lOMoARcPSD|19958401
Testbank-Chapter-Exam Chapter 11: Depreciation,
Impairments, and Depletion
Intermediate Accounting II (Silliman University)
Studocu is not sponsored or endorsed by any college or university
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
CHAPTER 11
DEPRECIATION, IMPAIRMENTS, AND DEPLETION
CHAPTER LEARNING OBJECTIVES
1.
Explain the concept of depreciation.
2.
Identify the factors involved in the depreciation process.
3.
Compare activity, straight-line, and diminishing-charge methods of depreciation.
4.
Explain component depreciation.
5.
Explain the accounting issues related to asset impairment.
6.
Explain the accounting procedures for depletion of mineral resources.
7.
Explain the accounting for revaluations.
8.
Explain how to report and analyze property, plant, equipment, and mineral resources.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 2
Test Bank for Intermediate Accounting, IFRS Edition, 2e
TRUE-FALSE—Conceptual
1.
Depreciation is a means of cost allocation, not a matter of valuation.
2.
Depreciation is based on the decline in the fair value of the asset.
3.
Depreciation, depletion, and amortization all involve the allocation of the cost of a longlived asset to expense.
4.
The cost of an asset less its residual value is its depreciation base.
5.
The three factors involved in the depreciation process are the depreciation base, the
useful life, and the risk of obsolescence.
6.
Inadequacy is the replacement of one asset with another more efficient and economical
asset.
7.
The major objection to the straight-line method is that it assumes the asset’s economic
usefulness and repair expense are the same each year.
8.
The units-of-production approach to depreciation is appropriate when depreciation is a
function of time instead of activity.
9.
An accelerated depreciation method is appropriate when the asset’s economic usefulness
is the same each year.
10.
The declining-balance method does not deduct the residual value in computing the
depreciation base.
11.
Changes in estimates are handled prospectively by dividing the asset’s book value less
any residual value by the remaining estimated life.
12.
Under component depreciation, each component of an item of property, plant and
equipment whose cost is significant relative to the total cost of the asset must be
depreciated separately.
13.
Component depreciation must be calculated using the straight-line method.
14.
The first step in determining an impairment loss is to identify whether impairment
indicators are present.
15.
The recoverable amount used to impairment test a long-lived tangible asset is defined as
the asset’s fair value less costs to sell.
16.
An asset’s value in use is defined as the present value of the cash flows expected from its
future use and eventual sale at the end its useful life.
17.
Recoveries of impairment for tangible long-lived assets are reported as components of
other comprehensive income.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 3
18.
A recovery of impairment for a tangible long-lived asset is limited to the carrying value that
would have been reported had the impairment not occurred.
19.
After an impairment loss is recorded, the recoverable amount becomes the basis for the
impaired asset and is used to calculate depreciation in future periods.
20.
An impairment loss is the amount by which the carrying amount of the asset exceeds the
sum of the expected future cash flows from the use of that asset.
21.
Recoverable amount is defined as the higher of fair value less costs to sell or value-inuse.
22.
Assets held for disposal should be reported at the lower of cost or net realizable value.
23.
Intangible development costs and restoration costs are part of the depletion base.
24.
Although IFRS allows it, most companies do not use revaluation accounting.
25.
Unrealized gains from revaluations do not increase net income but are instead reported as
components of other comprehensive income.
26.
The Accumulated Other Comprehensive Income account related to revaluations cannot
have a negative balance.
27.
Revaluation surplus is a temporary account which is closed to Retained Earnings at the
end of an accounting period.
28.
The recoverability test is the first step in impairment testing under both IFRS and U.S.
GAAP.
29.
The asset turnover is computed by dividing net sales by ending total assets.
30.
The profit margin on sales is a measure for analyzing the use of property, plant, and
equipment.
True False Answers—Conceptual
Item
1.
2.
3.
4.
5.
Ans.
T
F
T
T
F
Item
6.
7.
8.
9.
10.
Ans.
F
T
F
F
T
Item
11.
12.
13.
14.
15.
Ans.
T
T
F
T
F
Item
16.
17.
18.
19.
20.
Ans.
T
F
T
T
F
Item
21.
22.
23.
24.
25.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
Ans.
T
T
T
T
T
Item
26.
27.
28.
29.
30.
Ans.
T
F
F
F
T
lOMoARcPSD|19958401
11 - 4
Test Bank for Intermediate Accounting, IFRS Edition, 2e
MULTIPLE CHOICE—Conceptual
31.
Which of the following is true of depreciation accounting?
a. It is not a matter of valuation.
b. It is part of the matching of revenues and expenses.
c. It retains funds by reducing income taxes and dividends.
d. All of these answer choices are correct.
32.
Which of the following principles best describes the conceptual rationale for the methods
of matching depreciation expense with revenues?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition
S
33.
Which of the following most accurately reflects the concept of depreciation as used in
accounting?
a. The process of charging the decline in value of an economic resource to income in the
period in which the benefit occurred.
b. The process of allocating the cost of tangible assets to expense in a systematic and
rational manner to those periods expected to benefit from the use of the asset.
c. A method of allocating asset cost to an expense account in a manner which closely
matches the physical deterioration of the tangible asset involved.
d. An accounting concept that allocates the portion of an asset used up during the year
to the contra asset account for the purpose of properly recording the fair market value
of tangible assets.
S
34.
The major difference between the service life of an asset and its physical life is that
a. service life refers to the time an asset will be used by a company and physical life
refers to how long the asset will last.
b. physical life is the life of an asset without consideration of residual value and service
life requires the use of residual value.
c. physical life is always longer than service life.
d. service life refers to the length of time an asset is of use to its original owner, while
physical life refers to how long the asset will be used by all owners.
P
35.
The term "depreciable base," or "depreciation base," as it is used in accounting, refers to
a. the total amount to be charged (debited) to expense over an asset's useful life.
b. the cost of the asset less the related depreciation recorded to date.
c. the estimated fair value of the asset at the end of its useful life.
d. the acquisition cost of the asset.
36.
Economic factors that shorten the service life of an asset include
a. obsolescence.
b. supersession.
c. inadequacy.
d. All of these answer choices are correct.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
S
11 - 5
37.
Which of the following is not one of the basic questions that must be answered before the
amount of depreciation charge can be computed?
a. What depreciable base is to be used for the asset?
b. What is the asset's useful life?
c. What method of cost apportionment is best for this asset?
d. What product or service is the asset related to?
38.
Which of the following is a realistic assumption of the straight-line method of depreciation?
a. The asset's economic usefulness is the same each year.
b. The repair and maintenance expense is essentially the same each period.
c. The rate of return analysis is enhanced using the straight-line method.
d. Depreciation is a function of time rather than a function of usage.
39.
The activity method of depreciation
a. is a variable charge approach.
b. assumes that depreciation is a function of the passage of time.
c. conceptually associates cost in terms of input measures.
d. All of these answer choicesare correct.
40.
For income statement purposes, depreciation is a variable expense if the depreciation
method used is
a. units-of-production.
b. straight-line.
c. sum-of-the-years'-digits.
d. declining-balance.
41.
If an industrial firm uses the units-of-production method for computing depreciation on its
only plant asset, factory machinery, the credit to accumulated depreciation from period to
period during the life of the firm will
a. be constant.
b. vary with unit sales.
c. vary with sales revenue.
d. vary with production.
42.
Use of the double-declining balance method
a. results in a decreasing charge to depreciation expense.
b. means residual value is not deducted in computing the depreciation base.
c. means the book value should not be reduced below residual value.
d. All of these answer choices are correct.
43.
Use of the sum-of-the-years'-digits method
a. results in residual value being ignored.
b. means the denominator is the years remaining at the beginning of the year.
c. means the book value should not be reduced below residual value.
d. All of these answer choices are correct.
44.
A graph is set up with "yearly depreciation expense" on the vertical axis and "time" on the
horizontal axis. Assuming linear relationships, how would the graphs for straight-line and
sum-of-the-years'-digits depreciation, respectively, be drawn?
a. Vertically and sloping down to the right
b. Vertically and sloping up to the right
c. Horizontally and sloping down to the right
d. Horizontally and sloping up to the right
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 6
S
Test Bank for Intermediate Accounting, IFRS Edition, 2e
45.
A principal objection to the straight-line method of depreciation is that it
a. provides for the declining productivity of an aging asset.
b. ignores variations in the rate of asset use.
c. tends to result in a constant rate of return on a diminishing investment base.
d. gives smaller periodic write-offs than decreasing charge methods.
46.
When depreciation is computed for partial periods under a diminishing-charge
depreciation method, it is necessary to
a. charge a full year's depreciation to the year of acquisition.
b. determine depreciation expense for the full year and then prorate the expense
between the two periods involved.
c. use the straight-line method for the year in which the asset is sold or otherwise
disposed of.
d. use a residual value equal to the first year's partial depreciation charge.
47.
Depreciation is normally computed on the basis of the nearest
a. full month and to the nearest cent.
b. full month and to the nearest dollar.
c. day and to the nearest cent.
d. day and to the nearest dollar.
48.
Myers Company acquired machinery on January 1, 2010 which it depreciated under the
straight-line method with an estimated life of fifteen years and no residual value. On
January 1, 2015, Myers estimated that the remaining life of this machinery was six years
with no residual value. How should this change be accounted for by Myers?
a. As a prior period adjustment
b. As the cumulative effect of a change in accounting principle in 2015
c. By setting future annual depreciation equal to one-sixth of the book value on January
1, 2015
d. By continuing to depreciate the machinery over the original fifteen year life
49.
A change in estimate should
a. result in restatement of prior period statements.
b. be handled in current and future periods.
c. be handled in future periods only.
d. be handled retroactively.
50.
Lynch Printing Company determines that a printing press used in its operations has
suffered an impairment in value because of technological changes. An entry to record the
impairment should
a. recognize extra depreciation expense for the period.
b. include a credit to the equipment accumulated depreciation account.
c. include a credit to the equipment account.
d. not be made if the equipment is still being used.
51.
All of the following are true with regard to impairment testing of long-lived assets except:
a. If impairment indicators are present, the company must conduct an impairment test.
b. The impairment test compares the asset’s carrying value with the lower of its fair value
less cost to sell and its value-in-use.
c. If the recoverable amount is lower than the carrying value, an impairment loss will be
reported on the period’s income statement.
d. If either the fair value less cost to sell or the value-in-use is higher than the carrying
amount, no impairment loss will be recorded.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 7
52.
All of the following are true of the recoverable amount used in the impairment test of a
long-lived asset except:
a. An asset’s recoverable amount is the lower of its value-in-use and its fair value less
cost to sell.
b. An asset’s recoverable amount is the higher of its fair value less cost to sell and its
value-in-use.
c. The recoverable amount is calculated as the asset’s value in use less costs to sell.
d. If an asset’s recoverable amount is higher than the carrying amount, no impairment
loss will be reported on the period’s income statement.
53.
Which of following is not a similarity in the accounting treatment for depreciation and cost
depletion?
a. The estimated life is based on economic or productive life.
b. Assets subject to either are reported in the same classification on the statement of
financial position.
c. The rates may be changed upon revision of the estimated productive life used in the
original rate computations.
d. Both depreciation and depletion are based on time.
54.
Which of the following is not a difference between the accounting treatment for
depreciation and cost depletion?
a. Depletion applies to natural resources while depreciation applies to plant and
equipment.
b. Depletion refers to the physical exhaustion or consumption of the asset while
depreciation refers to the wear, tear, and obsolescence of the asset.
c. Many formulas are used in computing depreciation but only one is used to any extent
in computing depletion.
d. The cost of the asset is the starting point from which computation of the amount of the
periodic charge is made to operations for depreciation, but the fair value reassessed
each year as the starting point for the periodic charge for depletion.
55.
Dividends representing a return of capital to shareholders are not uncommon among
companies which
a. use accelerated depreciation methods.
b. use straight-line depreciation methods.
c. recognize both functional and physical factors in depreciation.
d. None of these answer choices are correct.
56.
Depletion expense
a. is usually part of cost of goods sold.
b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from the depletion base.
d. excludes restoration costs from the depletion base.
57.
The most common method of recording depletion for accounting purposes is the
a. percentage depletion method.
b. diminishing-charge method.
c. straight-line method.
d. units-of-production method.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 8
S
Test Bank for Intermediate Accounting, IFRS Edition, 2e
58.
Of the following costs related to the development of mineral resources, which one is not a
part of depletion cost?
a. Acquisition cost of the mineral resource deposit
b. Exploration costs
c. Tangible equipment costs associated with machinery used to extract the mineral
resource
d. Intangible development costs such as drilling costs, tunnels, and shafts
59.
Under IFRS, how is the account revaluation surplus reported?
a. As “other revenues and expenses” on the income statement.
b. As part of other comprehensive income which can be reported presented in separate
statement, combined with income statement, or in changes in stockholders’ equity
statement.
c. It is included with Reserves in the stockholders’ equity section of the Statement of
Financial Position.
d. The account is not reported in the financial statements.
60.
IFRS and U.S. GAAP differ with regard to accounting for impairment on property, plant
and equipment in all of the following ways except
a. U.S. GAAP requires the recoverability test to determine whether impairment has
occurred but IFRS does not.
b. Under IFRS, impairment testing is performed at each reporting date. Under U.S.
GAAP impairment testing is done only when management has reason to believe that
the asset may be impaired.
c. IFRS but not U.S. GAAP, allows for recovery of impairment in assets held for use.
d. U.S. GAAP requires assets held for sale or disposal to be reported at the lower-of-cost
or net realizable value. IFRS requires that these assets be reported at the higher of
fair value less cost to sell and value-in-use.
61.
The asset turnover is computed by dividing
a. net income by ending total assets.
b. net income by average total assets.
c. net sales by ending total assets.
d. net sales by average total assets.
62.
The return on total assets is computed by dividing
a. Net income by ending total assets.
b. Net sales by average total assets.
c. Net sales by ending total assets.
d. Net income by average total assets.
Multiple Choice Answers—Conceptual
Item
31.
32.
33.
34.
35.
Ans.
d
b
b
a
a
Item
36.
37.
38.
39.
40.
Ans.
d
d
d
a
a
Item
41.
42.
43.
44.
45.
Ans.
d
d
c
c
b
Item
46.
47.
48.
49.
50.
Ans.
b
b
c
b
b
Item
51.
52.
53.
54.
55.
Ans.
b
a
d
d
d
Item
56.
57.
58.
59.
60.
Ans.
Item
a
d
c
b
d
Solutions to those Multiple Choice questions for which the answer is “none of these.”
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
61.
62.
Ans.
d
d
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 9
MULTIPLE CHOICE—Computational
63.
Ferguson Company purchased a depreciable asset for $100,000. The estimated residual
value is $10,000, and the estimated useful life is 10 years. The straight-line method will be
used for depreciation. What is the depreciation base of this asset?
a. $9,000
b. $10,000
c. $90,000
d. $100,000
64.
Hamilton Company purchased a depreciable asset for $200,000. The estimated residual
value is $20,000, and the estimated useful life is 10 years. The straight-line method will be
used for depreciation. What is the depreciation base of this asset?
a. $18,000
b. $20,000
c. $180,000
d. $200,000
65.
Solar Products purchased a computer for $13,000 on July 1, 2015. The company intends
to depreciate it over 4 years using the double-declining balance method. Residual value is
$1,000. Depreciation for 2015 is
a. $6,500
b. $3,250
c. $4,875
d. $3,000
66.
Solar Products purchased a computer for $13,000 on July 1, 2015. The company intends
to depreciate it over 4 years using the double-declining balance method. Residual value is
$1,000. Depreciation for 2016 is
a. $6,500
b. $3,250
c. $4,875
d. $3,000
67.
Gardner Corporation purchased a truck at the beginning of 2015 for $75,000. The truck is
estimated to have a residual value of $3,000 and a useful life of 120,000 miles. It was
driven 18,000 miles in 2015 and 32,000 miles in 2016. What is the depreciation expense
for 2015?
a. $11,250
b. $10,800
c. $18,000
d. $30,000
68.
Gardner Corporation purchased a truck at the beginning of 2015 for $75,000. The truck is
estimated to have a residual value of $3,000 and a useful life of 120,000 miles. It was
driven 18,000 miles in 2015 and 32,000 miles in 2016. What is the depreciation expense
for 2016?
a. $20,000
b. $53,333
c. $19,200
d. $32,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 10 Test Bank for Intermediate Accounting, IFRS Edition, 2e
69.
Kinder Company purchased a depreciable asset for $200,000. The estimated residual
value is $10,000, and the estimated useful life is 10,000 hours. Kinder used the asset for
1,100 hours in the current year. The activity method will be used for depreciation. What is
the depreciation expense on this asset?
a. $19,000
b. $20,900
c. $22,000
d. $190,000
70.
Jamar Company purchased a depreciable asset for $150,000. The estimated residual
value is $10,000, and the estimated useful life is 8 years. The double-declining balance
method will be used for depreciation. What is the depreciation expense for the second
year on this asset?
a. $17,500
b. $26,250
c. $28,125
d. $37,500
71.
