Test 2- Intermediate 2

5. For a bond issue that sells for less than its face value, the market rate of interest is a. Higher than the rate stated on the bond. b. Dependent on the rate stated on the bond. c. Equal to the rate stated on the bond. d. Less than the rate stated on the bond.

a. Higher than the rate stated on the bond.

4. In May 2010, Caso Co. filed suit against Wayne, Inc., seeking $1,900,000 in damages for patent infringement. A court verdict in November 2013 awarded Caso $1,500,000 in damages, but Wayne's appeal is not expected to be decided before 2015. Caso's counsel believes it is probable that Caso will be successful against Wayne for an estimated amount in the range between $800,000 and $1,100,000, with $1,000,000 considered the most likely amount. What amount should Caso record as income from the lawsuit in the year ended December 31, 2013? a. $ 0 b. $ 800,000 c. $1,000,000 d. $1,500,000

a. $ 0 No gain contingencies need record. Income...

8. On December 31, 2013, Bain Corp. sold a machine to Ryan and simultaneously leased it back for one year. Pertinent information at this date follows: Sales price $360,000 Carrying amount 330,000 Present value of lease payments 34,100 ($3,000 for 12 months at 12%) Estimated remaining useful life 12 years In Bain's December 31, 2013, balance sheet, the deferred revenue from the sale of this machine should be a. $ 0 b. $ 4,100 c. $34,100 d. $30,000

a. $ 0 12 Month is too small for 12 years, less than 10%

3. A bond issue sold at a premium is valued on the statement of financial position at the a. maturity value. b. maturity value plus the unamortized portion of the premium. c. cost at the date of investment. d. maturity value less the unamortized portion of the premium.

b. maturity value plus the unamortized portion of the premium.

7. Prior (Past) service cost is included among OCI items in the statement of comprehensive income and thus subsequently becomes part of AOCI where it is amortized over the average remaining service period using a. U.S. GAAP. b. IFRS. c. Both U.S. GAAP and IFRS. d. Neither U.S. GAAP nor IFRS.

a. U.S. GAAP.

2 On November 30, the Board of Directors of Baldwin Corporation amended its pension plan giving retroactive benefits to its employees. The information below is provided at November 30. Accumulated benefit obligation (ABO) $825,000 Projected benefit obligation (PBO) 900,000 Plan assets (fair value) 307,500 Market-related asset value 301,150 Prior service cost 190,000 Average remaining service life of employees 10 years Useful life of pension goodwill 20 years Using the straight-line method of amortization, the amount of prior service cost charged to expense during the year ended November 30 is a. $9,500 b. $19,000 c. $30,250 d. $190,000

b. 19000 190000/10 years

3. On July 1, 2013, Pell Co. purchased Green Corp. 10-year, 8% bonds with a face amount of $500,000 for $420,000. The bonds mature on June 30, 2023, and pay interest semiannually on June 30 and December 31. Using the effective interest method, Pell recorded bond discount amortization of $1,800 for the six months ended December 31, 2013. From this long-term investment, Pell should report 2013 revenue of a. $16,800 b. $18,200 c. $20,000 d. $21,800

$500000*8%*(1/2)=20,000 20000+1800=21800

7. Neal Corp. entered into a nine-year capital lease on a warehouse on December 31, 2013. Lease payments of $52,000, which includes real estate taxes of $2,000, are due annually, beginning on December 31, 2014, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; Neal's incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should Neal report as capitalized lease liability at December 31, 2013? a. $300,000 b. $312,000 c. $450,000 d. $468,000

(52000-2000 taxes)*6=300000 a. $300,000

Questions 1 and 2 are based on the following information. On January 1, Matthew Company issued 7% term bonds with a face amount of $1,000,000 due in 8 years. Interest is payable semiannually on January 1 and July 1. On the date of issue, investors were willing to accept an effective interest rate of 6%. 1. The bonds were issued on January 1 at a. a premium. b. an amortized value. c. book value. d. a discount. 2. Assume the bonds were issued on January 1 for $1,062,809. Using the effective interest amortization method, Matthew Company recorded interest expense for the 6 months ended June 30 in the amount of a. $35,000 b. $70,000 c. $63,769 d. $31,884

