Chapter 17 - 19 Review - Exam #2

Horner Construction Co. uses the percentage-of-completion method. In 2021, Horner began work on a contract for $22,000,000; it was completed in 2022. The following cost data pertain to this contract: Year Ended December 31 2021 2022 Cost incurred during the year $7,800,000 $5,600,000 Estimated costs to complete at the end of year 5,200,000 — If the completed-contract method of accounting was used, the amount of gross profit to be recognized for years 2021 and 2022 would be 2021 2022 a. $9,000,000. $0. b. $8,600,000. $(400,000). c. $0. $8,600,000. d. $0. $9,000,000.

$0. $8,600,000. Explanation: under Complete-contract method, companies recognize revenue and gross profit only at point of sale—that is, when the contract is completed. The amount of gross profit to be recognized in 2021 = 0 The amount of gross profit to be recognized in 2022 = $22,000,000 - ($7,800,000 + $5,600,000) = $8,600,000

Hopkins Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $3,000,000 Estimated litigation expense 4,000,000 Extra depreciation for taxes (6,000,000) Taxable income $ 1,000,000 The estimated litigation expense of $4,000,000 will be deductible in 2020 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $2,000,000 in each of the next three years. The income tax rate is 20% for all years. The amount of deferred tax liability to be recognized is a. $800,000 b. $600,000 c. $1,200,000 d. $1,000,000

$1,200,000 Explanation: Use of the depreciable assets will result in taxable amounts of $2,000,000 in each of the next three years Future Taxable Amount Deferred Tax Liability. The amount of deferred tax liability to be recognized = $6,000,000 × 20% = $1,200,000.

On June 1, 2021, Johnson & Sons sold equipment to James Landscaping Service in exchange for a zero-interest bearing note with a face value of $110,000, with payment due in 12 months. The fair value of the equipment on the date of sale was $100,000. The amount of revenue to be recognized on this transaction in 2021 is a. $110,000. b. $10,000 c. $100,000 d. $100,000 sales revenue and $5,833 interest revenue.

$100,000 sales revenue and $5,833 interest revenue Explanation: June 1, 2021 Dr. Notes Receivable $110,000 Cr. Discount on Notes Receivable $10,000 Cr. Sales Revenue $100,000 December 31, 2021 Dr. Discount on Notes Receivable $5,833 Cr. Interest Revenue $5,833 (=$10,000 x 7/12)

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2021, paying $1,410,375. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. For the year ended December 31, 2021, Patton Company should report interest revenue from the Scott Company bonds of: a. $158,970. b. $155,283. c. $155,130. d. $150,000.

$155,283. Explanation: On Dec. 31, 2021 to recognize accrued interest revenue Dr. Interest Receivable $75,000 Dr. Debt Investments $2,712 Cr. Interest Revenue 77,712 Thus, Interest Revenue for 2021 = $77,571 + $77,712 = $155,283

Eilert Construction Company had a contract starting April 2021, to construct a $42,000,000 building that is expected to be completed in September 2022, at an estimated cost of $38,500,000. At the end of 2021, the costs to date were $17,710,000 and the estimated total costs to complete had not changed. The progress billings during 2021 were $8,400,000 and the cash collected during 2021 was $5,600,000. Eilert uses the percentage-of-completion method. At December 31, 2021, Eilert would report Construction in Process in the amount of a. $19,320,000. b. $17,710,000. c. $16,520,000. d. $ 1,610,000.

$19,320,000. Explanation: 2021 a. Cost incurred Dr. Construction in Progress $17,710,000 Cr. Materials, Cash, etc. $17,710,000 b. Billings Dr. Account Receivable $8,400,000 Cr. Billings on contracts $8,400,000 c. Collection Dr. Cash $5,600,000 Cr. Account Receivable $5,600,000 d. Revenue recognition Dr. Construction in Progress $1,610,000 Dr. Construction Expense $17,710,000 Cr. Construction Revenue $19,320,000 Thus, at December 31, 2021, Eilert would report Construction in Progress in the amount of $ $19,320,000 (=17,710,000 + $1,610,000)

73. Kraft Company made the following journal entry in late 2021 for rent on property it leases to Danford Corporation. Cash 150,000 Unearned Rent Revenue 150,000 The payment represents rent for the years 2022 and 2023, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $230,000 at the end of 2021, and its tax rate for next two years is 25%. What amount of income tax expense should Kraft Company report at the end of 2021? a. $117,500 b. $192,500 c. $211,250 d. $267,500

$192,500 Explanation: Unearned Rent Revenue will create future deductible amount because it is taxable when Kraft Company receives in cash but it is not recognized in financial reporting purpose. Thus Kraft Company will pay more tax this year and pay less taxes in the future. In other words, it should recognize Deferred Tax Asset. Deferred tax asset = future deductible amount × tax rate 25% = $150,000 x 25% = $37,500 Journal entry Dr. Income Tax Expense $192,500 Dr. Deferred Tax Asset $37,500 Cr. Income Taxes Payable $230,000

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2021, paying $1,410,375. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. On July 1, 2021, Patton Company should increase its Debt Investments account for the Scott Company bonds by a. $8,970. b. $5,140. c. $4,485. d. $2,571.

