Intermediate 3 final: computational

A company calculated the following data for the period: • Cash received from customers $25,000 • Cash received from sale of equipment 1,000 • Interest paid to bank on note 3,000 • Cash paid to employees 8,000 What amount should the company report as net cash provided by operating activities in its statement of cash flows? A) $14,000 B) $15,000 C) $18,000 D) $26,000

Cash inflows from operating activities include receipts from collection or sale of accounts and notes resulting from sales to customers ($25,000). Cash outflows from operating activities include cash payments to employees for services ($8,000) and creditors for interest ($3,000). Thus, the net cash provided by operating activities is $14,000. The cash received from sale of equipment is an investing cash inflow.

Smiley Corp.'s transactions for the year ended December 31, 2015 included the following: • Purchased real estate for $625,000 cash which was borrowed from a bank. • Sold available-for-sale securities for $500,000. • Paid dividends of $600,000. • Issued 500 shares of common stock for $250,000. • Purchased machinery and equipment for $125,000 cash. • Paid $450,000 toward a bank loan. • Reduced accounts receivable by $100,000. • Increased accounts payable $200,000. Smiley's net cash used in financing activities for 2015 was a. $225,000. b. $175,000. c. $450,000. d. $425,000.

$625,000 - $600,000 + $250,000 - $450,000 = ($175,000).

In 2012, Everlook Engineers LLP. enter into a contract with Darkhammer Iron Smiths to build a high speed rail system. The project is expected to take 20 years. The contract price is 10,000,000 and the expected cost is 9,000,000. In the 2012, Everlook Incurred 1,000,000 of costs and recognized 1,200,000 revenue. In 2013, Everlooks spends another 1,000,000 expects to spend an additional 6,000,000 to complete the project. What is the revenue recognized on Everlook's 2013 income statement? a. 2,500,000 b. 1,300,000 c. 2,222,222 d. 1,022,222

1,300,000 % Complete= Cost incurred to date/ Total estimated cost = (1,000,000+ 1,000,000)/ (1,000,000+ 1,000,000 + 6,000,000) = 25% Revenue (2013) = % Complete x Contract Price - Revenue in Prior Periods = 25% x 10,000,000 - 1,200,000 = 1,300,000

On 12/31/2011 Angor Mines Inc. calculated its deferred tax asset at 10,000 based on a single temporary difference of 50,000 that will reverse in 2013 and a 20% tax rate. In 2012 congress changed the tax law and the new tax rate will be 25% beginning 1/1/2013. In 2012 Angor has $20,000 of taxable income and no change in the temporary difference. What is the tax expense reported on Angor's 2012 income statement? a. $2,000 b. $4,000 c. $6,500 d. $1,500

20,000 x 20% - 50,000 x (25% - 20%) =1,500 Tax Expense (Plug) 1,500 (Plug) DTA 2,500 (50,000 x (25%-20%) - Apply increase in future tax rate) Tax payable 4000 (20,000 x 20%) 2,500 (50,000 x (25%-20%) = Increase in DTA due to increase in future tax rate.

In 2012, Everlook Engineers LLP. enter into a contract with Darkhammer Iron Smiths to build a high speed rail system. The project is expected to take 20 years. The contract price is 10,000,000 and the expected cost is 9,000,000. In the 2012, Everlook Incurred 1,000,000 of costs and recognized 1,200,000 revenue. In 2013, Everlooks spends another 1,000,000 expects to spend an additional 6,000,000 to complete the project. What is the reported gross profit on Everlook's 2013 income statement? a. 300,000 b. 1,500,000 c. 2,222,222 d. 22,222

300,000 Gross Profit = Revenue - Cost = 1,300,000 - 1,000,000 = 300,000

In 2012, Gadgetzan Engineers LLP entered into a contract with the Steamwheedle Cartel to rebuild the Docs. The project is expected to take 4 years. The contract price is 1,000,000 and the expected cost is 700,000. In the first year, Gadgetzan spends 600,000 and expects to spend an additional 200,000 to complete the project. What is the construction expense recognized by Gadgetzan in 2013. a. 350,000 b. 550,000 c. 950,000 d. 354,762

354,762 Note that the company has a Gross Loss in 2013= Contract Price - Total estimated cost = 1,000,000 - 1,050,000= -50,000 Entire Loss (2013) = Gross Profit in Prior periods + Gross Loss = (750,000 - 600,000) + 50,000 = 200,000 Journal entry: Construction Expense 354,762 (PLUG) Construction in Process (Entire Loss) 200,000 (Entire loss is credit to Construction in Process) Revenue on Long-Term Contract 154,762 (As calculated in the previous question)

8. During 2012 Jetson Company started a construction job with a contract price of $10,000,000. The firm spent 4,000,000 and recognized 6,000,000 revenue in 2012. In 2013 the firm spent an additional 5,000,000 and estimated that it would cost an additional 3,000,000 to complete the project. What is the construction expense the firm will recognize in 2013? a. 9,000,000 b. 5,500,000 c. 7,500,000 d. 3,000,000

5,500,000 Estimated total cost (2013) = 4,000,000 + 5,000,000 + 3,000,000 = 12,000,000 The contract is unprofitable in 2013 because Estimated total cost > Contract price Gross Loss= 2,000,000 1st Step: Entire Loss = Gross Profit in Prior periods + Gross Loss = (6,000,000 - 4,000,000) + 2,000,000 = 4,000,000 % Complete= Cost incurred to date/ Total estimated cost= (4+5)/ (4+5+3)= 75% 2nd Step: Revenue = % Complete x Contract Price - Revenue in Prior Periods = 75%*10,000,000-6,000,000= 1,500,000 Journal entry: Construction Expense 5,500,000 (PLUG) Construction in Process (Entire Loss) 4,000,000 (1st step) Revenue on Long-Term Contract 1,500,000 (2nd step)

During 2012 Pierson Company started a construction job with a contract price of $100,000. The firm estimated that it would cost $80,000 to complete the project. In the first year, the firm spent 45,000 and on 12/31/2012 the firm estimated that it would need to spend an additional 45,000 to complete the project. During the year the firm billed the client for 40,000 and collected 35,000. What is the revenue that the firm will report on the 2012 income statement? a. 35,000 b. 40,000 c. 50,000 d. 45,333

50,000 % Complete= Cost incurred to date/ Total estimated cost= 45,000/90,000= 50% Revenue = % Complete x Contract Price - Revenue in Prior Periods = 50%*100,000-0= 50,000 Revenue in Prior Periods=0 because 2012 is the first year.

In 2012, Gadgetzan Engineers LLP. enter into a contract with the Steamwheedle Cartel to rebuild the Docs. The project is expected to take 4 years. The contract price is 1,000,000 and the expected cost is 800,000. In the first year Gadgetzan spends 300,000, bills the Cartel 250,000 and collects 200,000. At the end of 2012, Gadgetzan expects to spend an additional 300,000 to complete the project. What is the balance in Gadgetzan's Accounts Receivable account on the 2012 balance sheet? a. 250,000 b. 50,000 c. 750,000 d. 800,000

A/R increases with billings and decreases with collections: A/R (2012) = 250,000 + 200,000 =50,000

Mellow Co. depreciated a $12,000 asset over 5 years, using the straight-line method with no salvage value. At the beginning of the fifth year, it was determined that the asset will last another 4 years. What amount should Mellow report as depreciation expense for Year 5? A) $600 B) $900 C) $1,500 D) $2,400

Answer (A) is correct. A change in the estimated useful life of a depreciable asset is accounted for prospectively. Hence, the net carrying amount of the asset after 4 years is the depreciable amount for the remaining 4 years of the new estimated useful life. This amount is $2,400 {$12,000 historical cost - [($12,000 ÷ 5) × 4] accumulated depreciation at 12/31/Yr 4}. The depreciation expense for Year 5 is $600 ($2,400 ÷ 4).

Lane Company acquired copyrights from authors, in some cases paying advance royalties and in others paying royalties within 30 days of year-end. Lane reported royalty expense of $375,000 for the year ended December 31, Year 2. The following data are included in Lane's balance sheet: Year 1 Year 2 Prepaid royalties Year 1 $60,000 Year 2 $50,000 Royalties payable Year 1 75,000 Year 2 90,000 In its Year 2 statement of cash flows, Lane should report cash disbursements for royalty payments of A) $350,000 B) $370,000 C) $380,000 D) $400,000

Answer (A) is correct. A decrease in a prepaid royalties asset account implies that royalty expense was greater than the related cash disbursements. Similarly, an increase in a royalties payable liability account indicates that royalties expense exceeded cash disbursements. Royalty expense therefore exceeds the amount of cash disbursements for royalty payments by the amount of the decrease in the prepaid royalties account plus the increase in the royalties payable account. Thus, Lane's Year 2 cash disbursements for royalty payments total $350,000 ($375,000 royalty expense - $10,000 decrease in prepaid royalties - $15,000 increase in royalties payable).

20. Falton Co. had the following first-year amounts related to its $9,000,000 construction contract: Actual costs incurred and paid $2,000,000 Estimated costs to complete 6,000,000 Progress billings 1,800,000 Cash collected 1,500,000 What amount should Falton recognize as a current liability at year end, using the percentage-of-completion method? A) $0 B) $200,000 C) $250,000 D) $300,000

Answer (A) is correct. Accumulated costs and recognized gross profit are debited to construction in progress. If the balance in this inventory account exceeds progress billings, a current asset is recorded. A liability is recorded when progress billings exceed the balance in construction in progress. Total estimated gross profit is $1,000,000 ($9,000,000 price - $2,000,000 costs - $6,000,000 estimated costs). Gross profit for the first year is $250,000 {$1,000,000 total GP × [$2,000,000 first-year costs ÷ ($2,000,000 + $6,000,000 costs to complete)]}. Thus, the balance in construction in progress ($2,000,000 + $250,000 = $2,250,000) exceeds progress billings ($1,800,000). No current liability is recognized.

On December 31, Year 3, Thomas Company reported a $150,000 warranty expense in its income statement. The expense was based on actual warranty costs of $30,000 in Year 3 and expected warranty costs of $35,000 in Year 4, $40,000 in Year 5, and $45,000 in Year 6. At December 31, Year 3, deferred taxes should be based on a A) $120,000 deductible temporary difference. B) $150,000 deductible temporary difference. C) $120,000 taxable temporary difference. D) $150,000 taxable temporary difference.

Answer (A) is correct. At year-end Year 3, Thomas Company should report a $120,000 warranty liability in its balance sheet. The warranty liability is equal to the $150,000 warranty expense minus the $30,000 warranty cost actually incurred in Year 3. Because warranty costs are not deductible until actually incurred, the tax basis of the warranty liability is $0. The result is a $120,000 temporary difference ($120,000 carrying amount - $0 tax basis). When the liability is settled through the actual incurrence of warranty costs, the amounts will be deductible. Thus, the temporary difference should be classified as a deductible temporary difference.

