Overview CH. 15 and 16

Assume that a lessor applies the five criteria to a lease involving equipment and determines that a lease should be classified as a sales-type lease. The entry the lessor will record at the beginning of the lease will include a:

Debit to Lease receivable for the present value of the lease payments.

On January 1, 2018, Savor Corporation leased equipment to Spree Company. The lease term is 9 years. The first payment of $698,000 was made on January 1, 2018. The present value of the lease payments is $4,561,300. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 9%, how much interest revenue will Savor record in 2018 on this lease?

Interest = Outstanding balance × 9%Interest = ($4,561,300 - $698,000) × 9% = $347,697

On January 1, Year 1, Savor Corporation leased equipment to Spree Company. The lease term is 9 years. The first payment of $698,000 was made on January 1, 2018. The present value of the lease payments is $4,561,300. The lease is appropriately classified as an operating lease. Assuming the interest rate for this lease is 9%, how much interest revenue will Savor record in Year 1 on this lease?

0 the lessor does not report any interest revenue for an operating lease.

Match each timing difference described with the deferred tax assets or liabilities created by the timing difference.

1 .Estimated expenses and losses- Deferred tax assets 2.Installment sales of property - Deferred tax liabilities 3.Prepaid expenses- Deferred tax liabilities 4.Subscriptions collected in advance -Deferred tax assets

Fitzgerald Corp. reports pretax accounting income of $210,000, but because of a single temporary difference, taxable income is only $155,000. At the beginning of the year, no temporary differences existed. Fitzgerald is subject to a tax rate of 40%. Prepare the appropriate journal entry to record the company's income tax expense for the year. For its first year of operations, Marcus Corporation reported pretax accounting income of $274,800. However, because of a temporary difference in the amount of $19,200 relating to depreciation, taxable income is only $255,600. The tax rate is 39%. What amount should Marcus report as its deferred income tax liability in its balance sheet at the end of that year?

1. Dr: ITE 84k Cr: ITP 62k Cr: DTL 22k 2. $19,200 × 39% = $7,488

Sicora Inc. reported installment sales totaling $670,000 in its income statement for Year 1, its first year of operations. Sicora is not required to report installment sales income on its tax return until the cash is collected. Sicora will make the collections on these installment sales as follows: Year 1$70,000 Year 2 130,000 Year 3 140,000 Year 4 160,000 Year 5 170,000 Total$670,000 The enacted tax rate is 30% in each of these years. What is the ending balance in the deferred tax liability account related to these installment sales at the end of Year 1?

670k-70k=600k ($600,000 - $0) × 30% = **$180,000**

Which of the following statements are correct regarding net operating losses?

A NOL occurs when taxable revenues exceed tax-deductible expenses. A NOL occurs when taxable revenues exceed tax-deductible expenses. Correct If a NOL carryback is used, any NOL that remains after the two-year carryback can then be carried forward. If a NOL carryback is used, any NOL that remains after the two-year carryback can then be carried forward. Correct Most companies elect to carry forward NOLs. Most companies elect to carry forward NOLs. Correct The tax benefit created by a net operating loss should be recognized in the income statement in the year the loss occurs.

Labrador Corp. reports a net operating loss of $100,000 during its first year of operations. The company is subject to a tax rate of 30%. Management expects that taxable income will more likely than not be $50,000 during Year 2 and $80,000 during Year 3. What is the amount of the deferred tax asset that will be recognized at the end of Year 1?

Deferred tax asset = Total future deductible amount × Tax rate = $100,000 × 30% = $30,000

Exeter Corp. reports warranty expense by estimating the amount that eventually will be paid to satisfy warranties on its product sales. For tax purposes, the expense is deducted when paid. During its first year of operations, Exeter reports pretax accounting income of $100,000. Its income statement includes a $50,000 warranty expense that is deducted for tax purposes when paid in Year 2 in the amount of $30,000 and Year 3 in the amount of $20,000. Exeter is subject to a tax rate of 40%. Prepare the appropriate journal entry to record the company's income tax expense for Year 1.

Dr: ITE 40k Dr: DTA 20k Cr: ITP 60k

Burnham Company collected rent of $3,800 during Year 1. For income tax reporting, the rent is taxed when collected. For financial reporting, the rent is recognized as income in the period earned. At the end of Year 1, the unearned portion of the rent collected during the year amounted to $440. Burnham had no temporary differences at the beginning of the current year. Assume an income tax rate of 30%. What is the amount of the deferred tax asset that should be recognized at the end of Year 1?

Ending balance in the deferred tax asset = Future deductible amount of $440 × 30% = $132

Assume that an asset being leased is expected to have a residual value at the end of the lease term. What will be the impact of the residual value?

