Acct Theory Exam 2 chpts 9,10,11,12,13

Equity securities a. are accounted for generally based on the percentage of voting stock obtained. b. are always accounted for using the equity method. c. where the investment is less than 20% are classified into two categories: available-for-sale and held-to-maturity. d. include common stock, preferred stock, and bonds.-WRONG

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A temporary difference that would result in a deferred tax liability is: a. accrual of warranty expense. b. subscriptions received in advance. c. interest revenue on municipal bonds.--WRONG d. excess of tax depreciation over financial accounting depreciation.

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Under the current (almost old) SFAS No. 13 (ASC 840), the appropriate valuation of an operating lease on the statement of financial position (balance sheet) of a lessee is a. The market value of the asset at the date of the inception of the lease b. The absolute sum of the lease payments c. Zero d. The present value of the sum of the lease payments discounted at an appropriate rate-WRONG

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Under the new FASB ASU 2016-02 (ASC 842), which of the following is not an advantage of leasing over purchasing property for use by a business? a. It is frequently less costly than other forms of financing the cost of the acquisition of fixed assets.--WRONG b. It offers protection against obsolescence. c. It offers 100 percent financing. d. If the lease qualifies as an operating lease, it does not add debt to the balance sheet.

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An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method Equity Method a. Income Income b. A reduction of the investment A reduction of the investment c. Income A reduction of the investment d. A reduction of the investment Income

C. FVM EM income A reduction of the investment

A loss on impairment of an intangible asset is the difference between the asset's Carrying amount and the expected future net cash flows Carrying amount and its fair value Fair value and the expected future net cash flows Present value and its fair value

Carrying amount and its fair value

With the increase in the assets and liabilities under ASU 2016-02 (ASC 842), a number of financial metrics used to measure the profitability and solvency of companies will change. Which of the following is not an expected change? Return on assets will decrease. Earnings before interest, taxes, and depreciation and amortization (EBIDTA) will require some adjustments as companies amortize right-of-use assets. Debt to equity ratio will decrease. All of the above are expected changes.

Debt to equity ratio will decrease.

The theoretical justification for reporting depreciation expense is Depreciation expense represents the allocation of the historical cost of the asset that has been applied to the accounting period Depreciation expense represents a decrease in the value of the asset that has occurred during the accounting period. Depreciation expense represents the impairment of the asset that has occurred during the accounting period. Depreciation expense represents the unrealized loss that has been incurred by using the asset during the accounting period.

Depreciation expense represents the allocation of the historical cost of the asset that has been applied to the accounting period

As generally used in accounting, depreciation Applies only to long-lived intangible assets Is a process of asset valuation for balance sheet purposes Is an accounting process that allocates long-lived asset cost to accounting periods Is used to indicate a decline in market value of a long-lived asset

Is an accounting process that allocates long-lived asset cost to accounting periods

A plant site donated by a city to a company that plans to open a new factory should be recorded on the company's books at The cost of taking title to it The value assigned to it by the company's directors One dollar (since the site cost nothing but should be included in the balance sheet) Its fair value

Its fair value

Under current GAAP, intangible assets are classified as Limited-life or indefinite-life Specifically, identifiable or unidentifiable Amortizable or unamortizable. Legally restricted or unrestricted

Limited-life or indefinite-life

Which of the following assets acquired in 2017 are amortizable? Goodwill Trademarks No Yes No No Yes Yes Yes No

No Yes

When a company reports goodwill in its balance sheet, we know that It was internally generated because the company has earnings in excess of those of other companies in the industry. The company will be reporting amortization expense for the goodwill. The company will not be reporting an impairment loss for the goodwill. The company purchased it.

The company purchased it.