$2,571. 10% bonds purchased to yield 11% Date Cash received Interest Revenue Bond discount amortization Carrying amount of bonds 1/1/21 $1,410,375 7/1/21 $75,000 $77,571 $2,571 $1,412,946 1/1/22 $75,000 $77,712 $2,712 $1,415,658 On July 1, 2021 Dr. Cash $75,000 Dr. Debt Investments $2,571 Cr. Interest Revenue $77,571

Hopkins Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $3,000,000 Estimated litigation expense 4,000,000 Extra depreciation for taxes (6,000,000) Taxable income $ 1,000,000 The estimated litigation expense of $4,000,000 will be deductible in 2020 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $2,000,000 in each of the next three years. The income tax rate is 20% for all years. Income taxes payable is a. $0. b. $200,000. c. $600,000. d. $900,000.

$200,000. Explanation: Income Tax Payable = Taxable income x Income Tax rate = $1,000,000 × 20% = $200,000

On August 5, 2021, Famous Furniture shipped 40 dining sets on consignment to Furniture Outlet, Inc. The cost of each dining set was $350 each. The cost of shipping the dining sets amounted to $3,600 and was paid for by Famous Furniture. On December 30, 2021, the consignee reported the sale of 30 dining sets at $850 each. The consignee remitted payment for the amount due after deducting a 6% commission, advertising expense of $600, and installation and setup costs of $780. The amount cash received by Famous furniture is a. $25,500 b. $23,970 c. $22,590 d. $23,370

$22,590 Explanation: The amount cash received by Famous furniture = (30 $850) × (100%-6%) - $600 - $780 = $22,590 Journal entry reported by Famous Furniture (consignor) at December 30, 2021 Dr. Cash $22,590 Dr. Advertising expense $600 Dr. Installation and setup expense $780 Dr. Commission Expense $1,530 (=30 $850 × 6%) Cr. Revenue from Consignment Sales $25,500 (= 30 $850)

Eckert Corporation's partial income statement after its first year of operations is as follows: Income before income taxes $3,750,000 Income tax expense Current $1,035,000 Deferred 90,000 1,125,000 Net income $2,625,000 Eckert uses the straight-line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The amount charged to depreciation expense on its books this year was $2,800,000. No other differences existed between book income and taxable income except for the amount of depreciation. Assuming a 20% tax rate, what amount was deducted for depreciation on the corporation's tax return for the current year? a. $2,350,000 b. $1,125,000 c. $2,800,000 d. $3,250,000

$3,250,000 Explanation: Temporary Difference = Depreciation for tax reporting - Depreciation for financial reporting Deferred Tax Liability = 20% × (Depreciation for tax reporting - Depreciation for financial reporting) = $90,000 Then, Depreciation for tax reporting - Depreciation for financial reporting = $450,000 (= $90,000 ÷ 20%) Since the amount charged to depreciation expense on its books this year was $2,800,000, Depreciation for tax reporting = Depreciation for financial reporting + $450,000 = $2,800,000 + $450,000 = $3,250,000

Kiner, Inc. began work in 2021 on a contract for $21,000,000. Other data are as follows: 2021 2022 Costs incurred to date $9,000,000 $14,000,000 Estimated costs to complete 6,000,000 - Billings to date 7,000,000 21,000,000 Collections to date 5,000,000 18,000,000 If Kiner uses the percentage-of-completion method, the gross profit to be recognized in 2021 is a. $3,600,000. b. $4,000,000. c. $5,400,000. d. $6,000,000.

$3,600,000. Explanation: Percentage-of-completion method: Recognize revenues and gross profits each period based upon the progress of the construction Estimated total cost = Costs to date + Estimated costs to complete = $9,000,000 + $6,000,000 = $15,000,000 Percentage of completion = Costs to date / Estimated total cost = $9,000,000 / $15,000,000=60% The gross profit to be recognized in 2021 = $21,000,000 x 60% - $9,000,000 = $3,600,000

On its December 31, 2020 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2021 in the composition of Calhoun's portfolio of debt investments held as available-for-sale debt securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/21 X $130,000 $160,000 Y 100,000 90,000 Z 175,000 125,000 $405,000 $375,000 What amount of unrealized loss on these debt securities should be included in Calhoun's stockholders' equity section of the balance sheet at December 31, 2021? a. $40,000. b. $30,000. c. $20,000. d. $0.

