ACCT 304 chapter 18 and 19
Which type of transaction generally results in revenue being recognized with the passage of time? A) Customer controls the asset as it is created or the company does not have an alternative use for the asset. B) Sale of product from inventory. C) Rendering a service. D) Sale of an asset other than inventory.
A)
Income tax expense is based on: A) pretax income. B) taxable income. C) operating income. D) income from continuing operations
A
A company accounts for a contract modification as a new contract if A) the promised goods and services are distinct and the company has the right to receive an amount of consideration that reflects the standalone selling price of the promised goods or services. B) the company has the right to receive an amount of consideration that reflects the standalone selling price of the promised goods or services. C) the promised goods and services are distinct. D) the prospective approach is used.
A)
An indication that the customer has not taken control of the good or service is A) the customer has no significant risks or rewards of ownership. B) the customer has physical possession of the asset. C) the selling company has transferred legal title to the asset. D) the selling company has right to payment for the good or service.
A)
All of the following are examples of temporary differences that result in taxable amounts in future years except: A) subscriptions received in advance. B) investments accounted for under the equity method. C) long-term construction contracts (percentage-of-completion). D) installment sales.
A) All of the options are examples of future taxable amounts except subscriptions received in advance.
The Billings on Construction in Process account is reported: A) in either the current asset or current liability section. B) in the current asset section only. C)in the current liability section only. D) as a revenue on the income statement
A) Billings on Construction in Process is never reported in the income statement. It is a record of amounts billed on the contract. It is reported on the balance sheet as a current asset or current liability, depending on whether its balance is larger or smaller than the Construction in Process account balance.
ELO Construction Co. began operations in 2017. Construction activity for 2017 is shown below. ELO uses the completed-contract method. What amount of gross profit should be reported on the income statement for 2017? Entry field with correct answer A) $950,000 B) $1,340,000 C) $0 D) $1,480,000
A) Gross profit is recognized only on the completed contract (Contract 1). Contract 1 Price, $4,650,000 - Contract 1 Costs, $3,700,000 = Contract 1 Gross Profit, $950,000.
Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if A) the future tax rates have been enacted into law. B) it appears likely that a future tax rate will be greater than the current tax rate. C) it is probable that a future tax rate change will occur. D) it appears likely that a future tax rate will be less than the current tax rate.
A) Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if the future tax rates have been enacted into law.
When using the percentage of completion method, the company A) recognizes revenues and gross profit each period during the contract. B) accumulates progress billings in an inventory account (Construction in Process). C) accumulates construction costs only in an inventory account (Construction in Process). D) recognizes revenues and gross profit only when the contract is completed.
A) When using the percentage of completion method, the company accumulates progress billings in a contra inventory account (Billings on Construction in Process), not in an inventory account (Construction in Process).
Howe Corporation has income before income taxes of $1,064,000 in 2017. The current provision for income taxes is $210,000 and the provision for deferred income taxes is $165,000. Howe's net income for 2017 is A) $689.000. B) $1,019,000. C) $854,000. d) $899,000.
A) Net income is [Income before income taxes, $1,064,000 - (Current provision for income taxes, $210,000 + Provision for deferred income taxes, $165,000)] = $689,000, 2017 Net Income.
Which of the following statements related to loss carrybacks and carryforwards is correct? A) The benefit due to a loss carryforward can be reported in both the loss year and future years. B) The benefit due to a loss carryback is reported only in the second year preceding the loss year. C) The benefit due to a loss carryback can be reported in both the loss year and future years. D) The benefit due to a loss carryforward is reported only in the loss year.
A) The benefit due to a loss carryforward is reported in both the loss year and future years when it is more likely than not that the entire loss carryforward will not be realized. The benefit due to a loss carryback can be reported only in the loss year, and not future years.