Engels Company purchased a depreciable asset for $600,000. The estimated residual
value is $30,000, and the estimated useful life is 10,000 hours. Engels used the asset for
1,100 hours in the current year. The activity method will be used for depreciation. What is
the depreciation expense on this asset?
a. $57,000
b. $62,700
c. $66,000
d. $570,000
72.
Hart Company purchased a depreciable asset for $360,000. The estimated residual value
is $24,000, and the estimated useful life is 8 years. The double-declining balance method
will be used for depreciation. What is the depreciation expense for the second year on this
asset?
a. $42,000
b. $63,000
c. $67,500
d. $90,000
73.
On July 1, 2014, Gonzalez Corporation purchased factory equipment for $150,000.
Residual value was estimated to be $4,000. The equipment will be depreciated over ten
years using the double-declining balance method. Counting the year of acquisition as onehalf year, Gonzalez should record depreciation expense for 2015 on this equipment of
a. $30,000.
b. $27,000.
c. $26,280.
d. $24,000.
74.
Krause Corporation purchased factory equipment that was installed and put into service
January 2, 2014, at a total cost of $60,000. Residual value was estimated at $4,000. The
equipment is being depreciated over four years using the double-declining balance method.
For the year 2015, Krause should record depreciation expense on this equipment of
a. $14,000.
b. $15,000.
c. $28,000.
d. $30,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 11
75.
On April 13, 2014, Neill Co. purchased machinery for $120,000. Residual value was
estimated to be $5,000. The machinery will be depreciated over ten years using the
double-declining balance method. If depreciation is computed on the basis of the nearest
full month, Neill should record depreciation expense for 2015 on this machinery of
a. $20,800.
b. $20,400.
c. $20,550.
d. $20,933.
76.
Matile Co. purchased machinery that was installed and ready for use on January 3, 2014,
at a total cost of $69,000. Residual value was estimated at $9,000. The machinery will be
depreciated over five years using the double-declining balance method. For the year
2015, Matile should record depreciation expense on this machinery of
a. $14,400.
b. $16,560.
c. $18,000.
d. $27,600.
77.
A plant asset has a cost of $24,000 and a residual value of $6,000. The asset has a threeyear life. If depreciation in the third year amounted to $3,000, which depreciation method
was used?
a. Straight-line
b. Declining-balance
c. Sum-of-the-years'-digits
d. Cannot tell from information given
78.
On January 1, 2014, Graham Company purchased a new machine for $2,100,000. The
new machine has an estimated useful life of nine years and the residual value was
estimated to be $75,000. Depreciation was computed on the sum-of-the-years'-digits
method. What amount should be shown in Graham's balance sheet at December 31,
2015, net of accumulated depreciation, for this machine?
a. $1,695,000
b. $1,335,000
c. $1,306,666
d. $1,244,250
79.
On January 1, 2008, Forbes Company purchased equipment at a cost of $50,000. The
equipment was estimated to have a residual value of $5,000 and it is being depreciated
over eight years under the sum-of-the-years'-digits method. What should be the charge for
depreciation of this equipment for the year ended December 31, 2015?
a. $1,250
b. $1,389
c. $2,500
d. $5,625
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 12 Test Bank for Intermediate Accounting, IFRS Edition, 2e
80.
On September 19, 2014, McCoy Co. purchased machinery for $190,000. Residual value
was estimated to be $10,000. The machinery will be depreciated over eight years using the
sum-of-the-years'-digits method. If depreciation is computed on the basis of the nearest full
month, McCoy should record depreciation expense for 2015 on this machinery of
a. $40,903.
b. $38,845.
c. $38,750.
d. $35,000.
81.
On January 3, 2013, Munoz Co. purchased machinery. The machinery has an estimated
useful life of eight years and an estimated residual value of $30,000. The depreciation
applicable to this machinery was $65,000 for 2015, computed by the sum-of-the-years'digits method. The acquisition cost of the machinery was
a. $360,000.
b. $390,000.
c. $420,000.
d. $468,000.
82.
On January 2, 2012, Stacy Company acquired equipment to be used in its manufacturing
operations. The equipment has an estimated useful life of 10 years and an estimated
residual value of $15,000. The depreciation applicable to this equipment was $70,000 for
2015, computed under the sum-of-the-years'-digits method. What was the acquisition cost
of the equipment?
a. $535,000
b. $565,000
c. $550,000
d. $541,667
83.
Orton Corporation, which has a calendar year accounting period, purchased a new
machine for $40,000 on April 1, 2010. At that time Orton expected to use the machine for
nine years and then sell it for $4,000. The machine was sold for $22,000 on Sept. 30,
2015. Assuming straight-line depreciation, no depreciation in the year of acquisition, and a
full year of depreciation in the year of retirement, the gain to be recognized at the time of
sale would be
a. $4,000.
b. $3,000.
c. $2,000.
d. $0.
84.
On January 1, 2015, the Accumulated Depreciation—Machinery account of a particular
company showed a balance of $370,000. At the end of 2015, after the adjusting entries
were posted, it showed a balance of $395,000. During 2015, one of the machines which
cost $125,000 was sold for $60,500 cash. This resulted in a loss of $4,000. Assuming that
no other assets were disposed of during the year, how much was depreciation expense
for 2015?
a. $85,500
b. $93,500
c. $25,000
d. $60,500
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 13
85.
During 2015, Noller Co. sold equipment that had cost $98,000 for $58,800. This resulted
in a gain of $4,300. The balance in Accumulated Depreciation—Equipment was $325,000
on January 1, 2015, and $310,000 on December 31. No other equipment was disposed of
during 2015. Depreciation expense for 2015 was
a. $15,000.
b. $19,300.
c. $28,500.
d. $58,500.
86.
Lloyd Company purchased a depreciable asset for £1,360,000. The estimated salvage
value is £360,000, and the estimated useful life is 8 years. The double-declining balance
method will be used for depreciation. What is the depreciation expense for the second
year on this asset?
a. £125,000
b. £170,000
c. £187,000
d. £255,000
87.
Kleinschmidt Company purchased a depreciable asset for €2,000,000. The estimated
salvage value is €150,000, and the estimated useful life is 400,000 hours. Kleinschmidt
used the asset for 35,000 hours in the current year. The activity method will be used for
depreciation. What is the depreciation expense on this asset?
a. €160,870
b. €161,875
c. €175,000
d. €350,000
88.
On January 1, 2009, Fleming Company purchased equipment at a cost of CHF650,000.
The equipment was estimated to have a salvage value of CHF55,000 and it is being
depreciated over seven years under the sum-of-the-year’s-digits method. What should be
the charge for the depreciation of this equipment for the year ended December 31, 2015?
a. CHF21,250
b. CHF23,214.
c. CHF85,000
d. CHF148,750
89.
Stevenson Company purchased a depreciable asset for $250,000 on April 1, 2012. The
estimated residual value is $25,000, and the estimated useful life is 5 years. The straightline method is used for depreciation. What is the balance in accumulated depreciation on
May 1, 2015 when the asset is sold?
a. $90,000
b. $105,000
c. $123,750
d. $138,750
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 14 Test Bank for Intermediate Accounting, IFRS Edition, 2e
90.
Williamson Corporation purchased a depreciable asset for $300,000 on January 1, 2012.
The estimated residual value is $30,000, and the estimated useful life is 9 years. The
straight-line method is used for depreciation. In 2015, Williamson changed its estimates to
a total useful life of 5 years with a salvage value of $50,000. What is 2015 depreciation
expense?
a. $30,000
b. $50,000
c. $80,000
d. $90,000
91.
Rollins Company purchased a depreciable asset for $300,000 on April 1, 2012. The
estimated residual value is $30,000, and the estimated total useful life is 5 years. The
straight-line method is used for depreciation. What is the balance in accumulated
depreciation on May 1, 2015 when the asset is sold?
a. $118,000
b. $126,000
c. $148,500
d. $166,500
92.
Fanestil Corporation purchased a depreciable asset for $420,000 on January 1, 2012. The
estimated residual value is $42,000, and the estimated total useful life is 9 years. The
straight-line method is used for depreciation. In 2015, Fanestill changed its estimates to a
total useful life of 5 years with a residual value of $70,000. What is 2015 depreciation
expense?
a. $42,000
b. $70,000
c. $112,000
d. $126,000
93.
Archer Company purchased equipment in January of 2005 for $90,000. The equipment
was being depreciated on the straight-line method over an estimated useful life of 20
years, with no residual value. At the beginning of 2015, when the equipment had been in
use for 10 years, the company paid $15,000 to overhaul the equipment. As a result of this
improvement, the company estimated that the useful life of the equipment would be
extended an additional 5 years. What should be the depreciation expense recorded for
this equipment in 2015?
a. $3,000
b. $4,000
c. $4,500
d. $5,500
94.
Marsh Corporation purchased a machine on July 1, 2012, for $750,000. The machine was
estimated to have a useful life of 10 years with an estimated residual value of $42,000.
During 2015, it became apparent that the machine would become uneconomical after
December 31, 2019, and that the machine would have no scrap value. Accumulated
depreciation on this machine as of December 31, 2014, was $177,000. What should be
the charge for depreciation in 2015?
a. $106,200
b. $114,600
c. $123,000
d. $143,250
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 15
95.
Rivera Company purchased a tooling machine on January 3, 2008 for $500,000. The
machine was being depreciated on the straight-line method over an estimated useful life
of 10 years, with no residual value. At the beginning of 2015, the company paid $125,000
to overhaul the machine. As a result of this improvement, the company estimated that the
useful life of the machine would be extended an additional 5 years (15 years total). What
should be the depreciation expense recorded for the machine in 2015?
a. $34,375
b. $41,667
c. $50,000
d. $55,000
96.
Gates Co. purchased machinery on January 2, 2009, for $440,000. The straight-line
method is used and useful life is estimated to be 10 years, with a $40,000 residual value.
At the beginning of 2015 Gates spent $96,000 to overhaul the machinery. After the
overhaul, Gates estimated that the useful life would be extended 4 years (14 years total),
and the residual value would be $20,000. The depreciation expense for 2015 should be
a. $28,250.
b. $34,500.
c. $40,000.
d. $37,000.
97.
Holcomb Corporation owns machinery with a book value of $190,000. The machinery’s
fair value less costs to sell is $175,000, and its value-in-use is $200,000. Holcomb should
recognize a loss on impairment of
a. $ -0-.
b. $10,000.
c. $15,000.
d. $25,000.
98.
Kohlman Corporation owns machinery with a book value of $190,000. The machinery has
a fair value less costs to sell of $175,000, and its value-in-use is $170,000. Kohlman
should recognize a loss on impairment of
a. $ -0-.
b. $5,000.
c. $15,000.
d. $20,000.
99.
Technique Co. has equipment with a carrying amount of $800,000. The equipment’s fair
value less costs to sell is $780,000, and its value-in-use is $815,000. The equipment is
expected to be used in operations in the future. What amount (if any) should Technique
report as an impairment to its equipment?
a. No impairment should be reported.
b. $20,000
c. $15,000
d. $35,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 16 Test Bank for Intermediate Accounting, IFRS Edition, 2e
Use the following information for questions 100 and 101.
On January 1, 2015, Fredrichs Inc. purchased equipment with a cost of €3,060,000, a useful life
of 12 years and no salvage value. The company uses straight-line depreciation. At December 31,
2015, the company determines that impairment indicators are present. The fair value less cost to
sell the asset is estimated to be €2,600,000. The asset’s value-in-use is estimated to be
€2,365,000. There is no change in the asset’s useful life or salvage value
100.
The 2015 income statement will report Loss on Impairment of
a. €0.
b. €205,000.
c. €440,000.
d. €460,000.
101.
The 2016 (second year) income statement will report depreciation expense for the
equipment of
a. €216,667.
b. €236,364.
c. €255,000.
d. €260,000.
102.
On January 1, 2015, W. Poon Inc. purchased equipment with a cost of HK$4,668,000 a
useful life of 12 years and no salvage value. The company uses straight-line depreciation.
At December 31, 2015, the company determines that impairment indicators are present.
The fair value less cost to sell the asset is estimated to be Hk$4,620,000. The asset’s
value-in-use is estimated to be HK$4,305,000. There is no change in the asset’s useful
life or salvage value. The 2015 income statement will report Loss on Impairment of
a. HK$0.
b. HK$26,000.
c. HK$48,000.
d. HK$341,000.
103.
On January 2, 2015, Q. Tong Inc. purchased equipment with a cost of HK$10,440,000, a
useful life of 10 years and no salvage value. The Company uses straight-line depreciation.
At December 31, 2015 and December 31, 2016, the company determines that impairment
indicators are present. The following information is available for impairment testing at
each year end:
Fair value less cost to sell
Value-in-use
12/31/2015
HK$9,315,000
HK$9,350,000
12/31/2016
Hk$8,350,000
HK$8,315,000
There is no change in the asset’s useful life or salvage value. The 2016 income statement
will report
a. Recovery of Impairment Loss of HK$3,889.
b. Impairment Loss of HK$10,000.
c. Recovery of Impairment Loss of HK$38,889.
d. Impairment Loss of HK$1,000,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
104.
11 - 17
On January 2, 2015, Q. Tong Inc. purchased equipment with a cost of HK$10,440,000, a
useful life of 10 years and no salvage value. The company uses straight-line depreciation.
At December 31, 2015 and December 31, 2016, the company determines that impairment
indicators are present. The following information is available for impairment testing at
each year end:
Fair value less costs to sell
Value-in-use
12/31/2015
HK$9,315,000
HK$9,350,000
12/31/2016
Hk$8,850,000
HK$8,915,000
There is no change in the asset’s useful life or salvage value. The 2016 income statement
will report
a. no Impairment Loss or Recovery of Impairment Loss.
b. Impairment Loss of HK$435,000.
c. Recovery of Impairment Loss of HK$40,889.
d. Recovery of Impairment Loss of HK$603,889.
Use the following information for questions 105 and 106.
On January 1, 2015, Edmondton Inc. purchased equipment with a cost of €4,500,000, a useful
life of 12 years and no salvage value. The Company uses straight-line depreciation. At December
31, 2015, the company determines that impairment indicators are present. The fair value less
cost to sell the asset is estimated to be €3,850,000. The asset’s value-in-use is estimated to be
€3,500,000. There is no change in the asset’s useful life or salvage value.
105.
The 2015 income statement will report Loss on Impairment of
a. €0.
b. €275,000.
c. €625,000.
d. €650,000.
106.
The 2016 (second year) income statement will report depreciation expense for the
equipment of
a. €320,833.
b. €350,000.
c. €375,000.
d. €385,000.
107.
Percy Resources Company acquired a tract of land containing an extractable mineral
resource. Percy is required by its purchase contract to restore the land to a condition
suitable for recreational use after it has extracted the mineral resource. Geological
surveys estimate that the recoverable reserves will be 2,000,000 tons, and that the land
will have a value of $1,200,000 after restoration. Relevant cost information follows:
Land
Estimated restoration costs
$9,000,000
1,800,000
If Percy maintains no inventories of extracted material, what should be the charge to
depletion expense per ton of extracted material?
a. $3.90
b. $4.50
c. $4.80
d. $5.40
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 18 Test Bank for Intermediate Accounting, IFRS Edition, 2e
108.
In January, 2015, Yoder Corporation purchased a mineral mine for $3,400,000 with
removable ore estimated by geological surveys at 2,000,000 tons. The property has an
estimated value of $200,000 after the ore has been extracted. The company incurred
$1,000,000 of development costs preparing the mine for production. During 2015, 500,000
tons were removed and 400,000 tons were sold. What is the amount of depletion that
Yoder should expense for 2015?
a. $640,000
b. $800,000
c. $840,000
d. $1,120,000
109.
During 2015, Eldred Corporation acquired a mineral mine for $1,500,000 of which
$200,000 was ascribed to land value after the mineral has been removed. Geological
surveys have indicated that 10 million units of the mineral could be extracted. During
2015, 1,500,000 units were extracted and 1,200,000 units were sold. What is the amount
of depletion expensed for 2015?
a. $130,000.
b. $156,000.
c. $180,000.
d. $195,000.
110.
In March, 2015, Maley Mines Co. purchased a coal mine for $6,000,000. Removable coal
is estimated at 1,500,000 tons. Maley is required to restore the land at an estimated cost
of $720,000, and the land should have a value of $630,000. The company incurred
$1,500,000 of development costs preparing the mine for production. During 2015, 450,000
tons were removed and 300,000 tons were sold. The total amount of depletion that Maley
should record for 2015 is
a. $1,374,000.
b. $1,518,000.
c. $2,061,000.
d. $2,277,000.
111.
In 2007, Horton Company purchased a tract of land as a possible future plant site. In
January, 2015, valuable sulphur deposits were discovered on adjoining property and
Horton Company immediately began explorations on its property. In December, 2015,
after incurring $400,000 in exploration costs, which were accumulated in an expense
account, Horton discovered sulphur deposits appraised at $2,250,000 more than the value
of the land. To record the discovery of the deposits, Horton should
a. make no entry.
b. debit $400,000 to an asset account.
c. debit $2,250,000 to an asset account.
d. debit $2,650,000 to an asset account.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 19
112.
