Intermediate Financial Accounting 2 Exam 2 Review File

On January 1, 2021, Green Co. recorded a right-of-use asset of $304,270 in an operating lease. The lease calls for ten annual payments of $39,000 with the first to be made on January 1, 2021, with each succeeding payment due on December 31. The interest rate charged by the lessor was 6%. The balance in the right-of-use asset at December 31, 2021, will be:

$281,186.

According to GAAP for accounting for income taxes, when a company has a net operating loss carryforward:

A deferred tax asset is recorded along with any applicable valuation allowance.

Woody Corp. had taxable income of $8,000 in the current year. The amount of depreciation reported in the tax return was $3,000, while the amount of depreciation reported in the income statement was $1,000. Assuming no other differences between tax and accounting income, Woody's pretax accounting income was:

$10,000.

Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations: 2010. 350000 2011. (600000) 2012. 700000 Puritan's tax rate is 40% for all years. Assuming that Puritan was eligible for the tax loss carryback, what would be the net loss in 2011 reported in Puritan's income statement?

$360,000

During the current year, Stern Company had pretax accounting income of $45 million. Stern's only temporary difference for the year was rent received in advance for the following year in the amount of $15 million. Stern's taxable income for the year would be:

$60 million.

Durney Co. recorded a right-of-use asset of $1,120,000 in a ten-year finance lease. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset after two years will be:

$896,000

When tax rates are changed subsequent to the creation of a deferred tax asset or liability, GAAP requires that:

All deferred tax accounts be adjusted to reflect the new tax rates.

Jacobs Eatery leased restaurant equipment from Gamma Leasing. Gamma earns interest under such arrangements at a 6% annual rate. The lease term is eight months with monthly payments of $20,000 due at the end of each month. Jacobs Eatery elected the short-term lease option. What is the effect of the lease on Jacobs Eatery's earnings during the eight-month term (ignore taxes)?

An expense of $20,000 at the end of each of the 8 months

The valuation allowance account that is used in conjunction with deferred tax assets is a(n):

Contra asset.

At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A footnote reveals that the entire $400,000 will be earned in the next year. In the absence of other temporary differences, in the balance sheet one would also expect to find a:

Deferred tax asset.

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax liability?

Depreciation early in the life of an asset.

Classify each item on the left as one that will either create a future deductible amount or a future taxable amount: Accrual of a loss contingency now. Tax deductible when paid later.

Future Deductible

Classify each item on the left as one that will either create a future deductible amount or a future taxable amount: Accrued bond interest now. Tax deductible when paid later.

Future Deductible

Classify each item on the left as one that will either create a future deductible amount or a future taxable amount: Accrued expenses for employee postretirement benefits. Tax deductible when subsequent payments are made.

Future Deductible

Classify each item on the left as one that will either create a future deductible amount or a future taxable amount: Bad debt expense accrued now under the allowance method. Tax deductible later when actually written off as uncollectible.

Future Deductible

Which of the following would never require reporting deferred tax assets or deferred tax liabilities?

Life insurance proceeds.

The appropriate asset value reported in the balance sheet by the lessee for an operating lease at lease inception is:

Present value of the lease payments.

Which of the following differences between financial accounting and tax accounting ordinarily creates a deferred tax asset?

Subscriptions collected in advance.

If the lessee and lessor use different interest rates to account for a finance/sales-type lease, then:

The lessee is unaware of the lessor's implicit rate.

In connection with an operating lease, the lessor would not record:

a liability

Of the following differences, which one ordinarily creates a deferred tax asset?

accrued warranty expense.

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs incurred by the lessee are:

added to the right-of-use asset and expensed over an amortization period.

Recognizing tax benefits in a loss year due to a net operating loss carryforward requires

creating a deferred tax asset.

In a finance lease:

the lessee records an asset and a liability for the present value of lease payments.

