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Accountancy 422 Review Sprinq 2009 Analysis of Review Leases ventures Accountancy 422 Review Sprinq 2009 Accountancy 422 Review Sprinq 2009 1 If a lessor appropriately classifies a lease as a salestype lease the following items related to the lease should be reported on the lessor s income statement in the first year of the lease Gain loss Rental Interest Deprecia On Sale Revenue Revenue tion of Expense Leased Property a No No No No b No Yes No Yes c No Yes Yes Yes d Yes No Yes No Accountancy 422 Review Sprinq 2009 2 A lease should be classified as a capital lease if the present value of the minimum lease payments at the beginning of the lease term is equal to or exceeds a 70 percent of the fair value of the leased property b 75 percent of the fair value of the leased property c 80 percent of the fair value of the leased property d90 percent of the fair value of the leased property Accountancy 422 Review Sprinq 2009 3 On October 1 1995 Pine Company received 120000 of rent in advance for the period October 1 1995 through September 30 1996 For income tax purposes 120000 was included in the 1995 taxable income whereas for financial reporting purposes only 30000 was included in the 1995 pretax financial income The tax effects of the 90000 difference would affect provision for income taxes the deferred tax asset and the deferred tax liability in the following ways for 1995 Provision for Deferred Deferred Income Taxes Tax Asset Tax Liability Increase Increase No effect Decrease Increase No effect Increase No effect Increase Decrease No effect Increase 99 Accountancy 422 Review Sprinq 2009 The expected tax benefits resulting from a net operating loss carryforward are reported in the year of the net operating loss as an aIncome tax refund receivable bDeferred tax asset cExtraordinary gain dReduction in deferred tax liability m U 0 P Accountancy 422 Review Sprinq 2009 In calculating diluted earnings per share the interest expense relating to convertible bonds that are dilutive should be Deducted from income to arrive at income available for common shareholders Deducted from income net of its tax effect to arrive at income available for common shareholders Added to income to arrive at income available for common shareholders Added to income net of its tax effect to arrive at income available for common shareholders Accountancy 422 Review Sprinq 2009 6 Dual presentation of earnings per share data is required For all corporations Whenever stock is reacquired c When the capital structure of a corporation is simple d When the capital structure of a corporation is complex 5 Accountancy 422 Review Sprinq 2009 7 Lovejoy Leasing Corp leased a bulldozer to a local construction company for five years The fair value normal selling price of the bulldozer was 75000 Lovejoy was properly carrying the bulldozer in its inventory account at 55000 The bulldozer must be returned to Lovejoy at the end of the lease term When setting the lease payments which were 16468 at the start of each year Lovejoy took into account an unguaranteed residual value of 15000 Initial direct costs amounted to 300 The rate implicit in this lease was 12 percent What amount should Lovejoy have recorded as the cost of goods sold in connection with this lease a 38532 b 40000 c 46789 d 55300 Accountancy 422 Review Sprinq 2009 8 Faire Corporation s pretax accounting income for 1995 was 420000 Included in this amount was 47000 of rent revenue At the beginning of the year there were no balances in deferred tax accounts The balance sheet included 15000 of unearned rent revenue The 15000 will be earned early in 1996 The total of 62000 had been collected from a tenant during 1995 and this was the amount reported on the tax return as rent revenue This was the only difference between accounting and taxable income in 1995 Faire s income tax rate was 40 percent in 1995 and 35 percent in 1996 Faire s 1995 provision for income taxes should be a 168000 b 168750 c 174000 d 179250 Accountancy 422 Review Sprinq 2009 9 Ace Company incurred a net operating loss of 525000 during year 2000 The effective tax rate during 2000 was 40 percent For the three previous years its taxable income and effective tax rates were as follows Year Taxable Income Effective Tax Rate 1997 50000 25 1998 440000 30 1999 275000 35 If there were no differences between pretax accounting income and taxable income in any of the years the income tax refund receivable account should be debited at December 31 2000 for a 156750 b 161750 c 171250 d 210000 10 Accountancy 422 Review Sprinq 2009 Baxter Company leased equipment to Fritz Inc on January 1 1999 The lease is for an eightyear period expiring December 31 2006 The first of eight equal annual payments of 900000 was made on January 1 1999 at the signing of the lease Baxter had purchased the equipment on December 29 1998 for 4800000 The lease is appropriately accounted for as a salestype lease by Baxter Assume that the present value at January 1 1999 of all rent payments over the lease term discounted at a 10 percent interest rate was 5280000 What amount of interest revenue should Baxter record in year 2000 the second year of the lease period as a result of the lease 528000 472000 438000 391800 905 Accountancy 422 Review Sprinq 2009 1 1 Flash Company has a defined benefit plan for its employees The following information relates to this plan Projected Bene t Obligation 1 199 10000000 