Balcom Corporation acquires a coal mine at a cost of $500,000. Intangible development
costs total $120,000. After extraction has occurred, Balcom must restore the property
(estimated fair value of the obligation is $60,000), after which it can be sold for $170,000.
Balcom estimates that 5,000 tons of coal can be extracted. What is the amount of
depletion per ton?
a. $102
b. $170
c. $100
d. $124
113.
Balcom Corporation acquires a coal mine at a cost of $500,000. Intangible development
costs total $120,000. After extraction has occurred, Balcom must restore the property
(estimated fair value of the obligation is $60,000), after which it can be sold for $170,000.
Balcom estimates that 5,000 tons of coal can be extracted. If 900 tons are extracted the
first year, which of the following would be included in the journal entry to record depletion?
a. Debit to Accumulated Depletion for $91,800
b. Debit to Inventory for $91,800
c. Credit to Inventory for $90,000
d. Credit to Accumulated Depletion for $153,000
Use the following information for questions 114 and 115.
On January 1, 2015, Miles Inc. purchased equipment with a cost of €3,570,000, a useful life of
15 years and no salvage value. The company uses straight-line depreciation. At December 31,
2015, an independent appraiser determines that the fair value of the equipment is €3,500,000.
Miles prepares financial statements using IFRS and elects to revalue the asset.
114.
In the second step of the 2-step revaluation process at the December 31, 2015, the
journal entry to revalue the equipment will include a
a. debit to Depreciation Expense for €357,000.
b. credit to Equipment for €70,000.
c. credit to Accumulated Depreciation for €238,000.
d. credit to Revaluation Surplus for €70,000.
115.
The 2016 (second year) income statement will report depreciation expense for the
equipment of
a. €250,000.
b. €238,000.
c. €233,333.
d. cannot be determined from the information given.
Use the following information for questions 116 and 117.
On January 1, 2015, Fredo Inc. purchased equipment with a cost of €2,550,000, a useful life of
15 years and no salvage value. The company uses straight-line depreciation. At December 31,
2015, an independent appraiser determines that the fair value of the equipment is €2,500,000
Fredo prepares financial statements using IFRS and elects to revalue the asset.
116.
In the second step of the 2-step revaluation process at December 31, 2015, the journal
entry to revalue the equipment will include a
a. debit to Depreciation Expense for €255,000.
b. credit to Equipment for €50,000.
c. credit to Accumulated Depreciation for €170,000.
d. credit to Revaluation Surplus for €150,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 20 Test Bank for Intermediate Accounting, IFRS Edition, 2e
117.
The 2016 (second year) income statement will report depreciation expense for the
equipment of
a. €178,571.
b. €170,000.
c. €166,667.
d. cannot be determined from the information given.
Use the following information for questions 118-121.
Simpson Company applies revaluation accounting to plant assets with a carrying value of
$800,000, a useful life of 4 years, and no salvage value. Depreciation is calculated on the
straight-line basis. At the end of year 1, independent appraisers determine that the asset has a
fair value of $750,000.
118.
The journal entry to record depreciation for year one will include a
a. debit to Accumulated Depreciation for $200,000.
b. debit to Depreciation Expense for $50,000.
c. credit to Accumulated Depreciation for $50,000.
d. debit to Depreciation Expense for $200,000.
119.
The journal entry to adjust the plant assets to fair value and record revaluation surplus in
year one will include a
a. debit to Accumulated Depreciation for $50,000.
b. credit to Depreciation Expense for $150,000.
c. credit to Plant Assets for $150,000.
d. credit to Revaluation Surplus for $150,000.
120.
The financial statements for year one will include the following information
a. Accumulated depreciation $200,000.
b. Depreciation expense $50,000.
c. Plant assets $750,000.
d. Revaluation surplus $50,000.
121.
The entry to record depreciation for this same asset in year two will include a
a. debit to Accumulated Depreciation for $200,000.
b. debit to Depreciation Expense for $250,000.
c. credit to Accumulated Depreciation for $150,000.
d. debit to Depreciation Expense for $200,000.
122.
In 2015, MegaStores reported net income of $3.8 billion, net sales of $109.8 billion, and
average total assets of $61.0 billion. What is MegaStores' asset turnover?
a. .0.56 times
b. .0.06 times.
c. 1.80 times.
d. 16.05 times.
123.
In 2015, MegaStores reported net income of $3.8 billion, net sales of $109.8 billion, and
average total assets of $61.0 billion. What is MegaStores' return on total assets?
a. 6.2%
b. 16.1%
c. 55.6%
d. 180%
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 21
Use the following information for questions 124 and 125:
For 2015, Hoyle Company reports beginning of the year total assets of $900,000, end of the year
total assets of $1,100,000, net sales of $1,250,000, and net income of $250,000.
124.
Hoyle’s 2015 asset turnover is
a. .23 times.
b. .25 times.
c. 1.14 times.
d. 1.25 times.
125.
The rate of return on assets for Hoyle in 2015 is
a. 20.0%.
b. 22.7%.
c. 25.0%.
d. 27.8%.
126.
Markowitz Company reported the following data:
Sales
Net Income
Assets at year end
Liabilities at year end
2014
$2,000,000
300,000
1,800,000
1,100,000
2015
$2,600,000
400,000
2,500,000
1,500,000
What is Markowitz’s asset turnover for 2015?
a. 1.04
b. 1.07
c. 1.21
d. 1.44
127.
Froelich Company reported the following data:
Sales
Net Income
Assets at year end
Liabilities at year end
2014
$2,000,000
300,000
1,800,000
1,100,000
2015
$2,800,000
400,000
2,500,000
1,500,000
What is Froelich’s asset turnover for 2015?
a. 1.12
b. 1.15
c. 1.30
d. 1.56
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 22 Test Bank for Intermediate Accounting, IFRS Edition, 2e
Multiple Choice Answers—Computational
Item
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
Ans.
c
c
b
c
b
c
b
c
b
c
Item
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
Ans.
b
b
b
b
c
b
a
c
c
b
Item
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
c
a
c
d
b
a
d
c
d
c
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
b
b
a
b
a
c
a
b
b
a
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
c
c
b
b
c
c
b
d
a
a
113.
114.
115.
116.
117.
118.
119.
120.
121.
122.
b
b
a
b
a
d
d
c
b
c
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
Item
123.
124.
125.
126.
127.
Ans.
a
d
c
c
c
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 23
MULTIPLE CHOICE—CPA Adapted
128.
Pike Co. purchased a machine on July 1, 2015, for $400,000. The machine has an
estimated useful life of five years and a residual value of $80,000. The machine is being
depreciated from the date of acquisition by the 150% declining-balance method. For the
year ended December 31, 2015, Pike should record depreciation expense on this
machine of
a. $120,000.
b. $80,000.
c. $60,000.
d. $48,000.
129.
A machine with a five-year estimated useful life and an estimated 10% residual value was
acquired on January 1, 2013. The depreciation expense for 2015 using the doubledeclining balance method would be original cost multiplied by
a. 90% × 40% × 40%.
b. 60% × 60% × 40%.
c. 90% × 60% × 40%.
d. 40% × 40%.
130.
On April 1, 2013, Verlin Co. purchased new machinery for $240,000. The machinery has
an estimated useful life of five years, and depreciation is computed by the sum-of-theyears'-digits method. The accumulated depreciation on this machinery at March 31, 2015,
should be
a. $160,000.
b. $144,000.
c. $96,000.
d. $80,000.
131.
Hahn Co. takes a full year's depreciation expense in the year of an asset's acquisition and
no depreciation expense in the year of disposition. Data relating to one of Hahn's
depreciable assets at December 31, 2015 are as follows:
Acquisition year
Cost
Residual value
Accumulated depreciation
Estimated useful life
2013
$140,000
20,000
96,000
5 years
Using the same depreciation method as used in 2013, 2014, and 2015, how much
depreciation expense should Hahn record in 2016 for this asset?
a. $16,000
b. $24,000
c. $28,000
d. $32,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 24 Test Bank for Intermediate Accounting, IFRS Edition, 2e
132.
A depreciable asset has an estimated 15% residual value. At the end of its estimated
useful life, the accumulated depreciation would equal the original cost of the asset under
which of the following depreciation methods?
a.
b.
c.
d.
133.
Straight-line
Method
Yes
Yes
No
No
Production or
Use Method
No
Yes
No
Yes
A plant asset with a five-year estimated useful life and no residual value is sold at the end
of the second year of its useful life. How would using the sum-of-the-years'-digits method
of depreciation instead of the double-declining balance method of depreciation affect a
gain or loss on the sale of the plant asset?
a.
b.
c.
d.
135.
Productive Output
No
Yes
Yes
No
Net income is understated if, in the first year, estimated residual value is excluded from
the depreciation computation when using the
a.
b.
c.
d.
134.
Straight-line
Yes
Yes
No
No
Gain
Decrease
Decrease
Increase
Increase
Loss
Decrease
Increase
Decrease
Increase
Giger Company acquired a tract of land containing an extractable mineral resource. Giger
is required by the purchase contract to restore the land to a condition suitable for
recreational use after it has extracted the mineral resource. Geological surveys estimate
that the recoverable reserves will be 5,000,000 tons, and that the land will have a value of
$1,000,000 after restoration. Relevant cost information follows:
Land
Estimated restoration costs
$7,000,000
1,500,000
If Giger maintains no inventories of extracted material, what should be the charge to
depletion expense per ton of extracted material?
a. $1.70
b. $1.50
c. $1.40
d. $1.20
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
136.
11 - 25
In January 2015, Fehr Mining Corporation purchased a mineral mine for $4,200,000 with
removable ore estimated by geological surveys at 2,500,000 tons. The property has an
estimated value of $400,000 after the ore has been extracted. Fehr incurred $1,150,000 of
development costs preparing the property for the extraction of ore. During 2015, 340,000
tons were removed and 300,000 tons were sold. For the year ended December 31, 2015,
Fehr should include what amount of depletion in its cost of goods sold?
a. $516,800
b. $456,000
c. $594,000
d. $673,200
Multiple Choice Answers—CPA Adapted
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
128.
129.
c
b
130.
131.
b
a
132.
133.
d
b
134.
135.
b
b
136.
c
DERIVATIONS — Computational
No. Answer
Derivation
63.
c
$100,000 – $10,000 = $90,000.
64.
c
$200,000 – $20,000 = $180,000.
65.
b
($13,000 – 0) × .50 × 6/12 = $3,250.
66.
c
($13,000 – 0) × .50 × 6/12 = $3,250;
($13,000 – $3,250) × .50 = $4,875.
67.
b
($75,000 – $3,000) ÷ 120,000 = $.60;
$.60 × 18,000 = $10,800.
68.
c
($75,000 – $3,000) ÷ 120,000 = $.60;
$.60 × 32,000 = $19,200.
69.
b
[$200,000 – $10,000) ÷ 10,000] × 1,100 = $20,900.
70.
c
$150,000 × [(1 ÷ 8) × 2] = $37,500
($150,000 – $37,500) × [(1 ÷ 8) × 2] = $28,125.
71.
b
[($600,000 – $30,000) ÷ 10,000] × 1,100 = $62,700.
72.
c
$360,000 × [(1 ÷ 8) × 2] = $90,000
($360,000 – $90,000) × [(1 ÷ 8) × 2] = $67,500.
73.
b
[$150,000 – ($150,000 × 0.1)] × 0.2 = $27,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 26 Test Bank for Intermediate Accounting, IFRS Edition, 2e
DERIVATIONS — Computational (cont.)
No. Answer
Derivation
74.
b
[$60,000 × (1 – 0.5)] × 0.5 = $15,000.
75.
b
[$120,000 – ($120,000 × 0.2 × 0.75)] × 0.2 = $20,400.
76.
b
[$69,000 – ($69,000 × 0.4)] × 0.4 = $16,560.
77.
c
($24,000 – $6,000) × 1/6 = $3,000.
78.
b
$2,100,000 – [($2,100,000 – $75,000) × (9/45 + 8/45)] = $1,335,000.
79.
a
($50,000 – $5,000) × 1/36 = $1,250.
80.
c
($180,000 × 8/36 × 9/12) + ($180,000 × 7/36 × 3/12) = $38,750.
81.
c
(AC – $30,000) × 6/36 = $65,000
AC = $420,000.
82.
b
(AC – $15,000) × 7/55 = $70,000
AC = $565,000.
83.
c
$40,000 – [($40,000 – $4,000) ÷ 9 × 5] = $20,000 (BV)
$22,000 – $20,000 = $2,000 (gain).
84.
a
($395,000 – $370,000) + [$125,000 – ($60,500 + $4,000)] = $85,500.
85.
c
$310,000 – {$325,000 – [$98,000 – ($58,800 – $4,300)]} = $28,500.
86.
d
(1/8 = .125 X 2 = .25); (.25 X £1,360,000 = £340,000);[.25 X(£1,360,000 £340,000) = £255,000].
87.
b
(€2,000,000 - €150,000)/ 400,000 = €4.625/ hour X 35,000 hours = €161,875.
88.
a
1/28 X (CHF650,000 – CHF55,000) = CHF21,250.
89.
d
[($250,000 – $25,000) ÷ 5] × 3 1/12 = $138,750.
90.
c
$300,000 – [($300,000 – $30,000) × 3/9] = $210,000
($210,000 – $50,000) ÷ (5 – 3) = $80,000.
91.
d
[($300,000 – $30,000) ÷ 5] × 3 1/12 = $166,500.
92.
c
$420,000 – [($420,000 – $42,000) x 3/9] = $294,000
($294,000 – $70,000) ÷ (5 – 3) = $112,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 27
DERIVATIONS — Computational (cont.)
No. Answer
Derivation
93.
b
[($90,000 – 0)  20] × 10 = $45,000
[($90,000 – $45,000) + $15,000] ÷ [(20 – 10)+5] = $4,000.
94.
b
($750,000 – $177,000) ÷ 5 = $114,600.
95.
a
[($500,000 ÷ 10) × 7] – $125,000 = $225,000 new (AD)
$500,000 – $225,000 = $275,000; $275,000 ÷ 8 = $34,375 per year.
96.
b
[($400,000  10) × 6] – $96,000 = $144,000 new (AD)
$440,000 – $144,000 = $296,000 (BV)
($296,000 – $20,000) ÷ 8 = $34,500 per year.
97.
a
$200,000 > $190,000; No loss recognized.
98.
c
$170,000 < $190,000; $175,000 – $190,000 = ($15,000).
99.
a
$815,000 > $800,000; No impairment.
100.
b
€3,060,000/12 = €255,000; €3,060,000 – €255,000 = €2,805,000; €2,805,000 €2,600,000 = €205,000.
101.
b
€2,600,000/11 = $236,364.
102.
a
CV < recoverable amount so no impairment has occurred.
103.
c
2015: [HK$10,440,000 – (HK$10,440,000/10)] = HK$9,396,000; HK$9,396,000
– HK$9,350,000 = HK$46,000 (Loss)
2016: HK$9,350,000/ 9 = HK$1,038,889; HK$9,350,000 – HK$1,038,889 =
HK$8,311,111; HK$8,350,000 – HK$8,311,111 = HK$38,889 (Recovery).
104.
c
2015: [HK$10,440,000 – (HK$10,440,000/10)] = HK$9,396,000; HK$9,396,000
– HK$9,350,000 = HK$46,000 (Loss)
2016:HK$9,350,000/ 9 = HK$1,038,889; HK$9,350,000 – HK$1,038,889 =
HK$8,311,111; HK$8,915,000 – HK$8,311,111 = HK$603,889 but recovery is
limited to carrying amount if impairment had never occurred: HK$8,352,000 –
HK$8,311,111 = HK$40,889.
105.
b
€4,500,000/12 = €375,000; €4,500,000 – €375,000 = €4,125,000; €4,125,000 –
€3,850,000 = €275,000.
106.
b
€3,850,000/11 = €350,000.
107.
c
($9,000,000 + $1,800,000 – $1,200,000) ÷ 2,000,000 = $4.80.
108.
c
[($3,400,000 – $200,000 + $1,000,000) ÷ 2,000,000] × 400,000 = $840,000.
109.
b
[($1,500,000 – $200,000) ÷ 10,000,000] × 1,200,000 = $156,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 28 Test Bank for Intermediate Accounting, IFRS Edition, 2e
110.
d
[($6,000,000 + $720,000 – $630,000 + $1,500,000) ÷ 1,500,000] × 450,000
= $2,277,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
DERIVATIONS — Computational (cont.)
No. Answer
Derivation
111.
a
Discovery value is generally not recognized.
112.
a
($500,000 + $120,000 + $60,000 – $170,000) ÷ 5,000 = $102.
113.
b
$500,000 + $120,000 + $60,000 – $170,000) ÷ 5,000 = $102;
900 × $102 = $91,800 dr. to Inventory.
114.
b
€3,570,000 – €3,500,000 = €70,000.
115.
a
€3,500,000 ÷ 14 = €250,000.
116.
b
€2,550,000 – €2,500,000 = €50,000.
117.
a
€2,500,000/14 = €178,571.
118.
d
($800,000 – 0) ÷ 4 = $200,000 Depr. Exp.
119.
d
$750,000 – ($800,000 – $200,000) = $150,000 Reval. Surplus
120.
c
121.
b
$750,000 ÷ 3 = $250,000.