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. Payment. PMT Interest Principle Balance 0 63,282 1 10,000 0 10,000 53,282 2 10,000 6,394 3,606 49,676 3 10,000 5,961 4,039 45,638 4 10,000 5,477 4,523 41,114 5 10,000 4,934 5,066 36,048 6 10,000 4,326 5,674 30,373 7 10,000 3,645 6,355 24,018 8 10,000 2,882 7,118 16,901 9 10,000 ? ? ? 10 10,000 ? ? ? What would be the outstanding balance after payment 10?

$0

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $2,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years. Payment PMT Interest Principle Balance 0 34,600 1 8,000 ?? ?? 26,600 2 8,000 2,660 5,340 21,260 3 8,000 2,126 5,874 15,386 4 8,000 1,539 6,461 8,925 5 8,000 ?? ?? ?? 6 2,000 182 1,818 0 What is the outstanding balance after payment 5?

$1,818

Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations: 2010. 350000 2011. (600000) 2012. 700000 Puritan's tax rate is 40% for all years. Puritan was eligible for the tax loss carryback. Puritan was certain it would recover the full tax benefit of the NOL. What did it report on December 31, 2011, as the deferred tax asset for the NOL carryforward?

$100,000.

On January 1, 2021, PokemonGo Company leased equipment to Waldo Corporation under a lease agreement that qualifies as an operating lease to Waldo. The present value of the end-of-year lease payments of $138,585 discounted at 5% is $600,000. The expected economic life of the asset is seven years. The lease term is five years. What would Waldo record as amortization of the ROU asset in 2021? Note: This would be the credit to the ROU asset in the December 31, 2021, journal entry.

$108,585.

For its first year of operations Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Pretax accounting income 300000 Permanent Difference (15000) 285,000 Temporary Difference-depreciation (20000) Taxable Income 265,000 Tringali's tax rate is 40%.What should Tringali report as its income tax expense for its first year of operations?

$114,000.

Apex is a Lessee in a finance lease and guarantees a $20,000 residual value. It is probable that the asset will be worth $8,000 at the end of the lease. What amount should Apex include in its required lease payments?

$12,000

Isaac Inc. began operations in January 2021. For some property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments.In 2021, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: 2021 $60million 2022 120million 2023 120million 2024 150million 2025 150million Total. $600million Assume that Isaac has a 25% income tax rate and that there were no other differences in income for financial statement and tax purposes.Ignoring operating expenses, what deferred tax liability would Isaac report in its year-end 2021 balance sheet?

$135 million.

XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a finance lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the lease payments is $720,000. The expected economic life of the asset is seven years. The lease term is five years. Using the straight-line method, what would West record as annual amortization?

$144,000

XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a finance lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the lease payments is $720,000. The expected economic life of the asset is seven years. The lease term is five years. Using the straight-line method, what would West record as annual amortization?

$144,000.

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars): Pretax accounting income:$195 Pretax accounting income included: Overweight fines (not deductible for tax purposes) 5 Depreciation expense 70 Depreciation in the tax return 110 The applicable tax rate is 25%. There are no other temporary or permanent differences.Franklin's net income ($ in millions) is:

$145.

Isaac Inc. began operations in January 2011. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments.In 2011, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: 2011 60 million 2012. 120 million 2013. 120 million 2014. 150 million 2015. 150 million total 600 million Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses, what deferred tax liability would Isaac report in its year-end 2011 balance sheet?

$162 million

Alamo Inc. had $300 million in taxable income for the current year. Alamo also had a decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60 million. The company is subject to a tax rate of 25%. The total income tax expense for the year was (hint: follow the 3 step process - calculate income tax payable, journalize the changes in DTAs and DTLs, then plug income tax expense):

$165 million.

Isaac Inc. began operations in January 2011. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2011, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: 2011 60 million 2012. 120 million 2013. 120 million 2014. 150 million 2015. 150 million total 600 million Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes. Suppose that, in 2012, legislation revised the income tax rates, so that Isaac would be taxed in 2013 and beyond at 40%, rather than 30%. Assume that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses and additional sales in 2012, what deferred tax liability would Isaac report in its year-end 2012 balance sheet

$168 million

Pretax accounting income for the year ended December 31, 2011, was $50 million for Truffles Company. Truffles' taxable income was $60 million. This was a result of differences between straight line depreciation for financial reporting purposes and MACRS for tax purposes. The enacted tax rate is 30% for 2011 and 40% thereafter. What amount should Truffles report as the current portion of income tax expense for 2011?

