Int Accounting Exam #2

Greene Co. has book income of​ $425,000, and a tax rate of​ 30%. Assuming there are no​ book-tax differences, what will the journal entry be to record the income tax​ expense? A) Income Tax Expense 127,500 Income Tax Payable 127,500 B) Income Tax Expense 255,000 Income Tax Payable 255,000 C) Income Tax Payable 127,500 Income Tax Expense 127,500 D) Income Tax Payable 255,000 Income Tax Expense 255,000

A) Income Tax Expense - 127,500 Income Tax Payable - 127,500

Which of the following assets is always considered a separate lease component in a​ lease, unless the impact on the financial statements of not separating it from the other​ asset(s) is​ insignificant? A) Land B) Services associated with the lease C) Fully depreciated assets D) All of the above

A) Land

The​ ________ date is when the lease agreement is signed. The​ ________ date is the date on which the lessee is allowed to begin using the leased asset. A) Lease inception; lease commencement B) Lease consideration; lease commencement C) Lease inception; lease finalization D) Both A and B are correct

A) Lease inception; lease commencement

The net investment in the lease for a sales−type lease reflects the assets related to the lease transaction and is comprised of the​following: ________. A) The lease receivable and the present value of any unguaranteed residual asset B) The lease receivable and the present value of any guaranteed residual asset C) the lease receivable and the future value of any unguaranteed residual asset D) the lease receivable and the future value of any guaranteed residual asset

A) The lease receivable and the present value of any unguaranteed residual asset

How are transfers between portfolios (i.e. from trading to available-for-sale) accounted for? A) Transfers between portfolios are accounted for at fair value on the date of the transfer. B) Transfers between portfolios are not allowed under U.S. GAAP. C) Transfers between portfolios are accounted for based on the initial cost of the investment. D) Transfers between portfolios are accounted for based on the most recently reported fair value of the investments.

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

Prior to​ 2019, lessees did not include the right−of−use asset and the lease liability for operating leases on their balance sheets. Both FASB and IASB wrote new standards to require that lessees nearly always report an asset and liability on their balance sheets when they engage in a lease transaction. This accounting results in which of the​ following? A) a more reliable estimation of the lease's value B) a more faithful representation of the rights and obligations arising from leases C) a better determination on whether the lessor held the risks and rewards of the leased asset's ownership D) All of the above

B) a more faithful representation of the rights and obligations arising from leases

Under the equity method, cash dividends received by the investor from the investee should be treated as ________. A) an adjustment to other comprehensive income B) a reduction in the investment account C) an increase in the investment account D) dividend income

B) a reduction in the investment account

Dowell Corporation decided that an investment originally classified as available for sale should be reclassified as held to maturity. Dowell would ________. A) not reclassify the investment B) reclassify the investment as held to maturity and recognize all unrealized gains and losses in net income C) reclassify the investment as held to maturity and record the fair value of the investment as of the date reclassification as its amortized cost basis D) reclassify the investment as held to maturity, but recognize no income or loss

B) reclassify the investment as held to maturity and recognize all unrealized gains and losses in net income

If the lessor meets any one of the five Group I​ criteria, then the lessor classifies the lease as a​ ________. If the lessor meets both of the Group II​ criteria, but none of the Group I​ criteria, then the lessor classifies the lease as a​ ________. If the transaction does not meet either the Group I or Group II​ criteria, then the lessor classifies the lease as a​ ________. A) operating-lease; direct financing lease; sales-type lease B) sales-type lease; direct financing lease; operating lease C) standalone price lease; sales-type lease; direct financing lease D) direct financing lease; operating lease; sales-type lease

B) sales-type lease; direct financing lease; operating lease

Net investment in the lease for a direct financing lease (NIL-DF) is comprised of ________. A) the lease receivable, the future value of any unguaranteed residual asset, and a reduction for any deferred profit B) the lease receivable, the present value of any unguaranteed residual asset, and a reduction for any deferred profit C) the lease receivable, the future value of any unguaranteed residual asset, and an addition for any deferred profit D) the lease receivable, the present value of any unguaranteed residual asset, and an addition for any deferred profit

B) the lease receivable, the present value of any unguaranteed residual asset, and a reduction for any deferred profit

