Intermediate 2 Test 2

Inferno Inc. is embroiled in a lawsuit. In 2015 they recognize that a loss of $45,000 is probable. Given a tax rate of 40%, how will this be treated in the accounting records?

A) deferred tax asset of $18,000

On December 31, 2014, Lang Corporation leased a ship from Fort Company for an eight-year period expiring December 30, 2022. Equal annual payments of $300,000 are due on December 31 of each year, beginning with December 31, 2014. The lease is properly classified as a capital lease on Lang 's books. The present value at December 31, 2014 of the eight lease payments over the lease term discounted at 10% is $1,760,528. Assuming all payments are made on time, the amount that should be reported by Lang Corporation as the total obligation under capital leases on its December 31, 2015 balance sheet is

$1,306,581.

On December 31, 2015, Kuhn Corporation leased a plane from Bell Company for an eight-year period expiring December 30, 2022. Equal annual payments of $300,000 are due on December 31 of each year, beginning with December 31, 2015. The lease is properly classified as a capital lease on Kuhn's books. The present value at December 31, 2015 of the eight lease payments over the lease term discounted at 10% is $1,760,528. Assuming the first payment is made on time, the amount that should be reported by Kuhn Corporation as the lease liability on its December 31, 2015 balance sheet is

$1,460,528.

) On July 1, Year 1, Fairfield Company purchased $2 million of Hampton Corporation's 6% bonds for $1,731,590. The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities. The bonds mature in 10 years and pay interest annually on July 1. Assuming that Fairfield uses the effective interest method of amortization, what amount should it report for its investment in bonds on December 31, Year 1?

$1,740,854

On July 1, Year 1, Fairfield Company purchased $2 million of Hampton Corporation's 6% bonds for $1,731,590. The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities. The bonds mature in 10 years and pay interest annually on July 1. Assuming that Fairfield uses the effective interest method of amortization, what amount should it report for its investment in bonds on December 31, Year 1?

$1,740,854

Pye Company leased equipment to the Polan Company on July 1, 2015, for a ten-year period expiring June 30, 2025. Equal annual payments under the lease are $160,000 and are due on July 1 of each year. The first payment was made on July 1, 2015. The rate of interest contemplated by Pye and Polan is 9%. The cash selling price of the equipment is $1,120,000 and the cost of the equipment on Pye's accounting records was $992,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Pye, what is the amount of profit on the sale and the interest revenue that Pye would record for the year ended December 31, 2015?

$128,000 and $43,200

Hyde Company leased equipment to Pittman Corporation under a six year lease agreement that qualifies as a direct financing lease. The asset cost $160,000. The lease contains a bargain purchase option that is effective at the end of the sixth year. The asset has an expected economic life of 12 years and is expected to have a residual value of $4,000 at the end of the 12th year. Assuming that straight-line depreciation is used, what would be the annual depreciation?

$13,000

On January 1 of the current year, Beta Company paid $200,000 for 10,000 shares of Gamma Company common stock. These securities were classified as trading securities. Beta owns 10% of Gamma Company. Gamma reported net income of $65,000 for December 31 of the current year. The fair value of the Gamma stock on that date was $27. What amount will be reported in Beta's balance sheet for the investment in Gamma at December 31

$270,000

) Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a capital lease for Metcalf. The six-year lease requires payment of $136,000 at the beginning of each year, including $20,000 per year for maintenance, insurance, and taxes. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271. Metcalf should record the leased asset at

$579,154.

Rowen, Inc. had pre-tax accounting income of $1,800,000 and a tax rate of 40% in 2015, its first year of operations. During 2015 the company had the following transactions: Received rent from Jane, Co. for 2016 $64,000 Municipal bond income $80,000 Depreciation for tax purposes in excess of book depreciation $40,000 Installment sales revenue to be collected in 2016 $108,000 For 2015, what is the amount of income taxes payable for Rowen, Inc?

$654,400

In 2014, Krause Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $2,400,000. The facilities were sold in March 2015 and a $2,400,000 loss was recognized for tax purposes. Also in 2014, Krause paid $100,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 30% in both 2014 and 2015, and that Krause paid $780,000 in income taxes in 2014, the amount reported as net deferred income taxes on Krause's balance sheet at December 31, 2014, should be a

$720,000 asset.

TLR Productions reported income before taxes of $175,000 for the years 2013, 2014, and 2015. In 2016 they experienced a loss of $300,000. TLR had a tax rate of 25% in 2013 and 2014, and a rate of 35% is 2015 and 2016. Assuming the company uses the carryback provisions for the net operating loss, what amount should be reported as Income Tax Refund Receivable in 2016?

