acct 15,16,18
LeaseCo Industries leased equipment to UserCorp. on July 1, 2021. LeaseCorecorded the lease as a sales-type lease at $810,000, the present value of leasepayments discounted at 10%. The lease called for ten annual lease payments of$120,000 due each July 1. The first payment was received on July 1, 2021.LeaseCo had manufactured the equipment at a cost of $750,000. The totalincrease in earnings (pretax) on LeaseCo's December 31, 2021, incomestatement would be:
$ 94,500 Interest revenue is [10% x ($810,000 - 120,000) x 6/12] =$34,500Selling profit is ($810,000 - 750,000) = 60,000Increase in earnings (pretax) $94,500
Knottworth Gedding Consulting leased machinery from Red Inc. onJuly 1, 2021. The lease was recorded as a finance lease. Thepresent value of the lease payments discounted at 10% was $40.5million. Ten annual lease payments of $6 million are due each July1 beginning July 1, 2021. What amount of interest expense fromthe lease should Knottworth Gedding report in its December 31,2021, income statement?
$1,725,000 10% x ($40,500,000 - 6,000,000) x 6/12 =$1,725,000
On January 1, 2021, Super Sports Supply recorded a right-of-use asset of$135,180 in an operating lease. The lease calls for ten annual payments of$20,000 at the beginning of each year. The interest rate charged by the lessorwas 10%. The balance in the right-of-use asset at December 31, 2021, will be:
$126,698 Interest the first year is 10% x ($135,180 - 20,000) = $11,518.So, amortization will be $20,000 - 11,518 =$8,482.
Encore Industries owned investment securities with a book value of $45 million on August 12. At that time, Encore's board of directors declared a property dividend consisting of these securities. The fair value of the securities was as follows: Declaration - August 12 $58million Record date - September 1 62million Distribution date - September 20 60million
$13 million Plus the present value of all future interest payments at the market or effective rate of interest.
When the 2021 year began, Senatobia Furniture's shareholders' equity included the following: 6 million shares of $1 par common stock $6 Paid-in capital - excess of par 114 1 million shares of $100 par, 9% cumulative, non-participating preferred stock 100 Retained earnings $140 The company earned $48 million during 2021. At the end of the year, the board of directors declared and paid the contracted amount of preferred dividends as well as $3 per share to common shareholders. No dividends had been declared or paid during 2020. On January 5, the company distributed a 3 for 2 common stock split effected in the form of a stock dividend. What is the balance in retained earnings to be reported on the 2021 balance sheet?
$143 million $140 million (beginning balance) + $48 million (net income) − $27 million (common stock dividend − $3/share × 6 million shares × 3/2 split adjustment) − $18 million [preferred stock − 9% × $100 par × 1 million shares × 2 years (the current year plus one year in arrears)].
The shareholders' equity of FSU Industries includes $200,000 of $1 par common stock and $400,000 par value of 6% cumulative preferred stock. The board of directors declared cash dividends of $50,000 in 2021 after paying$20,000 cash dividends in 2020 and $40,000 in 2019. What is the amount of dividends common shareholders will receive in 2021?
