Intermediate Accounting Test 2

Suppose the Fair Value of the asset being leased is $100. What should the PV of the minimum lease payments be, if the problem is internally consistent.

$100

Neal Corp. entered into a nine-year capital lease on a warehouse on December 31, 2013. Lease payments of $52,000, which includes real estate taxes of $2,000, are due annually, beginning on December 31, 2014, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; Neal's incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should Neal report as capitalized lease liability at December 31, 2013?

$300,000

Alvis Corporation reports pretax accounting income of $400,000, and taxable income of $250,000. The difference between the two is a $75,000 permanent deductible difference, and a $75,000 temporary deductible difference. At the beginning of the year, no differences existed. The tax rate is 30%. What is the net income for the year?

$302,500

West Corp. leased a building and received the $36,000 annual rental payment on June 15, 2013. The beginning of the lease was July 1, 2013. Rental income is taxable when received. West's tax rates are 30% for 2013 and 40% thereafter. West had no other permanent or temporary differences. West determined that no valuation allowance was needed. What amount of deferred tax asset should West report in its December 31, 2013, balance sheet?

$7,200

Stone Co. began operations in 2013 and reported $225,000 in income before income taxes for the year. Stone's 2013 tax depreciation exceeded its book depreciation by $25,000. Stone also had nondeductible book expenses of $10,000 related to permanent differences. Stone's tax rate for 2013 was 40%, and the enacted rate for years after 2013 is 35%. In its December 31, 2013, balance sheet, what amount of deferred income tax liability should Stone report?

$8,750

In a lease, the _____A______ is the owner of the property, whereas the _____B______ is the renter or user of the property.

A) Lessor B) Lessee

Receipt of cash as unearned income has what effect as we reconcile from Pretax Financial Income to Taxable Income

Adds to net income

Which of the following temporary differences will result in a deferred tax asset?

Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes.

A deferred tax _____ occurs when there is a future deductible amount.

Asset

A company leases the following asset: Fair value of $200,000. Useful life of 5 years with no salvage value. Lease term is 4 years. Annual lease payment is $30,000 and the lease rate is 11%. The company's overall borrowing rate is 9.5%. The firm can purchase the equipment at the end of the lease period for $45,000. What type of lease is this?

Capital

At the inception of a capital lease, the guaranteed residual value should be

Included as part of minimum lease payments at present value.

A direct financing lessor will show what sources of income?

Interest: yes Gross Profit: no

Suppose a lessee and direct financing lessor sign a capital lease. The PV of the rents is $2000. The PV of the unguaranteed residual value is $500. At what amount will the lease be recorded?

Lessee: $2,000 Lessor: $2,500

Suppose a lessee and sales-type lessor sign a capital lease. The PV of the rents is $2000. The PV of the guaranteed residual value is $500. The equipment cost the lessor $1200. By how much will total assets change when the lease is signed?

Lessee: $2,500 Lessor: $1,300

What types of leases can a lessee have?

Operating

How do we compute taxes payable?

Taxable income x tax rate

For companies that prepare their financial statements in accordance with both U.S. GAAP and IFRS, a lease is deemed to be a capital lease (usually called a finance lease under IFRS) if substantially all risks and rewards of ownership are transferred. In making this distinction, less judgment, more specifically is applied using

U.S. GAAP

What would make a lessor and lessee capitalize a lease at difference amounts?

Unguaranteed Residual Value: no Incremental borrowing rate is less than rate implicit in the lease: no

What would make a lessor and lessee capitalize a lease at difference amounts?

Unguaranteed Residual Value: yes Incremental borrowing rate is less than rate implicit in the lease: yes

On December 31, 2013, Bain Corp. sold a machine to Ryan and simultaneously leased it back for one year. Pertinent information at this date follows: Sales Price: $360,000 Carrying amount: $330,000 Present value of lease payments: $34,100 ($3,000 for 12 months at 12%) Estimated remaining useful life: 12 years In Bain's December 31, 2013, balance sheet, the deferred revenue from the sale of this machine should be

$0

In its December 31, 2013, balance sheet, Shin Co. had income taxes payable of $13,000 and a current deferred tax asset of $20,000 before determining the need for a valuation account. Shin had reported a current deferred tax asset of $15,000 at December 31, 2012. No estimated tax payments were made during 2013. At December 31, 2013, Shin determined that it was more likely than not that 10% of the deferred tax asset would not be realized. In its 2013 income statement, what amount should Shin report as total income tax expense?

$10,000

The following balances have been determined: Deferred tax asset (beginning) $100 million Deferred tax asset (ending) $120 million Taxes Payable (beginning) $0 Taxes Payable (ending) $90 million  At the end of the year, the company determined that it was more likely than not that 30% of the deferred tax asset ultimately would not be realized. The company made no estimated tax payments during the year, so the $90 million is the entire amount to be paid. What amount should the company report as income tax expense the year?