The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset when the exchange has commercial substance is usually recorded at The fair value of the asset given up, and a gain or loss is recognized The fair value of the asset received if it is equally reliable as the fair value of the asset given up Either the fair value of the asset given up or the asset received, whichever one results in the largest gain (smallest loss) to the company The fair value of the asset given up, and a gain but not a loss may be recognized

The fair value of the asset given up, and a gain or loss is recognized

Under the provisions of ASU 2016-02 (ASC 842) which of the following is not a criterion to use in determining whether a lessee should classify a lease as a finance lease? The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. The lease grants the lessee an option to purchase the underlying asset the lessee is reasonably certain to exercise. The lease term is for the major part of the remaining economic life of the underlying asset. The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds 50 percent of the fair value of the underlying asset.

The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds 50 percent of the fair value of the underlying asset.

An impairment of property, plant, or equipment has occurred The sum of the expected future net cash flows is less than the asset's carrying value The expected future cash flows exceed the asset's carrying value The estimated salvage value is less than the actual proceeds received on disposal The revised estimated useful life is less than the original estimated useful life

The sum of the expected future net cash flows is less than the asset's carrying value

Under the provisions of ASU 2016‐02 (ASC 842) sale‐leaseback accounting is virtually eliminated.as an off‐balance sheet financing proposition, because both the seller‐lessee and a buyer‐lessor will apply the provisions of FASB ASC 606 Revenue Recognition to determine whether a sale has occurred. Accordingly, which of the following is not a criterion that must be met to record a sale-leaseback as a sale? The transaction meets the sale guidance in the new revenue recognition standard. If there is a repurchase option, the exercise price is at the asset's fair value at the time of exercise, and alternative assets that are substantially the same as the transferred asset are readily available in the marketplace. The transaction is a leveraged lease. The leaseback is not a finance or a sales‐type lease.

The transaction is a leveraged lease.

Which of the following is not one of the basic questions that must be answered before the amount of depreciation charge can be computed? What is the depreciation base to use for the asset? What product or service is the asset related to? What method of cost apportionment is best for this asset? What is the asset's useful life?

What product or service is the asset related to?

Goodwill should be written off As soon as possible against retrained earnings When there is evidence that its carrying value has been impaired By systematic charges to expense over the period benefited, but not more than 40 years By systematic charges against retained earnings over the period benefited, but not more than 40 years

When there is evidence that its carrying value has been impaired

The theoretical justification for expensing research and development (R&D) cost as it is incurred is based on which of the following arguments? R&D costs are incurred to generate current period revenue; thus the matching concept requires that it be expensed as incurred. Since R&D costs have been incurred during the current period, they meet the definition of an expense. R&D costs provide no future benefits, thus it does not meet the definition of an asset. Whether R&D costs that have been incurred will provide future benefit is uncertain, thus it does not meet the definition of an asset.

Whether R&D costs that have been incurred will provide future benefit is uncertain, thus it does not meet the definition of an asset.

Which types of intangible assets are amortized? Limited-Life Indefinite-Life No Yes Yes Yes No No Yes No

Yes No

Under ASU 2016-02 (ASC 842), all of the following would be recorded on the balance sheet of the lessee except an operating lease. a finance lease. a lease with a lease term of 12 months or less. all of the above would be recorded.

a lease with a lease term of 12 months or less

Under ASU 2016-02 (ASC 842), all of the following would be recorded on the balance sheet of the lessee except an operating lease. a finance lease. a lease with a lease term of 12 months or less. all of the above would be recorded

a lease with a lease term of 12 months or less.

Which of the following causes a permanent difference between taxable income and financial accounting income? a. A life insurance premium paid by the corporation on a policy that names the corporation as the beneficiary. b. A penalty paid to a bank when a CD is cashed before its maturity date. c. Rent received in advance is taxable upon receipt. d. The useful life of an asset is 10 years. The asset is depreciated over 7 years for tax purposes.

a. A life insurance premium paid by the corporation on a policy that names the corporation as the beneficiary.