On January 1, 2015, Parks Co. has the following balances: Projected benefit obligation $4,200,000 Fair value of plan assets 3,750,000 The settlement rate is 10%. Other data related to the pension plan for 2015 are: Service cost $240,000 Amortization of prior service costs 54,000 Contributions 270,000 Benefits paid 250,000 Actual return on plan assets 264,000 Amortization of net gain 18,000 The balance of the projected benefit obligation at December 31, 2015 is a. $4,494,000. b. $4,596,000. c. $4,860,000. d. $4,610,000.

Answer d: $4,200,000 + $240,000 - $250,000 + ($4,200,000 × .10) = $4,610,000.

The following information is related to the pension plan of Long, Inc. for 2015. Actual return on plan assets $200,000 Amortization of net gain 82,500 Amortization of prior service cost due to increase in benefits 150,000 Expected return on plan assets 230,000 Interest on projected benefit obligation 362,500 Service cost 850,000 Pension expense for 2015 is a. $1,245,000. b. $1,215,000. c. $1,080,000. d. $1,050,000.

Answer d: $850,000 + $362,500 - $230,000 - $82,500 + $150,000 = $1,050,000.

Euclid's Plumbing reported the following information. Installment Sales 2012: $500,000 2013: $750,000 Cost of Sales 2012: 350,000 2013: 600,000 Cash Receipts from: 2012 Sales: 2012: 100,000 2013: 200,000 2013 Sales 2013: 300,000 What is the unrealized (deferred) gross profit reported on Euclid's 2013 balance sheet. a. 50,000 b. 150,000 c. 120,000 d. 100,0000

Deferred GP = Total - Realized = 300,000-150,000 = 150,000 See Ch. 18 #19 for more info

In 2013, Dwyer Shoe Shine Shop had two differences between its pretax financial income under GAAP and taxable income. The first was $10,000 excess tax deprecation for taxes on equipment with a 5 year life. This temporary difference will reverse evenly over five years beginning in 2014. The second temporary difference was $5,000 excess taxable revenue reported for taxes in 2013 but reported Under GAAP in 2014. The firm's tax rate is 40% for all years. What is the deferred tax liability that will be reported on Dwyer's 2014 (second year) balance sheet? a. 3,200 b. 4,000 c. 2,000 d. Cannot be determined without taxable income.

Excess depreciation results in DTL while excess revenue results in DTA. Because excess revenue is current, DTA and DTL cannot be netted. DTL= 10,000 x 40%= 4,000 (2013 year end) 2,000 of 10,000 reverses in 2014 (10,000/5). Thus, DTL decreases by 2,000 x 40%= 800 in 2014. DTL (2014 balance) = 4,000 - 800= 3,200. The excess revenue will result in DTA in 2013. That is, DTA= 5,000 x 40%= 2,000 (2013 balance sheet). The DTA will reverse in 2014. Thus, DTA = 0 (2014 balance sheet).

In 2012, Gadgetzan Engineers LLP. enter into a contract with the Steamwheedle Cartel to rebuild the Docs. The project is expected to take 4 years. The contract price is 1,000,000 and the expected cost is 800,000. In the first year Gadgetzan spends 300,000, bills the Cartel 250,000 and collects 200,000. At the end of 2012, Gadgetzan expects to spend an additional 300,000 to complete the project. What is the reported gross profit on Gadgetzan's 2012 income statement? a. 300,000 b. 500,000 c. 200,000 d. 375,000

Gross Profit = Revenue - Cost % Complete= Cost incurred to date/ Total estimated cost= 300,000 /(300,000 + 300,000) = 50% Revenue (2012) = % Complete x Contract Price - Revenue in Prior Periods = 50%*1,000,000-0= 500,000 Because 2012 is the first year, Revenue in Prior Periods=0. Thus, Gross Profit (2012) is 500,000 - 300,000=200,000

April Ludgate Services Inc. has no temporary differences so there are no difference between pretax financial income and taxable income each year. The firm had a 25% tax rate in 2012 and a 35% tax rate in 2013 onward. If the firm carry's its NOL back, what is the net loss Ludgate will report on its 2014 income statement? Year Pretax income 2012 270,000 2013 180,000 2014 <360,000> a.$234,000 b. $270,000 c. $261,000 d. $126,000

Income tax benefit from NOL carryback= 270,000 x 25% + 90,000 x 35%= 99,000 Net income = Pretax income + income tax benefit = - 360,000 + 99,000= - 261,000

In 2012, The Syndicate has pretax financial income of 100. In that year the firms deferred tax asset increased by $10. The firm has a 40% tax rate. What is the current portion of tax expense for 2012? a. $40 b. $50 c. $30 d. $44

Income tax expense 30 (Plug) DTA (increase-debit) 10 Income tax payable 40 (100 x 40%)

Sylvanas' Beauty shop begins business in 2012. In its first year of business the firm has 10,000 of taxable income. There were two differences between taxable income and pretax financial income. The first was 500 of excess deprecation for taxes and the second was $1,000 of non-taxable municipal bond interest. The firm had a 30% tax rate in 2012 and 40% in all future years. What is Sylvanas' 2012 tax expense? a. $2,800 b. $3,200 c. $3,150 d. $4,200

Tax Expense (Plug) 3.200 DTL 200 (500 x 40% - Apply future tax rate) Tax payable 3000 (10,000 x 30%)

Merloc and Key begin business on January 1st 2011. In 2012 there is one differences between the firm's pretax financial income and its taxable income. The firms has $1,000 of fines that are not deductible for taxes but are recorded as an expense on the 2012 income statement. The firm reports $10,000 pretax financial income in the 2012. The firm's tax rate is 40% in all years. What is tax expense in 2012? a. 6,000 b. 4,000 c. 3,600 d. 4,400

Taxable income = 10,000 + 1,000. Income Tax expense = tax payable = 4,400 No change in DTA or DTL.

New England Co. had net cash provided by operating activities of $351,000, net cash used by investing activities of $420,000, and cash provided by financing activities of $250,000. New England's cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000, and proceeds of $40,000 were received from the sale. What was New England's cash balance at the end of the year? A) $27,000 B) $40,000 C) $208,000 D) $248,000

The cash balance at year end is $208,000 ($27,000 on January 1 + $351,000 provided by operations - $420,000 used by investing activities + $250,000 provided by financing activities). The proceeds from the land sale are included in the calculation of the cash used by investing activities.

The following information relates to the pension plan for the employees of Turner Co.: 1/1/14 12/31/14 12/31/15 Accum. benefit obligation $6,160,000 $6,440,000 $8,400,000 Projected benefit obligation 6,510,000 6,972,000 9,338,000 Fair value of plan assets 5,950,000 7,280,000 8,036,000 AOCI - net (gain) or loss -0- (1,008,000) (1,120,000) Settlement rate (for year) 11% 11% Expected rate of return (for year) 8% 7% Turner estimates that the average remaining service life is 16 years. Turner's contribution was $882,000 in 2015 and benefits paid were $658,000. The amount of AOCI (net gain) amortized in 2015 is a. $17,850. b. $17,500. c. $13,563. d. $11,638.

The corridor for 2015 is $7,280,000 × .10 = $728,000. The amount of AOCI (net gain) amortized: ($1,008,000 - $728,000) ÷ 16 = $17,500

In its statement of cash flows issued for the year ending June 30, Prince Company reported a net cash inflow from operating activities of $123,000. The following adjustments were included in the supplementary schedule reconciling cash flow from operating activities with net income: Depreciation $38,000 Increase in net accounts receivable 31,000 Decrease in inventory 27,000 Increase in accounts payable 48,000 Increase in interest payable 12,000 Net income is A) $29,000 B) $41,000 C) $79,000 D) $217,000

The net adjustment to net cash inflow from operating activities is -$94,000 (-$38,000 + $31,000 - $27,000 - $48,000 - $12,000). Net income is $29,000 ($123,000 net cash inflow - $94,000 net adjustment).

Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following information is available: Mortgage repayment $20,000 Available-for-sale securities purchased 10,000 increase Bonds payable-issued 50,000 increase Inventory 40,000 increase Accounts payable 30,000 decrease What amount should Paper report as net cash provided by operating activities in its statement of cash flows for the year? A) $0 B) $10,000 C) $20,000 D) $30,000

The net cash provided by operating activities is therefore $0 ($70,000 net income - $40,000 inventory increase - $30,000 accounts payable decrease).

In 2012, Gadgetzan Engineers LLP. enter into a contract with the Steamwheedle Cartel to rebuild the Docs. The project is expected to take 4 years. The contract price is 1,000,000 and the expected cost is 800,000. In the first year Gadgetzan spends 300,000, bills the Cartel 250,000 and collects 200,000. At the end of 2012, Gadgetzan expects to spend an additional 300,000 to complete the project. At the end of 2012, what is the balance in the construction in processes account? a. 300,000 b. 500,000 c. 200,000 d. 375,000

% Complete= 300,000 / (300,000 + 300,000) = 50% Revenue recognized to date= 50% x 1,000,000 = 500,000

In 2012, Gadgetzan Engineers LLP entered into a contract with the Steamwheedle Cartel to rebuild the Docs. The project is expected to take 4 years. The contract price is 1,000,000 and the expected cost is 700,000. In the first year, Gadgetzan spends 600,000 and expects to spend an additional 200,000 to complete the project. In 2013 Gadgetzan spends 350,000 and expects to spend 100,000 to complete the project making the project a loss. What is the revenue recognized in 2013 year? a. 904,762 b. 154,762 c. <50,000> d. 150,000

% Complete= Cost incurred to date/ Total estimated cost = (600,000 +350,000) / (600,000 +350,000 + 100,000) = 90.4762% Revenue = % Complete x Contract Price - Revenue in Prior Periods = 90.4762%*1,000,000-750,000 = 154,762

Smiley Corp.'s transactions for the year ended December 31, 2015 included the following: • Purchased real estate for $625,000 cash which was borrowed from a bank. • Sold available-for-sale securities for $500,000. • Paid dividends of $600,000. • Issued 500 shares of common stock for $250,000. • Purchased machinery and equipment for $125,000 cash. • Paid $450,000 toward a bank loan. • Reduced accounts receivable by $100,000. • Increased accounts payable $200,000. Smiley's net cash used in investing activities for 2015 was a. $750,000. b. $375,000. c. $250,000. d. $125,000.

($625,000) + $500,000 - $125,000 = ($250,000).