1. a. a premium. 7%>6% 2. d. $31,884 $1000000*7%*0.5=35000 35000>31884

1. Scott Corp. received cash of $20,000 that was included in revenues in its 2013 financial statements, of which $12,000 will not be taxable until 2014. Scott's enacted tax rate is 30% for 2013, and 25% for 2014. What amount should Scott report in its 2013 balance sheet for deferred income tax liability? a. $2,000 b. $2,400 c. $3,000 d. $3,600

12000*25%=3000

Questions 2 and 3 are based on the following information. Bearings Manufacturing Company Inc. purchased a new machine on January 1, 2014 for $100,000. The company uses the straight-line depreciation method with an estimated equipment life of 5 years and a zero salvage value for financial statement purposes, and uses the 3-year Modified Accelerated Cost Recovery System (MACRS) with an estimated equipment life of 3 years for income tax reporting purposes. Bearings is subject to a 35% marginal income tax rate. Assume that the deferred tax liability at the beginning of the year is zero and that Bearings has a positive earnings tax position. The MACRS depreciation rates for 3-year equipment are shown below. Year Rate 1 33.33% 2 44.45 3 14.81 4 7.41 2. What is the deferred tax liability at December 31, 2014 (rounded to the nearest whole dollar)? a. $ 7,000 b. $33,330 c. $11,667 d. $ 4,667 3. For Bearings Manufacturing Company Inc., assume that the following new corporate income tax rates will go into effect: 2015-2017 40% 2018 45% What is the amount of the deferred tax asset/liability at December 31, 2014 (rounded to the nearest whole dollar)? a. $0 b. $9,000 c. $2,668 d. $6,332

2. d. $ 4,667 Book depreciation: 100000/5=20000 Tax depreciation: 100000*0.3333=33330 Different Between: 33330-20000=13330 13330*0.35=4667 3. d. $6,332 2015 BD: 20000 TD: 100000*0.4445=44450 Diff= 24450 2016 BD: 20000 TD: 100000*0.1481=14810 Diff: (5190) 2017 BD: 20000 TD: 100000*0.0741=7410 Diff: (12590) 2018 BD: 20000 TD: 0 Diff: (20000) (24550-5190-12590)*0.4=2668 -20000*0.45=-9000 2668-9000=6332

6. During 2013, Gum Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following the sale and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for the years ended December 31, 2013, and 2014, are as follows: Sales: 2013 $150,000 2014 250,000 Total $400,000 Actual Warranty Expenditures: 2013 $2,250 2014 7,500 Total $9,750 What amount should Gum report as estimated warranty liability in its December 31, 2014, balance sheet? a. $ 2,500 b. $ 4,250 c. $11,250 d. $14,250

4%+2%=6% $400000*0.06=24000 $24000-9750=14250

6. On January 31, 2013, Beau Corp. issued $300,000 maturity value, 12% bonds for $300,000 cash. The bonds are dated December 31, 2012, and mature on December 31, 2022. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should Beau report in its September 30, 2013, balance sheet? a. $ 9,000 b. $18,000 c. $27,000 d. $24,000

Accrued Interest-> June to Sept 3 mon $300000*12%*(3/12)=9000

4. Peg Co. leased equipment from Howe Corp. on July 1, 2013, for an eight-year period expiring June 30, 2021. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of interest contemplated by Peg and Howe is 10%. The cash selling price of the equipment is $3,520,000, and the cost of the equipment on Howe's accounting records is $2,800,000. The lease is appropriately recorded as a sales-type lease. What is the amount of profit on the sale and interest revenue that Howe should record for the year ended December 31, 2013? Profit on Sale Interest Revenue a. $ 45,000 $146,000 b. $ 45,000 $176,000 c. $720,000 $146,000 d. $720,000 $176,000