Fair value of plan assets 1 1 99 10600000 Marketrelated value of plan assets 1 1 99 10400000 Service cost 1999 800000 Actual return on plan assets 1999 900000 Settlement rate 10 Longterm rate of return on assets 8 Prior service costs are being amortized in the amount of 20000 per year Flash s net periodic pension expense for the year was 880000 920000 948000 988000 QOU N 13 Accountancy 422 Review Sprinq 2009 The service cost of a defined benefit pension plan is the annual fee charged by the plan administrator change in the pension liability caused by plan amendments change in the pension liability caused by one additional year of employee service annual interest charge of the pension liability Accountancy 422 Review Sprinq 2009 14 To compute the amortization on the cumulative unrecognized gains and losses in a pension plan the corridor is 10 of the a average of the beginning balances of the fair value of plan assets and the projected benefit obligation b higher of the beginning balances of the fair value of plan assets or the projected benefit obligation c lower of the beginning balances of the fair value of plan assets or the projected benefit obligation d higher of the beginning market related value of the plan assets or the projected benefit obligation Accountancy 422 Review Sprinq 2009 16 A fair value hedge would most likely be achieved with a a Knockout provision with an interest rate ceiling b Knockout provision with an interest rate oor c Payfixed receive variable interest rate swap d Payvariable receive xed interest rate swap Accountancy 422 Review Sprinq 2009 17 For purposes of computing weighted average number of shares outstanding during the year a midyear event that must be treated as occurring at the beginning of the year is the a b sale of additional common stock issuance of stock warrants 90 declaration and distribution of a stock dividend purchase of treasury stock Accountancy 422 Review Sprinq 2009 18 During its fiscal year Richard s Distributing Company had net income of 100000 no extraordinary items and 50000 shares of common stock and 10000 shares of preferred stock outstanding Richards declared and paid dividends of 050 per share to common and 600 per share to preferred The preferred stock is convertible into common stock on a shareforshare basis For the year Richards Distributing Company should report diluted earnings per share of a 025 b 067 c 080 d 167 Accountancy 422 Review Sprinq 2009 23 On January 1 2001 Cubs Corporation adopted a defined benefit pension plan The plan s service cost of 150000 was fully funded at the end of 2001 Prior service cost was funded by a contribution of 60000 at the end of 2001 Amortization of prior service cost was 24000 for 2001 What is the amount of Cub s comprehensive income at December 31 2001 36000 60000 84000 90000 90 Accountancy 422 Review Sprinq 2009 24 On March 1 2002 Vernonia Corporation stock was trading for 43 per share On that date Lynn Good bought a call option for 700 The expiration date was June 30 The strike price was 40 On June 30 Vernonia Corporation traded at 38 per share What was Lynn Good s profit or loss on the call option a 900 loss b 700 loss c 200 gain d500 gain Accountancy 422 Review Sprinq 2009 30 Which of the following would most likely be the underlying of an interest rate swap a 30day LIBOR b The fixed rate of interest stated in the derivative c The hypothetical value upon which interest is calculated d The principle amount of the loan being hedged Accountancy 422 Review Sprinq 2009 31 Jett Corp had 600000 shares of common stock outstanding on January 1 issued 900000 shares on July 1 and had income applicable to common stock of 1260000 for the year Basic earnings per share would be a 210 b 100 c 120 d 140 Accountancy 422 Review Sprinq 2009 32 The Explorer Company uses interest rate swaps to hedge its variable rate loans At the beginning of the year the value of the swaps on the books was a liability of 2500000 At year end the finance company reported that the swaps were assets in the amount of 2350000 on the finance company books All swaps qualify as perfect hedges What is the effect on Explorer s income statement No effect Gain of 150000 Loss of 150000 Loss of 2350000 super Accountancy 422 Review Sprinq 2009 33 On January 1 2004 Sims Corporation signed a tenyear noncancelable lease for certain machinery The terms of the lease called for Sims to make annual payments of 300000 at the end of each year for ten years with the title to pass to Sims at the end of this period The machinery has an estimated life of fifteen years and no salvage value Sims uses the straight line method of depreciation for all of its fixed assets The present value of the minimum lease payments is 2013024 at an implicit interest rate of 8 With respect to this lease Sims should record for 2004 a Lease expense of 300000 b Interest expense of 134202 and depreciation expense of 1 14204 c Interest expense of 161043 and depreciation expense of 134202 d Interest expense of 137043 and depreciation of 201302 Accountancy 422 Review Sprinq 2009 34 Prince Corporation recorded the following entry for taxes in its first year of operations Provision for income taxes 1050000 Income taxes payable 966000 Deferred tax liability 84000 Prince uses the straight line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes The amount charged to depreciation expense on its books this year was 1400000 No differences existed between book income and taxable