In Year 1, The Consortium had three differences between its book and tax income. The first was $5,000 excess tax deprecation on a building with a 10 year life, the second was $15,000 excess taxable revenue that will reverse in the third year of business, the third difference is a $1,000 fine paid to local authorities that is not deductible for taxes. The firm's tax rate is 40%. What is the deferred tax asset that will be reported on the year 1 balance sheet? a. 4,000 b. 2,000 c. 6,000 d. 3,600

(15,000 - 5,000) x 40% A deferred income tax liability arises from a taxable temporary difference. The $5,000 excess depreciation (a taxable temporary difference) is a noncurrent item. It results in a deferred tax liability. The $15,000 excess taxable revenue (a deductible temporary difference) results in a deferred tax asset (also noncurrent itemt). These items should be netted because all noncurrent deferred tax assets and liabilities should be offset and presented as a single amount. Accordingly, the net deferred tax liability is $4,000 [($15,000 - $5,000) × 40%].

5. State Co. recognizes construction revenue and expenses using the percentage-of-completion method. During Year 6, a single long-term project was begun, which continued through Year 7. Information on the project follows: Accounts receivable from construction contract Year 6: $100,000 Year 7:$300,000 Construction costs incurred Year 6: 105,000 Year 7: 192,000 Construction in progress Year 6: 122,000 Year 7: 364,000 Partial billings on contract Year 6: 100,000 Year 7: 420,000 Gross profit recognized on the long-term construction contract in Year 7 should be A) $50,000 B) $108,000 C) $120,000 D) $228,000

(A) is correct. Construction in progress is debited for gross profit recognized and costs incurred. Costs incurred through Year 7 equaled $297,000 ($105,000 + $192,000). Hence, total gross profit recognized in Year 6 and Year 7 was $67,000 ($364,000 construction in progress - $297,000 cumulative costs). Because $17,000 of gross profit was recognized in Year 6 ($122,000 construction in progress - $105,000 of costs), only $50,000 ($67,000 - $17,000) should be recognized in Year 7.

Kechara Corp. started a long-term construction project in Year 1. The following data relate to this project: Contract price $4,200,000 Costs incurred in Year 1 1,750,000 Estimated costs to complete 1,750,000 Progress billings 900,000 Collections on progress billings 800,000 The project is accounted for by the percentage-of-completion method of accounting. In Kechara's Year 1 income statement, what amount of gross profit should be reported for this project? A) $350,000 B) $150,000 C) $133,333 D) $100,000

(A) is correct. In Year 1, one-half of the estimated costs of this construction project were incurred [$1,750,000 ÷ ($1,750,000 + $1,750,000)]. The company should therefore recognize one-half of the estimated gross profit in Year 1. At year-end, the estimated gross profit is $700,000, equal to the contract price minus total estimated costs [$4,200,000 - ($1,750,000 + $1,750,000)]. In Year 1, $350,000 should be recognized as gross profit ($700,000 × 50%).

Ailouros Construction, Inc., has consistently used the percentage-of-completion method of recognizing gross profit. During Year 1, Ailouros started work on a $6 million fixed-price construction contract. The accounting records disclosed the following data for the year ended December 31, Year 1: Costs incurred $1,860,000 Estimated costs to complete 4,340,000 Progress billings 2,200,000 Collections 1,400,000 How much loss should Ailouros have recognized in Year 1? A) $460,000 B) $200,000 C) $60,000 D) $0

(B) is correct. The total of the costs incurred in Year 1 plus estimated costs to complete is $6,200,000 ($1,860,000 + $4,340,000). Because this sum exceeds the $6 million fixed-price construction contract amount, a $200,000 loss should be recognized.

Frame Construction Company's contract requires the construction of a bridge in 3 years. The expected total cost of the bridge is $2,000,000, and Frame will receive $2,500,000 for the project. The actual costs incurred to complete the project were $500,000, $900,000, and $600,000, respectively, during each of the 3 years. Progress payments received were $600,000, $1,200,000, and $700,000, respectively. Frame uses the input method based on costs incurred to recognize revenue from a performance obligation satisfied over time. What amount of gross profit should Frame report during the last year of the project? A) $120,000 B) $125,000 C) $140,000 D) $150,000

(D) is correct. The expected gross profit is $500,000 ($2,500,000 price - $2,000,000 expected cost). Cumulative recognized gross profit in Year 2 is $350,000 {$500,000 × [($500,000 + $900,000) ÷ $2,000,000]}. Recognized gross profit in Year 3 is $150,000 [($2,500,000 price - $500,000 - $900,000 - $600,000) actual gross profit - $350,000 previously recognized].

Corridor approach multi-year example (Lecture notes) The following information relates to the pension plan assets and projected benefit obligation for ABC Company: Beginning of Year PBO Plan Assets 2011 2,000,000 1,900,000 2012 2,400,000 2,500,000 2013 2,900,000 2,600,000 2014 3,600,000 3,000,000 Average remaining service life is 10 years in 2011 and 2012 and 11 years thereafter. The firm experienced $280,000 actuarial loss in 2011, $90,000 actuarial loss in 2012, $10,000 actuarial loss in 2013, and $25,000 actuarial gain in 2014. Find the amount of AOCI (net loss) amortized in 2013 (or 2014)? SEE Chapter 20 #20

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Martin Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available: Accounts receivable increase $20,000 Equipment gain on sale increase 10,000 Nontrade notes payable increase 50,000 Prepaid insurance increase 40,000 Accounts payable increase 30,000 What amount should Martin report as net cash provided by operating activities in its statement of cash flows for the year? A) $0 B) $40,000 C) $50,000 D) $100,000

70,000 + 10,000 (dep) - 20,000 (AR increase) - 10,000 (gain) - 40,000 (prepaid increase) + 30,000 (AP increase) = 40,000

In 2012, Gadgetzan Engineers LLP entered into a contract with the Steamwheedle Cartel to rebuild the Docs. The project is expected to take 4 years. The contract price is 1,000,000 and the expected cost is 700,000. In the first year, Gadgetzan spends 600,000 and expects to spend an additional 200,000 to complete the project. The construction revenue reported on Gadgetzan's 2012 income statement is approximately a. 857,143 b. 150,000 c. 750,000 d. 250,000

750,000 % Complete= Cost incurred to date/ Total estimated cost= 600,000/800,000= 75% Revenue = % Complete x Contract Price - Revenue in Prior Periods = 75%*1,000,000-0= 750,000 Because 2012 is the first year, Revenue in Prior Periods=0.

Grom's reported pretax income and taxable income are the same each year. The firm had a 20% tax rate in 2010 and a 30% tax rate in 2011 onward. If the firm carries its NOL back, what is the net loss Grom will report on its 2012 income statement? Year Pretax income 2010 300,000 2011 200,000 2012 <400,000> a. $320,000 b. $310,000 c. $400,000 d. $280,000

<400,000> - (300,000*20%+100,000*30%) = <310,000>

In its Year 3 income statement, Orr Corp. reported depreciation of $400,000. Orr reported depreciation of $550,000 on its Year 3 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next 3 years. Assume that the enacted income tax rates are 35% for Year 3, 30% for Year 4, and 25% for Year 5 and Year 6. What amount should be included in the deferred income tax liability in Orr's December 31, Year 3, balance sheet? A) $37,500 B) $40,000 C) $45,000 D) $52,500

Answer (B) is correct. At 12/31/Year 3, the only temporary difference is the $150,000 ($550,000 - $400,000) excess of the tax depreciation over the book depreciation. This temporary difference will give rise to a $50,000 taxable amount in each of the years Year 4 through Year 6. Given the enacted tax rates of 30% in Year 4 and 25% in Year 5 and Year 6, the total tax consequences are $40,000, which is the balance that should be reported in the deferred income tax liability at year end.

Ray Co. began operations in the current year and reported $225,000 in income before income taxes for the year. Ray's current-year tax depreciation exceeded its book depreciation by $25,000. Ray also had nondeductible book expenses of $10,000 related to permanent differences. Ray's tax rate for the current year was 40%, and 35% for the following years. In its current-year balance sheet, what amount of deferred income tax liability should Ray report? A) $8,750 B) $10,000 C) $12,250 D) $14,000

Answer (A) is correct. In measuring a deferred tax liability or asset, the objective is to use the enacted tax rate(s) expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. At the end of the current year, the only temporary difference is the $25,000 excess of tax depreciation over the book depreciation. This temporary difference will give rise to a $25,000 taxable amount in the years following the current year. Given the enacted tax rate of 35% applicable after the current year, the total tax consequence attributable to the taxable temporary difference (the deferred tax liability) is $8,750 ($25,000 × 35%).

Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance the remaining $27,000. On March 1, Year 1, Polk pays the $3,000 down and accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, Year 1. What amount should Polk report as an investing activity in the statement of cash flows for the year ended December 31, Year 1? A) $3,000 B) $9,000 C) $12,000 D) $30,000

Answer (A) is correct. Investing activities include acquiring property, plant, and equipment. Polk has a cash outflow of $3,000 for the equipment and finances the remaining amount. The monthly payments made by Polk are repayments of a debt obligation. Thus, they are financing cash flows.

Loeb Corp. frequently borrows from the bank in order to maintain sufficient operating cash. The following loans were at a 12% interest rate, with interest payable at maturity. Loeb repaid each loan on its scheduled maturity date. Date of loan amt mat date term Loan A: 11/1/Yr 2 $5,000 10/31/Yr 3 1 Yr Loan B: 2/1/Yr 3 $15,000 7/31/Yr 3 6 mths Loan C: 5/1/Yr 3 $8,000 1/31/Yr4 9 mths Loeb records interest expense when the loans are repaid. As a result, interest expense of $1,500 was recorded in Year 3. If no correction is made, by what amount would Year 3 interest expense be understated? A) $540 B) $620 C) $640 D) $720

Answer (A) is correct. Loeb Corp. improperly records interest expense when loans are repaid. If Loeb accrues its interest, it would recognize $2,040 of interest expense. The calculation is determined as follows:

Loire Co., a calendar year-end firm, has used the FIFO method of inventory measurement since it began operations in Year 3. Loire changed to the weighted-average method for determining inventory costs at the beginning of Year 6. Justification for this change was that it better reflected inventory flow. The following schedule shows year-end inventory balances under the FIFO and weighted-average methods: Year 3 FIFO $ 90,000 Weighted-Average $108,000 Year 4 FIFO 156,000 Weighted-Average 142,000 Year 5 FIFO 166,000 Weighted-Average 150,000 In its Year 6 financial statements, Loire included comparative statements for both Year 5 and Year 4. What adjustment, before taxes, should Loire make retrospectively to the balance reported for retained earnings at the beginning of Year 4? A) $18,000 increase. B) $18,000 decrease. C) $4,000 increase. D) $0.