$30,000 Explanation: Required Fair Value Adjustment account balance is $30,000 credit balance ($375,000 - $405,000) Fair Value Adjustment - Equity Beg. Bal $10,000 Necessary adjustment $40,000 Ending Bal. (Required to report debt investments at Fair value of $375,000 $30,000 Dr. Unrealized Holding Loss— Equity $40,000 Cr. Fair Value Adjustment $40,000 But the question is the amount of unrealized holding loss on the balance sheet at December 31, 2021. So it actually askes the ending balance of fair value adjustment for the AFS debt investment, which is $30,000.

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2021, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2021 and December 31, 2021 by the amortized premiums of $4,248 and $4,392, respectively. At December 31, 2021, the fair value of the Carlin, Inc. bonds was $1,272,000. What should Richman Company report as other comprehensive income and as a separate component of stockholders' equity? a. $0 b. $8,640 c. $22,104 d. $30,744

$30,744 Explanation: Available for Sale Debt Securities => Companies report available-for-sale securities at fair value, with unrealized holding gains and losses reported as other comprehensive income, a separate component of stockholder's equity, until realized. Fair Value Adjustment account is used to record the difference between fair value and amortized cost (the carrying value of bonds). The carrying value of bonds at 12/31/21 = $1,249,896 - $4,248 - $4,392 = $1,241,256. Unrealized holding gains (The fair value is greater than the amortized cost) = $1,272,000 - $1,241,256 = $30,744 Dr. Unrealized Holding Gain or Loss—Equity $30,744 Cr. Fair Value Adjustment $30,744

Operating income and tax rates for C.J. Company's first three years of operations were as follows: Income _ Enacted tax rate 2020 $400,000 25% 2021 ($1,000,000) 20% 2022 $1,680,000 30% Assuming that C.J. Company opts only to carryforward its 2021 NOL, what is the amount of deferred tax asset or liability that C.J. Company would report on its December 31, 2021 balance sheet? Amount _ Deferred tax asset or liability a. $200,000 Deferred tax liability b. $250,000 Deferred tax liability c. $300,000 Deferred tax asset d. $200,000 Deferred tax asset

$300,000 Deferred tax asset Explanation: Since C.J. Company carry forwards its 2021 NOL, $1,000,0000 will be used to create Deferred Tax Asset - NOL. Also when you determine deferred tax asset, it should use the enacted future tax rate, which is 30%. Thus, Deferred Tax Asset - NOL is $300,000 (=$1,000,000 × 30%).

Mitchell Corporation prepared the following reconciliation for its first year of operations: Pretax financial income for 2021 $ 1,800,000 Tax exempt interest (150,000) Originating temporary difference (350,000) Taxable income $1,300,000 The temporary difference will reverse evenly over the next two years at an enacted tax rate of 20%. The enacted tax rate for 2021 is 30%. In Mitchell's 2021 income statement, what amount should be reported for total income tax expense? a. $590,000 b. $530,000 c. $460,000 d. $390,000

$460,000 Explanation: Reversal Years 2021 2022 2023 Pretax financial income $1,800,000 Permanent Differences: Deduct Tax exempt interest ($150,000) Temporary difference: ($350,000) $175,000 $175,000 Taxable income $1,300,000 Enacted tax rate 30% 20% 20% Income taxes payable $390,000 Deferred tax liability $35,000 ($175,000×20%) $35,000 ($175,000×20%) Journal entry Dr. Income Tax Expense $460,000 (a + b) Cr. Income Tax Payable $390,000 (a) Cr. Deferred Tax Liability $70,000 (b) Notes: 1. Permanent difference will not create any deferred tax accounts although it affects income tax payable of current period. 2. Deferred tax assets/liabilities should be determined by enacted tax rates corresponding reversal years.