122.
c
$109.8 ÷ $61 = 1.8 times.
123.
a
$3.8 ÷ $61 = 6.2%
124.
d
$1,250,000 ÷ [($900,000 + $1,100,000) ÷ 2] = 1.25
125.
c
$250,000 ÷ [($900,000 + $1,100,000) ÷ 2] = 25%
126.
c
$2,600,000 ÷ [($1,800,000 + $2,500,000) ÷ 2] = 1.21
127.
c
$2,800,000 ÷ [($1,800,000 + $2,500,000) ÷ 2] = 1.30.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
11 - 29
lOMoARcPSD|19958401
11 - 30 Test Bank for Intermediate Accounting, IFRS Edition, 2e
DERIVATIONS — CPA Adapted
No. Answer
Derivation
128.
c
$400,000 × 0.3 × 0.5 = $60,000.
129.
b
Conceptual.
130.
b
$240,000 × (5/15 + 4/15) = $144,000.
131.
a
2/15 × ($140,000 – $20,000) = $16,000.
132.
d
Conceptual.
133.
b
Conceptual.
134.
b
Conceptual.
135.
b
($7,000,000 + $1,500,000 – $1,000,000) ÷ 5,000,000 = $1.50.
136.
c
[($4,200,000 – $400,000 + $1,150,000) ÷ 2,500,000] × 300,000 = $594,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 31
EXERCISES
Ex. 11-137—Definitions.
Provide clear, concise answers for the following.
1. Define depreciation.
2. Define depreciation accounting.
3. Does depreciation accounting provide funds? If not, what does provide funds? What does
depreciation accounting do related to funds?
Solution 11-137
1. Depreciation is the decline in service potentials or in future benefits of a plant asset due to
physical or economic factors.
2. Depreciation accounting is the systematic and rational allocation of the cost of plant assets to
the periods benefited from the use of the assets.
3. Depreciation accounting does not provide funds. Revenues provide funds. Depreciation
accounting retains funds by reducing income taxes and dividends.
Ex. 11-138—Depreciation methods.
Each of the statements appearing below is descriptive of one or more of the following
depreciation methods. In the spaces below, place the letter(s) belonging to the method(s) to
which the statement best applies.
a. Component
b. Declining-balance
c. Straight-line
d.
e.
Sum-of-the-years'-digits
Units-of-production
____ 1. The depreciation charged by this method decreases by the same amount each year.
____ 2. This method is used if each part of a plant asset is significant to the asset's total cost.
____ 3. These methods allocate larger shares of the cost of a plant asset to expense during
the years in which the greatest use is made of the asset.
____ 4. These methods always allocate larger shares of the cost of a plant asset to expense
during the earlier years of its life.
____ 5. Once the depreciable base, residual value, and life of a plant asset are determined,
the annual charges to operations under this method will be the same.
Solution 11-138
1. d
2. a
3. e
4. b, d
5. c
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 32 Test Bank for Intermediate Accounting, IFRS Edition, 2e
Ex. 11-139—Calculate depreciation.
A machine which cost $200,000 is acquired on October 1, 2015. Its estimated residual value is
$20,000 and its expected life is eight years.
Instructions
Calculate depreciation expense for 2015 and 2016 by each of the following methods, showing the
figures used.
(a) Double-declining balance
(b) Sum-of-the-years'-digits
Solution 11-139
(a) 2015: 25% × $200,000 × ¼
=
$12,500
2016: 25% × $187,500
=
$46,875
(b) 2015: 8/36 × $180,000 × ¼
=
$10,000
2016: 8/36 × $180,000 × ¾
7/36 × $180,000 × ¼
=
=
$30,000
8,750
$38,750
Ex. 11-140—Calculate depreciation.
A machine cost $500,000 on April 1, 2015. Its estimated residual value is $50,000 and its
expected life is eight years.
Instructions
Calculate the depreciation expense (to the nearest dollar) by each of the following methods,
showing the figures used.
(a) Straight-line for 2015
(b) Double-declining balance for 2016
(c) Sum-of-the-years'-digits for 2016
Solution 11-140
(a) 1/8 × $450,000 × ¾
=
$42,188
(b) 2016: 25% × $406,250
= $101,563
(c) 8/36 × $450,000 × ¼
7/36 × $450,000 × ¾
=
=
$25,000
65,625
$90,625
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 33
Ex. 11-141—Asset depreciation and disposition.
Answer each of the following questions.
1. A plant asset purchased for $150,000 has an estimated life of 10 years and a residual value
of $12,000. Depreciation for the second year of use, determined by the declining-balance
method at twice the straight-line rate is $_____________.
2. A plant asset purchased for $200,000 at the beginning of the year has an estimated life of 5
years and a residual value of $20,000. Depreciation for the second year, determined by the
sum-of-the-years'-digits method is $______________.
3. A plant asset with a cost of $216,000, estimated life of 5 years, and residual value of $36,000,
is depreciated by the straight-line method. This asset is sold for $160,000 at the end of the
second year of use. The gain or loss on the disposal (indicate by "G" or "L") is $___________.
Solution 11-141
1. $24,000
2. $48,000
3. $16,000 G
Ex. 11-142—Component Depreciation
Presented below are the components related to an office building that Lockard Company
purchased for €10,000,000 in January of 2015.
Component
Building structure
Building engineering
Building external works
Useful Life
60-year life
30-year life
30-year life
Value
5,400,000
2,400,000
900,000
Instructions
(a) Compute depreciation expense for 2015, assuming that Lockard uses component
depreciation and uses the straight-line method of depreciation.
(b) Assume that the building engineering was replaced in 20 years at a cost of €2,600,000.
Prepare the entry to record the replacement of the old component with the new
component.
Solution 11-142
(a) Component
Building structure
Building engineering
Building external works
Depreciation Expense
€5,400,000 ÷ 60 = € 90,000
2,400,000 ÷ 30 =
80,000
900,000 ÷ 30 =
30,000
€200,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
11 - 34 Test Bank for Intermediate Accounting, IFRS Edition, 2e
(b) Building Engineering........................................ 2,600,000
Accumulated Depreciation
(€2,400,000 X 20/30)....................................... 1,600,000
Loss on Disposal of Plant Assets....................
800,000
Building Engineering.............................
Cash......................................................
2,400,000
2,600,000
Ex. 11-143—Impairment
Presented below is information related to equipment owned by Marley Company at December 31,
2015.
Cost
Accumulated depreciation to date
Value-in-use
Fair value less cost of disposal
€7,000,000
1,500,000
5,000,000
4,400,000
Assume that Marley will continue to use this asset in the future. As of December 31, 2015, the
equipment has a remaining useful of 4 years.
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31,
2015.
(b) Prepare the journal entry to record depreciation expense for 2016.
(c) The recoverable amount of the equipment at December 31, 2016, is €5,250,000.
Prepare the journal entry (if any) necessary to record this increase.
Solution 11-143
(a)
December 31, 2015
Loss on Impairment..........................................
Accumulated Depreciation––Equipment.....
500,000
500,000
Cost.......................................... €7,000,000
Accumulated Depreciation....... (1,500,000)
Carrying amount......................
5,500,000
Fair value less cost of disposal (5,000,000)
Loss on impairment.................. € 500,000
(b)
December 31, 2016
Depreciation Expense..........................................
Accumulated Depreciation––Equipment........
1,250,000
1,250,000
New carrying amount.................. €5,000,000
Useful life.................................... ÷ 4 years
Depreciation per year................. €1,250,000
(c) Accumulated Depreciation––Equipment..............
Recovery of Impairment Loss .........................
1,500,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
1500,000
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 35
Ex. 11-144—Depletion allowance.
Rojas Company purchased for $5,600,000 a mine estimated to contain 2 million tons of ore.
When the ore is completely extracted, it was expected that the land would be worth $200,000. A
building and equipment costing $2,800,000 were constructed on the mine site, and they will be
completely used up and have no residual value when the ore is exhausted. During the first year,
750,000 tons of ore were mined, and $450,000 was spent for labor and other operating costs.
Instructions
Compute the total cost per ton of ore mined in the first year. (Show computations by setting up a
schedule giving cost per ton.)
Solution 11-144
Item
Ore
Building and Equipment
Labor and Operating Expenses
Total Cost
Base
$5,400,000
2,800,000
450,000
Tons
2,000,000
2,000,000
750,000
Per Ton
$2.70
1.40
.60
$4.70
Ex. 11-145—Revaluation Accounting
Sizemore Company owns land that it purchased at a cost of $600,000 in 2013. The company
chooses to use revaluation accounting to account for the land. The land’s value fluctuate as
follows (all amounts as of December 31): 2013, $675,000; 2014, $540,000; 2015, $580,000; and
2016, $615,000.
Instructions
Prepare the journal entries to record the revaluation of the land in each year.
Solution 11-145
December 31, 2013
Land ($675,000 – $600,000).....................................................
Unrealized Gain on Revaluation––Land.....................
75,000
75,000
December 31, 2014
Unrealized Gain on Revaluation––Land.................................
75,000
Loss on Impairment ($600,000 – $540,000)...............................
60,000
Land ($675,000 – $540,000).................................................
December 31, 2015
Land ($580,000 – $540,000).....................................................
Recovery of Impairment Loss ........................................
December 31, 2016
Land ($615,000 – $580,000)......................................................
Recovery of Impairment Loss ($60,000 - $40,000)……..
Unrealized Gain on Revaluation—Land…………………
135,000
40,000
40,000
35,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
20,000
15,000
lOMoARcPSD|19958401
11 - 36 Test Bank for Intermediate Accounting, IFRS Edition, 2e
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 37
Ex. 11-146—Revaluation Accounting
Merando Company acquired equipment on January 1, 2014, for €60,000. Merando elects to value
this class of equipment using revaluation accounting. This equipment is being depreciated on a
straight-line basis over its 6-year useful life. There is no residual value at the end of the 6-year
period. The appraised value of the equipment approximates the carrying amount at December 31,
2014 and 2016. On December 31, 2015, the fair value of the equipment is determined to be
€35,000.
Instructions
(a) Prepare the journal entries for 2014 related to the equipment.
(b) Prepare the journal entries for 2015 related to the equipment.
(c) Determine the amount of depreciation expense that Merando will record on the equipment
in 2016.
Solution 11-146
(a)
(b)
January 1, 2014
Equipment........................................................................
Cash...........................................................................
60,000
December 31, 2014
Depreciation Expense.......................................................
Accumulated Depreciation––Equipment.....................
10,000
December 31, 2015
Depreciation Expense........................................................
Accumulated Depreciation––Equipment......................
10,000
Accumulated Depreciation––Equipment.............................
Loss on Impairment.............................................................
Equipment (€60,000 – €35,000)....................................
60,000
10,000
10,000
20,000
5,000
(c) Depreciation expense––2016: (€60,000 – €25,000) ÷ 4 = €8,750
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
25,000
lOMoARcPSD|19958401
11 - 38 Test Bank for Intermediate Accounting, IFRS Edition, 2e
PROBLEMS
Pr. 11-147—Depreciation methods.
On July 1, 2014, Sparks Company purchased for $2,160,000 snow-making equipment having an
estimated useful life of 5 years with an estimated residual value of $90,000. Depreciation is taken
for the portion of the year the asset is used.
Instructions
(a) Complete the form below by determining the depreciation expense and year-end book values
for 2014 and 2015 using the
1. sum-of-the-years'-digits method.
2. double-declining balance method.
Sum-of-the-Years'-Digits Method
Equipment
Less: Accumulated Depreciation
Year-End Book Value
Depreciation Expense for the Year
2014
$2,160,000
______
______
______
2015
$2,160,000
_______
_______
_______
Double-Declining Balance Method
Equipment
Less: Accumulated Depreciation
Year-End Book Value
Depreciation Expense for the Year
$2,160,000
______
______
______
$2,160,000
_______
_______
_______
(b) Assume the company had used straight-line depreciation during 2014 and 2015. During
2016, the company determined that the equipment would be useful to the company for only
one more year beyond 2016. Residual value is estimated at $120,000. Compute the amount
of depreciation expense for the 2016 income statement.
Solution 11-147
(a) Sum-of-the-Years'-Digits
Accumulated Depreciation
Book Value
Depreciation Expense
2014
$ 345,000
1,815,000
345,000
2015
$ 966,000
1,194,000
621,000
Double-Declining Balance
Accumulated Depreciation
Book Value
Depreciation Expense
$ 432,000
1,728,000
432,000
$1,123,200
1,036,800
691,200
(b) Cost
Depreciation
Residual
$2,160,000
(621,000)
(120,000)
$1,419,000 × 1/2 = $709,500, 2016 depreciation
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Depreciation, Impairments, and Depletion
11 - 39
Pr. 11-148—Adjustment of Depreciable Base.
A truck was acquired on July 1, 2012, at a cost of $216,000. The truck had a six-year useful life
and an estimated residual value of $24,000. The straight-line method of depreciation was used.
On January 1, 2015, the truck was overhauled at a cost of $20,000, which extended the useful life
of the truck for an additional two years beyond that originally estimated (residual value is still
estimated at $24,000). In computing depreciation for annual adjustment purposes, expense is
calculated for each month the asset is owned.
Instructions
Prepare the appropriate entries for January 1, 2015 and December 31, 2015.
Solution 11-148
Cost
Less residual value
Depreciable base, July 1, 2012
Less depreciation to date [($192,000 ÷ 6) × 2 1/2]
Depreciable base, Jan. 1, 2015 (unadjusted)
Overhaul
Depreciable base, Jan. 1, 2015 (adjusted)
$216,000
24,000
192,000
80,000
112,000
20,000
$132,000
January 1, 2015
Accumulated Depreciation .............................................................
Cash ...................................................................................
20,000
December 31, 2015
Depreciation Expense ....................................................................
Accumulated Depreciation ($132,000 ÷ 5.5 yrs) .................
24,000
20,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
24,000
lOMoARcPSD|19958401
CHAPTER 13
CURRENT LIABILITIES AND CONTINGENCIES
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer
F
F
T
T
F
F
T
F
T
F
T
F
T
F
T
T
F
F
F
T
No.
Description
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Zero-interest-bearing note payable.
Dividends in arrears.
Examples of unearned revenues.
Reporting discount on Notes Payable.
Currently maturing long-term debt.
Excluding short-term debt refinanced.
Accounting for sales tax collected.
Accounting for sick pay.
Social security taxes as liabilities.
Definition of accumulation rights.
Recognizing compensated absences expense.
Accruing estimated loss contingency.
Disclosing gain contingencies.
Sales-type warranty profit.
Fair value of asset retirement obligation.
Reporting a litigation liability.
Expense warranty approach.
Acid-test ratio components.
Affect on current ratio.
Reporting current liabilities.
MULTIPLE CHOICE—Conceptual
Answer
d
d
a
a
b
d
c
d
c
d
c
d
c
d
b
a
No.
Description
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
Definition of a liability.
Nature of current liabilities.
Recording of accounts payable.
Classification of notes payable.
Classification of discounts on notes payable.
Identify current liability.
Bonds reported as current liability.
Identify item which is not a current liability.
Dividends reported as current liability.
Classification of stock dividends distributable.
Identify item which is not a current liability.
Identify current liability.
Characteristic of current liability.
Definition of a liability.
Importance of liability section of balance sheet.
Current liabilities and operating cycle.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 2
Test Bank for Intermediate Accounting, Thirteenth Edition
MULTIPLE CHOICE—Conceptual (cont.)
Answer
a
c
d
d
a
b
c
d
d
d
a
d
b
d
d
d
c
d
d
d
b
c
d
b
a
d
d
d
b
a
c
d
b
c
c
c
a
b
d
d
c
d
a
b
a
b
d
c
No.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
S
48.
S
49.
P
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
P
74.
S
75.
S
76.
77.
78.
79.
80.
81.
82.
83.
84.
Description
Present value and concept of a liability.
Zero-interest-bearing notes payable.
Callable debt reporting.
Condition to exclude short-term obligation.
Ability to consummate refinancing of short-term debt.
Disclosure of preferred dividends not declared.
Example of unearned revenue.
Short-term obligations expected to be refinanced.
Ability to consummate refinancing of short-term obligations.
Determine what is a liability.
Classification of sales taxes.
Disclosure for short-term debt refinanced.
Vested rights vs. accumulated rights.
Deductions in computing net pay.
Employer's payroll tax expense.
Accrual of a liability for compensated absences.
Accrual of a liability for compensated absences.
Accrual of a liability for compensated absences.
Compensated absences.
Requirements for compensated absences accrual.
Condition for sick pay accrual.
Payroll tax deduction.
Definition of a contingency.
Recording contingent liability.
Example of contingent liability.
Recording contingent liability.
Disclosure of a gain contingency.
Disclosure of contingencies.
Accrual of loss contingency.
Litigation and loss contingencies.
Accrual of a contingent liability.
Source of a contingent liability.
Asset retirement obligation.
Asset retirement obligation.
Classification of warranty liability.
Liability accrual due to governmental action.
Accrual of product warranties.
Determining loss amount to report.
Reporting lawsuit loss and liability.
Accrual method for warranty costs.