$87,500

StatMed Corporation leases medical equipment under a five year lease. The terms of the lease call for five equal payments of $25,000, with the first payment due at the inception. The interest rate implicit in the lease is 13%. The first year's interest expense will be ________.

$9,667

Price Enterprises invested in the bonds of Greater Glouster on January 1, 2015. These 10-year, $100,000 bonds pay interest of 3% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds?

$91,824

On July 1, Year 1, Walters Corporation purchased as a short-term investment a $2 million face amount Kempff 6% bond for $1,800,000 plus accrued interest to yield 8%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 5, the bonds had a fair value of $1,850,000. On March 1, Year 6, Walters sold the bond for $1,820,000 At what amount should Walters report the bond in its December 31, Year 5 balance sheet if it is classified as an available for sale security?

) $1,850,000

Eagle Exporters purchased 40,000 of the 100,000 outstanding shares of Giant Distributors for $2,000,000. Eagle has significant influence over Giant and will account for this investment using the equity method. During the year, Giant declared dividends of $140,000 and reported Net Income of $800,000. What is the balance in the Investment in Giant account at year end?

) $2,264,000

) S & C Company's net income before taxes is $400,000, and income tax expense is $125,000. S & C records a valuation allowance of $25,000. What is S & C's effective tax rate before and after recording the valuation allowance?

) 31% and 38% respectively

When must a company generally elect the fair value option for reporting assets?

) A company must typically elect the fair value option at acquisition.

All of the following are key questions that must be addressed when accounting for investments in debt and equity securities except which one?

) How is the return on equity impacted by this investment?

Cowgirl Capital reported that following items related to equity investments for the year: - Unrealized Loss - Trading Securities $(10,000) - Unrealized Gain - Available-for-Sale Securities 7,500 - Realized Gain - Trading Securities 2,500 - Realized Loss - Available-for-Sale Securities (1,500) Based on these investments, what amounts will be reported in Net Income? What amount will be reported in Other Comprehensive Income?

) Net Income - $(9,000); OCI - $7,500

Which of the following statements is incorrect?

) Unrealized gains for Trading securities that were transferred to Held-to-maturity securities should be recognized in other comprehensive income.

If the first payment on a lease is due at the lease's inception, which compound interest table should be used to determine the amount at which the lease should be recorded?

) present value of an annuity due

A lessee normally computes the liability on a lease as the ________.

) present value of minimum lease payments

HdG, Inc. accepts a $100,000, 5% note from Aberdeen Unlimited on 4/1/16., and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning 3/31/17. The market rate at the date of issuance of this note was 5%. How much Interest Revenue will HdG record on 3/31/17, the first annual installment payment date?

1,250

Bateman Enterprises invested in the bonds of Greater Glouster on January 1, 2015. These 10-year, $100,000 bonds pay interest of 3% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the semi-annual interest payment received by Bateman for these bonds?

1,500

On July 1, Year 1, Walters Corporation purchased as a short-term investment a $2 million face amount Kempff 6% bond for $1,800,000 plus accrued interest to yield 8%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 5, the bonds had a fair value of $1,850,000. On March 1, Year 6, Walters sold the bond for $1,820,000 At what amount should Walters report the bond in its December 31, Year 5 balance sheet if it is classified as an available for sale security?

1,850,000

Cross Clothiers invested $200,000 in a debt security that it properly classified as a trading security on 12/20/17. At 12/31/17, this trading security had a fair value of $201,500. Record the journal entries needed for this investment assuming this is the first and only trading debt security for Joss.

12/20 Trading Debt Investment - Cost 200,000 Cash 200,000 12/31 Fair Value Adjustment - Trading Debt Inv. 1,500 Unrealized Gain - Net Income 1,500

Trader Trust accepts a $500,000 non-interest bearing 10-year note from Coffee Co. in exchange for Cash on 1/1/16. Coffee Co. promises to repay $500,000 at maturity. The market rate on 1/1/16 was 4%. How much Interest Revenue will Trader Trust record on this note in 2016?

13,511

On January 1, Year 1, Gibson Corporation purchased bonds issued by Williamson Company. These bonds were classified as held-to-maturity securities. The face value of these bonds is $200,000, pay 8% interest and were purchased to yield 6%. The bonds mature in 10 years and pay interest on an annual basis. If Gibson Corporation paid $229,439 for these bonds, how much interest revenue should it report on the bonds at December 31, Year 1? Assume that Gibson used the effective interest method

13,766

On January 1, Year 1, Gibson Corporation purchased bonds issued by Williamson Company. These bonds were classified as held-to-maturity securities. The face value of these bonds is $200,000, pay 8% interest and were purchased to yield 6%. The bonds mature in 10 years and pay interest on an annual basis. If Gibson Corporation paid $229,439 for these bonds, how much interest revenue should it report on the bonds at December 31, Year 1? Assume that Gibson used the effective interest method.

