Exam 1

Put the following in order when a change in tax rate is scheduled to occur and the company has multiple temporary differences:

1. Determine the total of future taxable amounts and future deductible amounts for each future year. 2. Apply the specific tax rates of each future year. 3. Sum the annual tax effects to find the balances for the deferred tax liability and the deferred tax asset

Required disclosures for lessees and lessors:

1. Future payments for total remaining years 2. Future payments in each of the next 5 years 3. Description of the leasing arrangements

Which of the following items are permanent differences?

1. Life insurance proceeds on the death of insured executive 2. Premiums paid for life insurance on key officers 3. Interest on municipal bonds

Which of the following are required disclosures related to leases?

1. Nonlease payments 2. Variable lease cost 3. Residual values

What is the criteria to classify a lease as a finance lease?

1. The agreement specifies that ownership of the asset transfers to the lessee. 2. The agreement contains a purchase option that the lessee is reasonably certain to exercise. 3. The lease term is for the "major part" of the remaining economic life of the underlying asset. 4. The present value of the total of the lease payments equals or exceeds "substantially all" of the fair value of the underlying asset. 5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

When a lease is classified as a finance lease from the lessee's perspective and a sales-type lease from the lessor's perspective

1. The lessee records a right-of-use asset and lease liability for the present value of the lease payments 2. The lessor records a lease receivable for the same amount and removes the asset from its books 3. The lessor recognizes interest revenue and the lessee recognizes interest expense at the effective rate times the outstanding balance. 4. The lessee amortizes the right-of-use asset on a straight-line basis. 5. For an operating lease, the two components, interest and amortization, are shown as one lease expense in the income statement

A net operating loss carryback can be deducted from taxable income in the

2 prior years

Tax laws permit a net operating loss (NOL) to be used to reduce taxable income in other, profitable years by either a carryback of the loss to up to _______ prior years or a carryforward of the loss to up to _________ later years.

2; 20

Recording Amortization of the Right-of-use asset

Debit Amortization expense Credit Right-of-use asset

North Company leased equipment from LeaseCorp in a finance/sales-type lease. The annual payments equal $105,000. Payments include $5,000 which LeaseCorp will use to pay the annual maintenance fee on the equipment. How would LeaseCorp record the first payment?

Debit Cash $105,000 Credit Lease Receivable $5,000 Credit Maintenance Fee Payable $100,000

Rice Corp. has tax depreciation in excess of financial reporting depreciation of $100,000 in 2017. The timing difference is expected to reverse $30,000 in 2018 and $70,000 in 2019. In 2017, the enacted tax rates were 40% for 2017 thereafter. However, during 2018, the enacted rate was changed to 30% for years 2019 and thereafter. Rice records the journal entry for deferred taxes at the end of 2018 at the tax rate of 40%, and then prepares an adjusting entry to appropriately revalue the deferred tax account at year-end. Which of the following entries is required to record the adjusting entry for the change in enacted tax rates?

Debit Deferred Tax Liability for $7,000

Madhu Corp. receives rent in advance of $100,000 in 2017. The timing difference is expected to reverse $40,000 in 2019 and $60,000 in 2020. The enacted tax rates are 30% in 2017 and 2018. At the end of 2018, the balance in the deferred tax asset account is $30,000. In 2018, the tax laws are changed, and the new enacted tax rate for 2019 and thereafter is 40%. Which of the following entries would be included in the journal entry to adjust the deferred tax account at December 31, 2018?

Debit Deferred tax asset $10,000 Credit tax expense $10,000

Journal entry to show the effect of change in tax

Debit Deferred tax liability, credit income tax expense

Journal entries to record income taxes

Debit Income Tax Expense Debit Deferred Tax Liability Credit Income Tax Payable

Journal Entry without change in tax laws or rates

Debit Income Tax Expense, debit deferred tax liability, credit income tax payable

Journal Entry for Valuation Allocation

Debit Income Tax expense Credit Valuation Expense - deferred tax asset

Short-cut method journal entry

Debit Lease expense Credit Cash **No entry to record a right-of-use asset and liability**

Record the sale by lease

Debit Lease receivable Credit Sales revenue

______________ ________ __________ are recognized for all deductible temporary differences. However, a deferred tax asset is then reduced by a ___________ ______________ if it is more likely than not that some portion of all of the deferred tax asset will not be realized

Deferred tax assets; valuation allowance

______________ ___________ __________ are calculated by ________________ future taxable (and deductible) amounts by the currently enacted tax rates that will apply to them. If a change in a tax law or rate occurs, the ____________ ______ ______________ or _________ is adjusted to reflect the change in the amount to be paid or recovered. That effect is reflected in tax expense in the year of the enacted of the change in the tax law or rate

Deferred tax liabilities; multiplying; deferred tax liability; asset

Permanent difference

Difference between taxable income and pretax income that will not reverse in the future; Do not create deferred tax assets or liabilities but change the effective tax rate from the statutory tax rate

Temporary difference

Difference between the tax base and the carrying value of an asset or liability that will result in either taxable amounts or deductible amounts in the future

Gleuck Inc. leases an asset with a cost $200,000 to Perl Company. The present value of the annual lease payments is $320,000 and control of the asset is transferred to Perl Company. At the commencement of the lease, Gleuck should credit:

Equipment for $200,000 Sales Revenue for $320,000

Match the type of accounting with its goal or objective

Financial accounting standards: provide useful information to investors and creditors Tax laws: raise public revenues and influence behaviors