Accrual warranty method.
Cash-basis warranty method.
Characteristic of expense warranty approach.
Accounting for discount coupon.
Condition to recognize asset retirement obligation.
Recording liability for pending litigation.
Computation of acid-test ratio.
Current ratio information.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 3
MULTIPLE CHOICE—Conceptual (cont.)
Answer
c
a
d
d
d
P
S
No.
S
P
85.
86.
87.
88.
89.
Description
Presentation of current liabilities.
Current ratio formula.
Disclosure of accrued liabilities.
Acid-test ratio elements.
Items included in current ratio and acid-test ratio.
These questions also appear in the Problem-Solving Survival Guide.
These questions also appear in the Study Guide.
MULTIPLE CHOICE—Computational
Answer
b
d
a
d
b
c
b
d
b
d
b
b
c
a
a
d
d
c
c
c
d
a
d
a
b
d
d
c
b
d
a
b
d
d
No.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.
122.
123.
Description
Adjusting entry involving discount on short-term note payable.
Calculate effective interest on discounted note.
Calculate cost of inventory purchase.
Calculate interest expense.
Calculate interest expense.
Reporting 5-year note in financial statements.
Calculate unearned revenue.
Calculate amount of sales tax payable.
Determine amount of short-term debt to be reported.
Determine amount of short-term debt to be reported.
Calculate sales taxes for the month.
Calculate amount of sales taxes payable.
Determine amount of sales subject to sales tax.
Short-term debt to be excluded.
Short-term debt to be excluded.
Federal/state unemployment taxes.
Federal/state unemployment taxes.
Vacation liability accrual.
Vacation liability accrual.
Calculate payroll tax expense.
Calculation of vacation expense to be recognized.
Calculation of accrued liability to be recognized for compensated balances.
Effect of payroll taxes on assets / liabilities.
Record vacation liability accrual.
Record loss contingency amount.
Record asset retirement obligation.
Calculate extended warranty contract profit.
Calculate warranty liability.
Calculate rebate expense and liability.
Asset retirement obligation.
Calculate insurance expense and loss.
Calculate rebate expense and liability.
Asset retirement obligation.
Calculate warranty liability.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 4
Test Bank for Intermediate Accounting, Thirteenth Edition
MULTIPLE CHOICE—Computational (cont.)
Answer
b
d
b
d
d
d
b
d
a
d
b
c
No.
124.
125.
126.
127.
128.
129.
130.
131.
132.
133.
134.
135.
Description
Calculate liability for premiums.
Calculate warranty liability.
Calculate liability for premiums.
Determine premiums expense for the year.
Calculate estimated liability for premiums.
Calculate estimated liability for premiums.
Determine amount to accrue as a loss contingency.
Accrue warranty expense for the year.
Calculate warranty liability.
Determine amount to accrue as a gain contingency.
Calculate liability for unredeemed coupons.
Calculate the quick (acid-test) ratio.
MULTIPLE CHOICE—CPA Adapted
Answer
a
b
c
d
a
d
b
c
d
d
c
No.
136.
137.
138.
139.
140.
141.
142.
143.
144.
145.
146.
Description
Knowledge of accounts payable.
Determine current and long-term portions of debt.
Determine accrued interest payable.
Determine amount of short-term debt to be reported.
Calculate accrued salaries payable.
Accrual of payroll taxes.
Calculate unearned service contract revenue.
Determine liability from unredeemed trading stamps.
Determine range of loss accrual.
Calculate the estimated warranty liability.
Disclosure of a casualty claim.
EXERCISES
Item
E13-147
E13-148
E13-149
E13-150
E13-151
E13-152
Description
Notes payable.
Payroll entries.
Compensated absences.
Contingent liabilities.
Premiums.
Premiums.
PROBLEMS
Item
P13-153
P13-154
P13-155
P13-156
Description
Accounts and notes payable.
Refinancing of short-term debt.
Premiums.
Warranties.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
CHAPTER LEARNING OBJECTIVES
1.
Describe the nature, type, and valuation of current liabilities.
2.
Explain the classification issues of short-term debt expected to be refinanced.
3.
Identify types of employee-related liabilities.
4.
Identify the criteria used to account for and disclose gain and loss contingencies.
5.
Explain the accounting for different types of loss contingencies.
6.
Indicate how to present and analyze liabilities and contingencies.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
13 - 5
lOMoARcPSD|19958401
13 - 6
Test Bank for Intermediate Accounting, Thirteenth Edition
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item
Type
Item
Type
Item
1.
2.
3.
4.
21.
TF
TF
TF
TF
MC
22.
23.
24.
25.
26.
MC
MC
MC
MC
MC
27.
28.
29.
30.
31.
5.
6.
7.
40.
TF
TF
TF
MC
41.
42.
43.
44.
MC
MC
MC
MC
45.
46.
47.
S
48.
8.
9.
10.
11.
TF
TF
TF
TF
46.
49.
P
50.
51.
MC
MC
MC
MC
52.
53.
54.
55.
12.
13.
TF
TF
46.
59.
MC
MC
60.
61.
14.
15.
16.
17.
69.
70.
71.
TF
TF
TF
TF
MC
MC
MC
72.
73.
P
74.
S
75.
S
76.
77.
78.
MC
MC
MC
MC
MC
MC
MC
79.
80.
81.
82.
114.
115.
116.
18.
19.
TF
TF
20.
83.
TF
MC
Note:
S
S
TF = True-False
MC = Multiple Choice
84.
85.
Type
Item
Type
Item
Learning Objective 1
MC
32. MC
37.
MC
33. MC
38.
MC
34. MC
39.
MC
35. MC
90.
MC
36. MC
91.
Learning Objective 2
MC
95. MC
99.
MC
96. MC
100.
MC
97. MC
101.
MC
98. MC
102.
Learning Objective 3
MC
56. MC
106.
MC
57. MC
107.
MC
58. MC
108.
MC
105. MC
109.
Learning Objective 4
MC
62. MC
64.
MC
63. MC
65.
Learning Objective 5
MC
117. MC
124.
MC
118. MC
125.
MC
119. MC
126.
MC
120. MC
127.
MC
121. MC
128.
MC
122. MC
129.
MC
123. MC
130.
Learning Objective 6
P
MC
88.
86. MC
MC
87. MC
89.
Type
Item
Type
Item
Type
MC
MC
MC
MC
MC
92.
93.
94.
136.
137.
MC
MC
MC
MC
MC
138.
147.
153.
MC
E
P
MC
MC
MC
MC
103.
104.
139.
154.
MC
MC
MC
P
MC
MC
MC
MC
110.
111.
112.
113.
MC
MC
MC
MC
140.
141.
148.
149.
MC
MC
E
E
MC
MC
66.
67.
MC
MC
68.
150.
MC
E
MC
MC
MC
MC
MC
MC
MC
131.
132.
133.
134.
142.
143.
144.
MC
MC
MC
MC
MC
MC
MC
145.
146.
151.
152.
155.
156.
MC
MC
E
E
P
P
MC
MC
135.
153.
MC
P
154.
155.
P
P
E = Exercise
P = Problem
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 7
TRUE-FALSE—Conceptual
1. A zero-interest-bearing note payable that is issued at a discount will not result in any
interest expense being recognized.
2. Dividends in arrears on cumulative preferred stock should be recorded as a current liability.
3. Magazine subscriptions and airline ticket sales both result in unearned revenues.
4. Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.
5. All long-term debt maturing within the next year must be classified as a current liability on
the balance sheet.
6. A short-term obligation can be excluded from current liabilities if the company intends to
refinance it on a long-term basis.
7. Many companies do not segregate the sales tax collected and the amount of the sale at the
time of the sale.
8. A company must accrue a liability for sick pay that accumulates but does not vest.
9. Companies report the amount of social security taxes withheld from employees as well as
the companies’ matching portion as current liabilities until they are remitted.
10. Accumulated rights exist when an employer has an obligation to make payment to an
employee even after terminating his employment.
11. Companies should recognize the expense and related liability for compensated absences in
the year earned by employees.
12. Companies should accrue an estimated loss from a loss contingency if information available
prior to the issuance of financial statements indicates that it is probable that a liability has
been incurred.
13. A company discloses gain contingencies in the notes only when a high probability exists for
realizing them.
14. The expected profit from a sales type warranty that covers several years should all be
recognized in the period the warranty is sold.
15. The fair value of an asset retirement obligation is recorded as both an increase to the
related asset and a liability.
16. The cause for litigation must have occurred on or before the date of the financial statements
to report a liability in the financial statements.
17. Under the expense warranty approach, companies charge warranty costs only to the period
in which they comply with the warranty.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 8
Test Bank for Intermediate Accounting, Thirteenth Edition
18. Prepaid insurance should be included in the numerator when computing the acid-test
(quick) ratio.
19. Paying a current liability with cash will always reduce the current ratio.
20. Current liabilities are usually recorded and reported in financial statements at their full
maturity value.
True False Answers—Conceptual
Item
1.
2.
3.
4.
5.
Ans.
F
F
T
T
F
Item
6.
7.
8.
9.
10.
Ans.
F
T
F
T
F
Item
11.
12.
13.
14.
15.
Ans.
T
F
T
F
T
Item
16.
17.
18.
19.
20.
Ans.
T
F
F
F
T
MULTIPLE CHOICE—Conceptual
21.
Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally
accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.
22.
Which of the following is a current liability?
a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new
debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these
23.
Which of the following is true about accounts payable?
1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase Discounts
account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase
Discounts Lost account will be used.
a.
b.
c.
d.
1
2
3
Both 2 and 3 are true.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 9
24.
Among the short-term obligations of Lance Company as of December 31, the balance
sheet date, are notes payable totaling $250,000 with the Madison National Bank. These
are 90-day notes, renewable for another 90-day period. These notes should be classified
on the balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.
25.
Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the
balance sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than
the stated discount rate.
d. All of these are true.
26.
Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these
27.
Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as a long-term
investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in
eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the
marketability of the refunding issue.
28.
Which of the following should not be included in the current liabilities section of the
balance sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included
29.
Which of the following is a current liability?
a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these
30.
Stock dividends distributable should be classified on the
a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders' equity.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 10 Test Bank for Intermediate Accounting, Thirteenth Edition
31.
Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.
32.
An account which would be classified as a current liability is
a. dividends payable in the company's stock.
b. accounts payable—debit balances.
c. losses expected to be incurred within the next twelve months in excess of the
company's insurance coverage.
d. none of these.
33.
Which of the following is a characteristic of a current liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
c. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.
34.
Which of the following is not considered a part of the definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash,
goods, or services.
d. Liquidation is reasonably expected to require use of existing resources classified as
current assets or create other current liabilities.
35.
Why is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the entity's credit quality.
b. To assist in understanding the entity's liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.
36.
What is the relationship between current liabilities and a company's operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company's operating
cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can't exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.
37.
What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 11
38.
What is a discount as it relates to zero-interest-bearing notes payable?
a. The discount represents the lender's costs to underwrite the note.
b. The discount represents the credit quality of the borrower.
c. The discount represents the cost of borrowing.
d. The discount represents the allowance for uncollectible amounts.
39.
Where is debt callable by the creditor reported on the debtor's financial statements?
a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a longterm liability.
c. Current liability if it is probable that creditor will call the debt within the year, otherwise
a long-term liability.
d. Current liability.
40.
Which of the following is not a condition necessary to exclude a short-term obligation from
current liabilities?
a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.
41.
Which of the following does not demonstrate evidence regarding the ability to
consummate a refinancing of short-term debt?
a. Management indicated that they are going to refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing agreements that can be used to refinance the
obligation.
d. Enter into a financing agreement that clearly permits the entity to refinance the
obligation.
42.
A company has not declared a dividend on its cumulative preferred stock for the past
three years. What is the required accounting treatment or disclosure in this situation?
a. Record a liability for cumulative amount of preferred stock dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current year's dividends only.
d. No disclosure or recognition is required.
43.
Which of the following situations may give rise to unearned revenue?
a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.
44.
Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if the firm
intends to refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if the firm can
demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off
after the balance sheet date and subsequently replaced by long-term debt before the
balance sheet is issued.
d. None of these.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 12 Test Bank for Intermediate Accounting, Thirteenth Edition
45.
The ability to consummate the refinancing of a short-term obligation may be demonstrated by
a. actually refinancing the obligation by issuing a long-term obligation after the date of
the balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt
on a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the
balance sheet but before it is issued.
d. all of these.
46.
Which of the following statements is false?
a. A company may exclude a short-term obligation from current liabilities if the firm
intends to refinance the obligation on a long-term basis and demonstrates an ability to
complete the refinancing.
b. Cash dividends should be recorded as a liability when they are declared by the board
of directors.
c. Under the cash basis method, warranty costs are charged to expense as they are paid.
d. FICA taxes withheld from employees' payroll checks should never be recorded as a
liability since the employer will eventually remit the amounts withheld to the
appropriate taxing authority.
47.
Which of the following is not a correct statement about sales taxes?
a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the amount of
sales taxes is to divide sales by 1 plus the sales tax rate.
d. All of these are true.
S
48.
If a short-term obligation is excluded from current liabilities because of refinancing, the
footnote to the financial statements describing this event should include all of the following
information except
a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.
S
49.
In accounting for compensated absences, the difference between vested rights and
accumulated rights is
a. vested rights are normally for a longer period of employment than are accumulated
rights.
b. vested rights are not contingent upon an employee's future service.
c. vested rights are a legal and binding obligation on the company, whereas
accumulated rights expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee;
accumulated rights do not represent monetary compensation.
P
50.
An employee's net (or take-home) pay is determined by gross earnings minus amounts for
income tax withholdings and the employee's
a. portion of FICA taxes and unemployment taxes.
b. and employer's portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any voluntary deductions.
d. portion of FICA taxes and any voluntary deductions.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 13
51.
Which of these is not included in an employer's payroll tax expense?
a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. Federal income taxes
52.
Which of the following is a condition for accruing a liability for the cost of compensation for
future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.
53.
A liability for compensated absences such as vacations, for which it is expected that
employees will be paid, should
a. be accrued during the period when the compensated time is expected to be used by
employees.
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.
54.
The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the right to
compensated absences.
2. the future rates of pay expected to be paid when employees use
compensated time.
3. the present value of the amount expected to be paid in future periods.
a.
b.
c.
d.
1.
2.
3.
Either 1 or 2 is acceptable.
55.
What are compensated absences?
a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.
d. Paid time off.
56.
Which gives rise to the requirement to accrue a liability for the cost of compensated
absences?
a. Payment is probable.
b. Employee rights vest or accumulate.
c. Amount can be reasonably estimated.
d. All of the above.
57.
Under what conditions is an employer required to accrue a liability for sick pay?
a. Sick pay benefits can be reasonably estimated.
b. Sick pay benefits vest.
c. Sick pay benefits equal 100% of the pay.
d. Sick pay benefits accumulate.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 14 Test Bank for Intermediate Accounting, Thirteenth Edition
58.
Which of the following taxes does not represent a payroll deduction a company may
incur?
a. Federal income taxes.
b. FICA taxes.
c. State unemployment taxes.
d. State income taxes.
59.
What is a contingency?
a. An existing situation where certainty exists as to a gain or loss that will be resolved
when one or more future events occur or fail to occur.
b. An existing situation where uncertainty exists as to possible loss that will be resolved
when one or more future events occur.
c. An existing situation where uncertainty exists as to possible gain or loss that will not
be resolved in the foreseeable future.
d. An existing situation where uncertainty exists as to possible gain or loss that will be
resolved when one or more future events occur or fail to occur.
60.
When is a contingent liability recorded?
a. When the amount can be reasonably estimated.
b. When the future events are probable to occur and the amount can be reasonably
estimated.
c. When the future events are probable to occur.
d. When the future events will possibly occur and the amount can be reasonably
estimated.
61.
Which of the following is an example of a contingent liability?
a. Obligations related to product warranties.
b. Possible receipt from a litigation settlement.
c. Pending court case with a probable favorable outcome.
d. Tax loss carryforwards.
62.
Which of the following terms is associated with recording a contingent liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.
63.
Which of the following is the proper way to report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the
contingency.
d. As a disclosure only.
64.
Which of the following contingencies need not be disclosed in the financial statements or
the notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 15
65.
Which of the following sets of conditions would give rise to the accrual of a contingency
under current generally accepted accounting principles?
a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable.
c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.
66.
Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern
Railroad. On August 10, 2010, due to the admitted negligence of the Railroad, hay on the
farm was set on fire and burned. Beck had had a dispute with the Railroad for several
years concerning the ownership of a small parcel of land. The representative of the
Railroad has offered to assign any rights which the Railroad may have in the land to Beck
in exchange for a release of his right to reimbursement for the loss he has sustained from
the fire. Beck appears inclined to accept the Railroad's offer. The Railroad's 2010 financial
statements should include the following related to the incident:
a. recognition of a loss and creation of a liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.
67.
A contingency can be accrued when
a. it is certain that funds are available to settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an asset
has been impaired or a liability incurred.
d. it is probable that an asset has been impaired or a liability incurred even though the
amount of the loss cannot be reasonably estimated.
68.