$18 million

On January 1, 2021, Gibson Corporation entered into a four-year operating lease. The payments were as follows: $24,000 for 2021, $20,000 for 2022, $17,000 for 2023, and $14,000 for 2024. What is the correct amount of total lease expense for 2022?

$18,750.

Blue Co. recorded a right-of-use asset of $220,000 in a 10-year operating lease. Payments of $32,786 are made annually at the end of each year. The interest rate charged by the lessor was 8% and was known by Blue. The balance in the right-of-use asset after two years will be:

$188,413.

In its first year of operations Woodmount Corporation reported pretax accounting income of $500 million for the current year. Depreciation reported in the tax return in excess of depreciation in the income statement was $60 million. The excess tax depreciation will reverse itself evenly over the next three years. The current year's tax rate of 40% will be reduced under the current law to 35% next year and 30% for all subsequent years. At the end of the current year, the deferred tax liability related to the excess depreciation will be:

$19 million.

Technoid Inc. sells computer systems. Technoid leases computers to Lone Star Company on January 1, 2021. The manufacturing cost of the computers was $21 million.This noncancelable lease had the following terms: Lease payments: $3,204,433 semiannually; first payment at January 1, 2021; remaining payments at June 30 and December 31 each year through June 30, 2025. Lease term: 5 years (10 semiannual payments). No residual value; no purchase option. Economic life of equipment: 5 years. Implicit interest rate and lessee's incremental borrowing rate: 6% semiannually. Fair value of the computers at January 1, 2021: $25 million. What is the outstanding balance of the lease liability in Lone Star's June 30, 2021, balance sheet? (Round your answer to the nearest whole dollar.)

$19,898,868.

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars): Pretax accounting income:$230 Pretax accounting income included: Overweight fines (not deductible for tax purposes) 10 Depreciation expense 73 Depreciation in the tax return using MACRS: 122 The applicable tax rate is 25%. There are no other temporary or permanent differences.Franklin's taxable income ($ in millions) is:

$191

The following information relates to Franklin Freightways for its first year of operations (data in millions of dollars): Pretax accounting income:$230 Pretax accounting income included: Overweight fines (not deductible for tax purposes) 10 Depreciation expense 73 Depreciation in the tax return using MACRS: 122 The applicable tax rate is 25%. There are no other temporary or permanent differences.Franklin's taxable income ($ in millions) is:

$191

On October 1, 2021, Sonoma Company leased equipment from Napa Inc. in lease payable in five equal annual payments of $590,000, beginning Oct 1, 2022. Similar transactions have carried an 9% interest rate. The right-of-use asset would be recorded at: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided OR you may use Excel here and on the exam.)

$2,294,894.

BBB Leasing purchased a machine for $250,000 and leased it to Jack Tupp Auto Repair on January 1, 2021. Lease description: Quarterly rental payments. $16,315 at beginning of each period Lease term 5 years (20 quarters) No residual value; no BPO Economic life of machine 5 years Implicit interest rate 12% Fair value of asset $250,000 What is the balance in the lease payable account after the April 1, 2021, lease payment?

$224,381.

On January 1, 2021, Green Co. recorded a right-of-use asset of $270,360 in an operating lease. The lease calls for ten annual payments of $40,000 at the beginning of each year. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset at December 31, 2021, will be:

$253,396.

On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2026. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease. Reagan's lease amortization schedule appears below: Dec. 31 Payments Interest Principle Balance 2020 $519,115 2020 $90,000 $90,000 429,115 2021 $90,000 $17,165 72,835 356,280 2022 $90,000 14,251 75,749 280,531 2023 $90,000 11,221 78,779 201,752 2024 $90,000 8,070 81,930 119,822 2025 $90,000 4,793 85,207 34,615 2026 $36,000 1,385 34,615 0 What is the amount of residual value guaranteed by Reagan to the lessor?

$36,000.