Black Bear Construction Company has a contract to construct a $6,000,000 bridge at an estimated cost of $5,300,000. The contract is to start in July 2017, and the bridge is to be completed in October 2019. The following data pertain to the construction period. (Note that by the end of 2018, Black Bear has revised the estimated total cost from $5,300,000 to $5,400,000.) What amount of gross profit should Black Bear recognize in 2018 using the percentage-of-completion method? A) $315,000 B) $245,000 C) $270,000 D) $ 0
B
Taxable income of a corporation A) differs from accounting income due to differences in intraperiod allocation between the two methods of income determination. B) differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting. C) is based on generally accepted accounting principles. D) is reported on the corporation's income statement.
B
In determining the transaction price, the company must consider: A) the time value of money, but not consideration payable. B) variable consideration, non-cash consideration, time value of money, and consideration payable. C) variable consideration, but not non-cash consideration. D) non-cash consideration, but not the time value of money.
B)
Income tax expense is based on: A) taxable income. B) pretax income. C) operating income. D) income from continuing operations.
B)
On January 15, 2018, Bella Vista Company enters into a contract to build custom equipment for ABC Carpet Company. The contract specified a delivery date of March 1. The equipment was not delivered until March 31. The contract required full payment of $75,000 30 days after delivery. The revenue for this contract should be A) recorded on April 30, 2018. B) recorded on March 31, 2018. C) recorded on March 1, 2018. D) recorded on January 15, 2018.
B)
The seller of a good or service should recognize revenue when A) they determine the transaction price. B) each performance obligation is satisfied. C) they identify the contract with customers. D) they identify the separate performance obligations in the contract.
B)
The transaction price A) excludes discounts, volume rebates, coupons and free products, or services. B) is the amount of consideration that a company expects to receive from a customer. C) excludes time value of money if the contract involves a significant financing component. D) does not consider non-cash consideration such as donations, gifts, equipment or labor.
B)
A deferred tax liability represents the: A) increase in taxes saved in future years as a result of deductible temporary differences. B) increase in taxes payable in future years as a result of taxable temporary differences. C) decrease in taxes payable in future years as a result of taxable temporary differences. D) decrease in taxes saved in future years as a result of deductible temporary differences.
B) A deferred tax liability is the increase in future taxes payable due to temporary taxable differences.
Reedy Builders, Inc. is using the completed-contract method for a $12,400,000 contract that will take three years to complete. Data at December 31, 2017, the end of the first year, are as follows: Costs incurred to date $5,200,000 Estimated costs to complete 7,800,000 Billings to date 4,920,000 Collections to date 4,540,000 The gross profit or loss that should be recognized for 2017 is: A) a $240,000 loss. B) a $600,000 loss. C) $0. D) a $200,000 loss.
B) Under both the percentage-of-completion and the completed-contract methods, the company must recognize in the current period the entire loss immediately. The entire contract loss is computed as follows: Contract Price, $12,400,000 - (Costs incurred to date, $5,200,000 + Estimated costs to complete, $7,800,000) = $600,000 loss.
In computing deferred income taxes for which graduated tax rates are a significant factor, companies are required to use the: A)actual rates. B) average rates. C) incremental rates. D) graduated rates.
B) When graduated tax rates are a significant factor, companies must determine the average tax rate and use that rate.
An indication that the customer has not taken control of the good or service is A) the customer has physical possession of the asset. B) the customer has no significant risks or rewards of ownership. C) the selling company has transferred legal title to the asset. d) the selling company has right to payment for the good or service.
B) When the selling company has the right to payment for the good or service, it is an indication that the customer has obtained control. When the customer has significant risks or rewards of ownership, it is an indicator that the customer has obtained control, so when the customer has no significant risks or rewards of ownership, it is an indication that the customer has not taken control of the good or service.
Weatherly Company reported the following results for the year ended December 31, 2016, its first year of operations: Income (per books before income taxes) $3,300,000 Taxable income 4,450,000 The disparity between book income and taxable income is attributable to a temporary difference, which will reverse in 2017. What should Weatherly record as a net deferred tax asset or liability for the year ended December 31, 2016, assuming that the enacted tax rates in effect are 35% in 2016 and 30% in 2017? A) $345,000 deferred tax liability B) $345,000 deferred tax asset C) $402,500 deferred tax liability D) $402,500 deferred tax asset
B) ($4,450,000 less $3,300,000) * 30% (enacted tax rate expected to apply) results in $345,000 deferred tax asset.