13,766

Lyon Group's income before taxes is $450,000 and its tax rate is 30%. Lyon included $30,000 in fines and penalties in the $450,000. There are no other book-tax differences. What is the income tax liability for Lyon Group?

144,000

) In 2014, Squirrel Corp. recorded book income of $175,000. It has one temporary difference which relates to a $50,000 warranty expense that it recorded for book purposes, and no permanent differences. Squirrel anticipates satisfying this liability equally over the following two years. The current enacted tax rate is 40%. The enacted tax rates for the following four years are 30%, 35%, 30% and 40%, respectively. Under U.S. GAAP, what deferred tax amount should Squirrel Corp. record for this temporary difference?

16,250

Greene Co. has pretax book income for the year ended December 31, 2015 in the amount of $295,000 and has a tax rate of 30%. The following timing difference was present: Depreciation for tax purposes in excess of book depreciation - $14,500. 18) What should Greene Co. record as its federal income tax liability for 2015? 19) What should Greene Co. record as its deferred tax liability for 2015?

18) 84,150 19) 4,350

Tetra Corp. recorded book income of $225,000 in 2015. It does not have any permanent differences and the only temporary difference relates to $45,000 unearned income that it recorded for book purposes. Tetra anticipates satisfying this liability equally over the following three years. The current enacted tax rate is 38%. The enacted tax rates for the following three years are 35%, 40%, and 45%, respectively. Under U.S. GAAP, what deferred tax amount should Tetra Corp. record for this temporary difference?

18,000

Ewok Enterprises recently elected the fair value option to account for its investment in Yoda Inc. Ewok purchased the shares for $210,000 and the shares are currently trading for $195,000 at year-end. What is the carrying value of this investment on the balance sheet of Ewok?

195,000

A US company may carry back a tax loss for ________ years and carry forward a tax loss for ________ years.

2, 20

) Eagle Exporters purchased 40,000 of the 100,000 outstanding shares of Giant Distributors for $2,000,000. Eagle has significant influence over Giant and will account for this investment using the equity method. During the year, Giant declared dividends of $140,000 and reported Net Income of $800,000. What is the balance in the Investment in Giant account at year end?

2,264,000

In 2015, its first year of operations, Neuro Inc. experienced a $234,000 net operating loss and recorded a deferred tax asset of $81,900. Neuro decides that it is more likely than not that it will only be able to generate $175,000 of taxable income during the carryforward period. As a result, without generating additional future taxable income it will not be able to fully realize the NOL carryforward benefit. In order to account for this, what amount will Neuro Inc. record as a valuation allowance?

20,650

On January 3, 2016, Sheppard Corporation purchased 15% of Meredith Corporation's common stock for $62,000. The investment was classified as available for sale. Meredith's net income for the years ended December 31 2016 and 2017 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2016; however, during 2017, the company declared a $70,000 dividend. On December 31, 2016, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $70,000; in 2017, it increased again to $75,000. 20) Refer to Sheppard Corporation. What will be the net income effect shown on the 2016 income statement? Refer to Sheppard Corporation. What will be the effect shown on 2017 net income? Refer to Sheppard Corporation. If Sheppard sold all of its shares of Meredith for $75,000 at the end of 2017, what would be the effect on net income of this transaction?

20. 0 21. 10,500 22. 13,000 gain

HdG, Inc. accepts a $100,000, 5% note from Aberdeen Unlimited on 4/1/16, and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning 3/31/17. The market rate at the date of issuance of this note was 5%. What is the annual payment that HdG will receive for this note?

23,097

In its 2014 income statement, Cohen Corp. reported depreciation of $1,850,000 and interest revenue on municipal obligations of $350,000. Cohen reported depreciation of $2,750,000 on its 2014 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next three years. Cohen's enacted income tax rates are 35% for 2014, 30% for 2015, and 25% for 2016 and 2017. What amount should be included in the deferred income tax liability in Hertz's December 31, 2014 balance sheet?