Answer (A) is correct. Retrospective application requires that the carrying amounts of assets, liabilities, and retained earnings as of the beginning of the first period reported be adjusted for the cumulative effect of the new accounting principle on periods prior to the first period reported. Moreover, all periods reported must be individually adjusted for the period-specific effects of applying the new principle. The pretax cumulative-effect adjustment to retained earnings reported at the beginning of Year 4 is equal to the $18,000 increase ($108,000 - $90,000) in inventory. If the weighted-average method had been applied in the first year of operations (Year 3), cost of goods sold would have been $18,000 lower. Pretax net income and ending retained earnings for Year 3 and beginning retained earnings for Year 4 would have been $18,000 greater.

On January 2, Loch Co. established a noncontributory defined-benefit pension plan covering all employees and contributed $400,000 to the plan. At December 31, Loch determined that the annual service and interest costs of the plan were $720,000. The expected and the actual rate of return on plan assets for the year was 10%. Loch's pension expense has no other components. What amount should Loch report in its December 31, balance sheet as liability for pension benefits? A) $280,000 B) $320,000 C) $360,000 D) $720,000

Answer (A) is correct. Service and interest costs and the return on plan assets are the entity's only components of pension expense in the plan's first year. The return on plan assets is $40,000 ($400,000 contributed to the plan × 10%). The pension expense is therefore $680,000 ($720,000 service and interest costs - $40,000 actual and expected return on plan assets). Because the actual and expected returns were the same, no gain or loss occurred. The funded status of the plan is the difference between plan assets at fair value ($400,000 + $40,000 = $440,000 at year end) and the projected benefit obligation ($720,000 service and interest costs, given no prior service cost or credit). Consequently, the liability recognized to record the unfunded status of the plan at year end is $280,000 ($720,000 - $440,000).

The following is the only information pertaining to Kane Co.'s defined benefit pension plan: Pension asset, January 1, Year 1 $ 2,000 Service cost 19,000 Interest cost 38,000 Actual and expected return on plan assets 22,000 Amortization of prior service cost arising in a prior period 52,000 Employer contributions 40,000 In its December 31, Year 1, balance sheet, what amount should Kane report as the underfunded or overfunded projected benefit obligation (PBO)? A) $7,000 overfunded. B) $15,000 underfunded. C) $45,000 underfunded. D) $52,000 underfunded.

Answer (A) is correct. The employer must recognize the funded status of the plan as the difference between the fair value of plan assets and the PBO. That amount is an asset or a liability. Current service cost and interest cost increase the PBO. The actual return on plan assets and contributions increase plan assets. Amortization of prior service cost arising in a prior period and recognized in accumulated OCI has no additional effect on the PBO or plan assets. However, it is a component of pension expense. The PBO was overfunded by $2,000 on January 1. It increased during the year by $57,000 ($19,000 + $38,000). Plan assets increased by $62,000 ($22,000 + $40,000). Accordingly, the plan is overfunded by $7,000 [$2,000 + ($62,000 - $57,000)] at year end. Kane should recognize a pension asset of $7,000 at year end.

Ajax Corp. has an effective tax rate of 30%. On January 1, Year 1, Ajax purchased equipment for $100,000. The equipment has a useful life of 10 years. What amount of current tax benefit will Ajax realize during Year 1 by using the 150% declining balance method of depreciation for tax purposes instead of the straight-line method? A) $1,500 B) $3,000 C) $4,500 D) $5,000

Answer (A) is correct. The straight-line rate is 10% ($100,000 ÷ 10 years). Assuming no salvage value, straight-line depreciation is $10,000 ($100,000 × 10%). Declining-balance depreciation at 150% of the straight-line rate is $15,000 [$100,000 × (10% × 150%)]. Consequently, depreciation expense is $10,000, the tax deduction is $15,000, and the realized current tax benefit of using the 150% declining balance method of depreciation for tax purposes instead of the straight-line method is $1,500 [($15,000 - $10,000) × 30% tax rate].

On July 1, Year 1, Allegheny Corp. purchased computer equipment at a cost of $360,000. This equipment was estimated to have a 6-year life with no residual value and was depreciated by the straight-line method. On January 3, Year 4, Allegheny determined that this equipment could no longer process data efficiently, its value had been permanently impaired, and $70,000 could be recovered over the remaining useful life of the equipment. What carrying amount should Allegheny report on its December 31, Year 4, balance sheet for this equipment? A) $0 B) $50,000 C) $70,000 D) $150,000

Answer (B) is correct. At 1/3/Year 4, the carrying amount of the computer equipment = $70,000. The depreciation expense for the year ending 12/31/Year 4 = ($70,000 ÷ 3.5 years) =$20,000 Thus, the carrying amount in the year-end balance sheet = $70,000 - $20,000= $50,000.

Loire Co., a calendar year-end firm, has used the FIFO method of inventory measurement since it began operations in Year 3. Loire changed to the weighted-average method for determining inventory costs at the beginning of Year 6. Justification for this change was that it better reflected inventory flow. The following schedule shows year-end inventory balances under the FIFO and weighted-average methods: Year 3 FIFO $ 90,000 Weighted-Average $108,000 Year 4 FIFO 156,000 Weighted-Average 142,000 Year 5 FIFO 166,000 Weighted-Average 150,000 In its Year 6 financial statements, Loire included comparative statements for both Year 5 and Year 4. By what amount should cost of sales be retrospectively adjusted for the year ended December 31, Year 5? (Hint: Find the difference in COGS only for 2015, not cumulative). A) $0. B) $2,000 increase. C) $14,000 increase. D) $16,000 increase.

Answer (B) is correct. COGS= Beginning inventory + Purchases - Ending inventory. Purchases are the same under FIFO and weighted average. COGS (FIFO) = ($156,000 + Purchases- $166,000) = -10,000 + Purchases COGS (Weighted Average) = ($142,000 + Purchases- $150,000) = -8,000 + Purchases Thus, COGS (Weighted Average) - COGS (FIFO) = -8,000 - (-10,000) = $2,000

Baler Co. prepared its statement of cash flows at year-end using the direct method. The following amounts were used in the computation of cash flows from operating activities: Beginning inventory $200,000 Ending inventory 150,000 Cost of good sold 1,200,000 Beginning accounts payable 300,000 Ending accounts payable 200,000 What amount should Baler report as cash paid to suppliers for inventory purchases? A) $1,200,000 B) $1,250,000 C) $1,300,000 D) $1,350,000

Answer (B) is correct. A two-step adjustment is used to reconcile cost of goods sold to cash paid to suppliers. First, purchases are determined by subtracting the decrease in inventory from cost of goods sold. Second, the decrease in accounts payable is added to purchases to arrive at cash paid to suppliers. Baler should report $1,250,000 cash paid to suppliers [$1,200,000 - ($200,000 - $150,000) + ($300,000 - $200,000)].

At beginning of the year, Gallywix had a projected benefit obligation (PBO) equal to $2,400,000, which was $200,000 higher than had been expected. The market-related value of the defined benefit plan's assets was equal to its fair value of $2,500,000. No other gains and losses have occurred. If the average remaining service life is 20 years, the minimum required amortization of the net gain (loss) in the year will be a. $0 b. $20,000 c. $10,000 d. $1,000

Answer A: Actuarial Loss= 200,000 (due to unexpected increase in PBO) The corridor: 2,500,000 x 10%= 250,000 The loss outside the corridor = 0 (no amortization)

Long Corporation began construction work under a 3-year contract this year. The contract price is $800,000. Long uses the percentage-of-completion method for financial accounting purposes. The gross profit to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The following financial statement presentations relate to this contract at December 31 of the first year: Accounts receivable-construction contract billings $ 30,000 Construction in progress $100,000 Minus contract billings (94,000) Costs of uncompleted contract in excess of billings 6,000 Gross profit (before tax) on the contract recognized 20,000 How much cash was collected in the first year on this contract? A) $30,000 B) $64,000 C) $70,000 D) $94,000

Answer (B) is correct. Billings on a construction contract are debited to a receivable and credited to a cumulative contract billings account (progress billings). Collections are debited to cash and credited to the receivable. The billings account, however, will not be reduced until it is closed at the end of the contract. Consequently, the difference between the billings and receivable accounts is the amount collected. For Long Corporation, collections equal $64,000 ($94,000 contract billings - $30,000 accounts receivable).

An audit of Brasilia Company has revealed the following four errors that have occurred but have not been corrected: 1. Inventory at December 31, Year 2: $40,000, Understated 2. Inventory at December 31, Year 3: $15,000, Overstated 3. Depreciation for Year 2: $7,000, Understated 4. Accrued expenses at December 31, Year 3: $10,000, Understated The errors cause the reported net income for the year ending December 31, Year 3, to be A) Overstated by $72,000. B) Overstated by $65,000. C) Understated by $28,000. D) Understated by $45,000.

Answer (B) is correct. Both the understatement of beginning inventory and the overstatement of ending inventory will understate cost of goods sold. The result understates cost of goods sold and overstates net income by $55,000 ($40,000 + $15,000). The understatement of Year 2's depreciation has no effect on Year 3's net income, but results in an overstatement of Year 2 and Year 3 retained earnings of $7,000. The understatement of accrued expenses overstates net income by $10,000. Thus, net income is overstated by $65,000 ($40,000 + $15,000 + $10,000).

Eiger Co. reported a retained earnings balance of $400,000 at December 31, Year 2. In August Year 3, Eiger determined that insurance premiums of $60,000 for the 3-year period beginning January 1, Year 2, had been paid and fully expensed in Year 2. Eiger has a 30% income tax rate. What amount should Eiger report as adjusted beginning retained earnings in its Year 3 statement of retained earnings? A) $420,000 B) $428,000 C) $440,000 D) $442,000

Answer (B) is correct. Correction of prior-period errors must be reflected net of applicable income taxes as changes in the opening balance in the statement of retained earnings. The $60,000 insurance prepayment in Year 2 should have been expensed ratably over the 3-year period. Consequently, Year 2 net income was understated by $40,000, before tax effect, and $40,000 [$60,000 - ($60,000 ÷ 3)] should have been reported as a prepaid expense (an asset) at the beginning of Year 3. The error correction to the beginning balance of retained earnings is therefore a credit of $28,000 [$40,000 × (1.0 - 0.3 tax rate)]. The adjusted balance is $428,000 ($400,000 + $28,000).