Refer to the following lease amortization schedule. The five payments are made annually starting with the beginning of the lease. A $3,000 purchase option is reasonably certain to be exercised at the end of the five-year lease. The asset has an expected economic life of eight years. Payment. PMT Interest. Principle Balance 0. 32,720 1 7,400 ?? ?? 25,320 2 7,400 2,532 4,868 20,452 3 7,400 2,045 5,355 15,097 4 7,400 1,510 5,890 9,207 5 7,400 ?? ?? ?? 6 3,000 273 2,727 0 What amount would the lessee record as annual amortization on the asset using the straight-line method, assuming no residual value? (Round your answer to the nearest whole dollar.)

$4,090.

Giada Foods reported $940 million in income before income taxes for 2011, its first year of operations. Tax depreciation exceeded depreciation for financial reporting purposes by $100 million. The company also had non-tax-deductible expenses of $80 million relating to permanent differences. The income tax rate for 2011 was 35%, but the enacted rate for years after 2011 is 40%. The balance in the deferred tax liability in the December 31, 2011, balance sheet is:

$40 million

Information for Kent Corp. for the year 2011:Reconciliation of pretax accounting income and taxable income: Pretax Accounting Income 180000 Permanent DIfferences (15000) 165000 Temporary Difference-depreciation (12000) Taxable Income 153000 Cumulative future taxable amounts all from depreciation temporary differences: As of December 31, 2010 $13,000 As of December 31, 2011 $25,000 The enacted tax rate was 40% for 2010 and 30% for 2011 and thereafter. What should Kent report as the current portion of its income tax expense in the year 2011? Hint: This is just new terminology. The "current" portion of income tax expense equals the income tax payable.

$45,900.

Information for Kent Corp. for the year 20X1:Reconciliation of pretax accounting income and taxable income: Pretax Accounting Income 180000 Permanent DIfferences (15000) 165000 Temporary Difference-depreciation (12000) Taxable Income 153000 Cumulative future taxable amounts all from depreciation temporary differences: As of December 31, 20X0 $13,000 As of December 31, 20X1 $25,000 As of December 31, 20X0, the enacted tax rate was 40% for 20X0 and all years thereafter. In late 20X1 the tax rate was reduced to 30% for 20X1 and thereafter. What would Kent's income tax expense be in the year 20X1? Hint: The DTL on December 31, 20X0, would have been recorded when the tax rate was 40%.

$48,200.

For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Pretax accounting income. $320,000 Permanent difference (14,700) 305,300 Temporary difference-depreciation (20,300) Taxable income $285,000 Tringali's tax rate is 25%. 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?

$5,075.

During the current year, Stern Company had pretax accounting income of $41 million. Stern's only temporary difference for the year was rent received for the following year in the amount of $17 million. Stern's taxable income for the year would be:

$58 million.

Information for Kent Corp. for the year 2021: Reconciliation of pretax accounting income and taxable income: Pretax accounting income $180,000 Permanent differences (15,000) 165,000 Temporary difference-depreciation (12,000) Taxable income $153,000 Cumulative future taxable amounts all from depreciation temporary differences: As of December 31, 2020 $13,000 As of December 31, 2021 $25,000 The enacted tax rate was 25% for 2020 and thereafter. What should be the balance in Kent's deferred tax liability account as of December 31, 2021?

$6,250

For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Pretax accounting income$280,000 Permanent difference (15,300) 264,700 Temporary difference-depreciation (20,900) Taxable income$243,800 Tringali's tax rate is 25%. Assume that no estimated taxes have been paid.What should Tringali report as its income tax expense for its first year of operations?

$66,175.

Information for Kent Corp. for the year 2011: Reconciliation of pretax accounting income and taxable income: Pretax Accounting Income 180000 Permanent DIfferences (15000) 165000 Temporary Difference-depreciation (12000) Taxable Income 153000 Cumulative future taxable amounts all from depreciation temporary differences: As of December 31, 2010 $13,000 As of December 31, 2011 $25,000 The enacted tax rate was 40% for 2010 and 30% for 2011 and thereafter. What should be the balance in Kent's deferred tax liability account as of December 31, 2011?

