Intermediate accounting 2 Chapter 15 & 16
Baskin's pretax accounting income in Year 2 is $100,000. Baskin received cash rental payments in advance for $20,000 in Year 1 and $30,000 in year 2, which are taxed in the year of receipt. It is expected the rent will be recognized for financial reporting purposes as $25,000 in year 3 and $25,000 in year 4. The income tax rate is 40%. What is Baskin's tax basis for rental revenues in year 2?
$0
Baskin's pretax accounting income in year 2 is $100,000. Baskin received cash rental payments in advance for $20,000 in year 1 and $30,000 in year 2, which are taxed in the year of receipt. It is expected the rent will be recognized for financial reporting purposes as $25,000 in year 4. The income tax rate is 40%. What is Baskin's tax basis for rental revenues in year 2?
$0
Smith company receives $500,000 of subscription revenue in advance during 20X1. The subscription revenue is not included on the income statement, but is reported for tax purposes in 20X1. $250,00. Will be recognized in 20X2 and $250,000 in 20X3. Smith company is subject to a 40% tax rate. What is the amount of the deferred tax asset at the end of 20X2?
$100,000 = 250,000*40%
Garret has a deferred tax asset of $20,000. At the end of the year, Garrett has determined that it is more likely than not that $4,000 of the deferred tax asset will not be realized. The deferred tax asset should be reported in the balance sheet at
$16,000
Garrett has a deferred tax asset of $20,000. At the end of the year, Garrett has determined that it is more likely than not that $4,000 of the deferred tax asset will not be realized. The deferred tax asset should be reported in the balance sheet at
$16,000
Manning Insurance is a property and casualty insurance company in its fifth year of operations. The income tax rate is 40%. Manning had taxable income(loss) as follows: year 1 $10,000, Year 2 $40,000, Year 3 $30,000 Year 4 $20,000, and Year 5 ($300,000). The operating loss for financial reporting purposes is $300.000 in year 5. Assuming Manning is allowed to carryback its NOLS for two years, calculate the net loss after taxes for financial reporting income.
$180,000
Smith Company receives $500,000 of subscription revenue in advance during 20X1. The subscription revenue is not included on the income statement, but is reported for tax purposes in 20X1. $250,000 will be recognized in 20X2 and $250,000 in 20X3. Smith Company is subject to a 40% tax rate. What is the amount of the deferred tax asset at the end of 20X1?
$200,000
Smith company receives $500,000 of subscription revenue in advance during 20X1. The subscription revenue is not included on the income statement, but is reported for tax purposes in 20X1. $250,000 will be recognized in 20X2 and $250,000 in 20X3. Smith company is subject to a 40% tax rate. What is the amount of the deferred tax asset at the end of 20X1?
$200,000
Persimmon Corp. is a property and casualty insurance company in its fourth year of operation. Persimmon had taxable income of $20,000 in year 1, $30,000 in year 2, and $50,000 in year 3. In year 4, Persimmon incurred a $400,000 net operating loss. Persimmon is allowed to carry its NOLs back two years. Assuming the tax rate is 40% and Persimmon's pretax accounting loss was $400,000, the net loss for financial reporting purposes in year 4 is
$240,000
Persimmon corp. Is a property and casualty insurance company in its fourth year of operation. Persimmon had taxable income of $20,000 in years, $30,000 in year 2, and $50,000 in year 3. In year 4, Persimmon incurred a $400,000 net operating loss. Persimmon is allowed to carry its NOLs back two years. Assuming the tax rate is 40% and Persimmon's pretax accounting loss $400,000, the net loss for financial reporting purposes in year 4 is
$240,000
In year 1, Kelley estimates bad debt expense of $10,000 for financial reporting purposes. The amount of bad debts deductible on the tax return was $2,000. The difference will be deducted on the tax return in the following year. The income tax rate is 40%. What is the balance in the deferred tax asset account at the end of year 1?
$3,200
Olaf corp, is in its third year of operations. Olaf had taxable income (loss) as follows: Year 1 $10.000, year 2 $(50,000), year 3 $20,000. The NOL carryforward at the end of year 3 is
$34,000
Peachtree Corp. is a merchandiser in its fourth year of operations. Peachtree had taxable income of $20,000 in year 1, $30,000 in year 2, and $50,000 in year 3. In year 4, Peachtree incurred a $400,000 net operating loss for tax purposes. The NOL carryforward is
$400,000
Munchin Manufacturing Company leases an asset to Peter Inc in a sales-type lease. The present value of the lease payments is $400,000 and the cost of the asset is $330,000. At the beginning of the five-year lease term, Munchin should recognize a profit of:
$70,000
In year 1, Ling estimates warranty expense of $60,000 for financial reporting purposes. The amount of warranties deducted on the tax return was $40,000. The difference will be deducted on the tax return in the following year. The income tax rate is 40%. What is the balance in the deferred tax asset account at the end of year 1?