On January 3, 2020, Moss Company acquires $500,000 of Adam Company's 10-year, 10% bonds at a price of $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Company uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2021 related to these bonds? a. $50,000 b. $53,208 c. $47,890 d. $47,698

$47,698 Explanation: 10% bonds purchased to yield 9% Date Cash received Interest Revenue Bond premium amortization Carrying amount of bonds 1/3/20 $532,090 12/31/20 $50,000 $47,888 $2,112 $529,978 12/31/21 $50,000 $47,698 $2,302 $527,676 On Dec. 31, 2021 Dr. Interest Receivable $50,000 Cr. Debt Investments $2,302 Cr. Interest Revenue $47,698

Mathis Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 1,200,000 Estimated litigation expense 3,000,000 Installment sales (2,400,000) Taxable income $ 1,800,000 The estimated litigation expense of $3,000,000 will be deductible in 2022 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of $1,200,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the installment accounts receivable are classified as $1,200,000 current and $1,200,000 noncurrent. The income tax rate is 20% for all years. The deferred tax liability to be recognized is a. $120,000. b. $360,000. c. $480,000. d. $240,000.

$480,000 Explanation: Installment sales and receivable are recognized by the accrual method for financing reporting purpose but will be taxable when it is realized in the future Future Taxable Amount Deferred Tax Liability. The deferred tax liability to be recognized is ($2,400,000 × 20%) = $480,000.

Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2021, Taylor earns $1,200,000 and pays cash dividends of $960,000. Harrison should report investment revenue for 2021 of a. $480,000. b. $384,000. c. $96,000. d. $0.

$480,000. Explanation: Investment revenue for 2021 reported by Harrison = $1,200,000 × 40% = $480,000

A reconciliation of Gentry Company's pretax accounting income with its taxable income for 2021, its first year of operations, is as follows: Pretax accounting income $4,500,000 Excess tax depreciation (225,000) Taxable income $4,275,000 The excess tax depreciation will result in equal net taxable amounts in each of the next three years. Enacted tax rates are 30% in 2021, 25% in 2022 and 2023, and 20% in 2024. The total deferred tax liability to be reported on Gentry's balance sheet at December 31, 2021, is a. $67,500. b. $52,500. c. $56,250. d. $45,000.

$52,500 Explanation: Dr. Income Tax Expense $1,335,000 Cr. Deferred Tax Liabilities $52,500 Cr. Income Tax Payable $1,282,500 Reversal Years 2021 2022 2023 2024 Pretax financial income $4,500,000 Temporary difference: Excess tax depreciation ($225,000) $75,000 $75,000 $75,000 Taxable income $4,275,000 Enacted tax rate 30% 25% 25% 20% Income taxes payable $1,282,500 Deferred tax liability $18,750 $18,750 $15,000 Thus, total deferred tax liabilities = $18,750 + $18,750 + $15,000 = $52,500

Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Container Corporation purchased computer equipment, installation and training for a total cost of $144,000 on March 15, 2021. Estimated standalone fair values of the equipment, installation, and training are $90,000, $60,000, and $30,000 respectively. The transaction price allocated to equipment, installation and training is a. $90,000, $60,000, $30,000 respectively b. $48,000, $48,000, $48,000 respectively c. $144,000 for the entire bundle. d. $72,000, $48,000 and $24,000 respectively.

$72,000, $48,000 and $24,000 respectively Explanation: Allocation of transaction price to performance obligations. The total revenue of $144,000 should be allocated to the three components based on their relative standalone selling prices. In this case, the standalone selling price of the equipment is $90,000, the installation fee is $60,000, and the training is $30,000. The total standalone selling price therefore is $180,000 ($90,000 + $60,000 + $30,000). The allocation is as follows. • Equipment = ($90,000/$180,000) $144,000 = $72,000 • Installation = ($60,000/$180,000) $144,000 = $48,000 • Training = ($30,000/$180,000) $144,000 = $24,000

Hopkins Co. at the end of 2020, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $3,000,000 Estimated litigation expense 4,000,000 Extra depreciation for taxes (6,000,000) Taxable income $ 1,000,000 The estimated litigation expense of $4,000,000 will be deductible in 2020 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $2,000,000 in each of the next three years. The income tax rate is 20% for all years. The deferred tax asset to be recognized is a. $200,000. b. $400,000. c. $600,000. d. $800,000.

$800,000. Explanation: The estimated litigation expense of $4,000,000 will be deductible in 2020 when it is expected to be paid Future Deductible Amount Deferred Tax Asset. The deferred tax asset to be recognized = $4,000,000 × 20% = $800,000

Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2021, Taylor earns $1,200,000 and pays cash dividends of $960,000. If the beginning balance in the investment account was $750,000, the balance at December 31, 2021 should be a. $1,230,000. b. $990,000. c. $846,000. d. $750,000.