The major difference between new FASB ASU 2016-02 (ASC 842) and IFRS No. 16 is a. All leases must be recorded as finance leases by lessees under IFRS No. 16; whereas, some leases may be recorded as operating leases by lessees under ASU 2016-02 b. All leases must be recorded as finance leases by lessees under ASU 2016-02; whereas, some leases may be recorded as operating leases by lessees under IFRS No. 16. c. All leases must be recorded as finance leases by lessors under ASU 2016-02; whereas, some leases may be recorded as operating leases by lessors under IFRS No. 16 d. All leases must be recorded as finance leases by lessors under IFRS No. 16; whereas, some leases may be recorded as operating leases by lessors under ASU 2016-02.

a. All leases must be recorded as finance leases by lessees under IFRS No. 16; whereas, some leases may be recorded as operating leases by lessees under ASU 2016-02

Dr. Friske's most likely Halloween costume will be Selected Answer: a. Hello Kitty. Answers: a. Hello Kitty. b. a princess. c. a witch. d. Wonder Woman.

a. Hello Kitty.

When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, the carrying value assigned to the available-for-sale debt security should be a. Its fair value at the date of the transfer b. The higher of its original cost or its fair value at the date of the transfer. c. Its original cost d. The lower of its original cost or its fair value at the date of the transfer.

a. Its fair value at the date of the transfer

Which of the following are temporary differences that are normally classified as expenses or losses and are deductible for income tax purposes after they are recognized for financial accounting income? a. Product warranty liabilities b. Advance rental receipts c. Depreciable property d. Fines and expenses resulting from a violation of law

a. Product warranty liabilities

The recent ASU 2016-01 on Financial Instruments will change the accounting for investments in securities in the following way: a. all equity investments other than those accounted for under the equity method or consolidation will be measured at fair value with the changes in fair value recognized in net income. b. all equity investments other than those accounted for under the equity method or consolidation will be measured at fair value with the changes in fair value recognized in other comprehensive income. c. all debt investments will be measured at fair value with the changes in fair value recognized in net income. d. all equity and debt investments will be measured at fair value with the changes in fair value recognized in net income.

a. all equity investments other than those accounted for under the equity method or consolidation will be measured at fair value with the changes in fair value recognized in net income.

A deferred tax liability represents the: a.Increase in taxes payable in future years as a result of taxable temporary differences b.Decrease in taxes saved in future years as a result of deductible temporary differences c.Decrease in taxes payable in future years as a result of taxable temporary differences d.Increase in taxes saved in future years as a result of deductible temporary differences

a.Increase in taxes payable in future years as a result of taxable temporary differences

Income tax payable is based (computed) on: a.taxable income. b.pretax financial income. c.income before taxes. d.income for book purposes.

a.taxable income.

A deferred tax asset represents a a. Future taxable amount b. Future tax benefit c. Future tax expense d. Future tax liability.

b. Future tax benefit

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? a. The investor should always use the fair value method to account for its investment. b. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee. c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. d. The investor should always use the equity method to account for its investment.

b. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.

Buffco purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Buffco does not elect the fair value option for the bonds. Buffco should account for these bonds at a. lower of cost or market. b. amortized cost. c. cost d. fair value.

b. amortized cost.

Financial instruments sometimes contain features that separately meet the definition of a derivative instrument. These features are classified as a.swaptions. b.embedded derivative instruments. c.notional amounts. d. Underlyings.

b.embedded derivative instruments.

An example of a notional amount is a.currency swaps. b.number of barrels of oil. c.interest rates. d.stock prices.

b.number of barrels of oil.

Under ASU 2016‐02 (ASC 842), the methods of accounting for a lease by the lessee are a. operating and capital lease methods. b. operating, sales, and capital lease methods. c. operating and finance lease methods. d. none of these answers are correct.

c operating and finance lease methods

Under the provisions of new FASB ASU 2016-02 (ASC 842) a. Accounting by lessees for leases is virtually unchanged from what was required by SFAS No. 13 b. Accounting by lessors for leases is significantly changed from what was required by SFAS No. 13 c. Accounting by lessors for leases is virtually unchanged from what was required by SFAS No. 13 d. Accounting by lessees and lessors for leases is virtually unchanged from what was required by SFAS No. 13.

c. Accounting by lessors for leases is virtually unchanged from what was required by SFAS No. 13

Which of the following statements is (are) true regarding derivative financial instruments? I. Derivative financial instruments should be measured at fair value and reported in the balance sheet as assets or liabilities. II. Gains and losses on derivative instruments not designated as hedging activities should be reported and recognized in earnings in the period of the change in fair value. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

c. Both I and II.