Reed Co.'s Year 1 statement of cash flows reported cash provided from operating activities of $400,000. For Year 1, depreciation of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed's Year 1 statement of cash flows, what amount was reported as net income? A) $105,000 B) $205,000 C) $305,000 D) $595,000

Answer (B) is correct. Depreciation expense and the loss from goodwill impairment are noncash items that are added to net income to arrive at net cash provided by operating activities. Hence, they are subtracted from net cash provided by operating activities to arrive at net income. The payment of cash dividends is not a reconciling item because it is a financing cash flow that does not affect net income. Net income was therefore $205,000 ($400,000 net cash provided by operating activities - $190,000 depreciation - $5,000 goodwill impairment).

On January 1, Year 1, Newport Corp. purchased a machine for $100,000. The machine was depreciated using the straight-line method over a 10-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Newport's Year 1 financial statements, resulting in a $10,000 overstatement of the book value of the machine on December 31, Year 1. The oversight was discovered during the preparation of Newport's Year 2 financial statements. What amount should Newport report for depreciation expense on the machine in the Year 2 financial statements? A) $9,000 B) $10,000 C) $11,000 D) $20,000

Answer (B) is correct. Error corrections related to prior periods are not included in net income. They are reported in single-period statements as adjustments of the opening balance of retained earnings. If comparative statements are presented, corresponding adjustments should be made to net income (and its components) and retained earnings (and other affected balances) for all periods reported. Accordingly, the error in Year 1 does not affect depreciation expense in Year 2 regardless of whether single-year or comparative statements are presented. It equals $10,000 [($100,000 - $0 residual value) ÷ 10 years].

On January 2, Year 4, Raft Corp. discovered that it had incorrectly expensed a $210,000 machine purchased on January 2, Year 1. Raft estimated the machine's original useful life to be 10 years and its salvage value at $10,000. Raft uses the straight-line method of depreciation and is subject to a 30% tax rate. In its December 31, Year 4, financial statements, what amount should Raft report as a prior period adjustment? A) $102,900 B) $105,000 C) $165,900 D) $168,000

Answer (B) is correct. Expensing the machine in Year 1 resulted in an after-tax understatement of net income equal to $147,000 [$210,000 × (1.0 - .30 tax rate)]. Not recognizing annual depreciation of $20,000 [($210,000 - $10,000 salvage value) ÷ 10 years] in Years 1 - 3 resulted in an after-tax overstatement of net income equal to $42,000 [($20,000 × 3 years) × (1.0 - .30 tax rate)]. Thus, the prior period adjustment is for a net understatement of $105,000 ($147,000 - $42,000).

On its 2012 balance sheet, the Thrift Shop down the road reported a $1,000,000 credit in the pension liability account. In 2013, the firm reported pension expense of 500,000. The 2013 footnotes showed that the balance in the firm's PBO was 3,000,000 and the balance in the Fair value of pension plan assets was 2,300,000. During 2013, the firm will a. Credit pension liability for 500,000 b. Debit pension liability for 300,000 c. Credit pension liability for 700,000 d. Credit pension liability for 1,300,000

Answer b: Pension liability (2012) = 1,000,000 Pension liability (2013) = 3,000,000 - 2,300,000 = 700,000 Pension liability decreases by 300,000 (1,000,000 - 700,000) in 2013. Thus, we debit pension liability by 300,000.

Eta Co. sponsors a defined benefit pension plan. For the year just ended, service cost was $90,000, expected return on plan assets was $38,400, and the interest on the projected benefit obligation was $36,000. Additional data were available at year end concerning the following amounts that were amortized: Actuarial gain $5,000 Prior service cost 8,000 Eta's pension expense for the year was A) $95,600 B) $90,600 C) $82,600 D) $129,000

Answer (B) is correct. Probable components of pension expense are service cost; interest cost; the expected return on plan assets; and amortization of any (1) prior service cost in accumulated OCI, or (2) net gain (loss) in accumulated OCI. Service cost, interest cost, and the amortization of prior service cost increase the pension expense. The expected return on plan assets and the amortization of actuarial gain decrease pension expense. As indicated below, pension expense for the year is $90,600.

The following information pertains to Beltran Co.'s defined benefit pension plan for the current year: Fair value of plan assets, beginning of year $ 700,000 Fair value of plan assets, end of year 1,050,000 Employer contributions 220,000 Benefits paid 170,000 In computing pension expense, what amount should Beltran use as actual return on plan assets? A) $130,000 B) $300,000 C) $350,000 D) $520,000

Answer (B) is correct. The actual return on plan assets is based on the fair value of plan assets at the beginning and end of the accounting period adjusted for contributions and payments during the period. The actual return is $300,000 ($1,050,000 - $700,000 - $220,000 + $170,000).

Blunder Co. discovered the following errors in its financial statements: Utilities Expense Ending Inventory Year 2 Utilities expense: $500 overstated Ending inventory: $300 overstated Year 3 Utilities expenses: $800 understated Ending inventory: $600 understated Assuming no correcting entries have been made and no adjustments for income taxes are necessary, what is the effect of the errors on the ending balance of retained earnings for Year 3? A) $600 understated. B) $300 understated. C) $0 D) $200 overstated.

Answer (B) is correct. The error in 12/31/Year 2 inventory overstates net income by $300 in Year 2 and understates net income in Year 3. The error in 12/31/Year 3 inventory understates net income in Year 3 by $600. The error in 12/31/Year 2 utilities expense understates net income in Year 2 by $500. The error in 12/31/Year 3 utilities expense overstates net income in Year 3 by $800. The result is an understatement of retained earnings by $300 ($800 - $500 - $600 - $300 + $300).

An audit of Brasilia Company has revealed the following four errors that have occurred but have not been corrected: 1. Inventory at December 31, Year 2: $40,000, Understated 2. Inventory at December 31, Year 3: $15,000, Overstated 3. Depreciation for Year 2: $7,000, Understated 4. Accrued expenses at December 31, Year 3: $10,000, Understated The errors cause the reported retained earnings at December 31, Year 3, to be A) Overstated by $65,000. B) Overstated by $32,000. C) Overstated by $25,000. D) Understated by $18,000.

Answer (B) is correct. The error in 12/31/Year 2, inventory understates income in Year 2 (cost of goods sold is overstated by $40,000) and overstates income in Year 3 (cost of goods sold is understated by $40,000). The error in 12/31/Year 3, inventory understates cost of goods sold, which overstates net income in Year 3 by $15,000. The understatement of depreciation of $7,000 overstates Year 2 net income. The understatement of accrued expenses overstates income in Year 3 by $10,000. The effect of these errors on net income is reflected in retained earnings at 12/31/Year 3. The result is an overstatement of retained earnings by $32,000 ($40,000 + $15,000 + $7,000 + $10,000 - $40,000).

On January 2, Year 1, Ishmael Co. sold a plant to Merchant Co. for $1.5 million. On that date, the plant's carrying cost was $1 million. Merchant gave Ishmael $300,000 cash and a $1.2 million note, payable in four annual installments of $300,000 plus 12% interest. Merchant made the first principal and interest payment of $444,000 on December 31, Year 1. Ishmael appropriately uses the installment method of revenue recognition. In its Year 1 income statement, what amount of realized gross profit should Ishmael report? A) $344,000 B) $200,000 C) $148,000 D) $100,000

Answer (B) is correct. The installment method recognizes gross profit on a sale as the related receivable is collected. The amount recognized each period is the gross profit ratio (gross profit ÷ selling price) multiplied by the cash collected. In addition, interest income must be accounted for separately from the gross profit on the sale. The cash collected is the $300,000 paid to Ishmael on 1/2/Year 1, plus the $300,000 principal paid on 12/31/Year 1. The gross profit is $500,000 ($1,500,000 - $1,000,000), and the gross profit ratio is 33 1/3% ($500,000 ÷ $1,500,000). Thus, the amount of realized profit is $200,000 ($600,000 × 33 1/3%).

Tone Company is the defendant in a lawsuit filed by Witt in Year 2, disputing the validity of a copyright held by Tone. At December 31, Year 2, Tone determined that Witt would probably be successful against Tone for an estimated amount of $400,000. Appropriately, a $400,000 loss was accrued by a charge to income for the year ended December 31, Year 2. On December 15, Year 3, Tone and Witt agreed to a settlement providing for a cash payment of $250,000 by Tone to Witt and the transfer of Tone's copyright to Witt. The carrying amount of the copyright on Tone's accounting records was $60,000 at December 15, Year 3. The settlement's effect on Tone's income before income tax in Year 3 is A) No effect. B) $60,000 decrease. C) $90,000 increase. D) $150,000 increase.

Answer (C) is correct. In Year 2, a $400,000 contingent loss and an accrued liability in the amount of $400,000 were properly recognized. In Year 3, the actual loss of $310,000 ($250,000 cash + $60,000 carrying amount of the copyright) was $90,000 less than the previously estimated amount. This new information must be treated as a change in estimate and accounted for in the period of change. Consequently, the $90,000 difference will be credited to Year 3 income as a recovery of a previously recognized loss.

On January 1, Year 1, JIM Company purchased a machine for $550,000. It had a useful life of 10 years and no salvage value. The machine was depreciated by the straight-line method. On January 1, Year 2, JIM decided to change to the sum-of-the-years'-digits method. JIM can justify the change. What should the depreciation expense be on this machine for the year ended December 31, Year 3? A) $55,000 B) $80,000 C) $88,000 D) $99,000

Answer (C) is correct. A change in accounting estimate inseparable from (effected by) a change in accounting principle includes a change in depreciation, amortization, or depletion method. Thus, the effects must be recognized in the period of change and any future periods affected by the change. The carrying amount at January 1, Year 2 = $550,000 - [($550,000 - $0 salvage value) ÷ 10 years] = $495,000 Applying the SYD method over the remaining 9-year useful life. Year 3 depreciation is therefore $88,000 [$495,000 × (8 years remaining ÷ 45 sum of the years' digits for 9 years )].

On January 2 of the current year, Walesa Co. established a noncontributory defined benefit plan covering all employees and contributed $1,000,000 to the plan. At December 31 of the current year, Walesa determined that the current year service and interest costs for the plan were $620,000. The expected and the actual rate of return on plan assets for the current year was 10%. There are no other components of pension expense. What amount should Walesa report in its balance sheet for the current year as a pension asset? A) $280,000 B) $380,000 C) $480,000 D) $620,000

Answer (C) is correct. A pension asset is recognized when the fair value of the plan assets exceeds the projected benefit obligation. Two of the components of pension expense ($620,000 service and interest costs) increase the projected benefit obligation. The third component, the actual and expected return on plan assets, increases the plan assets by $100,000 ($1,000,000 beginning balance × 10% expected rate of return). Thus, at December 31, the fair value of the plan assets exceeds the projected benefit obligation by $480,000 ($1,100,000 - $620,000). This amount is reported as a pension asset.