$8,000
Smith Company receives $500,000 of subscription revenue in advance during 20X1. The subscription revenue is not included on the income statement, but is reported for tax purposes in 20X1. $250,000 will be recognized in 20X2 and $250,000 in 20X3. Smith Company is subject to a 40% tax rate. What is the amount of the deferred tax asset at the end of 20X2?
100,000= 250,000 * 40%
For tax years beginning before January 1, 2018, a net operating loss carryback can be applied to reduce previously reported taxable income in the ? prior year(S).
2
For tax years beginning before January 1, 2018, a net operating loss carryback can be applied to reduce previously reported taxable income in the _____ prior year(s).
2
A net operating loss carry forward creates
A deferred tax asset
A permanent difference is
A difference between taxable income and pretax accounting income.
Ludwig Corporation leases a machine to Kluge Corporation under a three-year lease agreement determined to be a finance/sales-type lease. At the inception of the lease, Ludwig Corporation should record
A lease receivable
Deferred tax liabilities can arise from a revenue being reported on the tax return ? the income statement, or an expense being reported on the tax return ? the income statement
After; before
The rights granted to a lessee under a finance lease ? the same as those granted to a company that purchases an asset.
Are not
In which of the following ways can a lease be accounted for? (Select all that apply.)
As a purchase/sale agreement with debt financing.; As a rental agreement.
Depending on the nature of the leasing arrangement, a lease is accounted for
As a rental or purchase/sale
A deferred tax ? occurs when there is a future deductible amount.
Asset
A permanent difference is a difference
Between pretax accounting income and taxable income that never reverses
A net operating loss ? must be applied to the earlier year first and then brought forward to the next year.
Carryback
A net operating loss ? creates a deferred tax asset.
Carryforward
Which of the following is true regarding how a lessor reports cash flows from a sales-type lease?
Cash receipts are reported as cash inflows from operating activities.
Which of the following occur in a lease?
Contractual agreement.; Lessee has the right to use an asset for a specified period of time.; Lessee pays the lessor periodic cash payments.
In year 1, heron corp. has depreciation expense for income statement purposes of $10,000. The depreciation deduction on the tax return was $14,000. The enacted tax rate is 30%. Heron's pretax income for the year was $80,000, and its taxable income was $76,000. If this is the only difference between pretax income and taxable income, the journal entry to record tax expense for the year would include which of the following entries?
Credit deferred tax liability of $1,200; debit tax expense of $24,000; Credit taxes payable of $22,800.
In year 1, casa corp. has depreciation expense for income statement purposes of $20,000. The depreciation deduction on the tax return was $30,000. The enacted tax rate is 40%. Casa's pretax income for the year was $100,000, and its taxable income was $90,000. If this is the only difference between pretax income and taxable income, the journal entry to record tax expense for the year would include which of the following entries?
Credit deferred tax liability of $4,000; Debit tax expense of $40,000; credit taxes payable of $36,000
In year 1, casa corp has depreciation expense for income statement purposes of $20,000. The depreciation deduction on the tax return was $30,000. The enacted tax rate is 40%. Casa's pretax income for the year was $100,000, and its taxable income was $90,000. If this is the only difference between pretax income and taxable income, the journal entry to record tax expense for the year would include which of the following entries? (Select all that apply.)
Credit taxes payable of $36,000; credit deferred tax liability of $4,000; debit tax expense of $40,000
Income tax expense is calculated as the result of the combination of
Current income tax payable; changes in deferred tax assets and liabilities
Regina Corp. is in its first year of operations and has a net loss of $50,000. Regina expects to be profitable within the next 3 years. The enacted income tax rate is 21%. Which of the following entries is included in the journal entry to record the NOL carryforward?
Debit deferred tax asset $10,500.
Brindle Corp. is in its first year of operations and has a net operating loss for tax purposes of $100,000. Brindle expects to be profitable within the next 2 years. The enacted income tax rate is 40%. Which of the following entries are included to record the NOL carryforward?
Debit deferred tax asset $40,000; Credit income tax benefit $40,000.
On January 1, 20X1, Tucker company leases equipment from Franz inc. over three years of the equipment's five-year estimated useful life. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The present value of the lease payments is $357,710. The annual lease payment is $100,000; the first payment is due in January 1, 20X1. Franz should recognize the first lease payment by
Debiting cash for $100,000; crediting deferred lease revenue for $100,000
A future ? amount creates a deferred tax asset, whereas a future ? amount creates a deferred tax liability.