Weatherly Company reported the following results for the year ended December 31, 2016, its first year of operations: Income (per books before income taxes) $3,300,000 Taxable income 4,450,000 The disparity between book income and taxable income is attributable to a temporary difference, which will reverse in 2017. What should Weatherly record as a net deferred tax asset or liability for the year ended December 31, 2016, assuming that the enacted tax rates in effect are 35% in 2016 and 30% in 2017? Entry field with correct answer A) $402,500 deferred tax liability B) $345,000 deferred tax asset C) $402,500 deferred tax asset D) $345,000 deferred tax liability
B) ($4,450,000 less $3,300,000) * 30% (enacted tax rate expected to apply) results in $345,000 deferred tax asset.
Hopkins Corp.'s 2017 income statement showed pretax accounting income of $1,035,000. To compute the federal income tax liability, the following 2017 data are provided: Income from exempt municipal bonds- $ 41,000 Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes- 97,000 Estimated federal income tax payments made- 159,500 Enacted corporate income tax rate- 27.5% What amount of current federal income tax liability should be included in Hopkins' December 31, 2017 balance sheet? Entry field with incorrect answer A) $163,075 B) $87,175 C) $132,578 D) $109,275
B) (Pretax accounting income, $1,035,000 - Income from exempt municipal bonds, $41,000 - Depreciation temporary difference, $97,000) × Enacted tax rate, 27.5% = Income tax payable, $246,675; Income tax payable, $246,675 - Income tax payments made, $159,500 = 2017 Federal income tax liability, $87,175.
On December 31, 2017, Winston Inc. has determined that it is more likely than not that $240,000 of a $600,000 deferred tax asset will not be realized. The journal entry to record this reduction in asset value will include a A) credit to Income Tax Expense for $360,000. B) credit to the Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $240,000. C) debit to Income Tax Payable of $240,000. D) debit to Income Tax Expense for $360,000.
B) A company reduces a deferred tax asset by a valuation account if it is more likely than not that it will not realize some portion or all of the deferred asset. . It recognizes this with a credit to the Allowance to Reduce Deferred Tax Asset to Expected Realizable Value of $240,000.
Under the completed contract method, the Construction in Process account balance will consist of A) construction costs and billings. B) construction costs only. C) gross profit only. D) construction costs and gross profit.
B) Under the completed contract method, the Construction in Process account balance consists of construction costs only, not gross profit. Gross profit is not recognized until the contract is completed.
In determining the transaction price, the company must consider: A) the time value of money, but not consideration payable. B) variable consideration, non-cash consideration, time value of money, and consideration payable. C) variable consideration, but not non-cash consideration. D) non-cash consideration, but not the time value of money.
B) Variable consideration, non-cash consideration, time value of money, and consideration payable must all be considered in determining the transaction price.
On January 1, 2017, Fullbright Company sold goods to Blue Dirt Company for $400,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of $629,406 (imputed rate of 12%). The goods have an inventory cost on Fullbright's books of $240,000. What amount of Sales Revenue should Fullbright recognize in 2017? A) $240,000 B) $629,406 C) $400,000 D) $229,406
C $629,406 is the amount recorded as Notes Receivable. $400,000 is recorded as Sales Revenue, while the other $229,406 will eventually be Interest Revenue.
One criteria that indicates that a company should disregard revenue guidance for contracts is when A) each party's rights regarding the goods or services to be transferred can be identified. B) the payment terms for the goods and services to be transferred can be identified. C) each party can unilaterally terminate the contract without compensation. D) the contract has commercial substance.
C The company should disregard revenue guidance to contracts if the contract is wholly unperformed, or if each party can unilaterally terminate the contract without compensation.
In a consignment sale, the consignee A) records advertising paid for the consignment as an expense. B) recognizes both commission revenue and sales revenue. C) records a payable when consigned merchandise is sold. D)makes a journal entry when the consigned merchandise is received.