On January 1, Year 3, Poe Construction, Inc. changed to the percentage-of-completion method of income recognition for financial statement reporting but not for income tax reporting. Poe can justify this change in accounting principle. As of December 31, Year 2, Poe compiled data showing that aggregate income under the completed-contract method was $700,000. If the percentage-of-completion method had been used, the accumulated income through December 31, Year 2, would have been $880,000. Assuming an income tax rate of 40% for all years and that Poe reports single-period statements only, the cumulative effect of this accounting change should be reported by Poe in the Year 3 A) Retained earnings statement as a $180,000 credit adjustment to the beginning balance. B) Income statement as a $180,000 credit. C) Retained earnings statement as a $108,000 credit adjustment to the beginning balance. D) Income statement as a $108,000 credit.

Answer (C) is correct. If Poe's new method of accounting (the percentage-of-completion method) had been used, accumulated net income for all prior years would have been $180,000 greater ($880,000 - $700,000). If net income had been greater during the prior periods, the retained earnings at the end of those periods also would have been greater. Hence, Poe must credit the retained earnings balance for the after-tax effect of $108,000 [$180,000 × (1.0 - .40 tax rate)].

Loire Co., a calendar year-end firm, has used the FIFO method of inventory measurement since it began operations in Year 3. Loire changed to the weighted-average method for determining inventory costs at the beginning of Year 6. Justification for this change was that it better reflected inventory flow. The following schedule shows year-end inventory balances under the FIFO and weighted-average methods: Year 3 FIFO $ 90,000 Weighted-Average $108,000 Year 4 FIFO 156,000 Weighted-Average 142,000 Year 5 FIFO 166,000 Weighted-Average 150,000 In its Year 6 financial statements, Loire included comparative statements for both Year 5 and Year 4. What amount should Loire report as inventory in its financial statements for the year ended December 31, Year 4, presented for comparative purposes? A) $90,000 B) $108,000 C) $142,000 D) $156,000

Answer (C) is correct. Retrospective application results in changing previously issued financial statements to reflect the direct effects of the newly adopted accounting principle as if it had always been used. The December 31, Year 4, inventory following the retrospective adjustment should be reported as the weighted-average amount of $142,000.

Parker Co. amended its pension plan on January 2 of the current year. It also granted $600,000 of prior service costs to its employees. The employees are all active and expect to provide 2,000 service years in the future, with 350 service years this year. What is Parker's prior service cost amortization for the year? A) $0 B) $2,000 C) $105,000 D) $600,000

Answer (C) is correct. The amortization of prior service cost should be recognized as a component of pension expense during the future service periods of those employees active at the date of the plan amendment and who are expected to receive benefits under the plan. The cost of retroactive benefits is the increase in the projected benefit obligation (PBO) at the date of the amendment. It should be amortized by assigning an equal amount to each future period of service of each employee active at the date of the amendment who is expected to receive benefits under the plan. However, to reduce the burden of these allocation computations, any alternative amortization approach (e.g., averaging) that more rapidly reduces the unrecognized prior service cost is acceptable provided it is applied consistently. Prior service cost is $300 per service year ($600,000 ÷ 2,000 service years). Prior service cost amortization is therefore $105,000 ($300 × 350 service years).

In preparing its current year-end financial statements, Guss Corp. must determine the proper accounting treatment of a $180,000 loss carryforward available to offset future taxable income. There are no temporary differences. The applicable current and future income tax rate is 30%. Available evidence is not conclusive as to the future existence of sufficient taxable income to provide for the future realization of the tax benefit of the $180,000 loss carryforward. However, based on the available evidence, Guss believes that it is more likely than not that future taxable income will be available to provide for the future realization of $100,000 of this loss carryforward. In its current-year statement of financial condition, Guss should recognize what amounts? Deferred Valuation Tax Asset Allowance A) $0 $0 B) $30,000 $0 C) $54,000 $24,000 D) $54,000 $30,000

Answer (C) is correct. The applicable tax rate should be used to measure a deferred tax asset for an operating loss carryforward that is available to offset future taxable income. Guss should therefore recognize a $54,000 ($180,000 × 30%) deferred tax asset. A valuation allowance should be recognized to reduce the deferred tax asset if, based on the weight of the available evidence, it is more likely than not (the likelihood is more than 50%) that some portion or all of a deferred tax asset will not be realized. The valuation allowance should be equal to an amount necessary to reduce the deferred tax asset to the amount that is more likely than not to be realized. Based on the available evidence, Guss believes that it is more likely than not that the tax benefit of $100,000 of the operating loss will be realized. Thus, the company should recognize a $24,000 valuation allowance to reduce the $54,000 deferred tax asset to $30,000 ($100,000 × 30%), the amount of the deferred tax asset that is more likely than not to be realized.

Jan Corp. amended its defined benefit pension plan, granting a total credit of $100,000 to four employees for services rendered prior to the plan's adoption. The employees, A, B, C, and D, are expected to retire from the company as follows: 1. A will retire after 3 years. 2. B and C will retire after 5 years. 3. D will retire after 7 years. What is the amount of prior service cost amortization in the first year? A) $0 B) $5,000 C) $20,000 D) $25,000

Answer (C) is correct. The cost of retroactive benefits is the increase in the PBO at the date of the amendment (debit OCI, net of tax, and credit pension liability or asset). It should be amortized by assigning an equal amount to each future period of service of each employee active at the date of the amendment who is expected to receive benefits under the plan. However, to reduce the burden of these allocation computations, any alternative amortization approach (e.g., averaging) that more rapidly reduces the unrecognized prior service cost is acceptable, provided that it is applied consistently. The total service years to be rendered by the employees equals 20 (3 + 5 + 5 + 7). Hence, the amortization percentage for the first year is 20% (4 ÷ 20), and the minimum amortization is $20,000 ($100,000 × 20%).

The following information was taken from the financial statements of Planet Corp. for the year just ended: Accounts receivable, January 1 $ 21,600 Accounts receivable, December 31 30,400 Sales on account and cash sales 438,000 Uncollectible accounts 1,000 No accounts receivable were written off or recovered during the year. If the direct method is used in the statement of cash flows, Planet should report cash collected from customers as A) $447,800 B) $446,800 C) $429,200 D) $428,200

Answer (C) is correct. This question requires the assumption that accounts receivable is a gross amount. Collections from customers equal sales revenue adjusted for the change in gross accounts receivable and write-offs and recoveries. Because no accounts receivable were written off or recovered during the year, no adjustment for these transactions is needed. Accounts receivable increased by $8,800 ($30,400 - $21,600), an excess of revenue recognized over cash received. Planet therefore should report cash collected from customers of $429,200 ($438,000 - $8,800).

On January 2, Year 7, Monongahela Co. purchased a machine for $264,000 and depreciated it by the straight-line method using an estimated useful life of 8 years with no salvage value. On January 2, Year 10, the company determined that the machine had a useful life of 6 years from the date of acquisition and will have a salvage value of $24,000. An accounting change was made in Year 10 to reflect the additional data. The accumulated depreciation for this machine should have a balance at December 31, Year 10, of A) $179,000 B) $160,000 C) $154,000 D) $146,000

Answer (D) is correct. A change in estimated life is accounted for on a prospective basis. The new estimate affects the year of the change and subsequent years. For Year 7 through Year 9, the amount of depreciation was $33,000 per year ($264,000 ÷ 8). In Year 10, the new estimates change annual depreciation to $47,000 [($264,000 - $99,000 accumulated depreciation - $24,000 expected salvage) ÷ 3 years remaining]. Thus, accumulated depreciation for Year 10 is $146,000 ($99,000 + $47,000).

Mobe Co. reported the following amounts of taxable income (operating loss) for its first 3 years of operations: Year 1 $ 300,000 Year 2 (700,000) Year 3 1,200,000 For each year, Mobe had no temporary differences, and its effective income tax rate was 30% at all relevant times. In its Year 2 income tax return, Mobe elected to carry back the maximum amount of loss possible. Furthermore, Mobe determined that it was more likely than not that the full benefit of any loss carryforward would be realized. In its Year 3 income statement, what amount should Mobe report as total income tax expense? A) $120,000 B) $150,000 C) $240,000 D) $360,000

Answer (D) is correct. A net operating loss (NOL) may be carried back 2 years and forward 20 years. Alternatively, the taxpayer may elect to carry the NOL forward only. Given that Mobe's first year of operations was Year 1 and that it elected to carry the NOL back, it could apply $300,000 of the loss (equal to the taxable income for Year 1) to Year 1 and the remaining $400,000 to Year 3. As a result, a deferred tax asset would have been recognized for the future tax benefit of the NOL, but no valuation allowance was necessary because it was not likely that some or all of the tax benefit would not be realized. Thus, in Year 2, Mobe recognized a deferred tax asset (a debit) of $120,000 [($700,000 - $300,000 NOL carryback × 30%) NOL carryforward], a tax refund receivable (a debit) of $90,000 ($300,000 NOL carryback × 30%), and a tax benefit (a credit) of $210,000 ($120,000 + $90,000). In Year 3, Mobe's income tax payable equals $240,000 [($1,200,000 - $400,000 NOL carryforward) × 30%]. Because the benefit of the deferred tax asset is fully realized in Year 3, it is credited for $120,000. Consequently, total income tax expense (the sum of the change in the deferred tax amounts and the current tax paid or payable) is $360,000 ($120,000 + $240,000). Income tax expense $360,000 Income tax payable $240,000 Deferred tax asset 120,000

In Year 2, Ajax, Inc., reported taxable income of $400,000 and pretax financial statement income of $300,000. The difference resulted from $60,000 of nondeductible premiums on Ajax's officers' life insurance and $40,000 of rental income received in advance. Rental income is taxable when received. Ajax's effective tax rate is 30%. In its Year 2 income statement, what amount should Ajax report as income tax expense--current portion? A) $90,000 B) $102,000 C) $108,000 D) $120,000

Answer (D) is correct. Current income tax expense or benefit is the amount of taxes paid or payable (or refundable) for the year based on enacted tax law applied to taxable income (excess of deductions over revenues). Thus, current income tax expense is $120,000 ($400,000 taxable income × 30%). Journal entry: Income tax expense 108,000 (Plug) --------------------- Total income tax expense DTA 12,000 (40,000 x 30%) Income tax payable 120,000 (400,000 x 30%) -------- Current tax expense 60,000 non-deductible premium is permanent difference.