Deductible; taxable
Which item creates a future taxable amount?
Depreciation for tax in excess of depreciation for financial reporting.
Which of the following statements are true with respect to permanent differences?
Differences between taxable income and pretax accounting income; caused by transactions that will never affect taxable income; affect the effective tax rate
The tax rate used to measure deferred tax assets and liabilities is the ? tax rate in the years the temporary difference reverses.
Enacted
The total of all future taxable amounts is multiplied by the ? tax rate to determine the appropriate balance for the deferred tax liability account.
Enacted
True or False: income tax expense is calculated directly.
False
True or false: A company having multiple temporary differences must show them individually in the financial statements.
False
True or false: income tax expense is calculated directly
False
True or false: income tax expense is calculated directly.
False
True or false: only the current portion of the tax expense or benefit of a company is a required disclosure.
False
True or false: the incremental borrowing rate is the rate of return that the lessor desires to earn and is used to calculate the lease payments.
False
The accounting in which of the following parallels that of an installment purchase?
Finance lease
Fit Company leases building space from Lease Corp. Fit Company agrees to pay Lease Corp an additional amount if Lease Corp attracts a higher amount of traffic through the doors resulting in more profit for Fit Company. How are these variable lease payments treated? (Select all that apply.)
Fit Company records lease expense when the variable lease payment is paid; Lease Corp records lease revenue when the variable lease payment is received
The desired rate of return for the lessor when determining the lease payments is referred to as the ? interest rate
Implicit
The desired rate of return for the lessor when determining the lease payments is referred to as the ? interest rate.
Implicit
Which of the following are true about income tax expense?
Income tax expense includes both current and deferred portions.; Income tax expense results from the combination of current taxes payable and changes in deferred taxes.
Which of the following are included in the journal entry for deferred taxes? (Select all that apply.)
Income tax expense or benefit; Change in deferred tax asset or liability; Income tax payable
Which of the following are included in the journal entry for deferred taxes? (Select all that apply)
Income tax payable; income tax expense or benefit; change in deferred tax asset or liability
A future taxable amount means taxable income will be ? relative to pretax accounting income, whereas a future deductible amount means taxable income will be ? relative to accounting income.
Increased; decreased
On January 1, 20X1, Tucker company leases equipment from Franz inc. over three years of the equipment's five-year estimated useful life. Franz acquired the asset for $431,213 and normally utilizes an 8% interest rate for these types of transactions. The present value of the lease payments is $357,710. The annual lease payment is $100,000; the first payment is due in January 1, 20X1. Tucker should recognize the second lease payment by debiting
Interest expense for $20,617; lease payable for $79,383
Which of the following items are permanent differences?
Interest on municipal bonds; life insurance proceeds on the death of insured executive; premiums paid for life insurance on key officers
From an accounting standpoint, legal ownership of a leased asset is ? to the accounting method used.
Irrelevant
An operating lease
Is similar to a typical rental agreement.
What is the balance sheet effect of a net operating loss carryback that is allowed for a property and casualty insurance company?
It creates a tax receivable
The tax basis of an asset or liability is
It's original value for tax purposes reduced by any amounts included to date on tax returns.
Ludwig Corporation leases a machine to Kluge Corporation under a three-year lease agreement determined to be a finance/sales-type lease. At the inception of the lease, (select all that apply)
Kluge records a right-of-use asset; Kluge records a lease payable
A contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time is called a ?
Lease
The ? Should recognize amortization of the right-of-use asset.
Lessee
A lease is a contractual agreement by which a ? Provides a ? The right to use an asset for a specified period of time.
Lessor; lessee
Which of the following items are permanent differences?
Life insurance proceeds on an insured executive; interest on municipal bonds
Lease payments are often ? than installment payments.
Lower/smaller/less
Tax laws permit installment sales, which are recognized in the year of sale of financial reporting purposes, to be reported in the tax return later when cash is received. This results in a deferred tax liability because taxable income ? than financial income in the year of sale, and ? than financial income in later years when collected.
Lower; higher
A ? Occurs when tax deductible expenses exceed taxablerevenues.
Net operating loss
How are deferred tax assets and liabilities classified on the balance sheet?
Noncurrent
How is lease expense recorded by the lessee in an operating lease?
On a straight line basis
When can the benefit of future deductible amounts be realized?
Only if future income is at least equal to the deferred deduction amount.
When can the benefit of future deductible amounts be realized?
Only if the future income is at least equal to the deferred deduction amount.
