Practice Questions:
1. Which of the following is a correct statement of one of the classification tests?
a. The lease contains a purchase option.
b. The lease term is equal to or more than 75% of the estimated economic life of the leased property.
c. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the
leased property.
d. The lease transfers ownership of the property to the lessor.
2. A lessee with a finance lease containing a bargain purchase option should depreciate the leased asset
over the
a.
b.
c.
d.
term of the lease.
period ending with the bargain purchase option date.
life of the asset or the term of the lease, whichever is longer.
asset's remaining economic life.
3. Which of the following would be included in the Lease Receivable account?
I. Guaranteed residual value.
II. Unguaranteed residual value.
III. Executory costs.
IV. Rental payments.
a.
b.
c.
d.
I and II only.
I, II, and IV.
I and III only.
II, III, and IV.
4. Which of the following best describes current practice in accounting for leases?
a.
b.
c.
d.
Leases are not capitalized.
Leases similar to installment purchases are capitalized.
All long-term leases are capitalized.
All leases are capitalized.
5. A single lease expense is recognized on the income statement for
a.
b.
c.
d.
a finance lease.
neither a finance lease or an operating lease.
both a finance lease and an operating lease.
an operating lease.
6.
Debt securities acquired by a corporation which are accounted for by recognizing unrealized
holding gains or losses that are included as other comprehensive income and as a separate
component of stockholders' equity are
a.
b.
c.
d.
7.
Held-to-maturity securities are reported at
a.
b.
c.
d.
8.
held-to-maturity debt securities.
trading debt securities.
available-for-sale debt securities.
never-sell debt securities.
acquisition cost.
acquisition cost plus amortization of a discount.
acquisition cost plus interest.
fair value.
On August 1, 2017, the McCellen Company acquired $100,000, 8% bonds of Lankford Co. for
$104,000. The bonds were dated August 1, 2017, and mature on July 31, 2022, with interest
payable each January 31 and July 31. McCellen plans on holding the bonds till their maturity.
What entry should McCellen make to record the purchase of the bonds on August 1, 2017?
a.
b.
c.
d.
Debt Investments
Interest Receivable
Cash
Debt Investments
Cash
Debt Investments
Accrued Interest Receivable
Cash
Debt Investments
Premium on Debt Securities
Cash
104,000
2,000
106,000
104,000
104,000
106,000
2,000
104,000
100,000
6,000
106,000
The requirement is to determine the journal entry to make when a bond investment is acquired at a
premium. It is common to combine the par value of the bonds ($100,000) and the premium on bond
investment ($4,000) into one account and debit the total of $104,000 to the account Debt
Investments. The entry made by McCellen Company to record the purchase of bonds on August 1,
2017, would be:
Debt Investments
104,000
Cash
104,000
9.
At December 31, 2018, Sunland Company has an equity portfolio valued at $178000. Its cost was
$144000. If the Securities Fair Value Adjustment has a debit balance of $8600, which of the
following journal entries is required at December 31, 2018
a.
Unrealized Holding Gain or Loss-Income
Fair Value Adjustment
34,000
34,000
b.
Unrealized Holding Gain or Loss-Income
Fair Value Adjustment
c.
Fair Value Adjustment
34,000
Unrealized Holding Gain or Loss - Income
34,000
Fair Value Adjustment
25,400
Unrealized Holding Gain or Loss - Income
25,400
d.
25,400
25,400
($178000 - $144000) - $8600 = $25400 Unrealized gain.
10.
On its December 31, 2017 balance sheet, Cullumber Company appropriately reported a $10,000
debit balance in its Fair Value Adjustment account. There was no change during 2018 in the
composition of Cullumber’s portfolio of debt investments held as available-for-sale debt
securities. The following information pertains to that portfolio:
Fair value at
12/31/18
Security
Cost
X
$132000
$163000
Y
102000
91500
Z
179000
129000
$413000
$383500
The amount of unrealized loss to appear as a component of comprehensive income for the year
ending December 31, 2018 is
a.
b.
c.
d.
$20,500
0.
39,500
31,000
$10000 + $29500 = $39500.
11.