Journal Entries for the First and Second Lease Payment

First Payment (Lessee) Debit Lease payable Credit Cash First Payment (Lessor) Debit Cash Credit lease receivable Second Payment (Lessee) Debit Interest expense Debit Lease payable Credit Cash Second Payment (Lessor) Debit Cash Credit Lease receivable Credit Interest revenue

Categorize the items between the lessee and lessor in a finance/sales-type lease

LESSEE: 1. Records a lease payable 2. Records a right-of-use asset LESSOR: 1. Removes the asset from its balance sheet 2 Records a lease receivable

Lease Payments that include nonlease components paid by the Lessor

Lessee Journal Entries: Debit Maintenance Expense Debit Lease Payable Credit Cash Lessor Journal Entries: Debit Cash Credit Lease receivable Credit Maintenance fee payable

_________________ differences between the reported amount of an asset or liability in the financial statements and its tax basis are those caused by transactions and events that under existing tax law will never affect taxable income or taxes payable.

Permanent

Match the treatment of initial direct costs incurred by the lessor with the correct lease classification:

Sales-type lease with selling profit: beginning of the lease Sales-type lease with no selling profit: deferred and expensed over the lease term by increasing the lease receivable Operating lease: expensed over the term on a straight-line basis

____________ differences produce future taxable amounts when the taxable income will be increased relative to pretax accounting income in one or more future years.

Temporary

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

Disclosure notes should reveal

additional relevant information pertaining to deferred tax amounts reported on the balance, the components of income tax expense, and available operating loss carryforwards

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

A net operating loss carryforward

creates a deferred tax asset

A future deferred amount creates a ____________ , where a future taxable amount creates a _____________

deferred tax asset; deferred tax liability

Effective tax rate

equals tax expense divided by pretax accounting income

A lease is classified as a ______________ lease if, in substance, the lessor is transferring control of the asset to the lessee

finance/sales-type lease

Operating leases

fundamental rights and responsibilities of ownership are retained by the lessor and the lessee merely is using the asset temporarily

When the future tax consequence of a temporary difference will be to decrease taxable income relative to pretax accounting income, ______________ ___________ are created. These have favorable tax consequences that are recognized as ____________ __________ _________

future deductible amounts; deferred tax assets

The effective interest rate of return the lease payments provide the lessor is referred to as the

implicit rate

The __________________ is the rate the lessee would pay a bank to borrow funds

incremental borrowing rate

The rate of interest incurred by the lessee if funds were borrowed to purchase the leased asset is known as the

incremental borrowing rate

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.

Through _____________ tax allocation, the total income tax expense for a reporting period is allocated among the financial statements that gave rise to it: specifically income (or loss) from continuing operations, discontinued operations, and prior period adjustments (to the beginning retained earnings balance)

intraperiod

Direct financing lease

lease in which the lessor finances the asset for the lessee and earns interest revenue over the lease term

Right of use asset calculation

lease payments x PVAD

Finance leases

lessee has, in substance, purchased the lease asset; assumed when one of five classification criteria is met

A ________ should classify a lease transaction as a ___________ lease if one or more of five classification criteria is met, and a __________ should record the lease as a _____________ lease.

lessee; finance; lessor; sales-type

The ___________ records sales revenue and cost of goods sold for a sales-type lease with a selling point. That happens when the present value of the lease payments exceeds the asset's carrying value

lessor

Sales-type lease

lessor transfers control of lease asset to lessee, with or without a selling profit on the sale of the asset

In a lease, the __________ is the owner of the property, whereas the __________ is the user of the property

lessor; lessee

A tax benefit associated with an uncertain tax position may be reflected in the financial statements only if it is ___________________ that the company will be able to sustain the tax return position, based on its technical merits. It should be measured as the largest amount of benefit that is cumulatively greater than 50% likely to be realized

more likely than notq

To measure the deferred tax liability or asset,

multiply the temporary difference by the currently enacted tax rate that will be effective in the year(s) the temporary difference reverses

Net operating loss

negative taxable income because tax-deductible expenses exceed taxable revenues

Deferred tax assets and deferred tax liabilities are classified as

noncurrent

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 deferred tax asset because it is a future deductible amount

If none of the five criteria is met, both the lessee and the lessor classify the lease as an

operating lease

When the lessee does not control substantially all of the remaining benefits of the underlying asset, the lease usually is considered an _______________

operating lease

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

In the short-cut method, the lessee recognizes ___________ over the lease term

rent expense

An advanced payment on an operating lease is allocated to _____________ over the lease term

rent revenue

When an owner of an asset sells it and immediately rents it from the new owner, the transaction is called a

sales-leaseback transaction

When Enacted Tax Rates Differ

specific tax rates of each future year are multiplied by the amounts reversing in each of those years

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

In a lease of 12 months or less

the lessee can elect not to record a right-of-use asset and lease payable at the beginning of the lease term, but instead simply record lease payments as expense as they occur (short-cut method)

The criteria are used to identify situations when the lease is economically similar to the purchase of an asset because

the lessee obtains control of the underlying asset, meaning the ability to direct the use of the asset and obtain substantially all of its remaining benefits, in contrast to merely obtaining control over the use of the asset for a period of time

When multiple temporary differences exist,

the total of the future taxable amounts is multiplied by the future tax rate to determine the appropriate balance for the deferred tax liability, and the total of the future deductible amounts is multiplied by the future tax rate to determine the appropriate balance for the deferred tax asset

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