ACCT 3120 EXAM 3
Calculate effective interest rate from table
$ amount of effective interest/outstanding balance
Pre tax accounting income = $100 Warranty is good for 3 years Warranty is $60 on the tax return Tax rate is 25% What is DTA?
$15 60 x 25% = 15
The following relates to FF for its first year of operations: Pretax accounting income = 195 Pretax accounting income included: Overweight fines = 5 Depreciation expense = 70 Depreciation in the tax return = 110 The applicable tax rate is 25%. There are no other temp. or perm. differences. What should FF record as the tax payable amount?
$40 2 STEPS 1. 110 - 70 = 40 ^^^have to minus dep. expense 2. 195 + 5 - 140 = 160 = taxable income ^^^add fines back in 160 x 25% = 40 = payable
On January 1, 2018, Sans Serif Publishers leased printing equipment from First LeaseCorp. First LeaseCorp purchased the equipment from CompuDec Corporation at a cost of $479,079. The lease agreement specifies six annual payments of $100,000beginning January 1, 2018, the beginning of the lease, and at eachDecember 31 thereafter through 2022. The six-year lease term ending December 31, 2023, is equal to the estimated useful life of the equipment. First Lease Corp routinely acquires electronic equipment for lease to other firms. The interest rate in these financing contracts is 10%. The price Sans Serif pays for the right to control the use of the equipment is the present value of the lease. Calc the right of use asset amount
$479,079 lease pmt x pv factor 100,000 x 4.79079 ***pv from pv of an annuity due table ***Note: this is a finance lease bc pv is 100% of asset value and 6 year lease term is 100% of asset life
Woody Corp. has taxable income of $7800 in the current year. The amount of depreciation reported in the tax return was $2825, while the amount of depreciation reported in the income statement was $1225. Assuming no other differences between tax and accounting income, Woody's pretax accounting income was...
$9400 2285 - 1225 = 1600 1600 + 7800 = 9400 Taxable income + temp. diff
What amount is reported as a lease liability?
(annual lease payments - nonlease component [ex. service fee]) x PV factor of ordinary annuity $1
5 classifications for a finance lease (if one is met it should be classified as a financial lease)
1. Ownership transfers to lessee at end of lease 2. Written bargain purchase option reasonably certain to be exercised 3. 90% of the asset's fair value is represented by present value of the lease payments 4. 75% of the asset's useful life will be used in the lease term 5. Underlying asset is of a specialized nature with no alt. use
For its first year of operations TT Corp.'s reconciliation of pretax accounting income to taxable income is: Pretax accounting income = 210,000 Permanent difference = (14,200) = 195,800 Temporary difference = (20,300) Taxable income = 175,500 TT's tax rate is 25%. Assume no other estimated taxes have been paid. What should TT report as income tax payable for its first year of operations?
43,875 175,500 x 25%
Information for A Corp. for 2023: Pretax accounting income = 180,700 Permanent differences = (14,600) = 166,100 Temporary differences = (10,800) Taxable income = 155,300 Cumulative future taxable amounts all from depreciation temporary differences: As of Dec. 2022 = 12,900 As of Dec. 2023 = 23,700 The enacted tax rate was 24% for 2020 and thereafter. What balance should be in the deferred tax liability account as of Dec. 2023?
5688 23,700 x 24%
What is a lease?
A lease is a contractual arrangement in which a lessor (owner) provides a lessee (user) the right to use an asset for a specified period of time. The lessee makes periodic cash payments in return.
