exam 3
residual asset
carrying amount of a leased asset not transferred to the lessee
initial direct costs
costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire the lease
finance leases
lessee has, in substance, purchased the lease asset; assumed when one of five classification criteria is met
sales-type lease
lessor transfers control of lease asset to lessee, with or without a selling profit on the sale of the asset
b
A reconciliation of pretax financial statement income to taxable income is shown below for Fieval Industries for the year ended December 31, 2018, its first year of operations. The income tax rate is 40%. Pretax act. income (income statement) $300,000 Interest rev. on municipal securities (15,000) Warranty exp. in excess of deductible amt 25,000 Dep. in excess of financial statement amt (70,000) Taxable income (tax return) $240,000 What amount(s) should Fieval report related to deferred income taxes in its 2018 balance sheet? a. Current deferred tax asset of $10,000 and noncurrent deferred tax liability of $28,000. b. Noncurrent deferred tax liability of $18,000. c. Current deferred tax asset of $4,000 and noncurrent deferred tax liability of $28,000. d. Noncurrent deferred tax liability of $24,000.
a
Before considering a net operating loss carryforward of $84 million, Fama Corporation reported $100 million of pretax accounting and taxable income in the current year. The income tax rate for all previous years was 30%. On January 1 of the current year, a new tax law was enacted, reducing the rate to 28% effective immediately. Fama's income tax payable for the current year would be: (Round your answer to the nearest whole million.) a. $4 million. b. $8 million. c. $5 million. d. $55 million.
a
Crystal Corporation makes $2,300 payments every month for leasing office equipment. Crystal recorded a lease payment as follows: Lease payable . 1,380 Interest expense 920 Cash 2,300 Amortization expense 1,380 Right-of-use asset 1,380 Crystal must have a(n): a. Operating lease. b. Finance lease. c. Sales-type lease without selling profit. d. Leveraged lease.
d
During the current year, Stern Company had pretax accounting income of $36 million. Stern's only temporary difference for the year was rent received for the following year in the amount of $20 million. Stern's taxable income for the year would be: a. $16 million. b. $41 million. c. $36 million. d. $56 million.
d
For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Pretax accounting income $290,000 Permanent difference (15,700) 274,300 Temporary difference-depreciation (19,200) Taxable income $255,100 Tringali's tax rate is 31%. Assume that no estimated taxes have been paid. What should Tringali report as income tax payable for its first year of operations? a. $5,952. b. $85,033. c. $89,900. d. $79,081.
d
For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Pretax accounting income $390,000 Permanent difference (15,300) 374,700 Temporary difference-depreciation (20,800) Taxable income $353,900 Tringali's tax rate is 31%. Assume that no estimated taxes have been paid. What should Tringali report as its deferred income tax liability as of the end of its first year of operations? a. $20,800. b. $11,191. c. $36,100. d. $6,448.
c
From the perspective of the lessee, leases may be classified as either: a. Sales-type without selling profit or sales-type with selling profit. b. Finance or sales-type without selling profit. c. Finance or operating. d. Sales-type or operating.
a
In 2017, HD had reported a deferred tax asset of $94 million with no valuation allowance. At December 31, 2018, the account balances of HD Services showed a deferred tax asset of $125 million before assessing the need for a valuation allowance and income taxes payable of $82 million. HD determined that it was more likely than not that 30% of the deferred tax asset ultimately would not be realized. HD made no estimated tax payments during 2018. What amount should HD report as income tax expense in its 2018 income statement? (Round your calculations to the nearest whole million.) a. $89 million b. $120 million c. $51 million d. $82 million
a
In 2018, Bodily Corporation reported $330,000 pretax accounting income. The income tax rate for that year was 29%. Bodily had an unused $126,000 net operating loss carryforward from 2016 when the tax rate was 32%. Bodily's income tax payable for 2018 would be: a. $59,160. b. $98,200. c. $66,800. d. $65,280.
a
Information for Kent Corp. for the year 2018: Reconciliation of pretax accounting income and taxable income: Pretax accounting income $180,900 Permanent differences (15,500) 165,400 Temporary difference-depreciation (12,900) Taxable income $152,500 Cumulative future taxable amounts all from depreciation temporary differences: As of December 31, 2017 $ 13,400 As of December 31, 2018 $ 26,300 The enacted tax rate was 30% for 2017 and thereafter. What should Kent report as the current portion of its income tax expense in the year 2018? a. $45,750. b. $49,620. c. $54,270. d. None of these answer choices are correct.
b
On December 31, 2018, Perry Corporation leased equipment to Admiral Company for a five-year period. The annual lease payment, excluding nonlease components, is $42,000. The interest rate for this lease is 13%. The payments are due on December 31 of each year. The first payment was made on December 31, 2018. The normal cash price for this type of equipment is $135,000 while the cost to Perry was $107,000. For the year ended December 31, 2018, by what amount will Perry's earnings increase due to this lease (ignore taxes)? a. $18,000. b. $28,000. c. $38,000. d. $41,000.
d
Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations: 2017 $343,000 2018 (547,000) 2019 711,000 Puritan's tax rate is 39% for all years. Puritan elected a loss carryback. As of December 31, 2018. Puritan was certain that it would recover the full tax benefit of the NOL that remained after the operating loss carryback. What did Puritan report on December 31, 2018, as the deferred tax asset for the NOL carryforward? a. $0. b. $277,290. c. $81,680. d. $79,560.