Taxable income of a corporation
a. differs from accounting income because companies use the full accrual method for financial
reporting but use the modified cash basis for tax reporting.
b. is based on generally accepted accounting principles.
c. is reported on the corporation's income statement.
d. differs from accounting income due to differences in intraperiod allocation between the two
methods of income determination.
12.
At the December 31, 2017 balance sheet date, Unruh Corporation reports an accrued receivable
for financial reporting purposes but not for tax purposes. When this asset is recovered in 2018, a
taxable amount will occur and
a.
b.
c.
d.
13.
Unruh will record an increase in a deferred tax asset in 2018.
total income tax expense for 2018 will exceed current tax expense for 2018.
pretax financial income will exceed taxable income in 2018.
Unruh will record a decrease in a deferred tax liability in 2018.
At the beginning of 2018, Pharoah Co. purchased an asset for $1900000 with an estimated useful
life of 5 years and an estimated salvage value of $100000. For financial reporting purposes the
asset is being depreciated using the straight-line method; for tax purposes the double-decliningbalance method is being used. Pharoah Co.’s tax rate is 40% for 2018 and all future years.
At the end of 2018, which of the following deferred tax accounts and balances is reported on
Pharoah’s balance sheet?
Account
Balance
a. Deferred tax liability
$160,000
b. Deferred tax asset
$160,000
c. Deferred tax asset
$144,000
d. Deferred tax liability
$144,000
Depreciation for Financial Reporting (straight-line method) 1,900,000 - 100,000 (salvage value) =
1,800,000 / 5 =360,000
Depreciation for Tax purposes (double declining method) 1,900,000 *(2/5) = 760,000
Difference: 760,000 - 360,000 = 400,000
DTL - 400,000 * 0.4 = $160,000
14.
Oriole Co. at the end of 2017, its first year of operations, prepared a reconciliation between pretax
financial income and taxable income as follows:
Pretax financial income
Estimated litigation expense
$1140000
2650000
Installment sales
(2360000)
Taxable income
$1430000
The estimated litigation expense of $2650000 will be deductible in 2019 when it is expected to be paid.
The gross profit from the installment sales will be realized in the amount of $1180000 in each of the
next two years. The estimated liability for litigation is classified as noncurrent and the installment
accounts receivable are classified as $1180000 current and $1180000 noncurrent. The income tax rate
is 40% for all years.
The income tax expense is
a.
b.
c.
d.
$590,000.
$1180000.
$456000.
$572000.
Income taxes payable = ($1430000 × 40%) = $572000
Change in deferred tax liability = ($2360000 × 40%) = $944000
Change in deferred tax asset = ($2650000 × 40%) = $1060000
$572000 + $944000 – $1060000 = $456000 (or $1140000 x 40%.)
15.
Presented below is pension information related to Cullumber, Inc. for the year 2018:
Service cost
Interest on projected benefit obligation
Interest on vested benefits
Amortization of prior service cost due to increase in benefits
Expected return on plan assets
$300000
215000
109000
49000
79000
The amount of pension expense to be reported for 2018 is
a. $594000.
b. $436000.
c. $485000.
d. $673000.
$300000 + $215000 + $49000 – $79000 = $485000.
16.
Crane, Inc. received the following information from its pension plan trustee concerning the
operation of the company's defined-benefit pension plan for the year ended December 31, 2018.
January 1, 2018
Fair value of pension plan assets
Projected benefit obligation
Accumulated benefit obligation
Accumulated OCI – (Gains / Losses)
December 31, 2018
$5000000
5800000
1060000
0
$5400000
6280000
1300000
-180000
The service cost component of pension expense for 2018 is $300000 and the amortization of prior
service cost due to an increase in benefits is $68000. The settlement rate is 11% and the expected
rate of return is 10%. What is the amount of pension expense for 2018?
a.
b.
c.
d.
$506000
$518800
$326000
$300000
$300000 + $68000 + ($5800000 × 0.11) – ($5000000 × 0.10) = $506000.
17.
The following information for Ivanhoe Enterprises is given below:
December 31, 2018
Assets and obligations
Plan assets (at fair value)
Accumulated benefit obligation
Projected benefit obligation
Other Items
$360000
860000
950000
Pension asset / liability, January 1, 2018
Contributions
Other comprehensive loss in 2018
20000
260000
253700
There were no actuarial gains or losses at January 1, 2018. The average remaining service life of
employees is 10 years.