Profit on Sale Interest Revenue c. $720,000 $146,000 Profit on sale: 3520-2800=720 Interest Revenue: $3520000-initial payment 600000= 2920000 $2920000*10%*(6/12)=146000

8. On April 30, 2013, Witt Corp. had outstanding 8%, $1,000,000 face amount, convertible bonds maturing on April 30, 2021. Interest is payable on April 30 and October 31. On April 30, 2013, all these bonds were converted into 40,000 shares of $20 par common stock. On the date of conversion: • Unamortized bond discount was $30,000. • Each bond had a market price of $1,080. • Each share of stock had a market price of $28. Using the book value method, how much of a gain or loss should be recognized? a. $ 0 b. $150,000 c. $110,000 d. $ 30,000

a. $ 0 No gain or loss recognized in Book value method

5. In December 2013, Mill Co. began including one coupon in each package of candy that it sells and offering a toy in exchange for 50 cents and five coupons. The toys cost Mill 80 cents each. Eventually 60% of the coupons will be redeemed. During December, Mill sold 110,000 packages of candy and no coupons were redeemed. In its December 31, 2013, balance sheet, what amount should Mill report as estimated liability for coupons? a. $ 3,960 b. $10,560 c. $19,800 d. $52,800

a. $ 3,960 110000*60%=66000 Redeem coupon 66000 coupon/5 coupon=13200 Toys 13200*(0.8-0.5)=3960

3. Glade Co. leases computer equipment to customers under direct-financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a five-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease? a. $ 51,600 b. $ 75,000 c. $129,360 d. $139,450

a. $ 51,600 Annual payment= 323400 / 4.312= 75000 five years= 7000*5=375000 375000-323400=51600

7. On January 1, 2008, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, 2018, but were callable at 101 any time after December 31, 2011. Interest was payable semiannually on July 1 and January 1. On July 1, 2013, Fox called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Fox's gain or loss in 2013 on this early extinguishment of debt was a. $ 8,000 gain b. $10,000 loss c. $12,000 gain d. $30,000 gain

a. $ 8,000 gain 1000*$1000=$1,000,000 $1040000-1000000=40000 40000/20 period=2000/period 2000*(6 years*2-1)=22000 40000-22000=18000 1000000+18000=1018000 1000000*1.01=1010000 1018000-1010000=8000 Gain

4. Stone Co. began operations in 2013 and reported $225,000 in income before income taxes for the year. Stone's 2013 tax depreciation exceeded its book depreciation by $25,000. Stone also had nondeductible book expenses of $10,000 related to permanent differences. Stone's tax rate for 2013 was 40%, and the enacted rate for years after 2013 is 35%. In its December 31, 2013, balance sheet, what amount of deferred income tax liability should Stone report? a. $ 8,750 b. $10,000 c. $12,250 d. $14,000

a. $ 8,750 $25,000*35%=8750

2. North Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2013, North's unadjusted balance of liability for compensated absences was $21,000. North estimated that there were 150 vacation days and 75 sick days available at December 31, 2013. North's employees earn an average of $100 per day. In its December 31, 2013, balance sheet, what amount of liability for compensated absences is North required to report? a. $15,000 b. $21,000 c. $22,500 d. $36,000

a. $15,000 150 vacation days * $100 per day=$15000

3. On December 31, 2013, Largo, Inc., had a $750,000 note payable outstanding, due July 31, 2014. Largo borrowed the money to finance construction of a new plant. Largo planned to refinance the note by issuing long-term bonds. Because Largo temporarily had excess cash, it prepaid $250,000 of the note on January 12, 2014. In February 2014, Largo completed a $1,500,000 bond offering. Largo will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2014. On March 3, 2014, Largo issued its 2013 financial statements. What amount of the note payable should Largo include in the current liabilities section of its December 31, 2013, balance sheet? a. $250,000 b. $750,000 c. $500,000 d. $0

