Theory Exam 2

A deferred tax valuation allowance account is used to recognize a reduction in

.a deferred tax liability only.

Derivatives are financial instruments or other contracts that must contain

.all of the above.

Which of the following causes a permanent difference between taxable income and financial accounting income?

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

Property, plant, and equipment are conventionally presented on the balance sheet at

Acquisition cost less depreciated portion thereof

The major difference between new FASB ASU 2016-02 (ASC 842) and IFRS No. 16 is

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

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

All of these are required

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the

Bond indenture

A loss on impairment of an intangible asset is the difference between the asset's

Carrying amount and its fair value

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

A deferred tax asset represents a

Future tax benefit

If a bond was sold at 97, the market rate of interest was:

Greater than the stated rate

Under the new FASB ASU 2016-02 (ASC 842), which of the following is not true about the advantages of leasing over purchasing property for use by a business?

If the lease qualifies as an operating lease, it does not add debt to the balance sheet.

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method Equity Method

Income A reduction of the investment

The times interest earned ratio is computed by dividing

Income before income taxes and interest expense by interest expense

A deferred tax liability represents the:

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

As generally used in accounting, depreciation

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

With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when

It is more likely than not that the tax position will be sustained upon auditd.All of the above

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

Its fair value

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

Its fair value at the date of the transfer

Under current GAAP, intangible assets are classified as

Limited-life or indefinite-life

An increase in the deferred income tax asset valuation allowance

Occurs when there is an expected increase in future taxable income

What was the primary accounting issue for lessees that lead to the issuance of ASU 2016-02?

Off-balance sheet financing.

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?

Product warranty liabilities

When computing the amount of interest cost to be capitalized, the concept of "avoidable interest" refers to

That portion of total interest cost which would not have been incurred if expenditures for asset construction had not been made

When a company reports goodwill in its balance sheet, we know that

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 but not a loss may be recognized

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

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.

Which of the following independent lease arrangements would most likely be accounted for as a finance lease by the lessee?

The lessee rents the truck for $1,000 a month for 10 years and after 10 years has an option to continue renting the truck for an additional 10 years at $50 per month, and the estimated life of the truck is 15 years.

Under the provisions of 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 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 key difference between new FASB ASU 2016-02 (ASC 842) and SFAS No. 13 (ASC 840) in accounting for leases by lessees is

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.

Canyon Manufacturing Corporation issued bonds with a maturity amount of $200,000 and a maturity 10 years from date of issue. If the bonds were issued at a premium, this indicates that

The stated rate of interest exceeded the yield rate

An impairment of property, plant, or equipment has occurred if

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

Lessees prefer to account for their leases as short-term leases because:

This decreases the amount of liability reported

In computing the present value of the minimum lease payments under ASC 842, the lessee should

Use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee

Financial leverage refers to the

Use of borrowed money to increase the return to owners

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 product or service is the asset related to?

When should a long-lived asset be tested for recoverability?

When events or changes in circumstances indicate that its carrying amount may not be recoverable

The theoretical justification for expensing research and development (R&D) cost as it is incurred is based on which of the following arguments?

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

Yes, no

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

amortized cost.

The FASB believes that the most consistent method for accounting for income taxes is the:

asset-liability method.

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.

c.Both I and II.

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

earnings are reported by the investee in its financial statements.

Financial instruments sometimes contain features that separately meet the definition of a derivative instrument. These features are classified as

embedded derivative instruments.

An ownership interest of 30% of the common stock of another corporation should be accounted for using the:

equity method

A temporary difference that would result in a deferred tax liability is:

excess of tax depreciation over financial accounting depreciation.

All of the following are true about the new ASU 2017-04 on goodwill except:

it allows all entities to amortize goodwill.

An example of a notional amount is

number of barrels of oil.

Under ASU 2016‐02 (ASC 842), the methods of accounting for a lease by the lessee are

operating and finance lease methods.

Future taxable amounts are temporary differences that:

require the recording of a deferred tax liability.

Income tax payable is based (computed) on:

taxable income