$22,000 Preferred Common 2019 $24,000* $16,000 (remainder) 2020 20,000** 0 2021 28,000*** $22,000 (remainder) * $24,000 current preference (6% × $400,000) ** $24,000 current preference, thus $4,000 dividends in arrears *** $4,000 dividends in arrears plus the $24,000 current preference $50,000 − 28,000 = $22,000
On December 31, 2021, I. B. Wright Corp. sold a machine to U. B. Wrong and simultaneously leased it back for one year. Pertinent information at this date follows: Sales price $620,000 Carrying amount 590,000 Present value of lease payments 68,200 ($6,000 for 12 months at 12%) The machine's estimated remaining useful life of 12 years in Wright's December 31, 2021, income statement, the gain from the sale of this machine should be
$30,000
Ellsworth Corporation was organized on January 1, 2021. The firm was authorized to issue 150,000 shares of $1 par common stock. During 2021,Ellsworth had the following transactions relating to shareholders' equity:
$320,000 issue of stock (20,000 × $7) $ 140,000 Issue of stock (20,000 × $8) 160,000 Net income 100,000 Dividends (50,000) Treasury stock (3,000 × $10) (30,000) $320,000
Hardy Welders Inc. had purchased a machine at the beginning of year 1 for$2,000,000. The machine has a useful life of 10 years and a book value of$1,800,000 at the beginning of year 2. Hardy depreciates the machine on a straight line basis for financial reporting purposes but fully depreciates it on the date of purchase for tax purposes. Hardy pays taxes at a rate of 25%.Hardy's year 2 balance sheet should include a deferred tax liability of
$400,000 $1,600,000 accounting basis ($2,000,000 cost minus 2 years of depreciation at$200,000 per year) − $0 tax basis = $1,600,000 total temporary difference $1,600,000 × 25% = $400,000
Dutch Bakers has a $100,000 deferred tax liability that will create taxable income in 2023. Dutch established the deferred tax liability in 2020 when the tax rate was 25%.Part 1: What is the amount of future taxable income that Dutch will incur in2023 associated with the deferred tax liability?
$400,000 (Future taxable amount) × 25% = $100,000, so Future taxable amount = $100,000 ÷ 25% = $400,000
On Jan. 2, 2021, Al Dente Pasta (lessee) entered into an 8-yearlease for equipment. Dente accounted for the acquisition as afinance lease for $500,000, which includes a $15,000 purchaseoption at the end of the lease. Dente is reasonably certain toexercise the purchase option. Dente estimates that theequipment's fair value will be $20,000 at the end of its 10-year life.For the year ended Dec. 31, 2021, what amount should Denterecognize as amortization expense on the leased asset?
$48,000 $500,000 cost - 20,000 salvage value =480,000 / 10 years = $48,000 per year.
The balance sheet of Chunn Industries included the following shareholders' equity section at December 31, 2021 ($ in millions): Common stock ($1 par value, authorized 100M shares, issued and outstanding 90M shares) $ 90 Paid-in capital—excess of par 540 Retained earnings 280 Total shareholders' equity $910 On January 5, 2022, Chunn purchased and retired 1 million shares for $9 million. Immediately after the purchase of the shares, the balances in the paid-in capital—excess of par and retained earnings accounts are
$534 $278 Common stock (cost) 1 PIC—excess of par ($540/90) 6 Retained earnings (difference) 2 Cash 9
The corporate charter of CD, Inc. authorized the issuance of 6 million, $1 par common shares. During 2021, its first year of operations, CD had the following transactions: February 4 sold 4 million shares at $15 per share October 12 purchased 1 million treasury shares at $18 per share December 30 resold the 1 million treasury shares at $20 per share What amount should CD report as additional paid-in capital in its December 31, 2021, balance sheet?
$58 million On Feb 4, additional paid-in capital was credited for $56 [4 million shares × $14/share ($15 − $1 par)]. On Oct 12, there was no impact on the account. On Dec 30, it was credited for $2 [1 million shares − $2/share ($20 − $18 cost)].
The corporate charter of Pharaoh Tent Co. authorized the issuance of 6 million, $1 par common shares. During 2021, its first year of operations, Pharaoh had the following transactions: February 4 sold 4 million shares at $15 per share October 12 retired 1 million shares at $18 per share December 30 sold the 1 million shares at $20 per share What amount should Pharaoh report as additional paid-in capital in its December 31, 2021, balance sheet?
$61 million On Feb 4, additional paid-in capital was credited for $56 [4 million shares × $14/share ($15 − $1 par)]. On Oct 12, it was debited for $14 (1 million shares × $14/share). On Dec 30, it was credited for $19 [1million shares × $19/share ($20 − $1 par)].