A lease that is more true to the nature of a rental agreement is called an ? lease
Operating
For a sales-type lease, the lessor should report cash received on the lease as an ? activity.
Operating
If a lease does not meet any of the criteria to be classified as a finance or sales-type lease, it is classified as an ? Lease
Operating
In an ? lease, recording lease expense should reflect straight line rental of the asset during the lease term.
Operating
Selma leases equipment from ABC Corp. The 4-year lease requires payments of $10,000 per year, beginning at the inception of the lease. The fair value of the equipment at the inception of the lease is $100,000. The equipment has a 6-year life. Selma's incremental borrowing rate is 6%. The lease does not transfer title and does not have a bargain purchase option. How should the lease be classified by Selma?
Operating
The two basic lease classifications by a lessee are
Operating and Finance
On January 1, smith co leased equipment from Bentley corp. the lease agreement includes four annual payments beginning at the inception of the lease. The estimated useful life of the equipment is 7 years. The lease does not contain a purchase option. The present value of the minimum lease payments is $400,000. The fair value of the asset is $500,000. What type of lease is this for smith co?
Operating lease
In a finance lease, the lessee records the interest portion of payments as a cash outflow from ? activities, and the principal portion as a cash outflow from ? Activities on the statement of cash flows
Operating; financing
In a finance lease, the lessee reports the interest portion of the payment as a cash outflow from ? Activities, and it reports the portion representing principal repayment as a cash outflow from ? Activities
Operating; financing
Which of the following are criteria for classification as a finance lease? (Select all that apply.)
Ownership of the asset transfers to the lessee; the lease includes a purchase option the lessee is reasonably certain to exercise; the present value of the total lease payments is greater than substantially all of the fair value of the asset
The right-of-use asset is amortized straight-line, unless the lessee's ? Of using the asset is different.
Pattern
Financial accounting standards
Provide useful information to investors and creditors
A ? is a lease provision giving the lessee the option to buy the leased property at the end of the lease term at a specified exercise price
Purchase option
Tax laws
Raise public revenues and influence behaviors.
Taylor Company leased an asset from Lease Corp. using an operating lease for equipment with a useful life of seven years. The initial lease term was for three years. After two years, Taylor Company and Lease Corp. agree to extend the lease term by three years, and to change the amount of lease payments. The additional three years were not originally an option. How should Taylor address this lease modification? (Select all that apply)
Reclassifying from an operating lease to a finance lease; update the right-of-use asset for the increase in present value
A net operating loss carry forward
Reduces taxable income in future years.
In atypical finance lease, the first lease payment at the beginning of the lease consists of
Reduction in principal only
In an operating lease, the lessor
Rents the asset to the lessee for a period of time
Which of the following are required disclosures related to leases?
Residual values, nonlease payments, and variable lease cost
Which of the following cause a deferred tax liability to occur? (Select all that apply.)
Revenue being reported on the tax return after the income statement; expense being reported in the tax return before the income statement.
Which of the following cause a deferred tax liability to occur?
Revenue being reported on the tax return after the income statement; expense being reported on the tax return before the income statement.
Which of the following will create a deferred tax liability? (Select all that apply.)
Revenue included on the income statement but not on the tax return; An amount that is deducted on the tax return but not included as an expense on the income statement.
Which of the following will create a deferred liability?
Revenue included on the income statement but not on the tax return; an amount that is deducted on the tax return but not included as an expense on the income statement.
Which of the following will create a deferred tax liability? (Select all that apply.)
Revenue included on the income statement but not on the tax return; an amount that is deducted on the tax return but not included as an expense on the income statement.
Which of the following will create a deferred tax liability? (select all that apply)
Revenue included on the income statement but not on the tax return; an amount that is deducted on the tax return but not included as an expense on the income statement.
Operating
Rights and responsibilities of ownership are retained by the lessor.
Finance or sales-type
Rights and responsibilities of ownership are transferred to the lessee.
When an owner of an asset sells it and immediately rents it from the new owner, the transaction is called a
Sale-leaseback
Which method should normally be used to amortize the right-of-use asset?
Straight-line
An asset or liability's original value for tax purposes reduced by any amounts included to date on tax returns is referred to as the
Tax basis
Which of the following is used to encourage certain activities such as investing in productive assets?
Tax laws
A net operating loss occurs when
Taxable income is less than tax-deductible expenses.
Deferred tax assets are recognized for the future tax benefits of ? differences.
Temporary
A ? difference is created when there is a timing difference of when an item is included in pretax accounting income and taxable income, whereas a ? difference is one in which the amount is different between pretax accounting income and taxable income and never reverses.
Temporary; permanent
Which one of the following will determine classification of a lease transaction as a finance lease?