The following information pertains to Seda Co.'s pension plan: Actuarial estimate of projected benefit obligation at 1/1/Yr 1 $72,000 Assumed discount rate 10% Service cost for Year 1 18,000 Pension benefits paid during Year 1 15,000 If no change in actuarial estimates occurred during Year 1, Seda's PBO at December 31, Year 1, was A) $67,800 B) $75,000 C) $79,200 D) $82,200

Answer (D) is correct. If no change in actuarial estimates occurred during the period, the ending balance of the PBO is the beginning balance plus the service cost and interest cost components, minus the benefits paid. The interest cost component is equal to the PBO's beginning balance times the discount rate. Beginning PBO balance $72,000 Service cost 18,000 Interest cost (10% × $72,000) 7,200 Benefits paid (15,000) Ending PBO balance $82,200

Belle Co. determined after 4 years that the estimated useful life of its labeling machine should be 10 years rather than 12 years. The machine originally cost $46,000 and had an estimated salvage value of $1,000. Belle uses straight-line depreciation. What amount should Belle report as depreciation expense for the current year? A) $3,200 B) $3,750 C) $4,500 D) $5,000

Answer (D) is correct. In each of the first 4 years, Belle recognized depreciation of $3,750 [($46,000 cost - $1,000 salvage) ÷ 12 years]. Thus, the carrying amount after 4 years was $31,000 [$46,000 - ($3,750 × 4)]. After the change in estimate, Belle should recognize depreciation for Year 5 of $5,000 [($31,000 - $1,000 salvage) ÷ (10 years - 4 years)].

The following information pertains to Lee Corp.'s defined benefit pension plan for Year 1: Service cost $160,000 Actual and expected gain on plan assets 35,000 Unexpected loss on plan assets related to a Year 1 disposal of a subsidiary 40,000 Amortization of prior service cost 5,000 Annual interest on pension obligation 50,000 What amount must Lee report as pension expense in its Year 1 income statement? A) $250,000 B) $220,000 C) $210,000 D) $180,000

Answer (D) is correct. The components of the required minimum pension expense are (1) service cost, (2) interest cost, (3) return on plan assets, (4) amortization of the net gain or loss recognized in accumulated OCI, and (5) amortization of any prior service cost or credit. Accordingly, the service cost, actual and expected gain on plan assets, interest cost, and amortization of prior service cost are included in the computation. Gains and losses arising from changes in the PBO or plan assets resulting from experience different from that assumed and from changes in assumptions about discount rates, life expectancies, etc., are not required to be included in the calculation of the required minimum pension expense when they occur. Accordingly, the unexpected Year 1 loss on plan assets is included in the gain or loss recognized in OCI (debit OCI, net of tax, and credit pension liability or asset). It must be amortized beginning in Year 2. Pension expense is therefore $180,000 ($160,000 service cost - $35,000 actual and expected return on plan assets + $5,000 prior service cost amortization + $50,000 interest cost).

The following information pertains to McNeil Co.'s defined benefit pension plan: Actuarial estimate of projected benefit obligation at January 1 $144,000 Assumed discount rate 10% Service cost for the year 36,000 Pension benefits paid during the year 30,000 If no change in actuarial estimates occurred during the year, McNeil's PBO at December 31 was A) $128,400 B) $150,000 C) $158,400 D) $164,400

Answer (D) is correct. The ending balance of the PBO is the beginning balance plus the service cost and interest cost components, minus the benefits paid. The interest cost component is equal to the PBO's beginning balance times the discount rate. Beginning PBO balance $144,000 Service cost 36,000 Interest cost ($144,000 × 10%) 14,400 Benefits paid (30,000) Ending PBO balance $164,400

Haft Construction Co. has consistently used the input method based on costs incurred to recognize revenue from a performance obligation satisfied over time. On January 10, Year 1, Haft began work on a $3 million construction contract. At the inception date, the estimated cost of construction was $2,250,000. The following data relate to the progress of the contract: Gross profit recognized at 12/31/Year 1 $ 300,000 Costs incurred 1/10/Year 1 through 12/31/Year 2 1,800,000 Estimated cost to complete at 12/31/Year 2 600,000 In its income statement for the year ended December 31, Year 2, what amount of gross profit should Haft report? A) $450,000 B) $300,000 C) $262,500 D) $150,000

Answer (D) is correct. The input method provides may be based on the relationship between the costs incurred to date and estimated total costs for the completion of the contract. The total anticipated gross profit is multiplied by the ratio of the costs incurred to date to the total estimated costs, and the product is reduced by previously recognized gross profit. The progress to completion at 12/31/Year 2 is 75% [$1,800,000 ÷ ($1,800,000 + $600,000)]. The total anticipated gross profit is $600,000 ($3,000,000 contract price - $2,400,000 expected total costs). Consequently, a gross profit of $150,000 [($600,000 total gross profit × 75%) - $300,000 previously recognized gross profit] is recognized for Year 2.

Kresley Co. has provided the following current account balances for the preparation of the annual statement of cash flows: January 1 December 31 AR $11,500 $14,500 Bad debt allow. 400 500 Prepaid rent expense 6,200 4,100 Accounts payable 9,700 11,200 Kresley's current-year net income is $75,000. Net cash provided by operating activities in the statement of cash flows should be A) $72,700 B) $74,300 C) $75,500 D) $75,700

Answer (D) is correct. The net income of a business should be adjusted for the effects of items properly included in the determination of net income but having either a different effect or no effect on net operating cash flow. The increase in gross accounts receivable should be subtracted from net income. The increase indicates that sales exceeded cash received. The increase in the allowance for uncollectible accounts should be added to net income. This amount reflects a noncash expense. The decrease in prepaid rent expense should be added to net income. The cash was disbursed in a prior period, but the expense was recognized currently as a noncash item. The increase in accounts payable indicates that liabilities and related expenses were recognized without cash outlays. Thus, the change in this account should be added to net income. The net cash provided by operating activities is $75,700 ($75,000 NI - $3,000 change in A/R + $100 change in allowance + $2,100 decrease in prepaid rent + $1,500 increase in A/P).

Jamison Corp.'s balance sheet accounts as of December 31, 2015 and 2014 and information relating to 2015 activities are presented below. December 31, 2015 2014 Assets Cash $ 440,000 $ 200,000 ST inv. 600,000 — AR 1,020,000 1,020,000 Inventory 1,380,000 1,200,000 LT inv. 400,000 600,000 Plant assets 3,400,000 2,000,000 AD (900,000) (900,000) Patent 180,000 200,000 Total assets $6,520,000 $4,320,000 Liabilities and Stockholders' Equity AP $1,660,000 $1,440,000 NP 580,000 — CS 1,600,000 1,400,000 Add PIC 800,000 500,000 Retained earnings 1,880,000 980,000 Total liabilities and stockholders' equity $6,520,000 $4,320,000 Information relating to 2015 activities: Net income for 2015 was $1,300,000. Cash dividends of $400,000 were declared and paid in 2015. Equipment costing $1,000,000 and having a carrying amount of $320,000 was sold in 2015 for $360,000. A long-term investment was sold in 2015 for $320,000. There were no other transactions affecting long-term investments in 2015. 20,000 shares of common stock were issued in 2015 for $25 a share. Short-term investments consist of treasury bills maturing on 6/30/16. Net cash provided by Jamison's 2015 financing activities was a. $680,000. b. $320,000. c. $1,080,000. d. $1,480,000.

Answer A 20,000 × $25 = $500,000 $500,000 + $580,000 - $400,000 = $680,000.

Black, Inc. is a calendar-year corporation whose financial statements for 2014 and 2015 included errors as follows: 2014: Ending inventory: 162,000 overstated Depreciation expense: 135,000 overstated 2015: Ending inventory: 64,000 understated Depreciation expense: 45,000 understated Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2014, or at December 31, 2015. Ignoring income taxes, by how much should Black's retained earnings be retroactively adjusted at January 1, 2016? a. $154,000 increase b. $46,000 increase c. $19,000 decrease d. $8,000 increase

Answer A) $64,000 (u) + $135,000 (u) - $45,000 (o) = $154,000 (u).

Jamison Corp.'s balance sheet accounts as of December 31, 2015 and 2014 and information relating to 2015 activities are presented below. December 31, 2015 2014 Assets Cash $ 440,000 $ 200,000 ST inv. 600,000 — AR 1,020,000 1,020,000 Inventory 1,380,000 1,200,000 LT inv. 400,000 600,000 Plant assets 3,400,000 2,000,000 AD (900,000) (900,000) Patent 180,000 200,000 Total assets $6,520,000 $4,320,000 Liabilities and Stockholders' Equity AP $1,660,000 $1,440,000 NP 580,000 — CS 1,600,000 1,400,000 Add PIC 800,000 500,000 Retained earnings 1,880,000 980,000 Total liabilities and stockholders' equity $6,520,000 $4,320,000 Information relating to 2015 activities: Net income for 2015 was $1,300,000. Cash dividends of $400,000 were declared and paid in 2015. Equipment costing $1,000,000 and having a carrying amount of $320,000 was sold in 2015 for $360,000. A long-term investment was sold in 2015 for $320,000. There were no other transactions affecting long-term investments in 2015. 20,000 shares of common stock were issued in 2015 for $25 a share. Short-term investments consist of treasury bills maturing on 6/30/16. Net cash used in Jamison's 2015 investing activities was a. $2,320,000. b. $1,820,000. c. $1,680,000. d. $1,720,000.

Answer A: $320,000 + $360,000 - ($3,400,000 + $1,000,000 - $2,000,000) - $600,000 = $2,320,000.

In 2012, Blue Bell reported revenue of 5,000, cost of sales equal to $3,000, a decrease in accounts receivable of $500, a increase in inventory of 100, a decrease in accounts payable of $300 and depreciation expense of 1,000. What is cash from operations? a. 2,100 b. 1,700 c. 3,900 d. 4,100

Answer A: NI is not provided so we use the direct method (Alternatively, you can first find the NI and then use the indirect method). 1. Cash received from customers = Revenue + decrease in AR= 5,000 +500= 5,500 2. Cash paid to suppliers= Purchases + decrease in AP; Purchases= COGS + Increase in Inv. = 3,000+100=3,100 Cash paid to suppliers=3,100 + 300=3,400 Cash paid for operating expenses = 0 b/c there is only depreciation expense and it is non-cash expense. Thus, CFO = 5,500 - 3,400 = 2,100

Payton Corp's books record the following transaction in 2012. Receipt of $100 dividends on stock classified as Available for Sale. Payment of $300 dividends, $250 cash interest payments. Receipt of 1,000 from retirement of 10 year Treasury bond. 1,500 cash paid for 2 month Treasury bill. In the 2012 statement of cash flows, cash from investing activities should be a. Net cash outflow of $950 b. Net cash inflow of $1,000 c. Net cash outflow of $500 d. Net cash inflow of $1,100

Answer B: Treasury bill is less than 3 months so it will be cash. The dividend and interest received is CFO. Dividend paid is financing.

