is probable.

the incurrence of a loss is reasonably possible

One of the five criteria for a finance lease specifies that the lease term be equal to or greater than: the major part of the remaining economic life of the leased property. the entire amount of the remaining economic life of the leased property. a meaningful part of the remaining economic life of the leased property. a non-insignificant part of the remaining economic life of the leased property.

the major part of the remaining economic life of the leased property.

One of the five criteria for a finance lease specifies that the lease term be equal to or greater than: Multiple Choice the major part of the remaining economic life of the leased property. the entire amount of the remaining economic life of the leased property. a meaningful part of the remaining economic life of the leased property. a non-insignificant part of the remaining economic life of the leased property.

the major part of the remaining economic life of the leased property.

total paid-in capital (common stock as well as paid-in capital in excess of par and paid-in capital from share repurchase) will decline by

the price paid to buy back the shares.

forefeiture recalculation formula

total compensation * (1- forfeiture %) * (current year/total years vested)- compensation already expensed

treasury stock has DEBIT balance and is therefore SUBTRACTED when calculating STOCKHOLDER"S EQUITY

treasury stock has DEBIT balance and is therefore SUBTRACTED when calculating STOCKHOLDER"S EQUITY

Retained earnings represent a company's: Undistributed cash. Extra paid-in capital. Undistributed net income. Undistributed net assets.

undistributed net income