income except for the amount of depreciation Assuming an enacted tax rate of 30 what amount was deducted for depreciation on the corporation s tax return a 1120000 b 1316000 c 1484000 d 1680000 Accountancy 422 Review Sprinq 2009 35 Which of the following would constitute an embedded option to an interest rate swap Early termination agreement Knockout provision Pay variable portion in the swap Pay fixed portion in the swap 99 Accountancy 422 Review Sprinq 2009 36 A method of estimating bad debts that focuses on the balance sheet rather than the income statement is the allowance method based on Direct writeoff Aging the trade receivable accounts Credit sales Specific accounts determined to be uncollectible super Accountancy 422 Review Sprinq 2009 37 Which of the following costs of Goodwill should be amortized over their estimated useful lives Cost of Goodwill from a business Cost of combination developing accounted for goodwill as a Burchase internally a No No b No Yes c Yes No d Yes Yes Accountancy 422 Review Sprinq 2009 38 When conducting an analysis of goodwill for impairment the following procedure is used a The undiscounted future cash ows of the goodwill asset are compared to its book value to assess whether an impairment exists b The discounted future cash ows of the goodwill asset are compared to its book value to assess whether an impairment exists c the fair value of the reporting unit is compared to the book value of the reporting unit d cash ow from assets within the asset group are compared to the fair value of the goodwill Accountancy 422 Review Sprinq 2009 39 In 2005 Morpheus Company determined that it must recognize an impairment of goodwill in the amount of 8400000 The book value of the related subsidiary was 66500000 at the beginning of the year Morpheus decided to sell the subsidiary during 2005 and was able to complete the sale to Neo Company for 16100000 Prior to the sale the subsidiary had pretax loss of 4900000 The effective tax rate is 40 What amount will Morpheus report on the income statement for loss on discontinued operation a 22260000 b 25200000 c 28140000 d 30240000 40 Accountancy 422 Review Sprinq 2009 Beginning accounts receivable was 10000 and ending accounts receivable was 8000 Sales from the year totaled 60000 with 45000 of it sold on account Based on this information what amounts of revenue and cash ow from operations will be reported for the year Revenue 45 000 60000 60000 45000 Cash in ow 58000 58000 62000 62000 Accountancy 422 Review Sprinq 2009 41 Which one of the following items would be found in the operating activities section of the cash ow statement under the indirect format collections from the sale of equipment E b payment to the shareholders for dividends c increase in accounts receivable d proceeds from issuing bonds 42 Accountancy 422 Review Sprinq 2009 Hiway Haulers owned a truck that cost 20000 when it was purchased on Januaryl 1997 It had accumulated depreciation of 12000 at December 31 1998 The company originally estimated the truck would have a residual value after using it for three years of 2000 It sold the truck for 15000 cash on January 1 1999 The amount of the gain or loss on the sale of the truck was a 3000 gain b 7000 gain c 13000 gain d 1000 loss Accountancy 422 Review Sprinq 2009 43 A transaction to writeoff an account receivable would affect the a Accounts Receivable and Bad Debts Expense accounts Allowance for Doubtful Accounts and Bad Debts Expense accounts Allowance for Doubtful Accounts and Cash accounts Allowance for Doubtful Accounts and Accounts Receivable accounts Accountancy 422 Review Sprinq 2009 44 At yearend Pat counted 300 in office supplies on hand The firm had 150 of supplies on hand at the beginning of the year and had purchased 1800 of supplies during the year What was supplies expense for the year a 1350 b 1950 0 1800 d 1650 Accountancy 422 Review Sprinq 2009 45 Bosco Company had the following financial information Accounts receivable December 31 2001 60000 Cash collected from customers during 2002 400000 Accounts receivable December 31 2002 70000 Sales revenue for 2002 was a 470000 b 460000 c 410000 d 390000 Accountancy 422 Review Sprinq 2009 46 The net income for the year ended December 312002 for Garfield Corporation was 1760000 Additional information is as follows Purchase of plant assets 1400000 Depreciation on plant assets 3 740000 Dividends declared and paid 3 485000 Net decrease in noncash current assets 3 145000 Loss on sale of machine 3 65000 Based on the above information what should be the net cash ow from operating activities in Garfield s statement of cash ows for the year ended December 31 2002 2565000 2645000 2710000 3625000 905 Accountancy 422 Review Sprinq 2009 47 When goods or services are exchanged for cash or claims to cash receivables revenues are earned realized or realizable realized or realizable and earned realized or realizable or earned 99 48 Accountancy 422 Review Sprinq 2009 Noland Constructors Inc has consistently used the percentageof completion method of recognizing income In 2007 Noland started work on a 35000000 construction contract that was completed in 2008 The following information was taken from Noland39s 2007 accounting records Progress billings 1 1 000000 Costs incurred 10500000 Collections 7000000 Estimated costs to complete 2 1 000000 What amount of revenue should Noland have recognized in 2007 on this contract a 28000000 b 24500000 c 12833333 d 1 1666665