The amortization of Other Comprehensive Loss for 2019 is:
a. $15870
b. $45000
c. $0
d. $25370
($253700 - $95000) ÷ 10 = $15870.
18.
The following information is related to the pension plan of Wildhorse, Inc. for 2018.
Actual return on plan assets
Amortization of net gain
Amortization of prior service cost due to increase in benefits
Expected return on plan assets
Interest on projected benefit obligation
Service cost
$370000
150000
270000
433000
695000
1550000
Pension expense for 2018 is
a.
b.
c.
d.
$2232000.
$1983000.
$1932000.
$2295000.
$1550000 + $695000 – $433000 – $150000 + $270000 = $1932000.
19.
The following information is related to the pension plan of Sandhill, Inc. for 2018.
Actual return on plan assets
Amortization of net gain
Amortization of prior service cost due to increase in benefits
Expected return on plan assets
Interest on projected benefit obligation
Service cost
Pension expense for 2018 is
a. $2230000.
b. $1876000.
$360000
145000
260000
424000
685000
1500000
c. $2166000.
d. $1924000.
$1500000 + $685000 – $424000 – $145000 + $260000 = $1876000.
20.
Ivanhoe, Inc. received the following information from its pension plan trustee concerning the
operation of the company's defined-benefit pension plan for the year ended December 31, 2018.
January 1, 2018
Fair value of pension plan assets
Projected benefit obligation
Accumulated benefit obligation
Accumulated OCI – (Gains / Losses)
$5700000
6500000
1130000
0
December 31, 2018
$6100000
6980000
1370000
-110000
The service cost component of pension expense for 2018 is $650000 and the amortization of prior
service cost due to an increase in benefits is $82000. The settlement rate is 10% and the expected
rate of return is 9%. What is the amount of pension expense for 2018?
a.
b.
c.
d.
$650000
$869000.
$881000
$759000
$650000 + $82000 + ($6500000 × 0.10) – ($5700000 × 0.09) = $869000.
21
What impact does a bargain purchase option have on the present value of the minimum lease
payments computed by the lessee?
a. The minimum lease payments would be increased by the present value of the option price if, at
the time of the lease agreement, it appeared certain that the lessee would exercise the option at
the end of the lease and purchase the asset at the option price.
b. The lessee must decrease the present value of the minimum lease payments by the present value
of the option price.
c. There is no impact as the option does not enter into the transaction until the end of the lease
term.
d. The lessee must increase the present value of the minimum lease payments by the future value
of the option price.
22.
The balance in retained earnings at December 31, 2017 was $1432000 and at December 31, 2018
was $1163000. Net income for 2018 was $1021000. A stock dividend was declared and
distributed which increased common stock $494000 and paid-in capital $191000. A cash
dividend was declared and paid.
The amount of the cash dividend was
a.
b.
c.
d.
$605000.
$796000.
$1290000.
$493000.
$1432000 + $1021000 – ($494000 + $191000) – X = $1163000
X = $605000
23.
When preparing a statement of cash flows, a decrease in prepaid insurance during a period would
require which of the following adjustments in determining cash flows from operating activities?
Indirect Method
a. Decrease
b. Increase
c. Increase
d. Decrease
24.
Direct Method
Decrease
Decrease
Increase
Increase
The following data are for the pension plan for the employees of Sandhill Company.
Accumulated benefit obligation
Projected benefit obligation
Plan assets (at fair value)
AOCL – net loss
Settlement rate (for year)
Expected rate of return (for year)
1/1/17
12/31/17
12/31/18
$5200000
5620000
4810000
0
$5230000
5650000
6110000
966000
11%
9%
$7000000
7610000
6640000
1050000
9%
8%
Sandhill’s contribution was $848000 in 2018 and benefits paid were $745000. Sandhill estimates that the
average remaining service life is 15 years.
The actual return on plan assets in 2018 was
a.
b.
c.
d.
$420000.
$397,000
$530,000
$427,000
($6640000 – $6110000) – $848000 + $745000 = $427000
25. Anna Maria Island Co. provided the following information on selected transactions during 2017:
Purchase of land by issuing bonds
Proceeds from sale of land
$1,550,000
925,000
Proceeds from issuing bonds
1,900,000
Purchases of inventory
2,975,000
Purchases of treasury stock
190,000
Dividends paid to preferred stockholders
120,000
Proceeds from issuing preferred stock
325,000
Proceeds from sale of equipment
650,000
The net cash provided by financing activities during 2017 is
a.
b.
c.
d.