$846,000. Explanation: 20,000 shares / 50,000 shares x100%= 40% Holding between 20% and 50% (Equity Method) The balance of equity investment as of December 31, 2021 = $750,000 + ($1,200,000 - 960,000)x40%= $846,000 (Adjusted cost)

Marle Construction enters into a contract with a customer to build a warehouse for $950,000 on March 30, 2021 with a performance bonus of $50,000 if the building is completed by July 31, 2021. The bonus is reduced by $10,000 each week that completion is delayed. Marle commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability July 31, 2021 65% August 7, 2021 25% August 14, 2021 5% August 21, 2021 5% The transaction price for this transaction using the expected value is a. $995,000 b. $950,000 c. $652,500 d. $685,000

$995,000 Explanation: When the contract includes variable consideration, companies can estimate amount of revenue to recognize using the expected value. Expected value: 65% chance of ($950,000+50,000) = $650,000 25% chance of ($950,000+50,000-10,000)=$247,500 5% chance of ($950,000+50,000-10,000-10,000)=$49,000 5% chance of ($950,000+50,000-10,000-10,000-10,000)=$48,500 Total = $650,000+$247,500+$49,000+48,500=$995,000

During 2021 Logic Company purchased 10,000 shares of Midi, Inc. for $30 per share. During the year Logic Company sold 2,500 shares of Midi, Inc. for $35 per share. At December 31, 2021 the market price of Midi, Inc.'s stock was $28 per share. What is the total amount of realized and unrealized gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2021 related to its investment in Midi, Inc. stock? a. ($20,000) b. $12,500 c. ($7,500) d. ($2,500)

($2,500) Explanation: Acquisition cost = $30 x 10,000 shares = $300,000 Sales of 2,500 shares Dr. Cash $87,500 Cr. Equity Investment $75,000 Cr. Realized Gain $12,500 [=($35- $30) x 2,500] The carrying value of equity investment after sale = $300,000 - $75,000 = $225,000 Adjusting entry to report equity investment at fair value at 12/31/21 Fair value of equity investment at 12/31/2021 = $28 x 7,500 shares = $210,000. Since the carrying value of equity investment at 12/31/2021 is $225,000, Logic needs $15,000 of a credit balance of fair value adjustment at 12/31/2021. Unrealized holding gains and losses from equity investment is reported in income statement. Dr. Unrealized holding loss $15,000 (=$225,000 - $210,000) Cr. Fair value adjustment $15,000 Thus, total amount of realized and unrealized gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2021 related to its investment in Midi, Inc. stock = $12,500 (realized gain on sales) - $15,000 (unrealized holding loss) = ($2,500).

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2021, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2021 and December 31, 2021 by the amortized premiums of $4,248 and $4,392, respectively. At February 1, 2022, Richman Company sold the Carlin bonds for $1,236,000. After accruing for interest, the carrying value of the Carlin bonds on February 1, 2022 was $1,240,500. Assuming Richman Company has a portfolio of available-for-sale debt investments, what should Richman Company report as a gain (or loss) on the bonds? a. $0. b. ($4,500). c. ($26,244). d. ($35,244).

($4,500). Explanation: Sale of available-for-sale debt investments If company sells bonds before maturity date: It must make entries to remove from the Debt Investments account the amortized cost of bonds sold. Any realized gain or loss on sale is reported in the income statement. Amortized cost = $1,240,500 Selling price of bonds = $1,236,000 Realized loss on sale of bond = $1,236,000 - $1,240,500 = ($4,500) Dr. Cash $1,236,000 Dr. Loss on Sale of Investment $4,500 Cr. Debt Investment $1,240,500

An example of a permanent difference is a. proceeds from life insurance on officers. b. interest revenue on municipal bonds. c. insurance expense for a life insurance policy on officers. d. All of these answers are correct as they are all examples of permanent differences.

All of these answers are correct as they are all examples of permanent differences.

Which of the following is not correct in regard to trading debt securities? a. They are held with the intention of selling them in a short period of time. b. Unrealized holding gains and losses are reported as part of net income. c. Any discount or premium is amortized. d. All of these choices are correct.

All of these choices are correct, They are held with the intention of selling them in a short period of time. Unrealized holding gains and losses are reported as part of net income. Any discount or premium is amortized.