$106

On January 1, 2013, Blaugh Co. signed a long-term lease for an office building. The terms of the lease required Blaugh to pay $10,000 annually, beginning December 30, 2013, and continuing each year for 30 years. The lease qualifies as a capital lease. On January 1, 2013, the present value of the lease payments is $112,500 at the 8% interest rate implicit in the lease. In Blaugh's December 31, 2013, balance sheet, the capital lease liability should be

$111,500

Dix, Inc., a calendar-year corporation, reported the following operating income (loss) before income tax for its first three years of operations: 2011 $100,000 2012 (200,000) 2013 400,000 There are no permanent or temporary differences between operating income (loss) for financial and income tax reporting purposes. When filing its 2012 tax return, Dix did not elect to forego the carryback of its loss for 2012. Assume a 40% tax rate for all years. What amount should Dix report as its income tax liability at December 31, 2013?

$120,000

On January 2, 2013, Nori Mining Co. (lessee) entered into a 5-year lease for drilling equipment. Nori accounted for the acquisition as a capital lease for $240,000, which includes a $10,000 bargain purchase option. At the end of the lease, Nori expects to exercise the bargain purchase option. Nori estimates that the equipment's fair value will be $20,000 at the end of its 8-year life. Nori regularly uses straight-line depreciation on similar equipment. For the year ended December 31, 2013, what amount should Nori recognize as depreciation expense on the lease asset?

$27,500

Alvis Corporation reports pretax accounting income of $400,000, and taxable income of $250,000. The difference between the two is the result of a temporary deductible difference. At the beginning of the year, no differences existed.  The tax rate is 30%. What is the net income for the year?

$280,000

Alvis Corporation reports pretax accounting income of $400,000, and taxable income of $250,000. The difference between the two is a $75,000 permanent deductible difference, and a $75,000 temporary deductible difference. At the beginning of the year, no differences existed. The current tax rate is 30% and the enacted tax rate for future years is 40%. What is the net income for the year?

$295,000

Scott Corp. received cash of $20,000 that was included in revenues in its 2013 financial statements, of which $12,000 will not be taxable until 2014. Scott's enacted tax rate is 30% for 2013, and 25% for 2014. What amount should Scott report in its 2013 balance sheet for defend income tax liability?

$3,000

Neal Corp. entered into a nine-year capital lease on a warehouse on December 31, 2013. Lease payments of $52,000, which includes real estate taxes of $2,000, are due annually, beginning on December 31, 2014, and every December 31 thereafter. Neal does not know the interest rate implicit in the lease; Neal's incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should Neal report as capitalized lease liability at December 31, 2013?

$300,000

Alvis Corporation reports pretax accounting income of $400,000, and taxable income of $250,000. The difference between the two is the result of a permanent deductible difference. At the beginning of the year, no differences existed. The tax rate is 30%. What is the net income for the year?

$325,000

Glade Co. leases computer equipment to customers under direct-financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a five-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?

$51,600

Glade Co. leases computer equipment to customers under direct-financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a five-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?

$51,600

Bearings Manufacturing Company Inc. purchased a new machine on January 1, 2014 for $100,000. The company uses the straight-line depreciation method with an estimated equipment life of 5 years and a zero salvage for financial statement purposes, and uses the 3-year Modified Accelerated Cost Recovery System (MACRS) with an estimated equipment life of 3 years for income tax purposes. Bearings is subject to a 35% marginal income tax rate. Assume that the deferred tax liability at the beginning of the year is zero and that Bearings has a positive earning tax position. The MACRS depreciation rates for 3-year equipment are shown below. Year 1 33.33% Year 2 44.45% Year 3 14.81% Year 4 7.41% For Bearings Manufacturing Company Inc., assume that the following new corporate income tax rates will go into effect: 2015-2017 40% 2018 45% What is the amount of the deferred tax asset/liability at December 31, 2014 (rounded to the nearest whole dollar)?

$6,332

Garrison Corp has pretax income of $100,000. The differences between accounting income and taxable income are: Bad Debt Expense: $10,000 Bad Debts Deducted: $8,000 Depreciation Expense: $20,000 Depreciation Deduction: $40,000 What is taxable income?

$82,000

Black Co. organized on January 2, 2013, had pretax financial statement income of $500,000 and taxable income of $800,000 for the year ended December 31, 2013. The only temporary differences are accrued product warranty costs, which Black expects to pay as follows: 2014 $100,000 2015 $ 50,000 2016 $ 50,000 2017 $100,000 The enacted income tax rates are 25% for 2013, 30% for 2014 through 2016, and 35% for 2017. Black believes that future years' operations will produce profits. In its December 31, 2013, balance sheet, what amount should Black report as deferred tax asset?