Harry Potter Barn (HPB) leased equipment from Sorcerer's Leasing Co. on July 1,2021, in a sales-type lease. The present value of the lease payments discountedat 10% was $80,000. Ten annual lease payments of $12,000 are due each July 1,beginning July 1, 2021. The total decrease in earnings (pretax) in HPB's Dec. 31,2021, income statement would be:
$7,400 $3,400 Interest expense: ([10% x ½] x [$80,000 -12,000])+ 4,000 Amortization expense: ($80,000/10) x ½= $7,400
The following data were reported in the shareholders' equity section of the Brandon Industries' comparative balance sheets for the years ended December 31 ($ in millions):2021 2020Common stock, $1 par per share $306 $300Paid-in capital—excess of par 174 150Retained earnings 314 300During 2021, Brandon declared and paid cash dividends of $45 million. The company also issued a stock dividend. No other changes occurred in shares outstanding during2021. What was Brandon's net income for 2021?
$89 million RE (2020) 300 Net income ? 89 Cash dividend (45) Stock dividend (30) RE (2021) 314 Retained earnings (total) 30 Common stock ($306 − 300) 6 PIC ($174 − 150) 24
Universal Leasing Corp. leases farm equipment to its customers. Typically, the equipment has no residual value at the end of leases and the contracts call for payments at the beginning of each year. Universal's target rate of return is 10%. On a five-year lease of equipment with a fair value of $485,100, Universal will earn interest revenue over the life of the lease of:
$96,575 The present value factor for an annuity due for 5 periods at 10% is 4.16987. Thus, the annual payment is $116,334 ($485,100/4.16987), and the total receipts are $581,675 ($116,334 × 5). The interest revenue is total receipts minus fair value ($581,675 − $485,100).
On January 1, Brighton Early Vineyard leased a truck for a five-year period, at which time possession of the truck will revert back to the lessor. Annual lease payments are $11,000 due on December 31of each year, calculated by the lessor using a 4% discount rate. If Early's revenues exceed a specifiedamount during the lease term, Early will pay an additional $3,000 lease payment at the end of the lease. Early estimates a 70% probability of meeting the target revenue amount. What amount, if any, should be added to lease payments used to determine the right-of-use asset and lease liabilityas a result of the contingent rent agreement?
0
At December 31, 2018, the account balances of Dowling, Inc. showed income taxes payable of $38 million and a current deferred tax asset of $60 million before assessing the need for a valuation allowance. The previous year Dowling had reported a current deferred tax asset of $45 million with no valuation allowance. Dowling determined that it was more likely than not that 20% of the deferred tax asset ultimately would not be realized. Dowling made no estimated tax payments during 2018. What amount should Dowling report as total income tax expense in its 2018 income statement?
35 mil ($60 million − $45 million = $15 million), a credit to tax payable of $38 million, and a credit to a valuation allowance of ($60 million × 20% = $12 million). Therefore, the debit to tax expense would be $35 million.
Phil Wright Dental Services leased kitchen equipment under a 5-year lease with an option to renew for 3 years at the end of 5 years and an option to renew for an additional 3 years at the end of 8 years. The first 3-year renewal option can be exercised for one-half the original and usual rate. What is the length of the lease term that Wright should assume in recording the transactions related to the lease?
8 years
Plaxco had a before-tax loss of $100,000 for both financial accounting and tax purposes in 2021, and pays tax at a rate of 25%. As a result Plaxco will have:
A 2021 net loss of $75,000 and a deferred tax asset of $25,000 Carryforward of the $100,000 NOL will reduce future taxable income by $100,000, so Plaxco recognizes a deferred tax asset of$100,000 × 25% = $25,000. Plaxco would make the following entry: Deferred tax asset 25,000 Income tax expense 25,000 As a result, Plaxco will show a net loss of $100,000 − $25,000 = $75,000.
In which of the following scenarios would the shortcut method be permissible?
A lease term of 6 months with an option to renew for an additional 6 months.
Which of the following statements is true regarding retained earnings?
Accumulated, undistributed net income results in a credit balance in retained earnings
Pyramid Properties entered a lease that contains a bargain purchase option. When calculating the amount to capitalize as a right-of-use asset at the beginning of the lease term, the payment called for by the bargain purchase option should be:
Added at its present value.
In 2021, Broyles, Inc. reacquired 3,000 shares of its common stock as treasury shares at $55 per share. In 2022, Broyles, Inc. sold 1,000 shares of the treasury stock at $75 per share. Which of the following would be included in the 2022entry?