The lessor would most likely prefer a​ ________ or​ ________ lease to an operating lease. Nonoperating lease treatment would permit a financial service company lessor to remove heavy machinery and​ equipment, jet​ airlines, oceangoing​ vessels, and such from its balance sheet and replace it with the​ ________, a financial asset compatible with the nature of its business. In​ addition, the nonoperating lease results in the recognition of​ ________, rather than​ ________ revenue. A) standalone price; sales-type; fair value of the leased asset; interest income; rent B) standalone; operating; fair value of the leased asset; interest income; rent C) direct financing; sales-type; net investment in the lease; interest income; rent D) direct financing; operating; net investment in the lease; financing income; unearned

C) direct financing; sales-type; net investment in the lease; interest income; rent

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. B) These bonds were purchased at a premium because the stated rate exceeds the market rate. C) These bonds were purchased at a discount because the market rate exceeds the stated rate. D) These bonds were purchased at a premium because the market rate exceeds the stated rate.

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

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? A) Unrealized Loss of $6,500, reported as part of Other Comprehensive Income. B) Unrealized Loss of $20,500, reported as part of Net Income. C) Unrealized Loss of $20,500, reported as part of Other Comprehensive Income. D) Unrealized Loss of $6,500, reported as part of Net Income.

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

Where are changes in fair value for trading securities reported? A) as operating income or loss on the income statement B) as income or loss from peripheral activities on the income statement C) as a component of accumulated other comprehensive income on the balance sheet D) as a prior period adjustment to retained earnings on the balance sheet

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

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 ________. A) available for sale securities B) held-to-maturity securities C) trading securities D) minority securities

C) trading securities

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? A) $1,500 B) $3,000 C) $2,000 D) $4,000

A) $1,500 $100,000*.03*.5 = $1,500

Inferno Inc. is embroiled in a lawsuit. In​ 2018, they recognize that a loss of $65,000i s probable. Given a tax rate of 40​%,how will this be treated in the accounting​ records? A) Deferred tax asset of $26,000 B) Deferred tax liability of $26,000 C) Deferred tax asset of $65,000 D) Deferred tax liability of $65,000

A) Deferred tax asset of $26,000 $65,000 * .40 = $26,000

Lyon​ Group's income before taxes is​ $420,000 and its tax rate is​ 40%. Lyon included​ $30,000 in fines and penalties in the​$420,000. There are no other​ book-tax differences. What is the income tax liability for Lyon​ Group? A. ​$168,000 B. ​$180,000 C. ​$156,000 D. ​$12,000

B. ​$180,000 Income before taxes - $420,000 ADD: Non-deductible expenses - $30,000 = Taxable Income = $450,000 Tax Rate - 40% Income Tax Liability = $180,000

TLR Productions reported income before taxes of $205,000 for the years 2016, 2017, and 2018. In 2019 they experienced a loss of $500,000. TLR had a tax rate of 35% in 2016 and 2017, and a rate of 45% in 2018 and 2019. Assuming the company uses the carryback provisions for the net operating loss, what amount should be reported as Income Tax Refund Receivable in 2019? A) $71,750 B) $164,000 C) $204,500 D) $225,000

B) $164,000 Year 2017 + Year 2018 ($205,000*.35) + ($205,000*.45) = $164,000

Danio Inc.'s income before taxes is $550,000 and its tax rate is 30%. Danio included $30,000 of interest from municipal bonds in the $550,000. There are no other book-tax differences. What is the effective tax rate for Danio Inc.? (Do not round intermediate calculations. Inly round your final answer to the nearest percent.) A) 27% B) 28% C) 30% D) 32%

B) 28% Income before Tax - $550,000 LESS: Interest from municipal bonds - $30,000 = Taxable Income = $520,000 Tax on income ($520,000 * 30%) = $156000 Effective Tax Rate = ($156,000/$550,000)*100 = 28.36%

Which of the following statements best describes the effective tax​ rate? A) It is the legally imposed rate in a given taxing jurisdiction B) It can be calculated by dividing income tax expense by book income before taxes C) It changes annually based on provisions from Congress D) It is calculated as book income divided by taxable income

B) It can be calculated by dividing income tax expense by book income before taxes

________ differences between book income and taxable income result in an effective tax rate that differs from the statutory rate. A) Temporary B) Permanent C) Short-term D) Long-term