$95,000

Peg Co. leased equipment from Howe Corp. on July 1, 2013, for an eight-year period expiring June 30, 2021. Equal payments under the lease are $600,000 and are due on July 1 of each year. The first payment was made on July 1, 2013. The rate of interest contemplated by Peg and Howe is 10%. The cash selling price of the equipment is $3,520,000, and the cost of the equipment on Howe's accounting records is $2,800,000. The lease is appropriately recorded as a sales-type lease. What is the amount of profit on the sale and interest revenue that Howe should record for the year ended December 31, 2013: (1) Profit on sale; (2) Interest Revenue?

(1) $720,000/ (2) $146,000

Blue Company is recording a capital lease (usually called a finance lease under IFRS) and is aware that the implicit interest rate used by the lessor to calculate lease payments is 8%. Blue's incremental borrowing rate is 7%. Blue should record the leased asset and lease liability at the present value of the lease payments discounted at

8% if using IFRS

The financial reporting carrying amount of Johns-Hopper Company's only depreciable asset exceeded its tax basis by $750,000 at December 31, 2013. The was a result of differences between depreciation for financial reporting purposes and tax purposes. The asset was acquired earlier in the year. Johns-Hopper has no other temporary differences. The enacted tax rate is 30% for 2013 and 40% thereafter. Johns-Hopper should report the deferred tax effect of this difference in its December 31, 2013, balance sheet as:

A liability of $300,000

Temporary difference arise when expenses are reported in the income statement:

After they are deductible for tax purposes: yes Before they are deductible for tax purposes: yes

A lessor who signs a lease and receives a downpayment has what sort of transaction?

Asset Exchange

Accounting for income tax expense uses what approach?

Asset-liability Approach

Houghton Corp. leased equipment to Barago Company on a sales-type lease. The lease agreement specifies lease payments of $20,000 each year for 10 years. The present value of the leased equipment is $122,891, and the interest rate on the lease is 10%. The cost of the equipment was $100,000. The first lease payment is due at the end of year 1. Houghton uses the net method for recording its sales-type leases. Which of the following entries is required for Houghton when the first lease payment is made?

Credit interest income $12,289

Lessees report which of the following related to the lease?

Depreciation Expense: yes Interest Expense: yes

Lessees report which of the following related to the lease?

Depreciation Expense: yes Interest Revenue: no

Calico is in its first year of operations. Which of the following will result in a deferred tax liability?

Depreciation for tax is greater than depreciation expense

Suppose the PV of the minimum lease payments of the asset being leased is $100. Pair the following asset cost with the correct lease for the lessor.

Direct Financing: $100 Sales Type: $90

A sales-type lessor will show what sources of income?

Interest: yes Gross Profit: yes

A lessee signs a lease that is appropriately classified as a capital lease. At the inception of the lease, the journal entry should include a debit to

Lease Asset

Suppose a lessee and a direct financing lessor sign a capital lease. The PV of the rents is $2000. The PV of the guaranteed residual value is $500. At what amount will the lease be recorded?

Lessee: $2,500 Lessor: $2,500

In the presence of a capital lease, depreciation expense shows up on which set of financial statements?

Lessor: yes Lessee: yes

A(n) _________ _________ __________ occurs when tax deductible expenses exceed taxable revenues

Net Operating Loss

How do we refer to a transaction when we have a difference in financial income and tax income that is never included on the tax return?

Permanent Difference

Justification for the method of determining periodic deferred tax expense is base on the concept of:

Recognition of assets and liabilities

Calico is in its first year of operations. Which of the following will result in a deferred tax asset?

Rent revenue is received in advance

An example of intraperiod income tax allocation is

Reporting an extraordinary item in the income statement, net of direct tax effects.

Which of the following items is treated differently under accounting for taxation guidance of U.S. GAAP and IFRS?

Reporting an extraordinary item in the income statement, net of direct tax effects.

A lessee who signs a capital lease has what sort of transaction, an asset source, use, or exchange?

Residual Value- Guaranteed: source Not Guaranteed: source

How do we compute tax expense?

Taxes payable plus or minus the changes in deferred tax items

A difference of when an item is included in financial income and when an item is included in taxable income is referred to as a ______ difference.

Temporary

A deduction that is allowed on the tax return one year, but is not recognized in financial income until a later period is an example of a

Temporary Difference

A taxable amount is when

This year's financial income is less than taxable income

A taxable amount is when

This year's taxable income is greater than financial income