A contingent liability
a. definitely exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not reasonably estimated.
c. is not disclosed in the financial statements.
d. is the result of a loss contingency.
69.
To record an asset retirement obligation (ARO), the cost associated with the ARO is
a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. none of these.
70.
A company is legally obligated for the costs associated with the retirement of a long-lived
asset
a. only when it hires another party to perform the retirement activities.
b. only if it performs the activities with its own workforce and equipment.
c. whether it hires another party to perform the retirement activities or performs the
activities itself.
d. when it is probable the asset will be retired.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 16 Test Bank for Intermediate Accounting, Thirteenth Edition
71.
Assume that a manufacturing corporation has (1) good quality control, (2) a one-year
operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy
of guaranteeing new products against defects for three years that has resulted in material
but rather stable warranty repair and replacement costs. Any liability for the warranty
a. should be reported as long-term.
b. should be reported as current.
c. should be reported as part current and part long-term.
d. need not be disclosed.
72.
Ortiz Corporation, a manufacturer of household paints, is preparing annual financial
statements at December 31, 2010. Because of a recently proven health hazard in one of
its paints, the government has clearly indicated its intention of having Ortiz recall all cans
of this paint sold in the last six months. The management of Ortiz estimates that this recall
would cost $800,000. What accounting recognition, if any, should be accorded this
situation?
a. No recognition
b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000
d. Appropriation of retained earnings of $800,000
73.
Information available prior to the issuance of the financial statements indicates that it is
probable that, at the date of the financial statements, a liability has been incurred for
obligations related to product warranties. The amount of the loss involved can be
reasonably estimated. Based on the above facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.
P
74.
Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably
estimated within a range of outcomes. No single amount within the range is a better
estimate than any other amount. The amount of loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.
S
75.
Dean Company becomes aware of a lawsuit after the date of the financial statements, but
before they are issued. A loss and related liability should be reported in the financial
statements if the amount can be reasonably estimated, an unfavorable outcome is highly
probable, and
a. the Dean Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial
statements.
S
76.
Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with
the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral
and inseparable part of the sale.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 17
77.
Which of the following best describes the accrual method of accounting for warranty
costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.
78.
Which of the following best describes the cash-basis method of accounting for warranty
costs?
a. Expensed based on estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.
79.
Which of the following is a characteristic of the expense warranty approach, but not the
sales warranty approach?
a. Estimated liability under warranties.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.
80.
An electronics store is running a promotion where for every video game purchased, the
customer receives a coupon upon checkout to purchase a second game at a 50%
discount. The coupons expire in one year. The store normally recognized a gross profit
margin of 40% of the selling price on video games. How would the store account for a
purchase using the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium
expense.
b. The difference between the cost of the video game and the cash received is
recognized as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the
coupon is recognized as premium expense.
81.
What condition is necessary to recognize an asset retirement obligation?
a. Company has an existing legal obligation and can reasonably estimate the amount of
the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.
82.
Which of the following are not factors that are considered when evaluating whether or not
to record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 18 Test Bank for Intermediate Accounting, Thirteenth Edition
83.
How do you determine the acid-test ratio?
a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by current
liabilities.
84.
What does the current ratio inform you about a company?
a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company's liquidity.
d. The company's profitability.
S
85.
Which of the following is not acceptable treatment for the presentation of current
liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of
working capital
P
86.
The ratio of current assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.
87.
Accrued liabilities are disclosed in financial statements by
a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.
88.
The numerator of the acid-test ratio consists of
a. total current assets.
b. cash and marketable securities.
c. cash and net receivables.
d. cash, marketable securities, and net receivables.
89.
Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 19
Multiple Choice Answers—Conceptual
Item
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
Ans.
d
d
a
a
b
d
c
d
c
d
Item
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
Ans.
c
d
c
d
b
a
a
c
d
d
Item
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
Ans.
a
b
c
d
d
d
a
d
b
d
Item
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
Ans.
d
d
c
d
d
d
b
c
d
b
Item
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
Ans.
Item
a
d
d
d
b
a
c
d
b
c
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
Ans.
Item
Ans.
c
c
a
b
d
d
c
d
a
b
81.
82.
83.
84.
85.
86.
87.
88.
*89.
a
b
d
c
c
a
d
d
d
Solutions to those Multiple Choice questions for which the answer is “none of these.”
22. A long-term debt maturing currently to be paid with current assets is a current liability.
32. Accounts Payable, Wages Payable, etc., would be examples of current liabilities.
44. The company must both intend to refinance the obligation on a long-term basis and
demonstrate the ability to consummate the refinancing to exclude a short-term obligation
from current liabilities.
MULTIPLE CHOICE—Computational
90.
Glaus Corp. signed a three-month, zero-interest-bearing note on November 1, 2010 for
the purchase of $150,000 of inventory. The face value of the note was $152,205.
Assuming Glaus used a “Discount on Note Payable” account to initially record the note
and that the discount will be amortized equally over the 3-month period, the adjusting
entry made at December 31, 2010 will include a
a. debit to Discount on Note Payable for $735.
b. debit to Interest Expense for $1,470.
c. credit to Discount on Note Payable for $735.
d. credit to Interest Expense for $1,470.
91.
The effective interest on a 12-month, zero-interest-bearing note payable of $300,000,
discounted at the bank at 10% is
a. 10.87%.
b. 10%.
c. 9.09%.
d. 11.11%.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 20 Test Bank for Intermediate Accounting, Thirteenth Edition
92.
On September 1, Hydra purchased $9,500 of inventory items on credit with the terms
1/15, net 30, FOB destination. Freight charges were $200. Payment for the purchase was
made on September 18. Assuming Hydra uses the perpetual inventory system and the net
method of accounting for purchase discounts, what amount is recorded as inventory from
this purchase?
a. $9,405.
b. $9,605.
c. $9,700.
d. $9,500.
93.
Sodium Inc. borrowed $175,000 on April 1. The note requires interest at 12% and
principal to be paid in one year. How much interest is recognized for the period from April
1 to December 31?
a. $0.
b. $21,000.
c. $5,250.
d. $15,750.
94.
Collier borrowed $175,000 on October 1 and is required to pay $180,000 on March 1.
What amount is the note payable recorded at on October 1 and how much interest is
recognized from October 1 to December 31?
a. $175,000 and $0.
b. $175,000 and $3,000.
c. $180,000 and $0.
d. $175,000 and $5,000.
95.
Purest owes $1 million that is due on February 28. The company borrows $800,000 on
February 25 (5-year note) and uses the proceeds to pay down the $1 million note and
uses other cash to pay the balance. How much of the $1 million note is classified as longterm in the December 31 financial statements.
a. $1,000,000.
b. $0.
c. $800,000.
d. $200,000.
96.
Vista newspapers sold 4,000 of annual subscriptions at $125 each on September 1. How
much unearned revenue will exist as of December 31?
a. $0.
b. $333,333.
c. $166,667.
d. $500,000.
97.
Purchase Retailer made cash sales during the month of October of $132,600. The sales
are subject to a 6% sales tax that was also collected. Which of the following would be
included in the summary journal entry to reflect the sale transactions?
a. Debit Cash for $132,600.
b. Credit Sales Tax Payable for $7,506.
c. Credit Sales for $125,094.
d. Credit Sales Tax Payable for $7,956.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 21
98.
On February 10, 2010, after issuance of its financial statements for 2009, House
Company entered into a financing agreement with Lebo Bank, allowing House Company
to borrow up to $4,000,000 at any time through 2012. Amounts borrowed under the
agreement bear interest at 2% above the bank's prime interest rate and mature two years
from the date of loan. House Company presently has $1,500,000 of notes payable with
First National Bank maturing March 15, 2010. The company intends to borrow $2,500,000
under the agreement with Lebo and liquidate the notes payable to First National. The
agreement with Lebo also requires House to maintain a working capital level of
$6,000,000 and prohibits the payment of dividends on common stock without prior
approval by Lebo Bank. From the above information only, the total short-term debt of
House Company as of the December 31, 2010 balance sheet date is
a. $0.
b. $1,500,000.
c. $2,000,000.
d. $4,000,000.
99.
On December 31, 2010, Irey Co. has $2,000,000 of short-term notes payable due on
February 14, 2011. On January 10, 2011, Irey arranged a line of credit with County Bank
which allows Irey to borrow up to $1,500,000 at one percent above the prime rate for three
years. On February 2, 2011, Irey borrowed $1,200,000 from County Bank and used
$500,000 additional cash to liquidate $1,700,000 of the short-term notes payable. The
amount of the short-term notes payable that should be reported as current liabilities on the
December 31, 2010 balance sheet which is issued on March 5, 2011 is
a. $0.
b. $300,000.
c. $500,000.
d. $800,000.
Use the following information for questions 100 and 101.
Stine Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep 2%
of the sales tax collected. Stine Co. records the sales tax in the Sales account. The amount
recorded in the Sales account during May was $148,400.
100.
The amount of sales taxes (to the nearest dollar) for May is
a. $8,726.
b. $8,400.
c. $8,904.
d. $9,438.
101.
The amount of sales taxes payable (to the nearest dollar) to the state for the month of
May is
a. $8,551.
b. $8,232.
c. $8,726.
d. $9,249.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 22 Test Bank for Intermediate Accounting, Thirteenth Edition
102.
Vopat, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law
provides that the retail sales tax collected during the month must be remitted to the state
during the following month. If the amount collected is remitted to the state on or before
the twentieth of the following month, the retailer may keep 3% of the sales tax collected.
On April 10, 2010, Vopat remitted $81,480 tax to the state tax division for March 2010
retail sales. What was Vopat 's March 2010 retail sales subject to sales tax?
a. $1,629,600.
b. $1,596,000.
c. $1,680,000.
d. $1,645,000.
103.
Jenkins Corporation has $2,500,000 of short-term debt it expects to retire with proceeds
from the sale of 75,000 shares of common stock. If the stock is sold for $20 per share
subsequent to the balance sheet date, but before the balance sheet is issued, what
amount of short-term debt could be excluded from current liabilities?
a. $1,500,000
b. $2,500,000
c. $1,000,000
d. $0
104.
Ermler Corporation has $1,800,000 of short-term debt it expects to retire with proceeds
from the sale of 60,000 shares of common stock. If the stock is sold for $20 per share
subsequent to the balance sheet date, but before the balance sheet is issued, what
amount of short-term debt could be excluded from current liabilities?
a. $1,200,000
b. $1,800,000
c. $600,000
d. $0
105.
Preston Co., which has a taxable payroll of $500,000, is subject to FUTA tax of 6.2% and
a state contribution rate of 5.4%. However, because of stable employment experience, the
company’s state rate has been reduced to 2%. What is the total amount of federal and
state unemployment tax for Preston Co.?
a. $58,500
b. $41,000
c. $20,000
d. $14,000
106.
Roark Co., which has a taxable payroll of $400,000, is subject to FUTA tax of 6.2% and a
state contribution rate of 5.4%. However, because of stable employment experience, the
company’s state rate has been reduced to 2%. What is the total amount of federal and
state unemployment tax for Roark Co.?
a. $46,800
b. $32,800
c. $16,000
d. $11,200
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 23
107.
A company gives each of its 50 employees (assume they were all employed continuously
through 2010 and 2011) 12 days of vacation a year if they are employed at the end of the
year. The vacation accumulates and may be taken starting January 1 of the next year.
The employees work 8 hours per day. In 2010, they made $14 per hour and in 2011 they
made $16 per hour. During 2011, they took an average of 9 days of vacation each. The
company’s policy is to record the liability existing at the end of each year at the wage rate
for that year. What amount of vacation liability would be reflected on the 2010 and 2011
balance sheets, respectively?
a. $67,200; $93,600
b. $76,800; $96,000
c. $67,200; $96,000
d. $76,800; $93,600
108.
A company gives each of its 50 employees (assume they were all employed continuously
through 2010 and 2011) 12 days of vacation a year if they are employed at the end of the
year. The vacation accumulates and may be taken starting January 1 of the next year.
The employees work 8 hours per day. In 2010, they made $17.50 per hour and in 2011
they made $20 per hour. During 2011, they took an average of 9 days of vacation each.
The company’s policy is to record the liability existing at the end of each year at the wage
rate for that year. What amount of vacation liability would be reflected on the 2010 and
2011 balance sheets, respectively?
a. $84,000; $117,000
b. $96,000; $120,000
c. $84,000; $120,000
d. $96,000; $117,000
109.
The total payroll of Teeter Company for the month of October, 2010 was $360,000, of
which $90,000 represented amounts paid in excess of $100,000 to certain employees.
$300,000 represented amounts paid to employees in excess of the $7,000 maximum
subject to unemployment taxes. $90,000 of federal income taxes and $9,000 of union
dues were withheld. The state unemployment tax is 1%, the federal unemployment tax is
.8%, and the current F.I.C.A. tax is 7.65% on an employee’s wages to $100,000 and
1.45% in excess of $90,000. What amount should Teeter record as payroll tax expense?
a. $118,620.
b. $113,040.
c. $23,040.
d. $28,440.
Use the following information for questions 110 and 111.
Vargas Company has 35 employees who work 8-hour days and are paid hourly. On January 1,
2009, the company began a program of granting its employees 10 days of paid vacation each
year. Vacation days earned in 2009 may first be taken on January 1, 2010. Information relative to
these employees is as follows:
Year
2009
2010
2011
Hourly
Wages
$25.80
27.00
28.50
Vacation Days Earned
by Each Employee
10
10
10
Vacation Days Used
by Each Employee
0
8
10
Vargas has chosen to accrue the liability for compensated absences at the current rates of pay in
effect when the compensated time is earned.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 24 Test Bank for Intermediate Accounting, Thirteenth Edition
110.
What is the amount of expense relative to compensated absences that should be reported
on Vargas’s income statement for 2009?
a. $0.
b. $68,880.
c. $75,600.
d. $72,240.
111.
What is the amount of the accrued liability for compensated absences that should be
reported at December 31, 2011?
a. $94,920.
b. $90,720.
c. $79,800.
d. $95,760.
112.
CalCount pays a weekly payroll of $85,000 that includes federal taxes withheld of
$12,700, FICA taxes withheld of $7,890, and 401(k) withholdings of $9,000. What is the
effect of assets and liabilities from this transaction?
a. Assets decrease $85,000 and liabilities do not change.
b. Assets decrease $64,410 and liabilities increase $20,590.
c. Assets decrease $64,410 and liabilities decrease $20,590.
d. Assets decrease $55,410 and liabilities increase $29,590.
113.
CalCount provides its employees two weeks of paid vacation per year. As of December
31, 65 employees have earned two weeks of vacation time to be taken the following year.
If the average weekly salary for these employees is $950, what is the required journal
entry?
a. Debit Wages Expense for $123,500 and credit Vacation Wages Payable for $123,500.
b. No journal entry required.
c. Debit Vacation Wages Payable for $123,000 and credit Wages Expense for $123,000.
d. Debit Wages Expense for $61,750 and credit Vacation Wages Payable for $61,750.
114.
Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior year.
The company has consulted with its attorney and determined that it is possible that they
may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is
the case, their attorney estimated that the amount of any payment would be $500,000.
What is the required journal entry as a result of this litigation?
a. Debit Litigation Expense for $500,000 and credit Litigation liability for $500,000.
b. No journal entry is required.
c. Debit Litigation Expense for $200,000 and credit Litigation Liability for $200,000.
d. Debit Litigation Expense for $300,000 and credit Litigation Liability for $300,000.
115.
Recycle Exploration is involved with innovative approaches to finding energy reserves.
Recycle recently built a facility to extract natural gas at a cost of $15 million. However,
Recycle is also legally responsible to remove the facility at the end of its useful life of
twenty years. This cost is estimated to be $21 million (the present value of which is $8
million). What is the journal entry required to record the asset retirement obligation?
a. No journal entry required.
b. Debit Natural Gas Facility for $21,000,000 and credit Asset Retirement Obligation for
$21,000,000
c. Debit Natural Gas Facility for $6,000,000 and credit Asset Retirement Obligation for
$6,000,000.
d. Debit Natural Gas Facility for $8,000,000 and credit Asset Retirement Obligation for
$8,000,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 25
116.
Warranty4U provides extended service contracts on electronic equipment sold through
major retailers. The standard contract is for three years. During the current year,
Warranty4U provided 21,000 such warranty contracts at an average price of $81 each.
Related to these contracts, the company spent $200,000 servicing the contracts during
the current year and expects to spend $1,050,000 more in the future. What is the net profit
that the company will recognize in the current year related to these contracts?
a. $451,000.
b. $1,501,000.
c. $150,333.
d. $367,000.
117.
Electronics4U manufactures high-end whole home electronic systems. The company
provides a one-year warranty for all products sold. The company estimates that the
warranty cost is $200 per unit sold and reported a liability for estimated warranty costs
$6.5 million at the beginning of this year. If during the current year, the company sold
50,000 units for a total of $243 million and paid warranty claims of $7,500,000 on current
and prior year sales, what amount of liability would the company report on its balance
sheet at the end of the current year?
a. $2,500,000.
b. $3,500,000.
c. $9,000,000.
d. $10,000,000.
118.
A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2010.