$7,500

For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Pretax accounting income. $320,000 Permanent difference (14,700) 305,300 Temporary difference-depreciation (20,300) Taxable income $285,000 Tringali's tax rate is 25%. Assume that no estimated taxes have been paid.What should Tringali report as income tax payable for its first year of operations?

$70,875.

For its first year of operations Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Pretax accounting income 300000 Permanent Difference (15000) 285,000 Temporary Difference-depreciation (20000) Taxable Income 265,000 Tringali's tax rate is 25%. Assume that no estimated taxes have been paid. What should Tringali report as its income tax expense for its first year of operations?

$71,250

Francisco leased equipment from Julio on December 31, 2021. The lease is a 10-year lease with annual payments of $152,000 due on December 31 of each year beginning December 31, 2021. The present value of the lease payments is $993,631. The implicit rate of 11% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2022?

$782,210.

Francisco leased equipment from Julio on December 31, 2021. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year beginning December 31, 2021. The present value of the lease payments is $1,013,854. Francisco's incremental borrowing rate is 12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2022?

$800,239.

On January 1, Smith Industries leased equipment to a customer for a four-year period, at which time possession of the leased asset will revert back to Smith. The equipment cost Smith $355,000 and has an expected useful life of six years. Its normal sales price is $355,000. The residual value after four years is $100,000. Lease payments are due on December 31 of each year, beginning with the first payment at the end of the first year. The interest rate is 8%. Calculate the amount of the annual lease payments. (Round your answer to the nearest whole dollar.) You may use Excel here and on the exam. The present value of $1: n = 4, i = 8% is 0.73503. The present value of an ordinary annuity of $1: n = 4, i = 8% is 3.31213. The present value of an annuity due of $1: n = 4, i = 8% is 3.57710.

$84,990

On December 31, 20X0, HD reported a deferred tax asset of $90 million with no valuation allowance. On December 31, 20X1, the account balances of HD Services showed a deferred tax asset of $120 million before assessing the need for a valuation allowance and income taxes payable of $80 million. Also on December 31, 20X1, HD determined that it was more likely than not that 30% of the deferred tax asset ultimately would not be realized. What amount should HD report as income tax expense in its 20X1 income statement?

$86 million.

On September 1, 2021, Custom Shirts Inc. entered into a lease agreement appropriately classified as an operating lease. The lease term is three years. The annual payments by Custom Shirts are (a) $23,000 for year 1, (b) $27,000 for year 2, and (c) $31,000 for year 3. How much total lease expense will Custom Shirts recognize for 2021? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) Note: Pay attention to the dates on this one!

$9,000.

Bumble Bee Co. had taxable income of $7,000, MACRS depreciation of $5,000, book depreciation of $2,000, and accrued warranty expense of $400 on the books although no warranty work was performed. What is Bumble Bee's pretax accounting income?

$9,600.

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. Payment PMT Interest. Principle Balance 0 81,108 1 12,000 0 12,000 69,108 2 12,000 6,911 5,089 64,019 3 12,000 6,402 5,598 58,421 4 12,000 5,842 6,158 52,263 5 12,000 5,226 6,774 45,489 6 12,000 4,549 7,451 38,038 7 12,000 3,804 8,196 29,842 8 12,000 2,984 9,016 20,826 9 12,000 ? ? ? 10 12,000 ? ? ? What is the effective annual interest rate? (Round final answer to the nearest whole percentage.)

10%

Clinton Corp. had the following pretax income (loss) over its first three years of operations: 2009 1200000 2010 (900000) 2011 1500000 For each year there were no deferred income taxes and the tax rate was 40%. For its 2010 tax return, Clinton was NOT eligible for the tax loss carryback. No valuation account was deemed necessary for the deferred tax asset as of December 31, 2010. What was Clinton's income tax expense in 2011? Hint: You first need to think about the DTA that was recorded in 2010 then know that you will use up that DTA in 2011 due to the carryforward provision.

600,000

One of the five criteria for a finance lease specifies that the lease term be equal to or greater than _____ percent of the useful life of the leased asset.