Credit Treasury Stock for $55,000 2021 Treasury Stock 165,000 Cash 165,000 2022 Cash 75,000 Treasury stock ($165M/3) 55,000 PIC—share repurchase 20,000
Beamer Co. issued 50,000 shares of $0.01 par common stock for $230,000. Which of the following will Beamer Co. record as part of the journal entry for this transaction
Credit to Common stock for $500
Bagwell took an aggressive tax position that reduced taxable income from$500,000 to $400,000. Now assume that Bagwell believes it is more likely than not that it would prevail in court if the position was questioned. Bagwell believes there is a 40% chance that $100,000 would be sustained, a 20% chance that $80,000 would be sustained, and a 40% chance that $50,000 would be sustained. Bagwell pays tax at a rate of 25%. Bagwell's journal entry to account for taxes would include a:
Credit to Liability—projected additional tax of $5,000 Bagwell can recognize benefit of $80,000 of deduction, as that is the largest amount that has more than 50% chance of success (40% chance of $100,000 + 20% chance of$80,000, so > 50% chance of $80,000). That leaves $20,000 of benefit that Bagwell assumes it will not receive, requiring a liability of $5,000. Tax expense (to balance) 105,000 Tax payable ($400,000 × 25%) 100,000 Liability—uncertain tax position ($20,000 × 25%) 5,000
Shortly before the end of 2021, Colter Company makes an installment sale that generates $400 of before-tax income. Colter recognizes income for accounting purposes when the sale is made, but will recognize income for tax purposes when cash is subsequently collected in 2022. Colter has a tax rate of 25%. As a result of this transaction, Colter's tax expense journal entry would include a:
Credit to deferred tax liability for $100 Tax expense (to balance) 100 Deferred tax liability 100
At the beginning of 2021, Wyatt Company purchased equipment for $800.The equipment has a four year useful life and Wyatt uses straight line depreciation method. Under the tax laws Wyatt is able to fully depreciate the equipment for tax purposes in the year of purchase. Wyatt has a tax rate of 25%. As a result of this transaction, Wyatt's tax expense journal entry in 2021 would include a:
Credit to deferred tax liability for $150 2021 Income Statement Depreciation = $200 ($800/4) 2021 Tax Return Depreciation = $800 Temporary Difference = $600 ($800 - $200) Deferred Tax Liability = $150 ($600 x 25%) Increase in Deferred Tax Liability = $150 - $0 = $150
Dutch Bakers has a $100,000 deferred tax liability that will create taxable income in 2023. Dutch established the deferred tax liability in 2020 when the tax rate was 25%, and in 2021 the tax rate enacted for 2023 was increased to 30%.Part 2: In 2021, the year the tax rate change for 2023 is enacted, the effect of the change on tax expense will be a:
Debit of 20,000 100,000+20,000= 120,000 $400,000 × 30% Tax expense (to balance) 20,000 Deferred tax liability 20,000
Now assume that Bagwell took an aggressive tax position that reduced taxable income from $500,000 to $400,000, recorded a Liability—uncertain tax position for $5,000, and in a later period learns that the entire position was upheld in court. Bagwell pays tax at a rate of 25%. Bagwell's journal entry to account for taxes would include a
Debit to Liability—uncertain tax position of $5,000 Liability—uncertain tax position 5,000 Income tax expense (benefit) 5,000
Bagwell took an aggressive tax position that reduced taxable income from$500,000 to $400,000. Bagwell does not believe it is more likely than not that it would prevail in court if the position was questioned. Bagwell pays tax at a rate of 25%. Bagwell's journal entry to account for taxes would include a:
Debit to tax expense for $125,000 Tax expense (to balance) 125,000 Tax payable ($400,000 × 25%) 100,000 Liability - uncertain tax position ($100,000 × 25%) 25,000
Windsor Company started 2021 with a deferred tax liability of $150. As of the end of the period, Windsor identifies future taxable amounts of $800.Windsor has a tax rate of 25%, and calculates that taxes payable will be$120. Windsor's tax expense journal entry will include a:
Debit to tax expense for $170 Tax expense (to balance) 170 Taxes payable 120 Deferred tax liability 50