240,000

Mathis Co. at the end of 2014, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 800,000 Estimated litigation expense 2,000,000 Installment sales (1,600,000) Taxable income $ 1,200,000 The gross profit from the installment sales will be realized in the amount of $800,000 in each of the next two years. The income tax rate is 30% for all years. The total income tax expense is

240,000

On January 1 of the current year, Beta Company paid $200,000 for 10,000 shares of Gamma Company common stock. These securities were classified as trading securities. Beta owns 10% of Gamma Company. Gamma reported net income of $65,000 for December 31 of the current year. The fair value of the Gamma stock on that date was $27. What amount will be reported in Beta's balance sheet for the investment in Gamma at December 31?

270,000

Bosworth Corporation accepted a 5 year note receivable from Steelman Company on January 1, Year 1. The note is for $750,000, which will be due at the maturity of the note. The note has a stated interest rate of 10%; however the prevailing market interest rate is 12%. The note requires interest payments on June 30 and December 31. 28) Refer to Bosworth Corporation. What will be the proceeds of the note receivable? 29) Refer to Bosworth Corporation. What will be the interest revenue recorded on June 30, Year 1? 30) Refer to Bosworth Corporation. What will be the note balance at December 31, Year 1?

28)694,799 29)41,688 30)703,426

HdG, Inc. accepts a $100,000, 5% note from Aberdeen Unlimited on 4/1/16., and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning 3/31/17. The market rate at the date of issuance of this note was 5%. How much Interest Revenue will HdG record on 12/31/16, the end of its fiscal year?

3,750

Violet Corporation reported a loss in 2015 of $650,000. The company reported taxable income of $195,000 in 2013 and $215,000 in 2014. It has no permanent or temporary differences and its tax rate is 30%. 33) Refer to Violet Corporation. What is the necessary journal entry for 2015? 34) Refer to Violet Corporation. Violet reported taxable income of $325,000 in 2016. What is the necessary journal entry for 2016?

33) Income Tax Refund Receivable 123,000 Deferred Tax Asset 72,000 Income Tax Benefit 195,000 34)Income Tax Expense 97,500 Income Tax Payable 25,500 Deferred Tax Asset 72,000

Thomas Corporation bought 25,000 shares of Powers Company stock for $250,000 on April 17 and initially classified it as available for sale. The market value of the stock declined to $195,000 by December 31. Thomas reclassified the investment as trading securities in December of the following year when the market value had risen to $215,000. What amount should be reported on the Year 2 income statement for the Powers shares?

35,000 net loss

Thomas Corporation bought 25,000 shares of Powers Company stock for $250,000 on April 17. The market value of the stock declined to $195,000 by December 31. Thomas reclassified the investment as trading securities in December of the following year when the market value had risen to $215,000. What amount should be reported on the Year 2 income statement for the Powers shares?

35,000 net loss

Trader Trust accepts a $500,000 non-interest bearing 10-year note from Coffee Co. in exchange for Cash on 1/1/16. Coffee Co. promises to repay $500,000 at maturity. The market rate on 1/1/16 was 4%. What is the carrying value of this note on the balance sheet on 12/31/16?

351,293

) On January 1, 2015, Gore, Inc. purchased a machine for $1,350,000 which will be depreciated $135,000 per year for financial statement reporting purposes. For income tax reporting, Gore elected to expense $150,000 and to use straight-line depreciation which will allow a cost recovery deduction of $120,000 for 2015. Assume a present and future enacted income tax rate of 30%. What amount should be added to Gore's deferred income tax liability for this temporary difference at December 31, 2015?

40,500

Caesar Corporation reported income before taxes of $200,000 for the years 2013, 2014, and 2015. In 2016 they experienced a loss of $200,000. The company had a tax rate of 25% in 2013 and 2014, and a rate of 35% is 2015 and 2016. Assuming Caesar uses the carryback provisions for the net operating loss, by what amount will the income tax benefit reduce the net loss in 2016?

50,000

Kelemen Asset Management invested in the bonds of DEF Co. on 1/1/16. Kelemen intends to hold the bonds until maturity. These 5-year bonds had a face vale of $300,000, pay 5% interest on 6/30 and 12/31 of each year, and were issued when the market rate of interest was 6%, resulting in a cost of $287,205. How much interest revenue will Kelemen record on 6/30/16?

8,616

Wilcox Corporation reported the following results for its first three years of operation: 2014 income (before income taxes) $ 200,000 2015 loss (before income taxes) (1,800,000) 2016 income (before income taxes) 2,000,000 There were no permanent or temporary differences during these three years. Assume a corporate tax rate of 30% for 2014 and 2015, and 40% for 2016. 8) Assuming that Wilcox elects to use the carryback provision, what income (loss) (after income tax) is reported in 2015? (Assume that any deferred tax asset recognized is more likely than not to be realized.) 9) Assuming that Wilcox elects to use the carryforward provision and not the carryback provision, what income (loss) (after income tax) is reported in 2015?