75

One of the five criteria for a finance lease specifies that the present value of the lease payments be equal to or greater than _______ percent of the fair market value of the leased asset.

90

P Corp. leased an asset to L Corp. using an operating lease in February of Year 1. P Corp.'s statement of cash flows for the year ending December 31, Year 1 will report:

A cash inflow from operating activities.

J Corp. is a lessee that entered into a finance lease in February of Year 1. The company's statement of cash flows for the year ending December 31, Year 1 will report:

A cash outflow from operating activities and a cash outflow from financing activities

J Corp. is a lessee that entered into an operating lease in February of Year 1. The company's statement of cash flows for the year ending December 31, Year 1 will report:

A cash outflow from operating activities.

A magazine publisher collects one year in advance for subscription revenue. In the year of providing the magazines to customers, the company would record:

A decrease in a deferred tax asset.

In reconciling net income to taxable income, interest earned on municipal bonds is:

A permanent difference.

Barr Corp. is the lessee in a finance lease. Barr would record:

A right-of-use asset.

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs incurred by the lessor are expensed at the beginning of the lease in:

A sales-type lease with selling profit.

If it is "reasonably certain" that the lessee will exercise a purchase option:

All of these answer choices are correct. (The lease is classified as a finance/sales-type lease, Both the lessee and the lessor consider the exercise price of the option to be an additional cash payment., It's assumed that the lease term ends on the date that the option is expected to be exercised.)

A sales-type lease is reported in the lessor's balance sheet as:

An asset

In 2011, Magic Table Inc. decides to add a 36-month warranty on its new product sales. Warranty costs are tax deductible when claims are settled. In its financial statements for 2011, Magic Table Inc incurs:

An increase in a deferred tax asset.

If the lessor records deferred lease revenue at the beginning of a lease term, the lease must:

Be an operating lease.

On January 1, 2021, Wellburn Corporation leased an asset from Tabitha Company. The asset originally cost Tabitha $420,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1, 2021, in the amount of $43,000. The other three remaining payments will be made on January 1 of each subsequent year. Which of the following journal entries should Tabitha record on January 1, 2021?

Cash 43,000 Deferred revenue 43,000

Future Deductible Gives Rise to:

Deferred Tax Asset

Future Taxable gives rise to:

Deferred Tax Liability

Matt Co. is the lessor in connection with an operating lease. Matt Co. would record:

Depreciation expense.

A net operating loss (NOL) carryforward creates a deferred tax liability.

False

Future taxable amounts result in deferred tax assets.

False

Revenues from installment sales of property reported on financial statements in prior years and currently reported in the tax return create deferred tax assets.

False

Minnetonka Company leases an asset. Information regarding the lease: Fair value of the asset: $400,000. Useful life of the asset: 6 years with no salvage value. Lease term is 5 years. Annual lease payments are $60,000 Implicit interest rate: 11%. Minnetonka can purchase the asset at the end of the lease period for $50,000. What type of lease is this to the Lessee?

Finance

In connection with a lease of more than 12 months, the lessee will always record each of the following except:

interest revenue.

Classify each item on the left as one that will either create a future deductible amount or a future taxable amount: Newspaper subscriptions received and taxable now. Recognized for financial reporting purposes when earned later.

Future Deductible

Classify each item on the left as one that will either create a future deductible amount or a future taxable amount: Received advance rent receipts on an operating lease. Taxable when received now.

Future Deductible

Classify each item on the left as one that will either create a future deductible amount or a future taxable amount: Unrealized loss from recording investments available for sale at fair value. Tax deductible in the future when the investments are sold.

Future Deductible

Classify each item on the left as one that will either create a future deductible amount or a future taxable amount: Prepaid rent tax deductible now.

Future Taxable

Classify each item on the left as one that will either create a future deductible amount or a future taxable amount: Straight-line depreciation for financial reporting purposes but accelerated depreciation for tax purposes.

Future Taxable

The costs that (a) are associated directly with consummating a lease, (b) are essential to acquire the lease, and (c) would not have been incurred had the lease agreement not occurred, are referred to as initial direct costs. Initial direct costs incurred by the lessor are deferred and expensed over the lease term:

In both an operating lease and a sales-type lease with no selling profit.