C The consignee records a payable to the consignor, not sales revenue, when consigned merchandise is sold. The consignee will later record commission revenue.
Non-cash consideration should be A) recognized on the basis of original cost paid by customer. B) recognized on the basis of fair value of what is given up. C) recognized on the basis of fair value of what is received. D) recognized on the basis of fair value of equivalent goods or services.
C)
Recognizing a valuation allowance for a deferred tax asset requires that a company A) take an aggressive approach in its tax planning. B) pass a recognition threshold, after assuming that it will be audited by taxing authorities. C) consider all positive and negative information in determining the need for a valuation allowance. D) consider only the positive information in determining the need for a valuation allowance.
C)
A deferred tax liability represents the: A)decrease in taxes payable in future years as a result of taxable temporary differences. B) increase in taxes saved in future years as a result of deductible temporary differences. C) increase in taxes payable in future years as a result of taxable temporary differences. D) decrease in taxes saved in future years as a result of deductible temporary differences.
C) A deferred tax liability is the increase in future taxes payable due to temporary taxable differences.
Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in Future Taxable Amounts Future Deductible Amounts 1) Yes Yes 2) Yes No 3) No Yes 4) No No A) 3 B) 4 C) 1 D) 2
C) Depreciation can result in both future taxable amounts and future deductible amounts.
Vasquez Corp.'s 2017 income statement showed pretax accounting income of $2,040,000. To compute the federal income tax liability, the following 2017 data are provided: Income from exempt municipal bonds - $ 110,000 Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes- 144,000 Estimated federal income tax payments made - 330,000 Enacted corporate income tax rate- 30% What amount of current federal income tax liability should be included in Vasquez's December 31, 2017 balance sheet? Entry field with incorrect answer A) $271,800 B) $282,000 C) $205,800 D) $249,000
C) [(Pretax accounting income, $2,040,000 - Income from exempt municipal bonds, $110,000 - Depreciation adjustment, $144,000) X tax rate, 30%] minus Tax payments made, $330,000 equals $205,800, Income tax liability at December 31, 2017.
Deferred tax expense is the: A) decrease in a deferred tax liability. B) increase in a deferred tax asset. C) increase in a deferred tax liability. D) amount of income taxes payable for the period
C) Deferred tax expense is the increase in a deferred tax liability.
Future deductible amounts will cause: A) taxable income to be more than pretax financial income in the future. B) the recording of a deferred tax liability. C) the recording of a deferred tax asset. D) a decrease in pretax financial income in future years.
C) A deferred tax asset is the consequence of future deductible amounts.
Gulfport Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Gulfport would be A) using accelerated depreciation for tax purposes and straight-line depreciation for book purposes. B) making installment sales during the year. C) a fine resulting from violations of OSHA regulations. D) a balance in the Unearned Rent account at year-end.
C) An item that would create a permanent difference in accounting and taxable incomes would be a fine resulting from violations of OSHA regulations. A difference resulting from using accelerated depreciation for tax purposes and straight-line depreciation for book purposes would be classified as a temporary difference, not a permanent difference.
Pizza Factory enters into a franchise agreement on 11/1/16 giving Mow's House the right to operate as a franchisee of Pizza Factory for 5 years. Pizza Factory prepared this entry on 11/1/16: Cash 40,000 Notes Receivable 60,000 Discount on Notes Receivable 12,086 Unearned Franchise Revenue 40,000 Unearned Service Revenue (training) 19,914 Unearned Sales Revenue (equipment) 28,000 Pizza Factory satisfies the performance obligations related to the elements above when the franchise opens on 3/1/17. Other than interest, how much revenue should Pizza factory recognize on 3/1/17? Entry field with correct answer A) $ 43,957. B) $100,000. C) $ 87,914. D) $ 0.