Rent receivable (prepaid rent)
Add prepaid rent into income right away
Examples of leases
Vehicles Office space Machinery Computers
JE for amortization for lessee (closing entry every year) for finance lease
Dr. Amortization expense Cr. Right of use asset ***Amount: amortization right of use (pv/lease term)
JE for first lease payment for lessor for operating lease
Dr. Cash Cr. Deferred Revenue - lease
JE for first lease payment for lessor for finance lease
Dr. Cash Cr. Lease receivable
JE for first lease payment for lessee for finance lease
Dr. Lease Payable Cr. Cash (lease pmt)
JE for first lease payment for lessee for operating lease
Dr. Lease payable Cr. Cash
JE for the beginning of the lease for lessor for finance lease
Dr. Lease receivable Cr. Asset being used **ex. equipment Amount - pv of pmts (same as right of use of asset)
JE for beginning of lease WITH selling profit (only difference is lessor je because profit is recognized at the beg) for finance lease
Dr. Lease receivable (PV) Dr. COGS Cr. Sales revenue (PV) Cr. Equipment (cog)
JE for the beginning of the lease for lessee for an operating lease
Dr. Right of use asset (PV) Cr. Lease payable
American Food Services, Inc. leased a packaging machine from Barton and Barton Corporation. Barton and Barton completed construction of the machine on January 1, 2021. The lease agreement for the $5.0 million (fair value and present value of the lease payments) machine specified four equal payments at the end of each year. The useful life of the machine was expected to be four years with no residual value. Barton and Barton's implicit interest rate was 10%. Prepare the journal entry for American Food Services at the beginning of the lease on January 1, 2021.
Dr. Right of use asset 5,000,000 Cr. Lease payable 5,000,000
JE for the beginning of the lease for lessee for finance lease
Dr. Right of use of asset Cr. Lease payable Amount - right of use of asset (same as pv of pmts)
Finance Lease WITH selling profit
FV of asset exceeds cost of carrying assets sold Profit earned on the sale when the lease begins Selling profit is recognized as difference between sales revenue and COGS
Operating Lease
If it doesn't meet any of the 5 criteria for a finance lease, it's operating Easy way to check - if the lease cost/corp cost isn't over 90% it's operating
Taxable income on tax return calculation
Income before tax/depreciation - depreciation
Pretax accounting income calculation on financial statements
Income before tax/depreciation - depreciation = pretax accounting income
Finding amortization of the right of use asset under an operating lease
Interest = discount x (PV of lease payment - annual payment) Amort = annual payment - ^interest
Lessor v. Lessee
Lessor = owner Lessee = user
EX of nonlease component
Lessor pays a maintenance fee to a 3rd party firm - addition to lease
Are fines a tax deduction?
NOOOOOOO
JE for the beginning of the lease for lessor for an operating lease
No JE required
Amortization of right of use
PV / lease term ex. 479,079 / 6 years
Taxable income
Pre tax accounting income - permanent differences - temporary differences
Why choose to lease?
Reduces upfront cash Payments are lower Tax implications
Nonlease components
Sometimes lessee pays for other fees and services as part of the lease EX. insurance, property taxes If the change represents a transfer of a good or service to the lessee, then it is a nonlease component and should be separate from payment
What should the balance be at the end of a lease?
ZERO You want to stop owing money
Tax payable
Taxable income x tax rate
Which of the following causes a temporary difference between taxable and pretax accounting income? a. MACRS used for depreciating equipment b. life insurance proceeds received due to the death of an executive c. the dividends received deduction d. investment expenses incurred to generate tax-exempt income
a. MACRS used for depreciating equipment
The five criteria provided in GAAP for distinguishing a finance lease from an operating lease do not include: a. The collectibility of the lease payments must be reasonably predictable b. The agreement specifies that ownership transfers at the end of the lease term c. The agreement grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise d. The noncancelable lease terms is for the major part of the remaining economic life of the underlying asset
a. The collectibility of the lease payments must be reasonably predictable
Which of the following circumstances creates a future deductible amount? a. accrued warranty expense b. prepaid advertising expense c. earning of non-taxable interest on municipal bonds d. sales of property (installment method for tax purposes)
a. accrued warranty expense
For the lessee to account for a lease as a sales-type lease, the lease must meet: a. any one of the five criteria specified by GAAP b. all five of the criteria specified by GAAP c. more than one the criteria specified by GAAP d. any one of first five classifications and both of the last two additional conditions specified by GAAP
a. any one of the five criteria specified by GAAP
For the lessor to account for a lease as a sales-type lease, the lease must meet: a. any one of the five criteria specified by GAAP b. all five of the criteria specified by GAAP c. more than one the criteria specified by GAAP d. any one of first five classifications and both of the last two additional conditions specified by GAAP