a. $250,000 only look for the prepaid

5. On January 2, 2013, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a capital lease for $240,000, which includes a $10,000 bargain purchase option. At the end of the lease, Nori expects to exercise the bargain purchase option. Nori estimates that the equipment's fair value will be $20,000 at the end of its 8-year life. Nori regularly uses straight-line depreciation on similar equipment. For the year ended December 31, 2013, what amount should Nori recognize as depreciation expense on the leased asset? a. $27,500 b. $30,000 c. $48,000 d. $46,000

a. $27,500 ($240000-20000 Salvage [estimated])/8=27500 depreciation

7. Wilhelm Company prepares its financial statements according to International Accounting Standards (IFRS). It recently estimated that it has a 55 percent chance of losing a lawsuit. Assuming Wilhelm can reliably estimate the amount it would pay if it loses the lawsuit, it should. a. Accrue a liability for the lawsuit. b. Disclose the matter in the notes to the financial statements but not accrue a liability for the lawsuit. c. Make no mention of the lawsuit in the financial statements or notes. d. None of the above.

a. Accrue a liability for the lawsuit.

8. Tweedy Inc. prepares its financial statements according to International Accounting Standards (IFRS). It recently estimated that it has a 99 percent chance of winning a lawsuit. Assuming Tweedy can reliably estimate the amount it would receive if it wins the lawsuit, it should. a. Accrue an asset for the lawsuit. b. Disclose the matter in the notes to the financial statements but not accrue an asset for the lawsuit. c. Make no mention of the lawsuit in the financial statements or notes. d. None of the above.

a. Accrue an asset for the lawsuit.

6. At the inception of a capital lease, the guaranteed residual value should be a. Included as part of minimum lease payments at present value. b. Included as part of minimum lease payments at future value. c. Included as part of minimum lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value. d. Excluded from minimum lease payments.

a. Included as part of minimum lease payments at present value.

1. The projected benefit obligation (PBO) is best described as the a. Present value of benefits accrued to date based on future salary levels. b. Present value of benefits accrued to date based on current salary levels. c. Increase in retroactive benefits at the date of the amendment of the plan. d. Amount of the adjustment necessary to reflect the difference between actual and estimated actuarial returns.

a. Present value of benefits accrued to date based on future salary levels.

7. An example of intraperiod income tax allocation is a. Reporting an extraordinary item in the income statement, net of direct tax effects. b. Interest income on municipal obligations. c. Estimated expenses for major repairs accrued for financial statement purposes in one year, but deducted for income tax purposes when paid in a subsequent year. d. Rental income included in income for income tax purposes when collected, but deferred for financial statement purposes until earned in a subsequent year.

a. Reporting an extraordinary item in the income statement, net of direct tax effects.

X 8. Which of the following items is treated differently under accounting for taxation guidance of U.S. GAAP and IFRS? a. Reporting an extraordinary item in the income statement, net of direct tax effects.. b. Reporting a deferred tax asset for a future deductible amount. c. Reporting a deferred tax liability for a future taxable amount. d. Reporting a deferred tax asset for a net operating loss.

a. Reporting an extraordinary item in the income statement, net of direct tax effects..

5. At December 31, 2012, Johnston and Johnston reported in its balance sheet as part of accumulated other comprehensive income a net loss of $37 million related to its postretirement benefit plan. The actuary for J&J increased her estimate of J&J's future health care costs at the end of 2013. J&J's entry to record the effect of this change will include a. a debit to other comprehensive income and a credit to postretirement benefit liability. b. a debit to postretirement benefit liability and a credit to other comprehensive income. c. a debit to pension expense and a credit to postretirement benefit liability. d. a debit to pension expense and a credit to other comprehensive income.

a. a debit to other comprehensive income and a credit to postretirement benefit liability.