For the lessor, a lessee-guaranteed residual value at the beginning of a finance lease should be:

Included as part of lease payments at present value.

Bird leased equipment that had a retail cash selling price of $1,200,000 and a useful life of five years with no residual value. The lessor paid $1,060,000 to acquire the equipment and used an implicit rate of 8% when calculating annual lease payments of $278,284 beginning January 1, at the beginning of the lease. Incremental costs of negotiating and consummating the completed lease transaction incurred by the lessor were $30,000. What is the increase in the lessor's earnings during the first year as a result of the lease (ignore taxes)? (Round your answer to the nearest whole dollar amount.) Hint: There's three components to this answer - gross profit, initial direct costs, and interest revenue.

Increase in earnings by $183,737.

On January 1, 2021, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a sales-type lease. Calloway paid $310,000 for the machine and is leasing it to Zone for $34,000 per year, an amount that will return 7% to Calloway. The present value of the lease payments is $310,000. The lease payments are due each January 1, beginning in 2021. What is the appropriate interest entry on December 31, 2021? Hint: Note that the payments are made on January 1, but interest accrues over time so think about the appropriate adjusting entry to be made on December 31, 2021.

Interest receivable. 19,320 Interest revenue 19,320

A noncancelable lease contains an option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably certain. The fair value of the asset exceeds the lessor's cost of the asset. Therefore, the lease will be accounted for by the lessor as a(n):

Sales-type lease.

The valuation allowance account that is used in conjunction with deferred taxes relates:

Only to deferred tax assets.

Abhijit Co. leased equipment from Barua Corp. on July 1, 2021, for an 8-year period expiring June 30, 2029. Equal annual payments on July 1 of each year are $120,000. The first payment was made on July 1, 2021. The rate of interest contemplated by Abhijit and Barua is 10%. The cash selling price of the equipment is $704,000, and the cost of the equipment on Barua's accounting records is $560,000. The lease is appropriately recorded as a sales-type lease. What is the amount of selling profit on the sale and interest revenue that Barua will record for the year ended December 31, 2021? Selling Profit Interest Revenue a.$9,000 $29,200 b.$9,000 $35,200 c.$144,000 $29,200 d.$144,000 $35,200

Option C

The lessee normally measures the lease liability to be recorded as the:

Present value of the lease payments.

Which of the following statements characterizes an operating lease?

The lessor records depreciation and lease revenue.

A temporary difference originates in one period and reverses, or turns around, in one or more later periods.

True

Expenditures currently deducted in the tax return but not included with expenses in the income statement until subsequent years create deferred tax liabilities (e.g., MACRS depreciation).

True

MACRS depreciation typically creates deferred tax liabilities early in the life of an asset.

True

Rent collected in advance results in deferred tax assets.

True

On December 31, 2020, Reagan Inc. signed a lease with Silver Leasing Co. for some equipment having a seven-year useful life. The lease payments are made by Reagan annually, beginning at signing date. Title does not transfer to the lessee, so the equipment will be returned to the lessor on December 31, 2026. There is no purchase option, and Reagan guarantees a residual value to the lessor on termination of the lease.Reagan's lease amortization schedule appears below: Dec. 31PaymentsInterestDecrease inBalanceOutstandingBalance2020 $519,115 2020$90,000 $90,000 429,115 2021$90,000 $17,165 72,835 356,280 2022$90,000 14,251 75,749 280,531 2023$90,000 11,221 78,779 201,752 2024$90,000 8,070 81,930 119,822 2025$90,000 4,793 85,207 34,615 2026$36,000 1,385 34,615 0 In this situation, Reagan:

is the lessee in a finance lease.

In an operating lease, the amortization of the right-of-use asset in the third year is:

less than in the fourth year.

ABC Books is the lessor in a lease agreement. From the perspective of the lessor, the lease may be classified as:

operating or sales-type.

In an operating lease:

the lessee records an asset and a liability for the present value of lease payments.