a
Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. Pmt. Cash Effective Decrease Outstanding Pmt. Interest in balance balance 71,908 1 11,000 0 11,000 60,908 2 11,000 6,700 4,300 56,607 3 11,000 6,227 4,773 51,834 4 11,000 5,702 5,298 46,536 5 11,000 5,119 5,881 40,655 6 11,000 4,472 6,528 34,127 7 11,000 3,754 7,246 26,881 8 11,000 2,957 8,043 18,838 9 11,000 ? ? ? 10 11,000 ? ? ? What is the outstanding balance after payment 9? (Round your answer to the nearest dollar.) a. $9,910. b. $18,838. c. $5,500. d. $8,928.
c
Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. Pmt. Cash Effective Decrease Outstanding Pmt. Interest in balance balance 75,939 1 12,000 0 12,000 63,939 2 12,000 7,673 4,327 59,612 3 12,000 7,153 4,847 54,765 4 12,000 6,572 5,428 49,337 5 12,000 5,920 6,080 43,257 6 12,000 5,191 6,809 36,448 7 12,000 4,374 7,626 28,822 8 12,000 3,459 8,541 20,281 9 12,000 ? ? ? 10 12,000 ? ? ? What would be the outstanding balance after payment 10? a. $991. b. $11,009. c. $0. d. $12,000.
b
Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable. Pmt. Cash Effective Decrease Outstanding Pmt. Interest in balance balance 75,939 1 12,000 0 12,000 63,939 2 12,000 7,673 4,327 59,612 3 12,000 7,153 4,847 54,765 4 12,000 6,572 5,428 49,337 5 12,000 5,920 6,080 43,257 6 12,000 5,191 6,809 36,448 7 12,000 4,374 7,626 28,822 8 12,000 3,459 8,541 20,281 9 12,000 ? ? ? 10 12,000 ? ? ? What is the effective annual interest rate? (Round final answer to the nearest whole percentage.) a. 10%. b. 12%. c. 14%. d. 9%.
a
Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2018. The manufacturing cost of the computers was $21 million. This noncancelable lease had the following terms: Lease payments: $3,573,855 semiannually; first payment at January 1, 2018; remaining payments at June 30 and December 31 each year through June 30, 2022. Lease term: 5 years (10 semi-annual payments). No residual value; no purchase option. Economic life of equipment: 5 years. Implicit interest rate and lessee's incremental borrowing rate: 9% semiannually. Fair value of the computers at January 1, 2018: $25 million. What is the outstanding balance of the lease liability in Lone Star's June 30, 2018, balance sheet? (Round your answer to the nearest dollar.) a. $19,780,643. b. $19,980,652. c. $25,000,000. d. None of these answer choices is correct.
b
The financial reporting carrying value of Boze Music's only depreciable asset exceeded its tax basis by $141,000 at December 31, 2018. This was a result of differences between straight-line depreciation for financial reporting purposes and MACRS for tax purposes. The asset was acquired earlier in the year. Boze has no other temporary differences. The enacted tax rate is 28% for 2018 and 31% thereafter. Boze should report the deferred tax effect of this difference in its December 31, 2018, balance sheet as: a. A liability of $42,920. b. A liability of $43,710. c. An asset of $42,920. d. An asset of $43,710.
b
The five criteria provided in GAAP for distinguishing a finance lease from an operating lease do not include: a. The agreement specifies that ownership transfers at the end of the lease term. b. The collectibility of the lease payments must be reasonably predictable. 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 term is for the major part of the remaining economic life of the leased asset.
b
When the total expenses over the life of an operating lease are compared to the total expenses over the life of a finance lease, one will find that: a. The expenses of a finance lease are greater than the expenses of the operating lease. b. The expenses of the finance lease and operating lease are equal. c. The expenses of an operating lease are greater than the expenses of a finance lease. d. No meaningful comparison can be made.
purchase option
a provision of some lease contracts that gives the lessee the option of purchasing the leased property during, or at the end of, the lease term at a specified price
leasehold improvement
account title when a lessee makes improvements to leased property that reverts back to the lessor at the end of the lease
permanent difference
difference between pretax accounting income and taxable income and, consequently, between the reported amount of an asset or liability in the financial statements and its tax basis that will not "reverse" resulting from transactions and events that under existing tax law will never affect taxable income or taxes payable
temporary difference
difference between pretax accounting income and taxable income and, consequently, between the reported amount of an asset or liability in the financial statements and its tax basis which will "reverse" in later years
effective tax rate
equals tax expense divided by pretax accounting income
operating leases
fundamental rights and responsibilities of ownership are retained by the lessor and the lessee merely is using the asset temporarily
valuation allowance
indirect reduction (contra account) in a deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized
net operating loss
negative taxable income because tax-deductible expenses exceed taxable revenues
tax basis
of an asset or liability is its original value for tax purposes reduced by any amounts included to date on tax returns
net operating loss carryforward
offsets future taxable income with an NOL to provide a reduction of taxes payable in that future period; therefore, gives rise to a deferred tax asset because it is a future deductible amount
residual value
or salvage value, the amount the company expects to receive for the asset at the end of its service life less any anticipated disposal costs
lessor
owner of a leased asset
advance payment
payment made at the beginning of the lease that represents prepaid rent
lease payments
payments the lessee is required to make in connection with the lease
deferred tax liability
taxes to be paid in the future when future taxable amounts become taxable (when the temporary differences reverse)
deferred tax asset
taxes to be saved in the future when future deductible amounts reduce taxable income (when the temporary differences reverse)
future deductible amounts
the future tax consequence of a temporary difference will be to decrease taxable income relative to accounting income
future taxable amounts
the future tax consequence of temporary difference will be to increase taxable income relative to accounting income
sale-leaseback transaction
the owner of an asset sells it and immediately leases it back from the new owner
lessee
user of a leased asset
selling profit
when the fair value of the asset (usually the present value of the lease payments, or "selling price") exceeds the cost or carrying value of the asset sold