8. $(1,100,000) 9. $(1,080,000)

Illusions Inc. just completed its second year of operations and has a deferred tax asset of $47,500 related to a net operating loss of $125,000 from the previous year. In the current year Illusions generates $400,000 in revenues and incurs $250,000 in expenses. There are no permanent or temporary book-tax differences. Assuming the same tax rate as last year, what amount will Illusions record for Income Tax Payable in the current year?

9,500

Price Enterprises invested in the bonds of Greater Glouster on January 1, 2015. These 10-year, $100,000 bonds pay interest of 3% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds?

91,824

Haag Corp.'s 2015 income statement showed pretax accounting income of $1,500,000. To compute the federal income tax liability, the following 2015 data are provided: Income from exempt municipal bonds $ 60,000 Depreciation deducted for tax purposes in excess of depreciation deducted for financial statement purposes 120,000 Estimated federal income tax payments made 300,000 Enacted corporate income tax rate 30% What amount of current federal income tax liability should be included in Hagg's December 31, 2015 balance sheet?

96,000

Kravitz Corporation had income before taxes of $850,000 and a tax rate of 35%. Included in the income are $60,000 in municipal bond interest and $10,000 in fines and penalties. There are no other book-tax differences. ) Refer to Kraviz Corporation. What is the net amount of Kravitz' book-tax difference? Refer to Kravitz Corporation. What is Kravitz' effective income tax rate? Refer to Kravitz Corporation. What is Kravitz' taxable income?

Book income that is $50,000 greater than taxable income 32.9% $800,000

) Leotis Asset Management invested in the bonds of DEF Co. on 1/1/16. Leotis intends to hold the bonds until maturity. These 5-year bonds had a face value of $300,000, pay 5% interest on 6/30 and 12/31 of each year, and were issued when the market rate of interest was 6%, resulting in a cost of $287,205. Which of the following is the correct journal entry to record the receipt of the interest payment on 6/30/16?

Cash 7,500 Held-to-Maturity Debt Investment - DEF Bonds 1,116 Interest Revenue 8,616

Piper, Inc. reported a net deferred tax asset balance of $190,000 resulting from an estimated warranty expense accrual for book purposes. The total book-tax difference related to the bases of the estimated warranty liability is $475,000. The enacted statutory tax rate related to this balance changed from 40% to 35%, effective immediately. What journal entry will Piper need to make to adjust for this change in tax rates?

Debit income tax expense Credit deferred tax asset 23,750

Big Bear Sporting Goods opened in 2015. They reported sales revenue of $395,000 and expenses of $445,000. There are no permanent or temporary differences, so the book loss and taxable loss will be the same. Big Bear plans on carrying forward the net operating loss (NOL). Assuming a 32% tax rate, what is the necessary journal entry in 2015 to record the NOL carryforward?

Deferred Tax Asset 16,000 Income Tax Benefit 16,000

ABC invested $19,000 in shares of DEF during Year 1, classifying the investment as available-for-sale. The fair value of this investment was $17,500 and $22,000 at the end of Year 1 and Year 2, respectively. Which of the following is the correct journal entry to adjust the securities to fair value at the end of Year 2?

Fair Value Adjustment - Available-for-Sale Securities 4,500 Unrealized Holding Gain - Other Comprehensive Income 4,500

Which of the following statements regarding available for sale debt securities is true?

Fair value adjustments are treated as adjustments to other comprehensive income

Which of the following statements regarding available for sale debt securities is true?

Fair value adjustments are treated as adjustments to other comprehensive income.

Which of the following statements regarding trading debt securities is false?

Fair value adjustments are treated as as adjustments to other comprehensive income

) On September 30, 2016, Angel Outfitters invested in 10-year, $200,000, 5% bonds of ABC Co. These bonds were dated January 1, 2016, and pay interest annually on December 31. Angel paid face value plus accrued interest for these bonds, and intends to hold these bonds until maturity. Which of the following is the correct journal entry to record this investment?

Held-to-Maturity Debt Investment - Cost 200,000 Interest Receivable 7,500 Cash 207,500

Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet? I. A revenue is deferred for financial reporting purposes but not for tax purposes. II. A revenue is deferred for tax purposes but not for financial reporting purposes. III. An expense is deferred for financial reporting purposes but not for tax purposes. IV. An expense is deferred for tax purposes but not for financial reporting purposes.

II and III only

) Which of the following statements is incorrect?

If the investor reports the investment as available-for-sale, the investment is reported at cost with unrealized gains and losses reported as part of other comprehensive income.