C) Since Pizza Factory satisfies the performance obligations related to the elements above when the franchise opens on 3/1/17, all of the Unearned Revenue amounts are recognized. Total revenue to be recognized is computed as follows: Unearned Franchise Revenue, $40,000 + Unearned Service Revenue (Training), $19,914 + Unearned Sales Revenue (Equipment), $28,000 = $87,914.
The FASB believes that the most consistent method for accounting for income taxes is the A) carryback-carryforward method. B) temporary-permanent method. C) asset-liability method. D) benefit-obligation method.
C) The FASB believes the asset-liability method to be the most consistent method for accounting for income taxes. There is not a method called the temporary-permanent method.
A deferred tax valuation allowance account is used to recognize a reduction in A) both a deferred tax asset and a deferred tax liability. B) a deferred tax liability only. C) income tax expense. D) a deferred tax asset only.
D)
A major distinction between temporary and permanent differences is A) permanent differences are not representative of acceptable accounting practice. B) temporary differences occur frequently, whereas permanent differences occur only once. C) once an item is determined to be a temporary difference, it maintains that status; however, a permanent difference can change in status with the passage of time. D) temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.
D)
A performance obligation exists when A) a contract is approved and signed. B) a company receives the right to receive consideration. C) a company provides interdependent product or service. D) a company provides a distinct product or service.
D)
In a consignment sale, the consignee A) records advertising paid for the consignment as an expense. B) recognizes both commission revenue and sales revenue. C) makes a journal entry when the consigned merchandise is received. D) records a payable when consigned merchandise is sold.
D)
One criteria that indicates that a company should disregard revenue guidance for contracts is when A) each party's rights regarding the goods or services to be transferred can be identified. B) the payment terms for the goods and services to be transferred can be identified. C) the contract has commercial substance. D) each party can unilaterally terminate the contract without compensation.
D)
Revenue from a contract with a customer A) is recognized when the customer receives the rights to receive consideration B) is recognized even if the contract is still wholly unperformed. C) can be recognized even when a contract is still pending. D) cannot be recognized until a contract exists.
D)
Stossel Company sells 300 units for $200 each to Liberty Inc. for cash. Stossel allows Liberty to return any unused product within 30 days and receive a full refund. The cost of each product is $120. To determine the transaction price, Stossel decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the most likely amount. Using the most likely amount, Stossel estimates that ten (10) units will be returned, the costs of recovering the units will be immaterial, and the returned units are expected to be resold at a profit. What amount of refund liability should Stossel record at the time of sale? A) $ 0 B) $800 C) $1,200 D) $2,000
D)
The new standard, Revenue from Contracts with Customers, A) adopts a revenue-gain approach for revenue recognition. B) adopts "earned and realized" criteria. C) adopts criteria that de-emphasize the importance of contracts with customers. D) adopts an asset-liability approach for revenue recognition.
D)
When accounting for income taxes, the differences between IFRS and U.S. GAAP involve: A) a few exceptions to the asset-liability approach. B) some minor differences in the recognition, measurement, and disclosure criteria. C) differences in the allocation of deferred income taxes. D) all of these answer choices are correct.
D) Differences between IFRS and U.S. GAAP involve a few exceptions to the asset-liability approach, some minor differences in the recognition, measurement, and disclosure criteria, and differences in the allocation of deferred income taxes. This response is correct, but there is a better answer.
Which type of revenue or gain is generally recognized with the passage of time? A)Revenue from sales. B)Gain or loss from disposition. C)Revenue from fees or services. D)Long-term construction contracts.
D) Revenue from fees or services is recognized as the services are performed and billable. Revenue from long-term construction contracts is generally recognized as time passes.
Which method of measuring the fair value of a performance obligation is dependent on the standalone selling prices of other goods or services promised in the contract? A) adjusted market assessment. B) expected cost plus a margin. C) standalone selling price. D) residual value.
D) Standalone selling price is the price of the specific goods or services in question, not of other goods or services promised in the contract. The residual value method of measuring the fair value of a performance obligation is dependent on the standalone selling prices of other goods or services promised in the contract.