As of the end of 2021, Elliott had a deferred tax asset of $100,000 and believed it was not more likely than not that it could realize any of the tax deductions associated with the deferred tax asset. As of the end of 2022, Elliott needed to show a deferred tax asset of$150,000, and believed it was more likely than not that it would realize$20,000 of that deferred tax asset. Assuming tax payable of $300,000 and no deferred tax liabilities, Elliott's 2022 tax expense journal entry includes a
Debit to tax expense for $280,000 Tax expense (to balance) 280,000 Deferred tax asset 50,000 Taxes payable 300,000 Valuation allowance 30,000
Duchess Company started the period with a deferred tax asset of $400. As of the end of the period, Duchess identifies future deductible amounts of$1,120. Duchess has a tax rate of 25%, and calculates that taxes payable will be $200. Duchess's tax expense journal entry would include a:
Debit to tax expense of $320 Tax expense (to balance) 320 Taxes payable 200 Deferred tax asset 120
NewsMonth has $10 million of deferred revenue—subscriptions. NewsMonth recognizes income for tax purposes when cash is collected, and pays tax at a rate of 25%. NewsMonth's balance sheet should include a:
Deferred tax asset of $2,500,000 $10,000,000 × 25% = $2,500,000
Which of the following is not a component of paid-in capital?
Earnings accumulated on behalf of the shareholders
Which of the following items would not be reported in the statement of comprehensive income as Other Comprehensive Income?
Gain on sale of equipment
Which of the following is a key difference between U.S. GAAP and IFRS with respect to short-term leases?
IFRS permits the short cut method for leases having a value of$5,000 or less
On January 1, 2021, Hy Marx Tutoring leased non-specialized machinery undera 6-year lease. As of January 1, 2021 The machinery has a 9-year economic life.The present value of the monthly lease payments is determined to be 80% ofthe machinery's fair value. The lease contract includes neither a transfer of titleto Marx nor a bargain purchase option. What amount should Marx report in its2021 income statement?
Lease expense equal to the 2021 lease payments.
On January 1, 2021, Walter Scott Co. leased non-specialized machinery under a 6-year lease. The machinery has a 9-year economic life. The present value of the monthly lease payments is determined to be 80% of the machinery's fair value. The lease contract includes neither a transfer of title to Scott nor a bargain purchase option. What amount should Scott report in its 2021 income statement?
Lease expense equal to the 2021 lease payments.
In which of the following situations would it be appropriate to include the variable payment in the calculation of the lease liability recorded at the beginning of the lease?
Lease payments will be $50,000 for years 1 - 5 and $60,000 for years 6 -10 but may be indexed if the Dow Jones moves more than 50% in a single year
Mill's Tread Industries leased exercise equipment to Jim's Gyms on July 1,2021. The lease does not meet the criteria for classification as a financelease. The lease agreement specifies four annual payments of $80,000beginning on July 1, 2021. The present value of those payments at adiscount rate of 10% is $278,948. Which of the following is trueregarding the entries made on July 1, 2021?
Mill's Tread records a debit to cash for $80,000.
Under a sales-type lease, the lessor reports cash receipts on the statement of cash flows as part of:
Operating activities
Temporary differences arise when expenses are reported in the income statement: After they are Before they are deductible for deductible for tax purposes tax purposes a. Yes Yes b. Yes No c. No No d. No Ye
Option A
What is the effect of the declaration and subsequent issuance of a stock split (not effected in the form of a stock dividend) on each of the following? Retained earnings Paid-in capital a. no effect no effect b. no effect increase c. increase decrease d. decrease increase
Option a
The beginning of a six-year finance lease is December 31, 2021. The agreement specifies equal annual lease payments on December 31 of each year. For the lessee, the first payment on December 31, 2021, includes: Interest Expense Reduction of the Lease Liability a.No Yes b.Yes No c.Yes Yes d.No No
Option a In an annuity due, the first payment contains no interest component - the entire payment is applied to a reduction of the lease liability.