Historically, 10% of customers mail in the rebate form. During 2010, 4,000,000 packages
of light bulbs are sold, and 140,000 $1 rebates are mailed to customers. What is the
rebate expense and liability, respectively, shown on the 2010 financial statements dated
December 31?
a. $400,000; $400,000
b. $400,000; $260,000
c. $260,000; $260,000
d. $140,000; $260,000
119.
A company buys an oil rig for $1,000,000 on January 1, 2010. The life of the rig is 10
years and the expected cost to dismantle the rig at the end of 10 years is $200,000
(present value at 10% is $77,110). 10% is an appropriate interest rate for this company.
What expense should be recorded for 2010 as a result of these events?
a. Depreciation expense of $120,000
b. Depreciation expense of $100,000 and interest expense of $7,711
c. Depreciation expense of $100,000 and interest expense of $20,000
d. Depreciation expense of $107,710 and interest expense of $7,711
120.
Ziegler Company self insures its property for fire and storm damage. If the company were
to obtain insurance on the property, it would cost them $1,000,000 per year. The
company estimates that on average it will incur losses of $800,000 per year. During 2010,
$350,000 worth of losses were sustained. How much total expense and/or loss should be
recognized by Ziegler Company for 2010?
a. $350,000 in losses and no insurance expense
b. $350,000 in losses and $450,000 in insurance expense
c. $0 in losses and $800,000 in insurance expense
d. $0 in losses and $1,000,000 in insurance expense
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 26 Test Bank for Intermediate Accounting, Thirteenth Edition
121.
A company offers a cash rebate of $1 on each $4 package of batteries sold during 2010.
Historically, 10% of customers mail in the rebate form. During 2010, 6,000,000 packages
of batteries are sold, and 210,000 $1 rebates are mailed to customers. What is the rebate
expense and liability, respectively, shown on the 2010 financial statements dated
December 31?
a. $600,000; $600,000
b. $600,000; $390,000
c. $390,000; $390,000
d. $210,000; $390,000
122.
A company buys an oil rig for $2,000,000 on January 1, 2010. The life of the rig is 10
years and the expected cost to dismantle the rig at the end of 10 years is $400,000
(present value at 10% is $154,220). 10% is an appropriate interest rate for this company.
What expense should be recorded for 2010 as a result of these events?
a. Depreciation expense of $240,000
b. Depreciation expense of $200,000 and interest expense of $15,422
c. Depreciation expense of $200,000 and interest expense of $40,000
d. Depreciation expense of $215,422 and interest expense of $15,422
123.
During 2009, Vanpelt Co. introduced a new line of machines that carry a three-year
warranty against manufacturer’s defects. Based on industry experience, warranty costs
are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the
second year after sale. Sales and actual warranty expenditures for the first three-year
period were as follows:
2009
2010
2011
Sales
$ 600,000
1,500,000
2,100,000
$4,200,000
Actual Warranty Expenditures
$ 9,000
45,000
135,000
$189,000
What amount should Vanpelt report as a liability at December 31, 2011?
a. $0
b. $15,000
c. $204,000
d. $315,000
124.
Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in
3 boxtops from Palmer Frosted Flakes boxes and $1.00. The company estimates that
60% of the boxtops will be redeemed. In 2010, the company sold 675,000 boxes of
Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the
bowls cost Palmer Company $2.50 each, how much liability for outstanding premiums
should be recorded at the end of 2010?
a. $25,000
b. $37,500
c. $62,500
d. $87,500
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
125.
13 - 27
During 2009, Stabler Co. introduced a new line of machines that carry a three-year
warranty against manufacturer’s defects. Based on industry experience, warranty costs
are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the
second year after sale. Sales and actual warranty expenditures for the first three-year
period were as follows:
2009
2010
2011
Sales
$ 400,000
1,000,000
1,400,000
$2,800,000
Actual Warranty Expenditures
$ 6,000
30,000
90,000
$126,000
What amount should Stabler report as a liability at December 31, 2011?
a. $0
b. $10,000
c. $136,000
d. $210,000
126.
LeMay Frosted Flakes Company offers its customers a pottery cereal bowl if they send in
4 boxtops from LeMay Frosted Flakes boxes and $1.00. The company estimates that 60%
of the boxtops will be redeemed. In 2010, the company sold 500,000 boxes of Frosted
Flakes and customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls
cost LeMay Company $2.50 each, how much liability for outstanding premiums should be
recorded at the end of 2010?
a. $20,000
b. $30,000
c. $50,000
d. $70,000
Use the following information for questions 127, 128, and 129.
Mott Co. includes one coupon in each bag of dog food it sells. In return for eight coupons,
customers receive a leash. The leashes cost Mott $2.00 each. Mott estimates that 40 percent of
the coupons will be redeemed. Data for 2010 and 2011 are as follows:
Bags of dog food sold
Leashes purchased
Coupons redeemed
2010
500,000
18,000
120,000
127.
The premium expense for 2010 is
a. $25,000.
b. $30,000.
c. $35,000.
d. $50,000.
128.
The estimated liability for premiums at December 31, 2010 is
a. $7,500.
b. $10,000.
c. $17,500.
d. $20,000.
2011
600,000
22,000
150,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 28 Test Bank for Intermediate Accounting, Thirteenth Edition
129.
The estimated liability for premiums at December 31, 2011 is
a. $11,250.
b. $21,250.
c. $22,500.
d. $42,500.
130.
Winter Co. is being sued for illness caused to local residents as a result of negligence on
the company's part in permitting the local residents to be exposed to highly toxic
chemicals from its plant. Winter's lawyer states that it is probable that Winter will lose the
suit and be found liable for a judgment costing Winter anywhere from $1,200,000 to
$6,000,000. However, the lawyer states that the most probable cost is $3,600,000. As a
result of the above facts, Winter should accrue
a. a loss contingency of $1,200,000 and disclose an additional contingency of up to
$4,800,000.
b. a loss contingency of $3,600,000 and disclose an additional contingency of up to
$2,400,000.
c. a loss contingency of $3,600,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of $1,200,000 to $6,000,000.
131.
Nance Company estimates its annual warranty expense as 4% of annual net sales. The
following data relate to the calendar year 2010:
Net sales
Warranty liability account
Balance, Dec. 31, 2010
Balance, Dec. 31, 2010
$1,500,000
$10,000
50,000
debit before adjustment
credit after adjustment
Which one of the following entries was made to record the 2010 estimated warranty
expense?
a. Warranty Expense .............................................................
60,000
Retained Earnings (prior-period adjustment) ............
10,000
Warranty Liability .....................................................
50,000
b. Warranty Expense .............................................................
50,000
Retained Earnings (prior-period adjustment) ......................
10,000
Warranty Liability .....................................................
60,000
c. Warranty Expense .............................................................
40,000
Warranty Liability .....................................................
40,000
d. Warranty Expense .............................................................
60,000
Warranty Liability .....................................................
60,000
132.
In 2010, Payton Corporation began selling a new line of products that carry a two-year
warranty against defects. Based upon past experience with other products, the estimated
warranty costs related to dollar sales are as follows:
First year of warranty
2%
Second year of warranty
5%
Sales and actual warranty expenditures for 2010 and 2011 are presented below:
2010
2011
Sales
$300,000
$400,000
Actual warranty expenditures
10,000
20,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 29
What is the estimated warranty liability at the end of 2011?
a. $19,000.
b. $29,000.
c. $49,000.
d. $8,000.
133.
On January 3, 2010, Boyer Corp. owned a machine that had cost $200,000. The
accumulated depreciation was $120,000, estimated salvage value was $12,000, and fair
market value was $320,000. On January 4, 2010, this machine was irreparably damaged
by Pine Corp. and became worthless. In October 2010, a court awarded damages of
$320,000 against Pine in favor of Boyer. At December 31, 2010, the final outcome of this
case was awaiting appeal and was, therefore, uncertain. However, in the opinion of
Boyer’s attorney, Pine’s appeal will be denied. At December 31, 2010, what amount
should Boyer accrue for this gain contingency?
a. $320,000.
b. $260,000.
c. $200,000.
d. $0.
134.
Fuller Food Company distributes to consumers coupons which may be presented (on or
before a stated expiration date) to grocers for discounts on certain products of Fuller. The
grocers are reimbursed when they send the coupons to Fuller. In Fuller's experience, 50%
of such coupons are redeemed, and generally one month elapses between the date a
grocer receives a coupon from a consumer and the date Fuller receives it. During 2010
Fuller issued two separate series of coupons as follows:
Issued On
1/1/10
7/1/10
Total Value
$375,000
540,000
Consumer
Expiration Date
6/30/10
12/31/10
Amount Disbursed
as of 12/31/10
$177,000
225,000
The only journal entries to date recorded debits to coupon expense and credits to cash of
$536,000. The December 31, 2010 balance sheet should include a liability for
unredeemed coupons of
a. $0.
b. $45,000.
c. $93,000.
d. $270,000.
135.
Presented below is information available for Morton Company.
Current Assets
Cash
Short-term investments
Accounts receivable
Inventories
Prepaid expenses
Total current assets
$
4,000
75,000
61,000
110,000
30,000
$280,000
Total current liabilities are $120,000. The acid-test ratio for Morton is
a. 2.33 to 1.
b. 2.08 to 1.
c. 1.17 to 1.
d. .54 to 1.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 30 Test Bank for Intermediate Accounting, Thirteenth Edition
Multiple Choice Answers—Computational
Item
90.
91.
92.
93.
94.
95.
96.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
b
d
a
d
b
c
b
97.
98.
99.
100.
101.
102.
103.
d
b
d
b
b
c
a
104.
105.
106.
107.
108.
109.
110.
a
d
d
c
c
c
d
111.
112.
113.
114.
115.
116.
117.
a
d
a
b
d
d
c
118.
119.
120.
121.
122.
123.
124.
b
d
a
b
d
d
b
125.
126.
127.
128.
129.
130.
131.
d
b
d
d
d
b
d
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
Item
132.
133.
134.
135.
Ans.
a
d
b
c
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 31
MULTIPLE CHOICE—CPA Adapted
136.
Which of the following is generally associated with payables classified as accounts
payable?
Periodic Payment
Secured
of Interest
by Collateral
a.
No
No
b.
No
Yes
c.
Yes
No
d.
Yes
Yes
137.
On January 1, 2010, Beyer Co. leased a building to Heins Corp. for a ten-year term at an
annual rental of $80,000. At inception of the lease, Beyer received $320,000 covering the
first two years' rent of $160,000 and a security deposit of $160,000. This deposit will not
be returned to Heins upon expiration of the lease but will be applied to payment of rent for
the last two years of the lease. What portion of the $320,000 should be shown as a
current and long-term liability, respectively, in Beyer's December 31, 2010 balance sheet?
Current Liability
Long-term Liability
a.
$0
$320,000
b.
$80,000
$160,000
c.
$160,000
$160,000
d.
$160,000
$80,000
138.
On September 1, 2010, Herman Co. issued a note payable to National Bank in the
amount of $1,200,000, bearing interest at 12%, and payable in three equal annual
principal payments of $400,000. On this date, the bank's prime rate was 11%. The first
payment for interest and principal was made on September 1, 2011. At December 31,
2011, Herman should record accrued interest payable of
a. $48,000.
b. $44,000.
c. $32,000.
d. $29,334.
139.
Included in Vernon Corp.'s liability account balances at December 31, 2010, were the
following:
7% note payable issued October 1, 2010, maturing September 30, 2011
8% note payable issued April 1, 2010, payable in six equal annual
installments of $150,000 beginning April 1, 2011
$250,000
600,000
Vernon's December 31, 2010 financial statements were issued on March 31, 2011. On
January 15, 2011, the entire $600,000 balance of the 8% note was refinanced by
issuance of a long-term obligation payable in a lump sum. In addition, on March 10, 2011,
Vernon consummated a noncancelable agreement with the lender to refinance the 7%,
$250,000 note on a long-term basis, on readily determinable terms that have not yet been
implemented. On the December 31, 2010 balance sheet, the amount of the notes payable
that Vernon should classify as short-term obligations is
a. $175,000.
b. $125,000.
c. $50,000.
d. $0.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 32 Test Bank for Intermediate Accounting, Thirteenth Edition
140.
Edge Company’s salaried employees are paid biweekly. Occasionally, advances made to
employees are paid back by payroll deductions. Information relating to salaries for the
calendar year 2011 is as follows:
12/31/10
12/31/11
Employee advances
$12,000
$ 18,000
Accrued salaries payable
65,000
?
Salaries expense during the year
650,000
Salaries paid during the year (gross)
625,000
At December 31, 2011, what amount should Edge report for accrued salaries payable?
a. $90,000.
b. $84,000.
c. $72,000.
d. $25,000.
141.
Risen Corp.'s payroll for the pay period ended October 31, 2010 is summarized as follows:
Department
Total
Payroll
Wages
Factory
$ 75,000
Sales
22,000
Office
18,000
$115,000
Federal
Income Tax
Withheld
$ 9,000
3,000
2,000
$14,000
Assume the following payroll tax rates:
F.I.C.A. for employer and employee
Unemployment
Amount of Wages Subject
to Payroll Taxes
F.I.C.A.
Unemployment
$70,000
$22,000
16,000
2,000
8,000
—
$94,000
$24,000
7% each
3%
What amount should Risen accrue as its share of payroll taxes in its October 31, 2010
balance sheet?
a. $21,300.
b. $14,720.
c. $13,880.
d. $7,300.
142.
Felton Co. sells major household appliance service contracts for cash. The service
contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts
are credited to unearned service contract revenues. This account had a balance of
$480,000 at December 31, 2009 before year-end adjustment. Service contract costs are
charged as incurred to the service contract expense account, which had a balance of
$120,000 at December 31, 2009. Outstanding service contracts at December 31, 2009
expire as follows:
During 2010
During 2011
During 2012
$100,000
$160,000
$70,000
What amount should be reported as unearned service contract revenues in Felton's
December 31, 2009 balance sheet?
a. $360,000.
b. $330,000.
c. $240,000.
d. $220,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
143.
13 - 33
Yount Trading Stamp Co. records stamp service revenue and provides for the cost of
redemptions in the year stamps are sold to licensees. Yount's past experience indicates
that only 80% of the stamps sold to licensees will be redeemed. Yount's liability for stamp
redemptions was $7,500,000 at December 31, 2009. Additional information for 2010 is as
follows:
Stamp service revenue from stamps sold to licensees
Cost of redemptions
$5,000,000
3,400,000
If all the stamps sold in 2010 were presented for redemption in 2011, the redemption cost
would be $2,500,000. What amount should Yount report as a liability for stamp redemptions
at December 31, 2010?
a. $9,100,000.
b. $6,600,000.
c. $6,100,000.
d. $4,100,000.
144.
Neer Co. has a probable loss that can only be reasonably estimated within a range of
outcomes. No single amount within the range is a better estimate than any other amount.
The loss accrual should be
a. zero.
b. the maximum of the range.
c. the mean of the range.
d. the minimum of the range.
145.
During 2010, Eaton Co. introduced a new product carrying a two-year warranty against
defects. The estimated warranty costs related to dollar sales are 2% within 12 months
following sale and 4% in the second 12 months following sale. Sales and actual warranty
expenditures for the years ended December 31, 2010 and 2011 are as follows:
2010
2011
Sales
$ 800,000
1,000,000
$1,800,000
Actual Warranty
Expenditures
$12,000
30,000
$42,000
At December 31, 2011, Eaton should report an estimated warranty liability of
a. $0.
b. $10,000.
c. $30,000.
d. $66,000.
146.
In March 2011, an explosion occurred at Kirk Co.'s plant, causing damage to area
properties. By May 2011, no claims had yet been asserted against Kirk. However, Kirk's
management and legal counsel concluded that it was reasonably possible that Kirk would
be held responsible for negligence, and that $4,000,000 would be a reasonable estimate
of the damages. Kirk's $5,000,000 comprehensive public liability policy contains a
$400,000 deductible clause. In Kirk's December 31, 2010 financial statements, for which
the auditor's fieldwork was completed in April 2011, how should this casualty be reported?
a. As a note disclosing a possible liability of $4,000,000.
b. As an accrued liability of $400,000.
c. As a note disclosing a possible liability of $400,000.
d. No note disclosure of accrual is required for 2010 because the event occurred in 2011.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 34 Test Bank for Intermediate Accounting, Thirteenth Edition
Multiple Choice Answers—CPA Adapted
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
136.
137.
a
b
138.
139.
c
d
140.
141.
a
d
142.
143.
b
c
144.
145.
d
d
146.
c
DERIVATIONS — Computational
No.
Answer
Derivation
90.
b
$152,205 – $150,000 = $2,205.
$2,205 × 2/3 = $1,470.
91.
d
$30,000 ÷ ($300,000 – $30,000) = 0.1111 = 11.11%.
92.
a
($9,500 × .99) = $9,405.
93.
d
$175,000 × .12 × 9/12 = $15,750.
94.
b
($180,000 – $175,000) × 3/5 = $3,000.
95.
c
$800,000.
96.
b
(4,000 × $125) × 8/12 = $333,333.
97.
d
$132,600 × .06 = $7,956.
98.
b
$1,500,000.