On January 1, 2012, Knapp Corporation acquired machinery at a cost of $750,000. Knapp adopted the double-declining balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value. At the beginning of 2015, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense for 2015 would be a. $38,400. b. $54,858. c. $75,000. d. $107,142.

Answer B: {$750,000 - [($750,000 × .2) + ($600,000 × .2) + ($480,000 × .2)]} ÷ 7 = $54,858.

Jamison Corp.'s balance sheet accounts as of December 31, 2015 and 2014 and information relating to 2015 activities are presented below. December 31, 2015 2014 Assets Cash $ 440,000 $ 200,000 ST inv. 600,000 — AR 1,020,000 1,020,000 Inventory 1,380,000 1,200,000 LT inv. 400,000 600,000 Plant assets 3,400,000 2,000,000 AD (900,000) (900,000) Patent 180,000 200,000 Total assets $6,520,000 $4,320,000 Liabilities and Stockholders' Equity AP $1,660,000 $1,440,000 NP 580,000 — CS 1,600,000 1,400,000 Add PIC 800,000 500,000 Retained earnings 1,880,000 980,000 Total liabilities and stockholders' equity $6,520,000 $4,320,000 Information relating to 2015 activities: Net income for 2015 was $1,300,000. Cash dividends of $400,000 were declared and paid in 2015. Equipment costing $1,000,000 and having a carrying amount of $320,000 was sold in 2015 for $360,000. A long-term investment was sold in 2015 for $320,000. There were no other transactions affecting long-term investments in 2015. 20,000 shares of common stock were issued in 2015 for $25 a share. Short-term investments consist of treasury bills maturing on 6/30/16. 10. Net cash provided by Jamison's 2015 operating activities was a. $1,300,000. b. $1,920,000. c. $1,880,000. d. $1,960,000.

Answer C $1,300,000 - $180,000 + ($900,000 - $900,000 + $680,000) - ($360,000 - $320,000) + $20,000 + $220,000 - ($320,000 - $200,000) = $1,880,000.

At beginning of the year, Gallywix had a projected benefit obligation (PBO) equal to $3,000,000, which was $400,000 higher than had been expected. The market-related value of the defined benefit plan's assets was equal to its fair value of $2,500,000. No other gains and losses have occurred. If the average remaining service life is 20 years, the minimum required amortization of the net gain (loss) in the year will be a. $0 b. $40,000 c. $7,500 d. $5,000

Answer D: Actuarial Loss= 400,000 (due to unexpected increase in PBO) The corridor: 3,000,000 x 10%= 300,000 The loss outside the corridor = 400,000 - 300,000= 100,000 (will be amortized) Amortization in the year= 100,000/ 20 (service years) = 5,000

1KungFu Company had net income of $100,000 in year 1 and 150,000 in year 2. The firm paid $150,000 of dividends during Year 2. The following are some items from its comparative balance sheet: 12/31/Year 2 12/31/Year 1 Cash $180,000 $150,000 Accounts receivable 200,000 220,000 DTA 100,000 50,000 Payables $80,000 $160,000 DTL 40,000 10,000 The amount of net cash provided by operating activities during Year 2 was a. $30,000 b. $80,000 c. $130,000 d. $70,000

Answer D: 150 (NI Year2) + 20 (decrease in AR) - 50 (Increase in DTA) - 80 (decrease in AP) +30 (increase in DTL) = 70,000

During 2015, a construction company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below: Completed-Contract Percentage-of- Completion 2013 $ 475,000 $ 900,000 2014 625,000 950,000 2015 700,000 1,050,000 $1,800,000 $2,900,000 Assuming an income tax rate of 40% for all years, the effect of this accounting change on prior periods should be reported by a credit of a. $660,000 on the 2015 income statement. b. $450,000 on the 2015 income statement. c. $660,000 on the 2015 retained earnings statement. d. $450,000 on the 2015 retained earnings statement.

Answer D: [($900,000 + $950,000) - ($475,000 + $625,000)] × (1 - .40) = $450,000.

Presented below is information related to Jensen Inc. pension plan for 2015. Service cost $1,020,000 Actual return on plan assets 210,000 Interest on projected benefit obligation 390,000 Amortization of net loss 90,000 Amortization of prior service cost due to increase in benefits 165,000 Expected return on plan assets 180,000 What amount should be reported for pension expense in 2015? a. $1,485,000 b. $1,455,000 c. $1,635,000 d. $1,275,000

Answer a: $1,020,000 + $390,000 + $90,000 + $165,000 - $180,000 = $1,485,000.

Rathke, Inc. has a defined-benefit pension plan covering its 50 employees. Rathke agrees to amend its pension benefits. As a result, the projected benefit obligation increased by $2,400,000. Rathke determined that all its employees are expected to receive benefits under the plan over the next 5 years. In addition, 20% are expected to retire or quit at the end of each year, beginning at the end of year 1. Assuming that Rathke uses the years-of-service method of amortization for prior service cost, the amount reported as amortization of prior service cost in year one after the amendment is a. $480,000. b. $800,000. c. $240,000. d. $640,000.

Answer b: 50 + 40 + 30 + 20 + 10 = 150. $2,400,000 ÷ 150 = $16,000/service yr. $16,000 × 50 = $800,000.

On January 1, 2015, Parks Co. has the following balances: Projected benefit obligation $4,200,000 Fair value of plan assets 3,750,000 The settlement rate is 10%. Other data related to the pension plan for 2015 are: Service cost $240,000 Amortization of prior service costs 54,000 Contributions 270,000 Benefits paid 250,000 Actual return on plan assets 264,000 Amortization of net gain 18,000 The fair value of plan assets at December 31, 2015 is a. $3,506,000. b. $3,764,000. c. $4,034,000. d. $4,284,000.

Answer c: $3,750,000 + $264,000 + $270,000 - $250,000 = $4,034,000.

Logan Corp., a company whose stock is publicly traded, provides a noncontributory defined-benefit pension plan for its employees. The company's actuary has provided the following information for the year ended December 31, 2015: Projected benefit obligation, 12/31 $700,000 Accumulated benefit obligation, 12/31 525,000 Fair value of plan assets, 12/31 825,000 Service cost 240,000 Interest on projected benefit obligation 24,000 Amortization of prior service cost 60,000 Expected and actual return on plan assets 82,500 The market-related asset value equals the fair value of plan assets. No contributions have been made for 2015 pension cost. In its December 31, 2015 balance sheet, Logan should report a pension asset / liability of a. Pension liability of $700,000 b. Pension asset of $825,000 c. Pension asset of $125,000 d. Pension liability of $525,000

Answer c: $825,000 - $700,000 = $125,000.

Windrunner Kite's begins 2012 with a deferred tax asset of $50,000 due to prepaid rent that was collected in 2011 and will be recognized for GAAP evenly over the 5 years 2013-2017. During 2012 Windrunner had a net operating loss of 100,000. The NOL will be carried forward. Windrunner's tax rate is 25% for all years. What is the value of the deferred tax asset at the end of 2012? a. $12,500 b. $65,500 c. $25,000 d. $75,000

DTA Beginning Balance = 50,000 DTA due to NOL =100,000 x 25%= 25,000 Thus, DTA ending balance= 50,000 + 25,000= 75,000

Ron and Tammy's Steak House begins business in 2012. In its first year of business the firm has $100,000 of taxable income. There were two differences between taxable income and pretax financial income. The first was $60,000 of excess deprecation for taxes in 2012 that will reverse equality over the following 3 years beginning in 2013. The second relates to a $75,000 non-current liability for GAAP (unearned rent revenue). The firm's tax rate is 30% in all years. On the firm's 2012 balance sheet, what is the reported non-current deferred tax asset? a. $10,500 b. $4,500 c. $22,500 d. $18,000

DTA = 75,000 x 30% = 22.500 DTL = 60,000 x 30%=18,000 They are both non-current and should be netted. Thus, net DTA= 22,500 - 18,000 = 4,500.

At December 31 2011, SCM reported the following accounts for which the carrying amount differed from the tax basis: Carrying Amount Tax Basis Depreciable assets (net) $150,000 $50,000 Deferred rental revenue 40,000 0 The rental revenue relates to rent that will be recognized in 2012. The difference in the deprecation will reverse evenly over 5 years. The firm has a 30% tax rate in all years. What is the deferred tax asset/liability reported on the 2011 balance sheet? DTA DTL a. $40,000 $100,000 b. $12,000 $30,000 c. $0 $18,000 d. $6,000 $24,000

DTL (150,000 - 50,000) x 30% = 30,000 (non-current) DTA = 40,000 x 30% = 12,000 (current) Because DTA is current, DTL and DTA cannot be netted.

Euclid's Plumbing reported the following information. Installment Sales 2012: $500,000 2013: $750,000 Cost of Sales 2012: 350,000 2013: 600,000 Cash Receipts from: 2012 Sales: 2012: 100,000 2013: 200,000 2013 Sales 2013: 300,000 What is the realized gross profit reported on Euclid's 2012 income statement. a. 105,000 b. 70,000 c. 30,000 d. 150,000

GP (2012) = 500,000 - 350,000 = 150,000 GP % (2012) = 150,000/500,000=30% Cash collected from 2012 sales in 2012 = 100,000 Realized GP (2012) = 100,000 x 30% = 30,000

In 2012, Thrall's panda farm has taxable income of 100. In that year the firms deferred tax liability decreased by $10. The firm has a 40% tax rate. What is tax expense in 2012? a. $40 b. $50 c. $30 d. $36

Income tax expense 30 (Plug) DTL (decrease-debit) 10 Income tax payable 40 (100 x 40%)

In 2012 Undercity Pest Control reported net income of 2,000. The firm's balance sheet shows the following balances. 2012 2011 Accounts Receivable 200 300 Inventory 300 450 Accounts payable 0 300 Lease payable 1,000 1,200 In addition the firm reported 300 loss on sale of PPE and 100 interest expense related to the lease. What is Undercity's 2012 Cash from Operations? a. 2,550 b. 2,250 c. 2,150 d. 1,950

NI 2,000 Loss +300 AR decrease 100 Inv decrease +150 AP decrease -300 CFO 2,250 2,250

Tide Hunter begins 2013 with a temporary difference of $50,000 due to accelerated depreciation that has been recognized for tax purposes but will be recognized for GAAP equality over the 5 years 2013-2017. Tide Hunter's tax rate is 20% for 2013 and 2014 and will be 30% thereafter. What is the value of the deferred tax liability at the end of 2013? a. $11,000 b. $13,000 c. $15,000 d. $12,000

Note that by the end of 2013 one year of the reversal has occurred. So there are 4 years remaining (2014 - 2017). DTL (2013 End) = 10,000 x 20% + (10,000 + 10,000 +10,000) x 30% = 11,000