The balance sheet of Holmes Services included the following shareholders' equity section at December 31, 2021: ($ in millions) Common stock ($1 par value, authorized 100 million shares, issued and outstanding 90 million shares) $90 Paid-in capital - excess of par 540 Retained earnings 280 Total shareholders' equity $910 On January 5, 2022, Holmes purchased 1 million treasury shares for $9 million. Immediately after the purchase of the shares, the balances in the paid-in capital - excess of par and retained earnings accounts are: Paid-in capital- excess of par Retained earnings a.$540 $280 b.$540 $272 c.$534 $278 d.$532 $280
Option a The treasury stock is deducted from total shareholders' equity as a separate line item - it is not part of either paid-in capital or retained earnings.
Gabriel Company views share buybacks as treasury stock. In its first treasury stock transaction, Gabriel purchased treasury stock for more than the price at which the stock was originally issued. What is the effect of the purchase of the treasury stock on each of the following? Paid-in capital retained earnings a. decrease decrease b. decrease no effect c. no effect no effect d. no effect decrease
Option c
Westside Shipping issued "preemptive rights" to its existing shareholders without consideration whereby each shareholder is offered the opportunity to buy a percentage of any new shares issued equal to the percentage of shares he/she owns at the time. When Westside issues the rights, which of the following accounts will be increased? Common Stock Additional Paid-in Capital a. Yes Yes b. Yes No c. No No d. No Yes
Option c
Dunavant Service Company views share repurchases as treasury stock. Dunavant purchased shares and then later sold the shares at more than their acquisition price. What is the effect of the sale of the treasury stock on each of the following? Retained earnings Paid-in capital a. increase increase b. increase no effect c. no effect no effect d. no effect increase
Option d
If a finance lease contains a bargain purchase option, the lessee should amortize the leased asset:
Over the economic life of the asset.
Chapman Chairs, a family-owned corporation, declared and distributed a property dividend from its overstocked inventory in place of its usual cash dividend. The inventory's book value exceeded its fair value. The excess is:
Reported as a loss.
Which of the following equity-related terms is used under IFRS but not under U.S. GAAP?
Revaluation reserve
Tanzier Trading earned municipal bond interest of $50,000 during 2021.That interest is not taxable. Tanzier pays tax at a rate of $25%. Which of the following is true?
Tanzier's tax expense will not be affected by the muni-bond interest
Which of the following leases would least likely be classified as an operating lease by the lessee?
The agreement permits the lessee to buy the leased asset for one dollar at the end of the lease term.
Which of the following meets the criteria for classification as afinance lease?
The lease term is 8 years, and the asset's economic life is 9 years.
Which of the following is true regarding the accounting for leasehold improvements?
The leasehold improvement should be depreciated over its useful life.
In an operating lease in which the asset's economic life and lease term are different:
The lessee amortizes the leased asset at an amount that increases each period.
A necessary condition for a sales-type lease is:
The lessee considers the lease to be a finance lease.
Which of the following is not a sufficient criterion for a lessor to classify a lease as a sales-type lease?
The present value of the lease payments is greater than the carrying value of the leased asset.
Which of the following is not a sufficient criterion for a lessee to classify a lease as a finance lease?
Which of the following is not a sufficient criterion for a lessee to classify a lease as a finance lease?
Karla Salons leased equipment from SmithCo on January 1, 2021, in anoperating lease. The present value of the lease payments discounted at10% was $80,000. Ten annual lease payments of $12,000 are due eachJanuary 1, beginning January 1, 2021. The amortization of the right-of-use asset in 2021 would be
$ 5,200 Interest the first year is 10% x ($80,000 - 12,000) = $6,800.So, amortization will be $12,000 - 6,800 = $5,200
Willie Winn Track Shoes entered into a 9-year finance lease withBetty Will for a warehouse on December 31, 2021. Lease payments of $13,000, which includes maintenance service of $500, are due annually, beginning on December 31, 2022, and every December 31 thereafter. The interest rate implicit in the lease is 9%. The rounded present value of an ordinary annuity for nine years at 9%is 6.0. What amount should Winn report as a lease liability at December 31, 2021?
$ 75,000 ordinary annuity of 1 for nine years at 9%. The calculation would be: ($13,000 - 500) ×6.0 = $75,000. The maintenance should be charged to expense each year