$ 2,465,000.
$ 1,725,000.
$ 1,915,000.
$ 2,040,000.
1,900,000-190,000-120,000+325,000=1915000
26. All of the following would be classified as financing cash flows except:
a.
b.
c.
d.
proceeds from the sale of stock.
dividends paid on preferred stock.
interest paid on long-term debt.
purchases of treasury stock.
27. All of the following adjustments would be deducted in determining net cash flow from operating
activities using the indirect method except:
a.
b.
c.
d.
gain on the sale of plant assets.
increase in accrued liabilities.
amortization of bond premium.
decrease in deferred income tax liability.
Problem on Lease
1. On January 1, 2017, Cullumber Company leased equipment to Foster Corporation. The following
information pertains to this lease:
The term of the non-cancellable lease is 6 years. At the end of the lease term, Flynn has the option to
purchase the equipment for $2,000, while the expected residual value at the end of the lease is $9,000.
Equal rental payments are due on January 1 of each year, starting in 2017.
The fair value of the equipment on January 1, 2017 is $170,000 and its cost is $140,000.
The equipment has an economic life of 8 years. Foster depreciates all of its equipment on a straight-line
basis.
Cullumber set the annual rental to ensure a 5% rate of return. Foster's incremental borrowing rate is 6%,
and the implicit rate of the lessor is unknown.
Collectibility of lease payments by the lessor is probable.
Both parties' accounting periods end on December 31.
Note: present value tables are available on separate worksheets.
A. How should Cullumber classify this lease?
Sales-type
B. How should Foster classify this lease?
Finance
C. Calculate the amount of the annual rental payment.
Fair
value
Less:
BPO
170,000
1,492
168,508
Return
rate
PVF
(6,5%)
5.32948
Rental:
31,618
5%
D. Prepare an amortization schedule for Cullumber in the area indicated to the right. Make sure you label
the columns.
Date
1/1/2017
1/1/2017
1/1/2018
1/1/2019
1/1/2020
1/1/2021
1/1/2022
12/31/2022
Amortization Schedule
Payt
Int
Amort
31,618
31,618
31,618
31,618
31,618
31,618
2,000
6,919
5,684
4,387
3,026
1,596
95
31,618
24,699
25,934
27,231
28,592
30,022
1,905
Balance
170,000
138,382
113,683
87,749
60,519
31,927
1,905
-
E. Prepare all of the necessary journal entries for Cullumber for 2017. Skip a line between entries.
Round all final answers to zero decimal places.
Date
1/1/17
Account title
Debit
Lease Receivable
170,000
COGS
140,000
Inventory
140,000
Sales
170,000
Cash
31,618
Lease Receivable
12/31/17
Credit
Lease Receivable
Interest Revenue
31,618
6,919
6,919
2. On January 1, 2017, a machine was purchased for $1,060,000 by Jiminy Cricket, Inc. The machine is
expected to have an 8-year life with no salvage value. It is to be depreciated on a straight-line basis. The
machine was leased to Sheridan Inc. for 3 years on January 1, 2017, with annual rent payments of
$285,000 due at the beginning of each year, starting January 1, 2017. The machine is expected to have a
residual value at the end of the lease term of $562,500, though this amount is unguaranteed.
Sheridan's incremental borrowing rate is 5% and the implicit rate used by the lessor is unknown.
A. How much should Jiminy Cricket report as income before income tax on this lease for 2017?
Revenue - Depreciation = 285,000 - (1,060,000 / 8) = 152,500
B. Prepare all of the necessary journal entries for Sheridan for 2017. Skip a line between entries. Round
all final answers to zero decimal places.
Date
Account title
1/1/17
ROU asset
Debit
814,932a
Lease Liability
Lease Liability
814,932
285,000
Cash
12/31/17
Lease Expense
285,000
285,000
Lease Liability
26,497b
ROU asset
258,503
a
814,932 = 285,000 * 2.85941
b
Credit
26,497 = (814,932 - 285,000) * 0.05