a. any one of the five criteria specified by GAAP
Using straight-line depreciation for financial reporting purposes and accelerated depreciation for tax purposes in the first year of an asset's life creates a a. deferred tax liability b. permanent difference not requiring inter-period tax allocation c. future deductible amount d. deferred tax asset
a. deferred tax liability
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. rent collected in advance c. none of these d. unrealized losses from recording investments at fair value
a. depreciation early in the life of an asset
From the perspective of the LESSEE, leases may be classified as either: a. finance or operating b. sales type or operating c. sales type with and without selling profit d. finance or sales type without profit
a. finance or operating
One of the five criteria for a finance lease specifies that the lease term be equal to or greater than a. the major part of the remaining economic life of the leased property b. a non-insignificant part of the remaining economic life of the leased property c. the entire amount of the remaining economic life of the leased property d. a meaningful part of the remaining economic life of the leased property
a. the major part of the remaining economic life of the leased property
Cook the Books is the lessee in a lease agreement. From the perspective of the lessee, the lease may be classified as: a. operating, sales type or financing b. operating or finance c. operating or sales type d. operating, indirect finance or sales type
b. operating or finance
In reconciling net income to taxable income, interest earned on municipal bonds is a. a reversing difference b. a permanent difference c. a temporary difference d. ignored
b. permanent difference
Which of the following is NOT among the criteria for classifying a lease as a finance lease? a. The agreement specifies ownership of the asset transfers to the lessee b. The agreement contains an option to purchase the underlying asset that the lessee is reasonably certain to exercise c. The lease term is for substantially all of the remaining economic life of the underlying asset d. The PV of the sum of the lease payments and any residual value guranteed by the lessee that isn't already reflected in the lease payments equals or exceeds substantially all of the FV of the underlying asset
c. The lease term is for substantially all of the remaining economic life of the underlying asset
Of the following temporary differences, which one ordinarily creates a deferred tax asset? a. accelerated depreciation for tax reporting b. installment sales for tax reporting c. accrued warranty expense d. unrealized gain from recording investments at FV
c. accrued warranty expense
From the perspective of the LESSOR, two possible classifications are a. operating or financing b. financing or sales type c. operating or sales type d. sales type or indirect financing
c. operating or sales type
Financial statement disclosure of the components of income tax expense a. must include the amount of cash paid for taxes b. must be made on the face of the income statement c. usually is included in the disclosure notes d. is not necessary when only permanent differences exist
c. usually is included in the disclosure notes
During the current year, S Company had pretax accounting income of $55 million. S's only temporary difference for the year was rent received for the following year in the amount of $23 million. S's taxable income for the year would be a. $60 million b. $55 million c. $32 million d. $78 million
d. $78 million 55 + 23
GAAP regarding accounting for income taxes requires which of the following procedures? a. computation of income tax expenses based on taxable income b. computation of deferred income tax based on temporary and permanent differences c. computation of deferred income tax based on permanent differences d. computation of deferred tax assets and liabilities based on temporary differences
d. computation of deferred tax assets and liabilities based on temporary differences
M Company leases an asset, info regarding the lease: FV of the asset is $400,000 Useful life is 6 years with no salvage value Lease term is 5 years Annual lease payments are $60,000 Implicit interest rate is 11% M can purchase the asset at the end of the lease period for $50,000 What type of lease is this? a. long term b. operating c. short term d. financing
d. financing
A deferred tax asset represents a. future tax refund b. future amount of money to be paid out c. future cash collection d. future income tax benefit
d. future income tax benefit
ABC is the LESSOR in a lease agreement. From the perspective of the lessor, the lease may be classified as a. operating, sales type, indirect financing b. operating, finance or sales type c. operating or finance d. operating or sales type
d. operating or sales type
Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset? a. none of these b. tax depreciation in excess of book depreciation c. the installment sales method for tax purposes d. revenue collected in advance
d. revenue collected in advance
Straight line depreciation
outstanding balance/years