At the beginning of 2021, Pitman Co. purchased an asset for $1,800,000 with an estimated useful life of 5 years and an estimated salvage value of $150,000. For financial reporting purposes the asset is being depreciated using the straight-line method; for tax purposes the double-declining-balance method is being used. Pitman Co.'s tax rate is 20% for 2021 and all future years. At the end of 2021, which of the following deferred tax accounts and balances is reported on Pitman's balance sheet? Account _ Balance a. Deferred tax asset $78,000 b. Deferred tax liability $78,000 c. Deferred tax asset $117,000 d. Deferred tax liability $117,000

Deferred tax liability $78,000 Explanation: Financial reporting purpose: Straight - line depreciation • Purchase cost of $1,800,000 - estimated salvage value of $150,000= Depreciable asset cost of $1,650,000 • 1 / 5-year useful life = 20% depreciation rate per year 20% depreciation rate x $1,650,000 depreciable asset cost = $330,000 annual depreciation Or, simply depreciation expense per year = ($1,800,000 - $150,000) / 5 years = $330,000 Tax reporting purpose: Double-declining-balance method • Depreciation under double declining balance method = 2 × Straight-line depreciation rate × Book value at the beginning of the year = 2 x 20% x $1,800,000 = $720,000 At the end of 2021 Asset at book basis = $1,800,000 - $330,000 = $1,470,000 Asset at tax basis = $1,800,000 -$720,000 = $1,080,000 • Because of great deduction, the company should expect future taxable amount. Thus, it should recognize Deferred Tax Liability representing the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year. Deferred tax liability = ($1,470,000 - $1,080,000) 20% = $78,000 Or, deprecation deduction difference in 2018 ($720,000 - $330,000) × 20% = $78,000

On August 1, 2021, Dambro Company acquired 1,200, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2027, with interest paid each October 31 and April 30. The bonds will be added to Dambro's available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2021 is a. Debt Investments 1,191,000 Cash 1,191,000 b. Debt Investments 1,164,000 Interest Receivable 27,000 Cash 1,191,000 c. Debt Investments 1,164,000 Interest Revenue 27,000 Cash 1,191,000 d. Debt Investments 1,200,000 Interest Revenue 27,000 Discount on Debt Investments 36,000 Cash 1,191,000

Dr. Debt Investments $1,164,0001 Dr. Interest Revenue $27,0002 Cr. Cash $1,191,0003 1,200 × $1,000 × .97 $1,200,000 × .09 × 3/12 (from 04/31 - 08/01) $1,164,000 + $27,000

Which of the following differences would result in future taxable amounts? a. Expenses or losses that are tax deductible after they are recognized in financial income. b. Revenues or gains that are taxable before they are recognized in financial income. c. Revenues or gains that are recognized in financial income but are never included in taxable income. d. Expenses or losses that are tax deductible before they are recognized in financial income.

Expenses or losses that are tax deductible before they are recognized in financial income.

At December 31, 2021, Atlanta Company has an equity portfolio valued at $160,000. Its cost was $132,000. If the Securities Fair Value Adjustment has a debit balance of $8,000, which of the following journal entries is required at December 31, 2021? a. Fair Value Adjustment 28,000 Unrealized Holding Gain or Loss-Income 28,000 b. Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Income 20,000 c. Unrealized Holding Gain or Loss-Income 28,000 Fair Value Adjustment 28,000 d. Unrealized Holding Gain or Loss-Income 20,000 Fair Value Adjustment 20,000

Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Income 20,000 Explanation: Fair Value Adjustment - Equity Beg. Bal $8,000 Necessary adjustment $20,000 Ending Bal. (Required to report equity investments at Fair value of $160,000 $28,000 Dr. Fair Value Adjustment $20,000 Cr. Unrealized Holding Gain or Loss—Income $20,000

Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in Future Future Taxable Amounts Deductible Amounts a. Yes Yes b. Yes No c. No Yes d. No No

Future Future Taxable Amounts Deductible Amount Yes Yes

Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates? I. Accrual for product warranty liability. II. Subscriptions received in advance. III. Prepaid insurance expense. a. I and II only. b. II only. c. III only. d. I and III only.

I and II only.

Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? Fair Value Method Equity Method a. No Effect Decrease b. Increase Decrease c. No Effect No Effect d. Decrease No Effect

No Effect Decrease

Taxable income of a corporation differs from pretax financial income because of Permanent Temporary Differences Differences a. No No b. No Yes c. Yes Yes d. Yes No

Permanent Temporary Differences Differences Yes Yes

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income? a. Prepaid expenses that are deducted on the tax return in the period paid. b. Product warranty liabilities. c. Depreciable property. d. Fines and expenses resulting from a violation of law.

Product warranty liabilities

A company uses the equity method to account for an investment for financial reporting purposes. This would result in what type of difference and in what type of deferred income tax? Type of Difference Deferred Tax a. Permanent Asset b. Permanent Liability c. Temporary Asset d. Temporary Liability

Temporary Liability

When a customer purchases a product but is not yet ready for delivery, this is referred to as a. a repurchase agreement. b. a consignment. c. a principal-agent relationship. d. a bill-and-hold arrangement

a bill-and-hold arrangement

Companies can use the expected value to estimate variable consideration when a. the contract has only two possible outcomes. b. a company has a small number of contracts with similar characteristics. c. a company can use the most likely amount in a range of possible outcomes. d. a company has a large number of contracts with similar characteristics.

a company has a large number of contracts with similar characteristics.

Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to providing the software, the company also provides consulting services and support to ensure smooth operation of the software. The total transaction price is $420,000. Based on standalone values, the company estimates the consulting services and support have a value of $120,000 and the software license has a value of $300,000. Assuming the performance obligations are not interdependent and licensed software is delivered and consulting service will be provided over 5 years, the journal entry to record the transaction includes a. a credit to Sales Revenue for $300,000 and a credit to Unearned Service Revenue of $120,000. b. a credit to Service Revenue of $120,000. c. a credit to Unearned Service Revenue of $300,000. d. a credit to Sales Revenue of $420,000.

a credit to Sales Revenue for $300,000 and a credit to Unearned Service Revenue of $120,000. Explanation: Dr. Cash $420,000 Cr. Unearned Service Revenue $120,000 Cr. Sales Revenue $300,000

Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as a. a reduction of the carrying value of the investment. b. additional paid-in capital. c. an addition to the carrying value of the investment. d. dividend income.

a reduction of the carrying value of the investment.

Korman Company has the following securities in its portfolio of equity securities on December 31, 2020: Cost Fair Value 5,000 shares of Thomas Corp., Common $151,000 $139,000 10,000 shares of Gant, Common 184,000 190,000 $335,000 $329,000 All of the securities had been purchased in 2020. In 2021, Korman completed the following securities transactions: March 1 Sold 5,000 shares of Thomas Corp., Common @ $32 less fees of $1,500. April 1 Bought 600 shares of Werth Stores, Common @ $45 plus fees of $550. The Korman Company portfolio of equity securities appeared as follows on December 31, 2021: Cost Fair Value 10,000 shares of Gant, Common $184,000 $195,500 600 shares of Werth Stores, Common 27,550 25,500 $211,550 $221,000 Prepare the general journal entries for Korman Company for: a) the 2020 adjusting entry. b) the sale of the Thomas Corp. stock. c) the purchase of the Werth Stores' stock. d) the 2021 adjusting entry.

a) December 31, 2020- Fair Value Adjustment Dr. Unrealized Holding Gain or Loss—Income $6,000 Cr. Fair Value Adjustment $6,000 ($335,000 - $329,000) b) March 1, 2021: the sale of the Thomas Corp. stock. Dr. Cash [(5,000 × $32) - $1,500] $158,500 Cr. Gain on Sale of Investments $7,500 Cr. Equity Investments $151,000 c) April 1, 2021: purchase of the Werth Stores' stock. Dr. Equity Investments $27,550 Cr. Cash [(600 × $45) + $550] $27,550 d) December 31, 2021- Fair Value Adjustment Dr. Fair Value Adjustment $15,450* Cr. Unrealized Holding Gain or Loss-Income $15,450

Debt Securities - Available for sale West Company purchased $600,000, 6 percent, five-year bonds on January 1, 2020, with interest payable on June 30, and December 31. The bonds sell for $551,356, which results in a bond discount of $48,644 and an effective interest rate of 8 percent. The bonds are available for sale. Prepare the general journal entries for West Company on the following dates: a) January 1, 2020 b) June 30, 2020 c) December 31, 2020

a) January 1, 2020 Dr. Debt Investments- AFS $551,356 Cr. Cash $551,356 b) June 30, 2020 Dr. Cash ($600,000 × 6% / 2) $18,000 Dr. Debt Investments - AFS $4,054 Cr. Interest Revenue ($551,356×8%/2) $22,054 Carrying amount of bonds = $551,356 + $4,054= $555,410 c) December 31, 2020 Dr. Cash $18,000 Dr. Debt Investments - AFS $4,216 Cr. Interest Revenue ($555,410 × 8%/2) $22,216 Carrying amount of bonds = $555,410 + $4,216= $559,626 - Recognition of fair value adjustment: at December 31, 2020 the fair value of the bonds is $557,900. Dr. Unrealized Holding Loss $1,726 Cr. Fair Value Adjustment* $1,726 Fair Value Adjustment = $559,626 - $557,900 = $1,726

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

available-for-sale debt securities.

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.

cannot be recognized until a contract exists.

A company has satisfied its performance obligation when the a. company has received payment for goods or services. b. company has significant risks and rewards of ownership. c. company has legal title to the asset. d. company has transferred physical possession of the asset.

company has transferred physical possession of the asset.