An increase in the deferred income tax asset valuation allowance a. Occurs when there is an operating loss carryforward. b. Has no effect on income tax expense. c. Increases income tax expense. d. Occurs when there is an expected increase in future taxable income.

c. Increases income tax expense.

Taxable income of a corporation differs from pretax financial income because of Permanent Diff Temporary Differences a. No Yes b. No No c. Yes Yes d. Yes No

c. Yes Yes

A deferred tax valuation allowance account is used to recognize a reduction in a. income tax expense. b. both a deferred tax asset and a deferred tax liability. c. a deferred tax asset only. d. a deferred tax liability only.

c. a deferred tax asset only.

An ownership interest of 30% of the common stock of another corporation should be accounted for using the: a. fair value method. b. consolidated method. c. equity method. d. cost method.

c. equity method.

Future taxable amounts are temporary differences that: a. increase pretax financial income in future years. b. require the recording of a deferred tax asset. c. require the recording of a deferred tax liability. d. decrease taxable income in future years.

c. require the recording of a deferred tax liability.

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when a.It is probable and can be reasonably estimated b.There is at least a 51% probability that the uncertain tax position will be approved by the taxing authorities c.it is more likely than not that the tax position will be sustained upon audit d.All of the above

c.it is more likely than not that the tax position will be sustained upon audit

A requirement for a security to be classified as held-to-maturity is a. Positive intent b. The security must be a debt security c. Ability to hold the security to maturity d. All of these are required.

d. All of these are required

A net operating loss incurred in 2018: a. may be deducted 100% against taxable income. b. may be carried forward indefinitely and is limited to 80%. c. occurs when a company reports a net loss in their income statement. d. may be carried back 2 years and/or carried forward up to 20 years.

d. may be carried back 2 years and/or carried forward up to 20 years.

The major difference between new FASB ASU 2016-02 (ASC 842) and IFRS No. 16 is a. All leases must be recorded as finance leases by lessors under ASU 2016-02; whereas, some leases may be recorded as operating leases by lessors under IFRS No. 16 b. All leases must be recorded as finance leases by lessees under ASU 2016-02; whereas, some leases may be recorded as operating leases by lessees under IFRS No. 16. c. All leases must be recorded as finance leases by lessors under IFRS No. 16; whereas, some leases may be recorded as operating leases by lessors under ASU 2016-02. d. All leases must be recorded as finance leases by lessees under IFRS No. 16; whereas, some leases may be recorded as operating leases by lessees under ASU 2016-02

d. All leases must be recorded as finance leases by lessees under IFRS No. 16; whereas, some leases may be recorded as operating leases by lessees under ASU 2016-02

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. Investor sells the investment b. Investee pays a dividend. c. Investee declares a dividend d. Earnings are reported by the investee in its financial statements

d. Earnings are reported by the investee in its financial statements

The key difference between new FASB ASU 2016-02 (ASC 842) and SFAS No. 13 (ASC 840) in accounting for leases by lessees is a. Leases will be measured at their fair value by lessees. b. The classification of a lease as a finance lease by a lessee is based on a completely new set of criteria than was used in SFAS No. 13. c. There are no major differences between the two standards in accounting for leases by lessees. d. The recognition of a right of use asset (ROU) and lease liability on the balance sheet for those leases previously classified as operating leases under SFAS 13.

d. The recognition of a right of use asset (ROU) and lease liability on the balance sheet for those leases previously classified as operating leases under SFAS 13.

Derivatives are financial instruments or other contracts that must contain a. one or more underlyings and an identified payment provision. b. little or no initial investment. c. terms that require or permit net settlement. d. all of the above.

d. all of the above.

The FASB believes that the most consistent method for accounting for income taxes is the: a. benefit-obligation method. b. carryback-carryforward method. c. temporary-permanent method. d. asset-liability method.

d. asset-liability method.