Which of the following statements is incorrect?

If the investor reports the investment as available-for-sale, the investment is reported at cost with unrealized gains and losses reported as part of other comprehensive income.

At December 31, 2014 Raymond Corporation reported a deferred tax liability of $180,000 which was attributable to a taxable type temporary difference of $600,000. The temporary difference is scheduled to reverse in 2018. During 2015, a new tax law increased the corporate tax rate from 30% to 40%. Raymond should record this change by debiting

Income Tax Expense for $60,000.

S & C Company reported income before taxes of $111,000 for the years 2013, 2014, and 2015. In 2016 they experienced a loss of $222,000. S & C had a tax rate of 30% in 2013 and 2014, and a rate of 40% is 2015 and 2016. The company elects to carry back the loss. What is the necessary journal entry to record the NOL carryback in the year of the loss?

Income Tax Refund Receivable 77,700 Income Tax Benefit 77,700

The additional depreciation expense will decrease the income from the investment as well as the Investment account by $8,400. Meyer Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. Meyer has significant influence over Angel, so Meyer will account for this investment using the equity method. On the purchase date, Angel had net assets with a book value of $7,300,000 and a fair value of $8,000,000. The difference in fair value is a result of the higher fair value of equipment than its book value. The remaining useful life of this equipment is 25 years. Assuming this investment was purchased on 1/1, which of the following is the correct journal entry to record the difference in net assets for this investment on 12/31?

Income from Investment 8,400 Investment in Angel & Associates 8,400

Betz Corporation entered into a capital lease on January 1 of the current year. The lease is for 8 years and calls for the first payment to be made at the inception. The first annual minimum lease payment will contain which of the following components? A)

Interest Expense no Lease Liability Yes

Jardon Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. Jardon has significant influence over Angel, so Jardon will account for this investment using the equity method. Angel declared Net Income of $1,250,000 for the year. How will Angel's Net Income be recorded by Jardon?

Investment in Angel & Associates 375,000 Income from Investment 375,000

) Griffin buys and sells securities and typically classifies them as available for sale. On December 15, Griffin purchased $800,000 of Baker Corporation shares and elected the fair value option to account for the investment. As of December 31, the shares in Baker Corporation had a fair value of $875,000. In its December 31 financial statements, Griffin will report pretax ________.

Investment income of $75,000 in its income statement

) JayBird Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. JayBird has significant influence over Angel, so JayBird will account for this investment using the equity method. Angel declared dividends of $275,000 during the year. How will JayBird record this transaction?

JayBird will decrease the investment account by $82,500.

Keller Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. Keller has significant influence over Angel, so Keller will account for this investment using the equity method. Angel declared Net Income of $1,250,000 for the year. How will Angel's Net Income impact Keller's books?

Keller will increase the Investment account and Income from the Investment for $375,000.

On January 2, 2014, Gold Star Leasing Company leases equipment to Brick Co. with 5 equal annual payments of $80,000 each, payable beginning January 2, 2014. Brick Co. agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Brick's incremental borrowing rate is 10%, however it knows that Gold Star's implicit interest rate is 8%. What journal entry would Brick Co. make at January 1, 2015 to record the second lease payment? PV Annuity Due PV Ordinary Annuity PV Single Sum 8%, 5 periods 4.31213 3.99271 .68508 10%, 5 periods 4.16986 3.79079 .62092

Lease Liability 56,062 Interest Payable 23,938 Cash 80,000

Packer Publications purchased 40,000 of the outstanding 100,000 shares of Bear Homes. How should Packer account for this investment?

Packer should account for this investment using the equity method, as Packer has significant influence over the investee.

Zeng Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. Zeng has significant influence over Angel, so Zeng will account for this investment using the equity method. On the purchase date, Angel had net assets with a book value of $7,300,000 and a fair value of $8,000,000. The difference in fair value is a result of the higher fair value of equipment than it's book value. The remaining useful life of this equipment is 25 years. Assuming this investment was purchased on 1/1, how will Zeng record the difference in net assets for this investment on 12/31?

The additional depreciation expense will decrease the income from the investment as well as the Investment account by $8,400.

Which of the following statements is incorrect in regards to the equity method of accounting for investments?

The investment account is adjusted to fair value at the end of the reporting period.

When should a company use the equity method to account for an investment in another company's common stock?

The investor exerts significant influence over the investee.

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

The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.

Which of the following statements are correct regarding an operating lease?

The lessor records depreciation expense and lease revenue.

) If a note's interest rate is equal to the prevailing market rate of interest, which of the following will occur?