2. West Corp. leased a building and received the $36,000 annual rental payment on June 15, 2013. The begin- ning of the lease was July 1, 2013. Rental income is taxable when received. West's tax rates are 30% for 2013 and 40% thereafter. West had no other permanent or temporary differences. West determined that no valuation allowance was needed. What amount of deferred tax asset should West report in its December 31, 2013, balance sheet? a. $ 5,400 b. $ 7,200 c. $10,800 d. $14,400

b. $ 7,200 36000*0.5(6 month)=18000 18000*40%=7200

9. On June 30, 2013, King Co. had outstanding 9%, $5,000,000 face value bonds maturing on June 30, 2018. Interest was payable semiannually every June 30 and December 31. On June 30, 2013, after amortization was recorded for the period, the unamortized bond premium and bond issuance costs were $30,000 and $50,000, respectively. On that date, King acquired all its outstanding bonds on the open market at 98 and retired them. At June 30, 2013, what amount should King recognize as gain before income taxes on redemption of bonds? a. $ 20,000 b. $ 80,000 c. $120,000 d. $180,000

b. $ 80,000 $5000000*0.98=4900000 (Repurchase) Bond Payable 5000000 Bond premium 30000 Cash 4900000 Bond issuance 50000 Gain 80000

10. Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable stock warrants for 100 shares of Ray's common stock. Total proceeds from the issue amounted to $240,000. The market value of each warrant was $2, and the market value of the bonds without the warrants was $196,000. The bonds were issued at a discount of (rounding the allocation percentage to two decimal places): a. $ 0 b. $ 800 c. $ 4,000 d. $33,898

b. $ 800 $200000/$1000=200 $2*200*100=40000 $196000+40000=236000 196000/236000=0.83 0.83*240000=199200 200000-199200=800

4. The following information pertains to Camp Corp.'s issuance of bonds on July 1, 2013: Face amount $800,000 Terms 10 years Stated interest rate 6% Interest payment dates: Annually on July 1 Yield 9% Present value of $1 for 10 periods At 6% At 9% 0.558 0.422 Future value of $1 for 10 periods At 6% At 9% 1.791 2.367 Present value of ordinary annuity of $1 for 10 periods At 6% At 9% 7.360 6.418 What should be the issue price for each $1,000 bond? a. $ 700 b. $ 807 c. $ 864 d. $1,000

b. $ 807 6%*$1000=60 $60*6.418=385 $1000*0.422=422 385+422=807

2. On January 1, 2013, Blaugh Co. signed a long-term lease for an office building. The terms of the lease required Blaugh to pay $10,000 annually, beginning December 30, 2013, and continuing each year for 30 years. The lease qualifies as a capital lease. On January 1, 2013, the present value of the lease payments is $112,500 at the 8% interest rate implicit in the lease. In Blaugh's December 31, 2013, balance sheet, the capital lease liability should be a. $102,500 b. $111,500 c. $112,500 d. $290,000

b. $111,500 $10000-(8%*112500)interest=1000 liabi 112500-1000=111500

1. A company leases the following asset: • Fair value of $200,000. • Useful life of 5 years with no salvage value. • Lease term is 4 years. • Annual lease payment is $30,000 and the lease rate is 11%. • The company's overall borrowing rate is 9.5%. • The firm can purchase the equipment at the end of the lease period for $45,000. What type of lease is this? a. Operating. b. Capital. c. Financing. d. Long term.

b. Capital. 4 year/ 5 year = 80%>75%

X 1. Lister Company intends to refinance a portion of its short-term debt next year and is negotiating a long-term financ- ing agreement with a local bank. This agreement will be noncancelable and will extend for 2 years. The amount of short-term debt that Lister Company can exclude from its statement of financial position at December 31 a. May exceed the amount available for refinancing under the agreement. b. Depends on the demonstrated ability to consummate the refinancing. c. Must be adjusted by the difference between the present value and the market value of the short-term debt. d. Is reduced by the proportionate change in the working capital ratio.

b. Depends on the demonstrated ability to consummate the refinancing.

