Exam 2

Add back to taxable income

-Insurance paid = P.D. -Unrealized holding losses (Originating) = T.D. -Warranty expense = T.D. -DTA = T.D.

Subtract from taxable income

-Municipal income = P.D. -DTL (Originating) = T.D. -Installment sales = T.D

Unguaranteed lease:

-NOT included in the PV of cash payments -depreciation = PV of payments / lease term

What gives rise to a DTL?

-a revenue that's deferred for Tax Purposes... -an expense that's deferred for Financial Reporting differences

BPO

-add in PV of cash payments -NOT included in depreciation -depreciation = FV/life of asset -after returned, no more depreciation expense entries

Guaranteed residual:

-add residual value in the PV calculation of the cash payments -depreciation = PV of cash pmts / lease term -account for gain/loss at the end of the lease and pay back what's expected

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? 1. A revenue is deferred for financial reporting purposes but not for tax purposes. 2. A revenue is deferred for tax purposes but not for financial reporting purposes. 3. An expense is deferred for financial reporting purposes but not for tax purposes. 4. An expense is deferred for tax purposes but not for financial reporting purposes.

Both 2 and 3 result in lower taxable income in the current year and higher taxable income in future years when the difference reverses.

Machinery was acquired at the beginning of the year. During the first two years, depreciation for financial statement purposes will be more than depreciation for tax purposes. For the first two years, this will result in

Future Taxable Amounts: No; Future Deductible Amounts: Yes

At the December 31, 2007 balance sheet date, Garth Brooks Corporation reports an accrued loss for financial reporting purposes but not for tax purposes. When this liability is paid in 2008, a future deductible amount will occur and

Garth will record a decrease in a deferred tax asset in 2008

How to find New Prior Service Cost:

PBO W/O change: Salary at retirement * % of final salary * # of years worked = x (x*PVF-OA (expected life, settlement %))*PVF(years until retirement, settlement %) = X PBO W/ change: Salary at retirement * new % * # of years worked = y (y*PVF-OA(expected life, settlement %)*PVF(years until retirement, settlement %) = Y Find difference between X and Y

Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?

Product warranty liabilities

At the December 31, 2009 balance sheet date, South Orange Pizza reports an unrealized gain for financial reporting purposes but not for tax purposes. When this gain in realized, a future taxable amount will occur and

South Orange Pizza will record an increase in a deferred tax liability in 2009

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

The lessee must increase the present value of the minimum lease payments by the present value of the option price. OR The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

What impact does a guaranteed residual have on the present value of the minimum lease payments computed by the lessee?

The minimum lease payments would be increased by the present value of the guaranteed residual

Why did the FASB change the terminology for capitalization?

They had to differentiate between operating and financing leases

At the December 31, 2012 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2013, a future taxable amount will occur and

Unruh will record a decrease in a deferred tax liability in 2013.

Which of the following statements is correct? a. For direct-financing leases, initial direct costs are added to the net investment in the lease. b. For sales-type leases, initial direct costs are added to the net investment in the lease. c. For operating leases, initial direct costs are added to the net investment in the lease. d. For all leases, initial direct costs are expensed immediately.

a

In accounting for a pension plan, any changes in actuarial assumptions should be reported as

a change in other comprehensive income - gains/losses

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

When lessors account for residual values related to leased assets, they

always include the residual value because they always assume the residual value will be realized

When a company amends a pension plan, for accounting purposes, prior service cost should be

amortized under accrual accounting to current and future periods benefited.

Which of the following best describes current practice in accounting for leases? a. Leases are not capitalized b. Leases similar to installment purchases are capitalized c. All long-term leases are capitalized d. All leases are capitalized

b. Leases similar to installment purchases are capitalized

A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be

based on the classification of the related asset or liability for financial reporting purposes

Which of the following is a correct statement of one of the capitalization criteria? a. The lease transfers ownership of the property to the lessor b. The lease contains a purchase option c. The lease term is equal to or more than 75% of the estimated economic life of the leased property d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property

c. The lease term is equal to or more than 75% of the estimated economic life of the leased property

In the earlier years of a lease, from the lessee's perspective, the use of the

capital method will cause debt to increase, compared to the operating method

Minimum lease payments may include a a. penalty for failure to renew. b. bargain purchase option. c. guaranteed residual value. d. any of these

d

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

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

In computing depreciation of a leased asset, the lessee should subtract:

guaranteed residual value and depreciate over the term of the LEASE

Deferred taxes should be presented on the balance sheet

in two amounts: one for the net current amount and one for the net noncurrent amount

The deferred tax expense is the

increase in balance of deferred tax liability minus the increase in balance of deferred tax asset

The amount to be recorded by the lessee as the cost of an asset under capital lease is equal to the

present value of the minimum lease payments or the fair value of the asset, whichever is lower

at the 12/31 BS date, Unruh Inc. reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered, a future taxable amount will occur and they will:

record a decrease in DTL

A major distinction between temporary and permanent differences is

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

A major distinction between temporary and permanent difference is

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

In computing the present value of the minimum lease payments, the lessee should

use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee

Partial income statement, find the amount deducted for DTL:

x*tax rate = Deferred # given X-Depreciation stated on books = x (found before)