The cost-to-cost basis measures progress towards completion by a. comparing costs incurred to date with total costs to complete the contract. b. tracking results of work completed to date; it is an output measure. c. tracking floors of a building completed versus floors still to be completed. d. tracking miles of a highway completed versus miles of highway still to be completed.

comparing costs incurred to date with total costs to complete the contract.

Consigned goods are recognized as revenues by the a. consignor when a sale to a third party has occurred. b. consignor when the merchandise has been shipped to a consignee. c. consignee when a sale to a third party has occurred. d. consignor when it receives payment from consignee for goods sold.

consignor when it receives payment from consignee for goods sold.

The Billings on Construction in Progress account is a(n) a. contract revenue account. b. inventory account. c. contra-inventory account. d. construction expense account.

contra-inventory account.

On November 1, 2021, Green Valley Farm entered into a contract to buy a $150,000 harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in advance on November 1, 2021. The harvester (cost of $110,000) was delivered on November 30, 2021. The journal entry to record the contract on November 1, 2021 includes a a. credit to Accounts Receivable for $150,000. b. credit to Sales Revenue for $150,000. c. credit to Unearned Sales Revenue for $150,000. d. debit to Unearned Sales Revenue for $150,000.

credit to Unearned Sales Revenue for $150,000. Explanation: Journal entry by John Deere to record the contract on November 1, 2021 Dr. Cash $150,000 Cr. Unearned Sales Revenue $150,000

Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Container Corporation purchased computer equipment, installation and training for a total cost of $144,000 on March 15, 2021. Estimated standalone fair values of the equipment, installation, and training are $90,000, $60,000, and $30,000 respectively. The transaction price allocated to equipment, installation and training is Meyer & Smith will have a journal entry to record the transaction on March 15, 2021 that includes a a. credit to Sales Revenue for $144,000. b. debit to Unearned Service Revenue of $30,000. c. credit to Unearned Service Revenue of $24,000. d. credit to Service Revenue of $60,000

credit to Unearned Service Revenue of $24,000. Explanation: Allocation of transaction price to performance obligations March 15, 2021 Dr. Cash $144,000 Cr. Service Revenue (installation) $48,000 Cr. Unearned Service Revenue $24,000 Cr. Sales Revenue (Equipment) $72,000

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a a. debit to Debt Investments. b. debit to the discount account. c. debit to Interest Revenue. d. None of these answers are correct.

debit to Debt Investments Dr. Debt Investments $$$ Cr. Interest Revenue $$$

The third step in the process for revenue recognition is to a. determine the transaction price. b. identify the separate performance obligations in the contract. c. allocate transaction price to the separate performance obligations. d. recognize revenue when each performance obligation is satisfied.

determine the transaction price.

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.

differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting.

When a company has an obligation or right to repurchase an asset for an amount greater than or equal to its selling price, the transaction should be treated as a a. outright sale. b. financing transaction. c. repurchase transaction. d. put option.

financing transaction.

Debt securities that are accounted for at amortized cost, not fair value, are a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

held-to-maturity debt securities.

Non cash consideration should be a. recognized on the basis of fair value of what is given up. b. recognized on the basis of original cost paid by customer. 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.

recognized on the basis of fair value of what is received

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be a. handled retroactively in accordance with the guidance related to changes in accounting principles. b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset. c. reported as an adjustment to income tax expense in the period of change. d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change.

reported as an adjustment to income tax expense in the period of change.

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are a. securities where a company has holdings of less than 20%. b. securities where a company has holdings of more than 20%. c. securities where a company has holdings of between 20% and 50%. d. securities where a company has holdings of more than 50%.

securities where a company has holdings of less than 20%.

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.

temporary differences reverse themselves in subsequent accounting periods, whereas permanent differences do not reverse.

Recognition of tax benefits in the loss year due to a loss carry forward requires a. the establishment of a deferred tax liability. b. the establishment of a deferred tax asset. c. the establishment of an income tax refund receivable. d. only a note to the financial statements.

the establishment of a deferred tax asset

If a contract involves a significant financing component, a. the time value of money is used to determine the fair value of the transaction. b. the time value of money is not required to determine transaction price, if the payment is scheduled to occur in more than a year. c. the transaction amount should be based on the current sales price of goods or services. d. interest must be accrued on the current sales price of goods or services.

the time value of money is used to determine the fair value of the transaction.

Unrealized holding gains or losses which are recognized in income are from debt securities classified as a. held-to-maturity. b. available-for-sale. c. trading. d. None of these answers are correct.

trading