8. Prior (Past) service cost is expensed immediately using a. U.S. GAAP. b. IFRS. c. Both U.S. GAAP and IFRS. d. Neither U.S. GAAP nor IFRS.

b. IFRS.

11. When a sale-leaseback transaction occurs, if the leaseback is considered to be an operating lease, and the lease payments and sales price are at fair value, any gain on the sale a. Is amortized over the lease term by a company using IFRS. b. Is recognized immediately by a company using IFRS. c. Is amortized over the lease term by a company using either U.S. GAAP or IFRS. d. Is not recorded by a company using IFRS.

b. Is recognized immediately by a company using IFRS.

9. For companies that prepare their financial statements in accordance with both U.S. GAAP and IFRS, a lease is deemed to be a capital lease (usually called a finance lease under IFRS) if substantially all risks and rewards of ownership are transferred. In making this distinction, less judgment, more specificity is applied using a. IFRS. b. U.S. GAAP. c. Either U.S. GAAP or IFRS. d. Neither U.S. GAAP nor IFRS.

b. U.S. GAAP.

2. A statement of comprehensive income for a company with a defined benefit pension plan does not include a. net income. b. the return on plan assets. c. gains from the return on assets exceeding expectations. d. losses from changes in estimates regarding the pension obligation.

b. the return on plan assets

3. In its December 31, 2013, balance sheet, Shin Co. had income taxes payable of $13,000 and a current deferred tax asset of $20,000 before determining the need for a valuation account. Shin had reported a current deferred tax asset of $15,000 at December 31, 2012. No estimated tax payments were made during 2013. At December 31, 2013, Shin determined that it was more likely than not that 10% of the deferred tax asset would not be realized. In its 2013 income statement, what amount should Shin report as total income tax expense? a. $ 8,000 b. $ 8,500 c. $10,000 d. $13,000

c. $10,000 Income Tax Expense 8000 DeferredTA 5000(20-15) Income Tax payable 13000 Income Tax Expense 2000 Valuation account 2000 8000+2000=10000

6. Dix, Inc., a calendar-year corporation, reported the following operating income (loss) before income tax for its first three years of operations: 2011 $100,000 2012 (200,000) 2013 400,000 There are no permanent or temporary differences between operating income (loss) for financial and income tax reporting purposes. When filing its 2012 tax return, Dix did not elect to forego the carryback of its loss for 2012. Assume a 40% tax rate for all years. What amount should Dix report as its income tax liability at December 31, 2013? a. $ 60,000 b. $ 80,000 c. $120,000 d. $160,000

c. $120,000 400000-100000=300000 (ignore 2012) 300000*0.4=120000

9. Cline Inc. prepares its financial statements according to International Accounting Standards (IFRS). It recently concluded that it will lose a lawsuit, and that it will pay a range of damages falling somewhere between $10 million and $20 million. Cline should accrue a liability in the amount of. a. $0, as no specific amount is probable to be incurred. b. $10 million, the lower end of the range of probable amounts. c. $15 million, the expected value of the amount to be paid. d. $20 million, the upper end of the range of probable amounts.

c. $15 million, the expected value of the amount to be paid.

4. For the past 3 months, Kenton Inc. has been negotiating a labor contract with potentially significant wage increases. Before completing the year-end financial statements on November 30, Kenton determined that the contract was likely to be signed in the near future. Kenton has estimated that the effect of the new contract will cost the company either $100,000, $200,000, or $300,000. Also Kenton believes that each estimate has an equal chance of occurring and that the likelihood of the new contract being retroactive to the fiscal year ended November 30 is probable. According to GAAP regarding contingencies, Kenton should a. Do nothing because no loss will occur if the contract is never signed. b. Disclose each loss contingency amount in the notes to the November 30 financial statements. c. Accrue $100,000 in the income statement, and disclose the nature of the contingency and the additional loss exposure. d. Follow conservatism and accrue $300,000 in the income statement, and disclose the nature of the contingency.

c. Accrue $100,000 in the income statement, and disclose the nature of the contingency and the additional loss exposure.