B) Permanent

In cases where the standalone price is highly variable or​ uncertain, the lessee may use what type of method for determining standalone​ prices? A) Market Method B) Residual Method C) Component Method D) Both A and C are correct

B) Residual Method

Greene Co. has a pretax book income for the year ended December 31, 2018 in the amount of $285,000 and has a tax rate of 40%. Depreciation for tax purposes exceeded book depreciation by $13,500. What should Green Co. record as its federal income tax liability for 2018? A) $114,000 B) $78,750 C) $108,600 D) $119,400

C) $108,600 $285,000 - $13,500 = $271,500 $271,500 * .40 = $108,600

All of the following are key questions that must be addressed when accounting for investments in debt and equity securities except which one? A) How long does management intend to hold the investment? B) Is the fair value of the equity investment readily determinable? C) How is the return on equity impacted by this investment? D) How much control does the investor have over the investee company for this equity investment?

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

When a company depreciates a fixed asset at a faster rate for tax purposes than book purposes, this creates a ________. A) deferred tax asset B) higher tax basis than book basis of assets in the early years C) deferred tax liability D) lower tax basis than book basis of liabilities in the early years

C) deferred tax liability

TNT Corporation's income tax payable is $240,000 and its tax rate is 30%. Assuming no book-tax differences, what is TNT's net income? (Round your answer to the nearest whole dollar.) A) $72,000 B) $240,000 C) $800,000 D) $560,000

D) $560,000 240,000/.30 = 800,000 800,000 - (.30*800,000) = 560,000

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? A) JayBird will increase the investment account by $82,500. B) JayBird will increase Dividend Revenue by $82,500. C) JayBird will increase Dividend Revenue by $275,000. D) JayBird will decrease the investment account by $82,500.

D) JayBird will decrease the investment account by $82,500. (3,000,000 / 10,000,000) × $275,000 = $82,500

All of the following are examples of facts that may create temporary book-tax differences except _________? A) Contigent liabilities B) Depreciation C) Product warranty cost D) Payment of premiums for life insurance

D) Payment of premiums for life insurance

If a company chooses to carryback a net operating loss (NOL), but is not able to fully offset the loss, they will ________. A) forgo the carryback option and carryforward the entire NOL B) forfeit the unused amount C) carry forward the remaining balance D) both A & C are viable options

D) both A & C are viable options

For a​ ________ lease, a lessor recognizes revenue on the sale and records the​ asset, ________ lease. It also removes the leased asset from its accounts and records the​ ________. A) sales-type; finance; revenue B) operating; net investment in lease-sales-type; cost of goods sold C) finance; gross investment in lease-sales-type; cost of goods sold D) sales-type; net investment in lease-sales-type; cost of goods sold

D) sales-type; net investment in lease-sales-type; cost of goods sold

During 2015, Arnold Corporation purchased $6 million of 10 year municipal bonds at face value. On December 31, 2017, the bonds had a market value of $6,600,000. Arnold reclassified the bonds from held-to-maturity to trading securities. Arnold's balance sheet and income statement for December 31, 2017 will reflect which of the following? A) Investment in municipal bonds- $6,000,000 Income statement gain on investments -$0 B)Investment in municipal bonds - $6,000,000 Income statement gain on investments - $600,000 C)Investment in municipal bonds - $6,600,000 Income statement gain on investments - $0 D)Investment in municipal bonds - $6,600,000 Income statement gain on investments -$ 600,000

D)Investment in municipal bonds - $6,600,000 Income statement gain on investments -$ 600,000

Purrfect Pet​ Industries' income before taxes is​ $810,000 and its tax rate is​ 50%. Purrfect Pet included​ $50,000 of fully deductible​ inter-corporate dividends received in the​ $810,000. There are no other​ book-tax differences. What is the income tax liability for Purrfect​ Pet? A. ​$405,000 B. ​ $430,000 C. ​$25,000 D. ​$380,000

D. ​$380,000 Income before taxes - $810,000 LESS: fully deductible dividends- $50,000 = Taxable Income = $760,000 Tax Rate - 50% Income Tax Liability = $380,000

Kravitz Corporation had income before taxes of $900,000 and a tax rate of 25%. Included in the income are $70,000 in municipal bond interest and $10,000 in fines and penalties. There are no other book-tax differences. A) Book income that is $60,000 greater than taxable income B) Book income that is $70,000 greater than taxable income C) Taxable income that is $10,000 greater than book income D) Taxable income that is $60,000 greater than book income