It will cause the lease payments by the lessee to be higher. It will cause the lease payments by the lessee to be higher. Correct It will affect the lessor's accounting for the lease. It will affect the lessor's accounting for the lease. Correct At the beginning of the lease, the lessor will add the present value of the residual value to the amount of the lease receivable that would otherwise be recorded under the lease. At the beginning of the lease, the lessor will add the present value of the residual value to the amount of the lease receivable that would otherwise be recorded under the lease. Correct A gain or loss will be recorded at the end of the lease if the actual residual value is different than that estimated. A gain or loss will be recorded at the end of the lease if the actual residual value is different than that estimated.

On January 1, Year 1, Manlier Inc. leased equipment costing $45,000 to one of its customers. The sales-type lease agreement specifies six annual payments of $15,000 beginning on that date. The present value of the annual lease payments is $73,619. At the end of the lease, the equipment will be returned to Manlier and is expected to have a residual value of $5,000. The present value of that residual value is $2,822. Complete the appropriate journal entry recorded by Manlier at the beginning of the lease.

Lease receivable 76,441 Cost of goods 42,178 Sales revenue 73,619 Equipment 45,000

Amortization of a right-of-use asset over the lease term is recorded by the:

Lessee with a debit to Amortization Expense.

Manning Corp. reported the following pretax accounting income and taxable income for its first three years of operations. The company's tax rate is 34% for all three years. The company elected a loss carryback. Assuming a valuation allowance is not required, what is the amount of the deferred tax asset that will be reported at the end of Year 2? Year 1 $353,000 Year 2 (579,000) Year 3 735,000

NOL carryforward at end of Year 2 = Year 2 NOL - Carryback to Year 1 = $579,000 - $353,000 = $226,000 Deferred tax asset = Future deductible amount × Tax rate = $226,000 × 34% = $76,840

Assume that the five classification criteria are applied to a lease involving equipment and, because none of the criteria is met, it is determined that a lease should be classified as an operating lease. At the beginning of the lease, the lessee:

Records an entry that includes a debit to Right-of-use asset for the present value of the lease payments.

The amortization of a right-of-use asset over the lease term is computed by:

Subtracting the amount needed for interest from the straight-line lease payment.

Assume Jackson Company determines that it is more likely than not that a portion of its deferred tax asset ultimately will not be realized and records an entry to increase its valuation allowance. Which of the following describes how the company's financial statements will be impacted?

The amount of income tax expense reported in the income statement will decrease. The amount of income tax expense reported in the income statement will decrease. Correct The amount of income tax expense reported in the income statement will increase. The amount of income tax expense reported in the income statement will increase. Correct Total assets reported in the balance sheet will decrease. Total assets reported in the balance sheet will decrease. Correct Total assets reported in the balance sheet will increase.

Under an operating lease

The lessee reports amortization expense and interest expense separately in its income statement. The lessee reports amortization expense and interest expense separately in its income statement. Correct The lessee reports a single amount of lease expense, which is equal to interest expense plus amortization expense, in its income statement. The lessee reports a single amount of lease expense, which is equal to interest expense plus amortization expense, in its income statement. Correct The lessor reports a single amount of lease revenue, which is equal to interest revenue plus amortization revenue, in its income statement. The lessor reports a single amount of lease revenue, which is equal to interest revenue plus amortization revenue, in its income statement. Correct The lessee reports lease expense on a straight-line basis and the lessor reports lease revenue on a straight-line basis over the lease term.

If the option is reasonably certain to be exercised, how does the inclusion of a provision that gives the lessee the option to purchase the lease asset during the lease term at a specified exercise price impact that accounting for that lease?

The lessor must classify the lease as a sales-type lease. The lessor must classify the lease as a sales-type lease. Correct The lessee has the option of classifying the lease as an operating lease. The lessee has the option of classifying the lease as an operating lease. correct The lease term is assumed to end on the date that the option is expected to be exercised. The lease term is assumed to end on the date that the option is expected to be exercised. Correct In the present value calculations, the lessor adds the present value of the exercise price to the present value of the periodic lease payments to determine the amount recorded as the lease receivable. In the present value calculations, the lessor adds the present value of the exercise price to the present value of the periodic lease payments to determine the amount recorded as the lease receivable. Correct In the present value calculations, the lessee subtracts the present value of the exercise price from the present value of the periodic lease payments to determine the amount recorded as the lease liability.

On January 1, Leveler Corporation leased equipment to Messy Company. The present value of the lease payments is $200,000 and Leveler's cost of the equipment was $125,000. The lease is properly classified as a sales-type lease. In comparison to the entries that would have been made if this lease did not include a selling profit, how are the entries affected because this lease includes a selling profit? (Select all that apply.) Check All That Apply

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