1. Which one of the following temporary differences will result in a deferred tax asset? a. Use of the straight-line depreciation method for financial statement purposes and the modified Accelerated Cost Recovery System (MACRS) for income tax purposes. b. Installment sale profits accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes. c. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes. d. Investment gains accounted for under the equity method for financial statement purposes and under the cost method for income tax purposes.

c. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes.

3. The accrual of a contingent liability and the related loss should be recorded when the a. Loss resulting from a future event may be material in relation to income. b. Future event that gives rise to the liability is unusual in nature and nonrecurring. c. Amount of the loss resulting from the event is reasonably estimated and the occurrence of the loss is probable. d. Event that gives rise to the liability is unusual and its occurrence is probable.

c. Amount of the loss resulting from the event is reasonably estimated and the occurrence of the loss is probable.

6. Actuarial (Remeasurement) gains and losses are reported as OCI as they occur using a. U.S. GAAP. b. IFRS. c. Both U.S. GAAP and IFRS. d. Neither U.S. GAAP nor IFRS.

c. Both U.S. GAAP and IFRS.

11. On May 1, 2013, Maine Co. issued 10-year convertible bonds at 103. During 2015, the bonds were converted into common stock. Maine prepares its financial statements according to International Accounting Standards (IFRS). On May 1, 2013, cash proceeds from the issuance of the convertible bonds should be reported as a. A liability for the entire proceeds. b. Paid-in capital for the entire proceeds. c. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. d. A liability for the face amount of the bonds and paid-in capital for the premium over the par value.

c. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance.

1. The market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest a. Less the present value of all future interest payments at the rate of interest stated on the bond. b. Plus the present value of all future interest payments at the rate of interest stated on the bond. c. Plus the present value of all future interest payments at the market (effective) rate of interest. d. Less the present value of all future interest payments at the market (effective) rate of interest.

c. Plus the present value of all future interest payments at the market (effective) rate of interest.

3. JWS Corporation has a defined benefit pension plan. JWS reported a net pension liability in last year's balance sheet. This year, the company revised its estimate of future salary levels causing its projected benefit obligation estimate to decline by $8. Also, the $16 million actual return on plan assets was less than the $18 million expected return. As a result a. the net pension liability will decrease by $8 million. b. the statement of comprehensive income will report a $2 million gain and an $8 million loss. c. the net pension liability will increase by $6 million. d. accumulated other comprehensive income will increase by $6 million.

c. the net pension liability will increase by $6 million. $8 million gain less $2 million loss

1. Wolf Inc. began a defined benefit pension plan for its employees on January 1, 2013. The following data are provided for 2013 as of December 31, 2013: Projected benefit obligation $385,000 Accumulated benefit obligation 340,000 Plan assets at fair value 255,000 Pension expense 95,000 Employer's cash contribution (end of year) 255,000 What amount should Wolf report as a net pension liability at December 31, 2013? a. $ 0 b. $ 45,000 c. $ 85,000 d. $130,000

d. $130,000 385-288=130

1. On March 1, 2012, Fine Co. borrowed $10,000 and signed a two-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2014. What amount should Fine report as a liability for accrued interest at December 31, 2013? a. $ 0 b. $1,000 c. $1,200 d. $2,320