The note's face value and present value are equal

How do the total expenses over the life of a capital lease compare with the total expenses over the life of an operating lease?

There is no difference between total expenses for an operating lease and a capital lease.

If a company elects the fair value option to account for Trading Equity securities, what will be recorded differently for these trading securities?

There is no difference in accounting for Trading securities as these are already accounted for using the fair value method.

) Goo Goo Enterprises invested in the bonds of Greater Glouster. These bonds pay interest of 3%. The effective rate of interest for similar bonds on the date of investment was 4%. Did Goo Goo purchase the bonds at a discount or premium?

These bonds were purchased at a discount because the market rate exceeds the stated rate.

Goo Goo Enterprises invested in the bonds of Greater Glouster. These bonds pay interest of 3%. The effective rate of interest for similar bonds on the date of investment was 4%. Did Goo Goo purchase the bonds at a discount or premium? A) These bonds were purchased at a discount because the stated rate exceeds the market rate

These bonds were purchased at a discount because the market rate exceeds the stated rate.

) Cassa & Associates purchased the bonds of JayBird. These bonds pay 5% interest semi-annually. The effective rate of interest at the date of investment was 4%. Did Jules purchase these bonds at a discount or premium?

These bonds were purchased at a premium because the stated rate exceeds the market rate

How are transfers between portfolios (i.e. from trading to available-for-sale) accounted for

Transfers between portfolios are accounted for at fair value on the date of the transfer.

Rhoads purchased common shares of Company A and B for $10,000 and $12,000, respectively on 12/15. Rhoads intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $15,000, respectively. Assuming this is the first trading investment for Rhoads, what is the unrealized gain or loss for these securities and how is it reported?

Unrealized Gain of $2,000, reported as part of Net Income.

) L & J purchased common shares of Company A and B for $10,000 and $12,000, respectively on 12/15. L & J intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $15,000, respectively. Assuming an existing $1,500 credit balance in Fair Value Adjustment - Trading Equity Securities, what is the unrealized gain or loss for these securities and how is it reported?

Unrealized Gain of $3,500, reported as part of Net Income.

Skywalker Limited purchased shares of Jedi Jewelers during 2015 for $124,000. Skywalker elected the fair value option for accounting for this investment. At year end 2015, 2016, and 2017, this investment had a fair value of $120,000, $130,000, and $135,000, respectively. What is the amount of unrealized gain or loss reported on this investment at year-end 2017?

Unrealized Gain of $5,000

If a company has elected the fair value option, where are gains and losses resulting from adjusting these accounts to fair value reported?

Unrealized Gains and Losses are both reported as part of Net Income.

Laurent invested $19,000 in shares of DEF during Year 1, classifying the investment as available-for-sale. The fair value of this investment was $17,500 and $22,000 at the end of Year 1 and Year 2, respectively. What is the unrealized gain or loss for this investment at the end of Year 1 and how is it reported?

Unrealized Loss of $1,500, reported as part of Other Comprehensive Income.

Ewok Enterprises recently elected the fair value option to account for its investment in Yoda Inc. Ewok purchased the shares for $210,000 and the shares are currently trading for $195,000 at year-end. What is the amount of gain or loss reported at year-end for this investment and where is this loss reported?

Unrealized Loss of $15,000, reported as part of Net Income.

As of 12/31/17, XYZ Inc. had Available-for-Sale debt investments with a fair value of $522,000, an amortized cost of $535,000, and a debit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,500. What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported?

Unrealized Loss of $20,500, reported as part of Other Comprehensive Income.

) As of 12/31/17, XYZ Inc. had Available-for-Sale debt investments with a fair value of $522,000, an amortized cost of $535,000, and a credit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,500. What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported?

Unrealized Loss of $5,500 reported as part of Other Comprehensive Income

Stuart 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 Stuart would be

a fine resulting from violations of OSHA regulations.

Under the equity method, cash dividends received by the investor from the investee should be treated as ________.

a reduction in the investment amount

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 reduction of the carrying value of the investment.