Stossel Company sells 300 units for $200 each to Liberty Inc. for cash. Stossel allows Liberty to return any unused product within 30 days and receive a full refund. The cost of each product is $120. To determine the transaction price, Stossel decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the most likely amount. Using the most likely amount, Stossel estimates that ten (10) units will be returned, the costs of recovering the units will be immaterial, and the returned units are expected to be resold at a profit. What amount of refund liability should Stossel record at the time of sale? A) $1,200 B) $ 0 C) $800 D) $2,000
D) Stossel would record an asset, Estimated Inventory Returns, of $1,200 (10 estimated units to be returned X $120 cost per unit) and should record a refund liability of $2,000 (10 estimated units to be returned X $200 selling price).
A deferred tax asset represents a: A) future tax liability. B) future tax expense. C) future taxable amount. D) future tax benefit.
D) A deferred tax asset is a future tax benefit, not a future taxable amount.
A deferred tax valuation allowance account is used to recognize a reduction in A) a deferred tax liability only. B) income tax expense. C) both a deferred tax asset and a deferred tax liability. D) a deferred tax asset only.
D) A valuation allowance account is established to recognize the reduction only in a deferred tax asset, not a deferred tax liability.
Pringle Corporation reported $200,000 in revenues in its 2016 financial statements, of which $88,000 will not be included in the tax return until 2017. The enacted tax rate is 40% for 2016 and 35% for 2017. What amount should Pringle report for deferred income tax liability in its balance sheet at December 31, 2016? A) $39,200 B) $35,200 C) $44,800 D) $30,800
D) Deferred amount, $88,000 .35 = $30,800. The 35% tax rate is used to calculate the deferred income tax amount since it is the enacted tax rate expected to apply in future years.
In a bill-and-hold arrangement, which of the following is not one of the criteria which must be met for the customer to have obtained control of the product? A) The product currently must be ready for physical transfer to the customer. B) The seller cannot have the ability to use the product or to direct it to another customer. C) The reason for the bill-and-hold arrangement must be substantive. D) The product must be physically located in the seller's warehouse.
D) For the customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria should be met: (a) The reason for the bill-and-hold arrangement must be substantive, (b) The product must be identified separately as belonging to the customer, (c) The product currently must be ready for physical transfer to the customer, and (d) the seller cannot have the ability to use the product or to direct it to another customer.
Tax rates other than the current tax rate may be used to calculate the deferred income tax amount for financial statement reporting if A) it is probable that a future tax rate change will occur. B) it appears likely that a future tax rate will be greater than the current tax rate. C) it appears likely that a future tax rate will be less than the current tax rate. D) the enacted tax rate is expected to apply in future years.
D) If tax rates are expected to change in the future, the company should use the enacted tax rate expected to determine the tax rate to apply to existing temporary differences.
On January 1, 2017, Purdy Company enters into a contract to transfer Blue and Rain to Georgia Co. for $300,000. The contract specifies that payment for Blue will not occur until Rain is also delivered. In other words, payment will not occur until both Blue and Rain are transferred to Georgia. Purdy determines that standalone prices are $110,000 for Blue and $190,000 for Rain. Purdy delivers Blue to Georgia on February 10, 2017. On March 15, 2017, Purdy delivers Rain to Georgia. Purdy should record A) Accounts Receivable of $300,000 on January 1. B) Accounts Receivable of $110,000 on February 10. C) Contract Asset of $110,000 on January 1. D) Contract Asset of $110,000 on February 10.
D) No entry is required on January 1 because neither party has performed on the contract. Conditional rights to receive consideration are reported as contract assets rather than as receivables. Thus, a contract asset of $110,000 would be reported on February 10.
Under the asset-liability method, deferred taxes should be presented on the balance sheet A) as reductions of the related asset or liability accounts. B) as one net debit or credit amount. C) in two amounts: one for the net debit amount and one for the net credit amount. D) as either net noncurrent deferred tax assets or noncurrent deferred tax liabilities.
D) Under the asset-liability method, deferred taxes should be reported on the balance sheet as either net noncurrent deferred tax assets or noncurrent deferred tax liabilities.