d. $2,320 10000*12%*12/12=1200 (10000+1200)*12%*10/12=1120 2120+1200=2320

5. Black Co. organized on January 2, 2013, had pretax financial statement income of $500,000 and taxable income of $800,000 for the year ended December 31, 2013. The only temporary differences are accrued product warranty costs, which Black expects to pay as follows: 2014 $100,000 2015 $ 50,000 2016 $ 50,000 2017 $100,000 The enacted income tax rates are 25% for 2013, 30% for 2014 through 2016, and 35% for 2017. Black believes that future years' operations will produce profits. In its December 31, 2013, balance sheet, what amount should Black report as deferred tax asset? a. $50,000 b. $75,000 c. $90,000 d. $95,000

d. $95,000

10. Blue Company is recording a capital lease (usually called a finance lease under IFRS) and is aware that the implicit interest rate used by the lessor to calculate lease payments is 8%. Blue's incremental borrowing rate is 7%. Blue should record the leased asset and lease liability at the present value of the lease payments dis- counted at a. 7% if using either U.S. GAAP or IFRS. b. 7% if using IFRS. c. 8% if using U.S. GAAP. d. 8% if using IFRS.

d. 8% if using IFRS.

3. Initial direct costs incurred by the lessor under a sales-type lease should be a. Deferred and allocated over the economic life of the leased property. b. Expensed in the period incurred. c. Deferred and allocated over the term of the lease in proportion to the recognition of rental income. d. Added to the gross investment in the lease and amortized over the term of the lease as a yield adjustment.

d. Added to the gross investment in the lease and amortized over the term of the lease as a yield adjustment.

2. Howell Corporation, a publicly traded corporation, is the lessee in a leasing agreement with Brandon Inc. to lease land and a building. If the lease contains a bargain purchase option, Howell should record the land and the building as a(n) a. Operating lease and capital lease, respectively. b. Capital lease and operating lease, respectively. c. Capital lease but recorded as a single unit. d. Capital lease but separately classified.

d. Capital lease but separately classified.

X 1. For a direct-financing lease, the gross investment of the lessor is equal to the a. Present value of the minimum lease payments minus the unguaranteed residual value accruing to the lessor at the end of the lease term. b. Lower of 90% of the present value of the minimum lease payments or the fair value of the leased asset. c. Difference between the fair value of the leased asset and the unearned interest revenue. d. Minimum lease payments plus the unguaranteed residual value accruing to the lessor at the end of the lease term.

d. Minimum lease payments plus the unguaranteed residual value accruing to the lessor at the end of the lease term.

2. An employee has the right to receive compensation for future paid leave, and the payment of compensation is probable. If the obligation relates to rights that vest but the amount cannot be reasonably estimated, the employer should a. Accrue a liability with proper disclosure. b. Not accrue a liability nor disclose the situation. c. Accrue a liability; however, the additional disclosure is not required. d. Not accrue a liability; however, disclosure is required.

d. Not accrue a liability; however, disclosure is required.

2. A bond issue on June 1, 2013, has interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2013, is for a period of a. Three months b. Four months c. Six months d. Seven months

d. Seven months

4. Amortizing a net gain for pensions and other postretirement benefit plans will a. decrease retained earnings and decrease accumulated other comprehensive income. b. increase retained earnings and increase accumulated other comprehensive income. c. decrease retained earnings and increase accumulated other comprehensive income. d. increase retained earnings and decrease accumulated other comprehensive income.

d. increase retained earnings and decrease accumulated other comprehensive income.

12. When bonds and other debt securities are issued, payments such as legal costs, printing costs, and underwriting fees, are referred to as debt issuance costs (called transaction costs under IFRS). If Rushing International prepares its financial statements using IFRS: a. the recorded amount of the debt is increased by the transaction costs. b. the decrease in the effective interest rate caused by the transaction costs is reflected in the interest expense. c. the transaction costs are recorded separately as an asset. d. the increase in the effective interest rate caused by the transaction costs is reflected in the interest expense.

d. the increase in the effective interest rate caused by the transaction costs is reflected in the interest expense.