A) Book income that is $60,000 greater than taxable income

Olympics Inc. recorded a dividends received deduction on their tax return this year. What​ (if any)​ book-tax difference will​ result? A) Temporary difference; book income less than taxable income B) Permanent difference; book income less than taxable income C) Permanent difference; book income greater than taxable income D) Temporary difference; book income greater than taxable income

C) Permanent difference; book income greater than taxable income

In 2017, Squirrel Corp. recorded book income of $165,000. It has one temporary difference which relates to a $30,000 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 36%. The enacted tax rates for the following years are 2017: 26%, 2018: 31%, 2019: 26% and 2020: 36%, respectively. Under U.S. GAAP, what deferred tax amount should Squirrel Corp. record for this temporary difference? A) $8,550 B) $7,800 C) $9,300 D) $10,050

A) $8,550 ((.31 + .26) / 2 ) * 30,000 = 8,550

Brightney purchased common shares of Company A and B for $10,000 and $12,000, respectively on 12/15. Brightney 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 debit balance in Fair Value Adjustment - Trading Equity Securities, what is the unrealized gain or loss for these securities and how is it reported? A) Unrealized Gain of $500, reported as part of Net Income. B) Unrealized Gain of $3,500, reported as part of Net Income. C) Unrealized Gain of $500, reported as part of Other Comprehensive Income. D) Unrealized Gain of $3,500, reported as part of Other Comprehensive Income.

A) Unrealized Gain of $500, reported as part of Net Income. A) Fair Value of A & B less the cost of A & B = desired balance in Fair Value Adjustment account: ($15,000 + $9,000) - ($10,000 + $12,000) = $2,000 desired debit balance - previous debit balance, $1,500 = Unrealized Gain of $500.

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? A) Unrealized Loss of $1,500, reported as part of Other Comprehensive Income. B) Unrealized Loss of $1,500, reported as part of Net Income. C) Unrealized Gain of $3,000, reported as part of Other Comprehensive Income. D) Unrealized Gain of $3,000, reported as part of Net Income.

A) Unrealized Loss of $1,500, reported as part of Other Comprehensive Income. Cost - Fair Value = Unrealized loss $19,000 - $17,500 = $1,500

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 ________. A) less than 20% B) 20% to 50% C) 51% to 74% D) 75% or greater

A) less than 20%

Revenue for a direct financing lease is calculated as ________. A) the lower of (1) the fair value of the leased asset or (2) the sum of the lease receivable and any lease payments paid before the lease commencement date B) the higher of (1) the fair value of the leased asset or (2) the sum of the lease receivable and any lease payments paid before the lease commencement date C) the lower of (1) the residual value of the asset or (2) the sum of the lease receivable and any lease payments paid before the lease commencement date D) None of the above

A) the lower of (1) the fair value of the leased asset or (2) the sum of the lease receivable and any lease payments paid before the lease commencement date

On the balance sheet, the lease liability is measured as ________. A) the present value of the lease payments plus the present value of the guaranteed residual value if the lessee guarantees it (if any) B) the present value of the lease payments less the present value of the guaranteed residual value (if any) C) the future value of the lease payments plus the future value of the guaranteed residual value (if any) D) the present value of the lease payments plus the future value of the guaranteed residual value (if any)

A) the present value of the lease payments plus the present value of the guaranteed residual value if the lessee guarantees it (if any)

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? A)Held-to-Maturity Debt Investment - Cost 200,000 Interest Receivable 7,500 Cash 207,500 B)Held-to-Maturity Debt Investment - Cost 200,000 Discount on Held-to-Maturity Investment 7,500 Cash 207,500 C)Available-for-Sale Debt Investment - Cost 200,000 Discount on Held-to-Maturity Investment 7,500 Cash 207,500 D)Available-for-Sale Debt Investment - Cost 200,000 Discount on Available-for-Sale Investment 7,500 Cash 207,500

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

Dante Inc. reported fines and penalties on their income statement this year. What​ (if any)​ book-tax difference will​ result? A) Temporary difference; book income less than taxable income B) Permanent difference; book income greater than taxable income C) Permanent difference; book income less than taxable income D) No difference; fines and penalties are tax deductible