) Lehman Corporation purchased a machine on January 2, 2013, for $3,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes: 2013 $600,000 2016 $345,000 2014 960,000 2017 345,000 2015 576,000 2018 174,000 Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Lehman's balance sheet at December 31, 2014 be

a. $0 $108,000

A requirement for a security to be classified as held-to-maturity is

all of these

) Where are changes in fair value for available for sale securities reported?

as a component of accumulated other comprehensive income on the balance sheet

Where are changes in fair value for trading securities reported?

as operating income or loss on the income statement

. Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are

available for sale debt securities

Carly Enterprises purchased 1,000 shares of the 1,000,000 common shares outstanding in Crush Inc. Carly intends to hold onto this investment for the forseeable future. How should this investment be classified on the books of Carly?

available-for-sale equity investment

A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax? Type of Difference Deferred Tax a. Temporary Liability b. Temporary Asset c. Permanent Liability d. Permanent Asset

b. Temporary Asset

What type of account is Discount on Notes Receivable?

contra asset account

What is the initial reporting basis for all investment securities?

cost

Charmed Inc.'s income before taxes is $710,000 and its tax rate is 35%. Charmed included $40,000 in non-deductible life insurance premiums in the $710,000. There are no other book-tax differences. What is the journal entry to record income tax expense?

debit income tax expense 262,500 credit income tax payable 262,500

On December 31, 2015, Big Bear Corporation reports liabilities with a tax basis of $1,000,000 and a book basis of $1,300,000. There was no difference in the asset basis. The difference in liability basis arose from temporary differences that would reverse in the following years: 2016 $80,000 2017 $70,000 2018 $72.000 2019 $40,000 2020 $38,000 Assuming a tax rate of 30% for 2015 - 2018 and a rate of 35% for 2019 - 2020, what should Big Bear report on its balance sheet on December 31, 2015?

deferred tax asset of $93,900

Sheehan & Co. purchased 35% of the outstanding shares of Jules & Associates. Jules then declared dividends at year end. How will these dividends effect the investment account for Sheehan?

dividends received will reduce the investment account

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

earnings are reported by the investee in its financial statements.

Fair values and subsequent growth of an investment are not relevant for reporting for which category of investments?

held to maturity

Debt securities that are accounted for at amortized cost, not fair value, are

held to maturity debt securities

) Which of the following is a debt security for which management has both the positive intent and ability to hold the debt investment until all principal and interest is fully paid?

held to maturity security

) Violet, Inc. recorded a deferred tax asset of $35,000 due to a basis difference in warranty liabilities. Management has assessed that it is more likely than not that the firm will not realize 35% of the deferred tax asset. What is the necessary journal entries to record the valuation allowance?

income tax expense debit 12,250 valuation allowance for deferred asset credit 12,250

) On January 1, 2015, Dean Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Dean to make annual payments of $150,000 at the end of each year for ten years with the title passing to Dean at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Dean uses the straight-line method of depreciation for all of its fixed assets. Dean accordingly accounted for this lease transaction as a capital lease. The lease payments were determined to have a present value of $1,006,512 at an effective interest rate of 8%. With respect to this capitalized lease, Dean should record for 2015

interest expense of $80,521 and depreciation expense of $67,101.

) Unrealized gains and losses on investments in equity securities are reported for an investment in another company when the percentage of ownership in another company is ________.

less than 20%

. Investments in debt securities should be recorded on the date of acquisition at

market value plus brokerage fees and other costs incident to the purchase.

Norman Corporation owns an investment that it had originally classified as available for sale. This investment is now more appropriately treated as held to maturity. Norman would ________.

reclassify the investment as held to maturity and record the fair value at the reclassification date as the investment's cost basis for future amortization

Initial direct costs are expensed at the inception of the lease in ________.

sales type lease

A noncancellable lease contains a bargain purchase option. The fair value of the asset is greater than the lessor's cost. Collectability of the lease payments is reasonably assured, and no material uncertainties about future costs exist. How will the lessor account for the lease?

sales-type lease

) Accumulated Other Comprehensive Income reflects changes in the fair value of which type of securities?

securities available for sale

Investments in debt and equity securities that cannot be readily classified in the other reporting categories are classified as ________.

securities available for sell

A major distinction between temporary and permanent differences is

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

Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on

the classification of the related asset or liability

When a note receivable is non-interest bearing, ________.

the effective rate of interest exceeds the prevailing rate

) The cost of a leasehold improvement is depreciated over which of the following time periods?

the shorter of the physical life of the asset or the lease term

Joss Enterprises invested in shares of Angel Athletics. Joss intends to sell these shares for a profit in the very near future. How should Joss classify this investment?

trading equity investment

) Ryan Corporation purchased 10,000 shares of Acme Stock. It plans to hold them for a short time and then sell them at a gain. It should classify these securities as ________.

trading securities

Which of the following is a debt or equity security that a company intends to hold only for the short term?

trading security

For equity securities are carried and reported as available for sale, when should a gain be reported on the income statement?

when the security is sold

Pepper Company owns 40% of the common stock and exercises significant influence over Salt Company. Pepper Company ________.

would record 40% of the net income of Salt Company as investment income each year