The asset is of a very specialized nature and will have no alternative use to the lessor.
When the tax laws change, which rate is used to value deferred tax assets and liabilities?
The enacted rate in the year the timing difference reverses.
Who is the initial owner of the asset in a sale-leaseback transaction?
The lessee
Which of the following occur in a sale-leaseback transaction?
The lessee pays periodic rental payments; the lessee receives cash from the sale of the asset.
The lessee records the right-of-use asset as
The present value of lease payments
True or false: A deferred tax asset valuation allowance is up to managerial judgement.
True
If it is more likely than not that all or a portion of a deferred tax asset will not be realized, then the amount of the deferred tax asset reported on the balance sheet should be reduced by a ? ?
Valuation Allowance
If it is more likely than not that all or a portion of a deferred tax asset will not be realized, then the amount of the deferred tax asset reported in the balance sheet should be reduced by a ??
Valuation allowance
Under what circumstances is a deferred tax valuation account required?
When it is more likely than not that some portion or all of the deferred tax asset will not be realized.
When is a nonlease component of a lease agreement recorded separately from the lease payments?
When the amount represents transfer of a good or service to the lessee.
A deferred tax ? occurs when there is a future deductible amount.
asset
A permanent difference is a difference
between pretax accounting income and taxable income that never reverses.
Income tax expense is calculated as the result of the combination of
current income tax payable; changes in deferred tax assets and liabilities
Which of the following items are disclosures for income tax expense on the notes to the financial statements? (Select all that apply.)
deferred portion of income tax expense; current portion of income tax expense
Deferred tax liabilities should be netted against
deferred tax assets
Which of the following are required disclosures for lessees and lessors?
description of the leasing arrangements; future payments in each of the next 5 years; future payments for total remaining years
Corr Inc. leases equipment from LM Leasing Corp. The lease requires rental payments of $20,000 per year for 5 years. Title of the property transfers at the end of the lease term. The equipment has a useful life of 10 years. How should the lease be classified by Corr?
finance lease
Agatha Corp. leases store space from Christie Company. Agatha agrees to pay $10,000 per month. In addition, if Agatha exceeds specified sales targets, it will pay additional monthly rent based on a percentage of those excess sales. The additional rent payments
have no effect on the lessee's lease liability and lessor's lease receivable.
The effective interest rate of return the lease payments provide the lessor is referred to as the
implicit rate
The accounting for finance leases is similar to the purchase of an asset using an ? note
installment
Which of the following are possible reasons for leasing an asset rather than purchasing an asset? (Select all that apply.)
insufficient cash flow; fear of obsolescence; tax benefits; lower periodic payments on the asset
After the first lease payment, each lease payment in a finance lease consists of an amount representing
interest and a reduction in the principal
Tax laws permit installment sales, which are recognized in the year of sale for financial reporting purposes, to be reported in the tax return later when cash is received. This results in a deferred tax liability because taxable income is ? than financial income in the year of sale, and ? than financial income in later years when collected.
lower; higher
The short-cut method of accounting for leases
may be used if the lease has a lease term (including any options to renew or extend) of twelve months or less.
When a portion of a lease payment represents the transfer of a good or service to the lessee, it is considered a
nonlease component
A lease in which the rights and responsibilities of ownership are retained by the lessor is called a ? lease
operating
In which section of the statement of cash flows should a lessee report payments on an operating lease?
operating
In which section of the statement of cash flows should a lessor report the receipt of payments on an operating lease?
operating
The two basic lease classifications by a lessor are
operating and sales-type.
If a lease modification substantially lengthens the amount of time the lessee has the right to use an asset, it is possible that the lessee might need to switch its lease classification from ? to ?
operating; finance/sales-type
When recording a finance lease, the amount initially recognized for the right-of-use asset is the
present value of the lease payments
Selling profit exists in a sales-type lease when the
present value of the lease payments is greater than the cost of the asset.
The estimated commercial value of leased property at the end of the lease term is known as
residual value
Deferred tax assets are recognized for the future tax benefits of ? differences.
temporary
A ? difference is created when there is a timing difference of when an item is included in pretax accounting income and taxable income, whereas a ? difference is one in which the amount is different between pretax accounting income and taxable income and never reverses.
temporary; permanent
Residual value is an estimate of
the commercial value of an asset at the end of the lease term
The lease term includes
the contractual term of the lease.; any periods covered by options to extend with significant incentive.
In an operating lease, interest expense plus amortization expense is equal to
the straight-line lease payment.
A valuation account for a deferred tax asset would likely be necessary if
there is not sufficient estimated taxable income in the future to use future deductible amounts.