C) Permanent difference; book income less than taxable income

Greenville Industries uses the accrual basis to account for all sales transactions. Sales for 2018 total $560,000. Included in this amount is $25,000 in receivables from sales on installment. Installment sales are considered revenue for book purposes, but not for tax purposes. Operating expenses total $120,000 and are treated the same for book and tax purposes. What is Greenville's tax basis in the installment sale receivable? A) $25,000 B) $0 C) $12,500 D) $120,000

B) $0

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? A) $1,747,695 B) $1,740,854 C) $1,750,117 D) $2,000,000

B) $1,740,854

The following information applies to the operations of MK Inc. for 2018 and 2019. Assume a tax rate of 30% for both years. 2018 INFORMATION: Sales on account in the amount of $650,000 Warranty expense and associated liability in the amount of $105,000 No other expenses incurred 2019 INFORMATION: Sales on account in the amount of $225,000 Warrant repairs made in the amount of $68,000 No expenses incurred What is MK's taxable income for 2018? A) $545,000 B) $650,000 C) $755,000 D) $582,000

B) $650,000

When a company pays taxes that were previously recorded as a deferred tax liability, the temporary difference _________. A) Originates B) Reverses C) Increases D) Decreases

B) Reverses

In which of the following instances would a company most likely choose the carryforward option for a net operating loss? A) The company expects lower tax rates in the future compared to the past. B) The company expects higher tax rates in the future compared to the past. C) The company expects lower earnings in the future compared to the past. D) The company expects higher losses in the future compared to the past.

B) The company expects higher tax rates in the future compared to the past.

A company may carry back a tax loss for ________ years and carry forward a tax loss for ________ years. A) 20; 2 B) 1; 15 C) 2; 20 D) 15; 1

C) 2; 20

Piper, Inc. reported a net deferred tax asset balance of $166,650 resulting from an estimated warranty expense accrual for book purposes. The total book-tax difference related to this balance changed from 33% to 28%, effective immediately. What journal entry will Piper need to make to adjust for this change in tax rates? A) Deferred Tax Asset 46,662 Income Tax Payable 46,662 B) Income Tax Expense 46,662 Deferred Tax Asset 46,662 C) Income Tax Expense 25,250 Deferred Tax Asset 25,250 D) Deferred Tax Asset 25,250 Income Tax Payable 25,250

C) Income Tax Expense 25,250 Deferred Tax Asset 25,250

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. A) $20,000 B) $12,000 C) $16,000 D) $22,943

D) $22,943

For an operating​ lease, the lessee will record a​ ______ and an associated lease liability on the balance sheet. A) Intangible asset B) Capital Adjustment C) Contra-liability account D) Right-of-use asset

D) Right-of-use asset

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? A) Unrealized Loss of $1,000, Unrealized Gain of $3,000, both reported as part of Net Income. B) Unrealized Gain of $2,000, reported as part of Other Comprehensive Income. C) Unrealized Loss of $1,000, Unrealized Gain of $3,000, both reported as part of Other Comprehensive Income. D) Unrealized Gain of $2,000, reported as part of Net Income.

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

Leewin Brokerage enters into a lease agreement with Bumble Motors to lease an automobile with a fair value of $76,000 under a 5-year lease on December 20, 2018. The lease commences on January 1, 2019, and Leewin will return the automobile to Bumble on December 31, 2023. The automobile has an estimated useful life of 7 years. Leewin made a lease payment of $10,000 on December 20, 2018. In addition, the lease agreement stipulates annual payments of $10,000, due on January 1 of 2019, 2020, 2021, 2022, and 2023. The implicit rate of the lease is 6% and is known by Leewin. There is no purchase option, no lease incentives, no residual value guarantees, and no transfer of ownership. Leewin incurs initial direct costs of $1,100. Assuming that this is classified as an operating lease, what is the annual lease expense reported on the income statement? A. $10,000 B. $12,200 C. $11,100 D. $11,020

D. $11,020 Annual lease expense = [(Total annual payments + Lease payment on December 20, 2018 + indirect cost - Incentive provided by Bumble)] / 5 years=> [($10000 X 5 years) + $10000 + $1100 - $6000] / 5 years=> ($55100 / 5 years)=> $11020 (Ans)