99.
d
$2,000,000 – $1,200,000 = $800,000.
100.
b
S + .06S = $148,400,  S = $140,000.
$148,400 – $140,000 = $8,400.
101.
b
$8,400 × .98 = $8,232.
102.
c
.05S × .97 = $81,480,  S = $1,680,000.
103.
a
75,000 × $20 = $1,500,000.
104.
a
60,000 × $20 = $1,200,000.
105.
d
[(.062 – .054) + .02] × $500,000 = $14,000.
106.
d
[(.062 – .054) + .02] × $400,000 = $11,200.
107.
c
50 × 12 × 8 × $14 = $67,200; 50 × 15 × 8 × $16 = $96,000.
108.
c
50 × 12 × 8 × $17.50 = $84,000; 50 × 15 × 8 × $20 = $120,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
DERIVATIONS — Computational (cont.)
No.
Answer
Derivation
109.
c
($270,000 × 7.65%) + ($90,000 × 1.45%) + ($60,000 × 1.8%) = $23,040.
110.
d
$25.80 × 8 × 10 × 35 = $72,240.
111.
a
($28.50 × 8 × 10 × 35) + ($27.00 × 8 × 2 × 35) = $94,920.
112.
d
$12,700 + $7,890 + $9,000 = $29,590;
$85,000 – $29,590 = $55,410.
113.
a
65 × 2 weeks × $950/week = $123,500.
114.
b
Likelihood of loss is only possible, not probable.
115.
d
Present value of the removal cost.
116.
d
[(21,000 × $81)  3 yrs.] – $200,000 = $367,000.
117.
c
$6,500,000 + (50,000 × $200) – $7,500,000 = $9,000,000.
118.
b
4,000,000 × .10 × $1 = $400,000; $400,000 – $140,000 = $260,000.
119.
d
($1.000,000 + $77,110) ÷ 10 = $107,710; $77,110 × .10 = $7,711.
120.
a
121.
b
6,000,000 × .10 × $1 = $600,000; $600,000 – $210,000 = $390,000.
122.
d
($2,000,000 + $154,220) ÷ 10 = $215,420; $154,220 × .10 = $15,422.
123.
d
($4,200,000 × .12) – $189,000 = $315,000.
124.
b
{[(675,000 × .60) – 330,000] ÷ 3} × $1.50 = $37,500.
125.
d
($2,800,000 .12) – $126,000 = $210,000.
126.
b
{[(500,000 × .60) – 220,000] ÷ 4} × $1.50 = $30,000.
127.
d
[(500,000 × .4) ÷ 8] × $2 = $50,000.
129.
d
[(200,000 – 120,000) ÷ 8] × $2 = $20,000.
129.
d
{[(600,000 × .4) – 150,000] ÷ 8} × $2 = $22,500.
$22,500 + $20,000 = $42,500.
130.
b
$3,600,000 and $2,400,000.
131.
d
$1,500,000 × .04 = $60,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
13 - 35
lOMoARcPSD|19958401
13 - 36 Test Bank for Intermediate Accounting, Thirteenth Edition
DERIVATIONS — Computational (cont.)
No.
Answer
Derivation
132.
a
[($300,000 + $400,000) × .07] – $30,000 = $19,000.
133.
d
$0, gain contingencies are not accrued.
134.
b
($540,000 × .5) – $225,000 = $45,000.
135.
c
$4,000 + $75,000 + $61,000
————————————— = 1.17 to 1.
$120,000
DERIVATIONS — CPA Adapted
No.
Answer
Derivation
136.
a
Conceptual—accounts payable generally are zero-interest-bearing and
unsecured.
137.
b
$80,000 and $160,000.
138.
c
$800,000 × .12 ×
139.
d
Conceptual—both notes have been refinanced by long-term obligations.
140.
a
$650,000 + $65,000 – $625,000 = $90,000.
141.
d
($94,000 × .07) + ($24,000 × .03) = $7,300.
142.
b
$100,000 + $160,000 + $70,000 = $330,000.
143.
c
($2,500,000 × .8) + $7,500,000 – $3,400,000 = $6,100,000.
144.
d
Conceptual.
145.
d
($1,800,000 × .06) – $42,000 = $66,000.
146.
c
Conceptual.
4
= $32,000.
12
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 37
EXERCISES
Ex. 13-147—Notes payable.
On August 31, Jenks Co. partially refunded $180,000 of its outstanding 10% note payable made
one year ago to Arma State Bank by paying $180,000 plus $18,000 interest, having obtained the
$198,000 by using $52,400 cash and signing a new one-year $160,000 note discounted at 9% by
the bank.
Instructions
(1) Make the entry to record the partial refunding. Assume Jenks Co. makes reversing entries
when appropriate.
(2) Prepare the adjusting entry at December 31, assuming straight-line amortization of the
discount.
Solution 13-147
(1) Notes Payable ..........................................................................
Interest Expense ......................................................................
Discount on Notes Payable (9% × $160,000) ...........................
Notes Payable ..............................................................
Cash .............................................................................
180,000
18,000
14,400
(2) Interest Expense (1/3 × $14,400) .............................................
Discount on Notes Payable ...........................................
4,800
160,000
52,400
4,800
Ex. 13-148—Payroll entries.
Total payroll of Watson Co. was $920,000, of which $160,000 represented amounts paid in
excess of $100,000 to certain employees. The amount paid to employees in excess of $7,000
was $720,000. Income taxes withheld were $225,000. The state unemployment tax is 1.2%, the
federal unemployment tax is .8%, and the F.I.C.A. tax is 7.65% on an employee’s wages to
$100,000 and 1.45% in excess of $100,000.
Instructions
(a) Prepare the journal entry for the wages and salaries paid.
(b) Prepare the entry to record the employer payroll taxes.
Solution 13-148
(a) Wages and Salaries Expense ..................................................
Withholding Taxes Payable ..........................................
FICA Taxes Payable .....................................................
Cash .............................................................................
* [($920,000 – $160,000) × 7.65%] + ($160,000 × 1.45%)
920,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
225,000
60,460*
634,540
lOMoARcPSD|19958401
13 - 38 Test Bank for Intermediate Accounting, Thirteenth Edition
Solution 13-148 (cont.)
(b) Payroll Tax Expense ..............................................................
FICA Taxes Payable
($760,000 × 7.65%) + ($160,000 × 1.45%)..............
Federal Unemployment Tax Payable
[($920,000 – $720,000) × .8%] ...............................
State Unemployment Tax Payable ($200,000 × 1.2%) .
64,460
60,460
1,600
2,400
Ex. 13-149—Compensated absences.
Yates Co. began operations on January 2, 2010. It employs 15 people who work 8-hour days.
Each employee earns 10 paid vacation days annually. Vacation days may be taken after January
10 of the year following the year in which they are earned. The average hourly wage rate was
$24.00 in 2010 and $25.50 in 2011. The average vacation days used by each employee in 2011
was 9. Yates Co. accrues the cost of compensated absences at rates of pay in effect when earned.
Instructions
Prepare journal entries to record the transactions related to paid vacation days during 2010 and
2011.
Solution 13-149
2010
Wages Expense.................................................................. 28,800 (1)
Vacation Wages Payable ........................................
28,800
(1) 15 × 8 × $24.00 = $2,880; $2,880 × 10 = $28,800.
2011
Wages Expense.................................................................. 1,620
Vacation Wages Payable .................................................... 25,920 (2)
Cash .......................................................................
27,540 (3)
Wages Expense.................................................................. 30,600 (4)
Vacation Wages Payable ........................................
30,600
(2) $2,880 × 9 = $25,920.
(3) 15  8  $25.50 = $3,060; $3,060  9 = $27,540.
(4) $3,060  10 = $30,600.
Ex. 13-150—Contingent liabilities.
Below are three independent situations.
1. In August, 2010 a worker was injured in the factory in an accident partially the result of his
own negligence. The worker has sued Wesley Co. for $800,000. Counsel believes it is
reasonably possible that the outcome of the suit will be unfavorable and that the settlement
would cost the company from $250,000 to $500,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 39
Ex. 13-150 (cont.)
2. A suit for breach of contract seeking damages of $2,400,000 was filed by an author against
Greer Co. on October 4, 2010. Greer's legal counsel believes that an unfavorable outcome is
probable. A reasonable estimate of the award to the plaintiff is between $600,000 and
$1,800,000. No amount within this range is a better estimate of potential damages than any
other amount.
3. Quinn is involved in a pending court case. Peete’s lawyers believe it is probable that Quinn
will be awarded damages of $1,000,000.
Instructions
Discuss the proper accounting treatment, including any required disclosures, for each situation.
Give the rationale for your answers.
Solution 13-150
1.
Wesley Co. should disclose in the notes to the financial statements the existence of a
possible contingent liability related to the law suit. The note should indicate the range of the
possible loss. The contingent liability should not be accrued because the loss is not
probable.
2. The probable award should be accrued by a charge to an estimated loss and a credit to an
estimated liability of $600,000. Greer Co. should disclose the following in the notes to the
financial statements: the amount of the suit, the nature of the contingency, the reason for the
accrual, and the range of the possible loss.
The accrual is made because it is probable that a liability has been incurred and the amount
of the loss can be reasonably estimated. The lowest amount of the range of possible losses
is used when no amount is a better estimate than any other amount.
3.
Quinn should not record the gain contingency until it’s realized. Usually, gain contingencies
are neither accrued nor disclosed. The $1,000,000 gain contingency should be disclosed
only if the probability that it will be realized is very high.
Ex. 13-151—Premiums.
Irving Music Shop gives its customers coupons redeemable for a poster plus a Dixie Chicks CD.
One coupon is issued for each dollar of sales. On the surrender of 100 coupons and $5.00 cash,
the poster and CD are given to the customer. It is estimated that 80% of the coupons will be
presented for redemption. Sales for the first period were $700,000, and the coupons redeemed
totaled 340,000. Sales for the second period were $840,000, and the coupons redeemed totaled
850,000. Irving Music Shop bought 20,000 posters at $2.00/poster and 20,000 CDs at $6.00/CD.
Instructions
Prepare the following entries for the two periods, assuming all the coupons expected to be
redeemed from the first period were redeemed by the end of the second period.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
13 - 40 Test Bank for Intermediate Accounting, Thirteenth Edition
Ex. 13-151 (cont.)
Entry
Period 1
Period 2
(a) To record coupons redeemed
———————————————————————————————————————————
(b) To record estimated liability
———————————————————————————————————————————
Solution 13-151
Entry
Period 1
Period 2
(a) Estimated Liability for Premiums
6,600
Premium Expense [(340,000 ÷ 100) × ($8.00 – $5)] 10,200
18,900
Cash (340,000 ÷ 100) × $5
17,000
42,500
Inventory of Premium Posters and CDs
27,200
68,000
———————————————————————————————————————————
(b) Premium Expense
Estimated Liability for Premiums
*[(700,000 × .80) – 340,000] ÷ 100 × $3.00
6,600*
1,260
6,600
1,260
Ex. 13-152—Premiums.
Edwards Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons,
customers receive a dog toy that the company purchases for $1.20 each. Edwards's experience
indicates that 60 percent of the coupons will be redeemed. During 2010, 100,000 bags of dog
food were sold, 12,000 toys were purchased, and 40,000 coupons were redeemed. During 2011,
120,000 bags of dog food were sold, 16,000 toys were purchased, and 60,000 coupons were
redeemed.
Instructions
Determine the premium expense to be reported in the income statement and the estimated
liability for premiums on the balance sheet for 2010 and 2011.
Solution 13-152
Premium expense
Estimated liability for premiums
(1)
(2)
(3)
(4)
2010
$18,000 (1)
6,000 (2)
2011
$21,600 (3)
9,600 (4)
100,000 × .6 = 60,000; 60,000 ÷ 4 = 15,000; 15,000 × $1.20 = $18,000.
40,000 ÷ 4 = 10,000; 15,000 – 10,000 = 5,000; 5,000 × $1.20 = $6,000.
120,000 × .6 = 72,000; 72,000 ÷ 4 = 18,000; 18,000 × $1.20 = $21,600.
60,000 ÷ 4 = 15,000; 5,000 + 18,000 – 15,000 = 8,000; 8,000 × $1.20 = $9,600.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 41
PROBLEMS
Pr. 13-153—Accounts and Notes Payable.
Described below are certain transactions of Larson Company for 2010:
1.
On May 10, the company purchased goods from Fry Company for $50,000, terms 2/10, n/30.
Purchases and accounts payable are recorded at net amounts. The invoice was paid on May
18.
2.
On June 1, the company purchased equipment for $60,000 from Raney Company, paying
$20,000 in cash and giving a one-year, 9% note for the balance.
3.
On September 30, the company discounted at 10% its $120,000, one-year zero-interestbearing note at First State Bank.
Instructions
(a) Prepare the journal entries necessary to record the transactions above using appropriate
dates.
(b) Prepare the adjusting entries necessary at December 31, 2010 in order to properly report
interest expense related to the above transactions. Assume straight-line amortization of
discounts.
(c) Indicate the manner in which the above transactions should be reflected in the Current
Liabilities section of Larson Company's December 31, 2010 balance sheet.
Solution 13-153
(a) May 10, 2010
Purchases/Inventory.................................................................
Accounts Payable .........................................................
49,000
May 18, 2010
Accounts Payable ....................................................................
Cash .............................................................................
49,000
June 1, 2010
Equipment ................................................................................
Cash .............................................................................
Notes Payable ..............................................................
September 30, 2010
Cash ........................................................................................
Discount on Notes Payable ......................................................
Notes Payable ..............................................................
49,000
49,000
60,000
20,000
40,000
108,000
12,000
120,000
(b) Interest Expense ......................................................................
Interest Payable ($40,000 × .09 × 7/12) ........................
2,100
Interest Expense ......................................................................
Discount on Notes Payable ($12,000 × 3/12) ................
3,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
2,100
3,000
lOMoARcPSD|19958401
13 - 42 Test Bank for Intermediate Accounting, Thirteenth Edition
(c) Current Liabilities
Interest payable
Note payable—Raney Company
Note payable—First State Bank
Less: Discount on note
$
$120,000
9,000
2,100
40,000
111,000
$153,100
Pr. 13-154—Refinancing of short-term debt.
At the financial statement date of December 31, 2010, the liabilities outstanding of Packard
Corporation included the following:
1.
2.
3.
4.
Cash dividends on common stock, $60,000, payable on January 15, 2011.
Note payable to Galena State Bank, $470,000, due January 20, 2011.
Serial bonds, $1,000,000, of which $250,000 mature during 2011.
Note payable to Third National Bank, $300,000, due January 27, 2011.
The following transactions occurred early in 2011:
January 15: The cash dividends on common stock were paid.
January 20: The note payable to Galena State Bank was paid.
January 25: The corporation entered into a financing agreement with Galena State Bank,
enabling it to borrow up to $500,000 at any time through the end of 2013.
Amounts borrowed under the agreement would bear interest at 1% above the
bank's prime rate and would mature 3 years from the date of the loan. The
corporation immediately borrowed $400,000 to replace the cash used in paying its
January 20 note to the bank.
January 26: 40,000 shares of common stock were issued for $350,000. $300,000 of the
proceeds was used to liquidate the note payable to Third National Bank.
February 1: The financial statements for 2010 were issued.
Instructions
Prepare a partial balance sheet for Packard Corporation, showing the manner in which the above
liabilities should be presented at December 31, 2010. The liabilities should be properly classified
between current and long-term, and appropriate note disclosure should be included.
Solution 13-154
Current liabilities:
Dividends payable on common stock
Notes payable— Galena State Bank
Currently maturing portion of serial bonds
Total current liabilities
Long-term debt:
Note payable—Third National Bank, refinanced in
January, 2011—Note 1
Serial bonds not maturing currently
Total long-term debt
Total liabilities
$ 60,000
470,000
250,000
$ 780,000
300,000
750,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
1,050,000
$1,830,000
lOMoARcPSD|19958401
Current Liabilities and Contingencies
13 - 43
Note 1: On January 26, 2011, the corporation issued 40,000 shares of common stock and
received proceeds totaling $350,000, of which $300,000 was used to liquidate a note payable that
matured on January 27, 2011. Accordingly, such note payable has been classified as long-term
debt at December 31, 2010.
Pr. 13-155—Premiums.
Paige Candy Company offers a coffee mug as a premium for every ten 50-cent candy bar
wrappers presented by customers together with $1.00. The purchase price of each mug to the
company is 90 cents; in addition it costs 60 cents to mail each mug. The results of the premium
plan for the years 2010 and 2011 are as follows (assume all purchases and sales are for cash):
2010
2011
Coffee mugs purchased
720,000
800,000
Candy bars sold
5,600,000
6,750,000
Wrappers redeemed
2,800,000
4,200,000
2010 wrappers expected to be redeemed in 2011
2,000,000
2011 wrappers expected to be redeemed in 2012
2,700,000
Instructions
(a) Prepare the general journal entries that should be made in 2010 and 2011 related to the
above plan by Paige Candy.
(b) Indicate the account names, amounts, and classifications of the items related to the premium
plan that would appear on the Paige Candy Company balance sheet and income statement
at the end of 2010 and 2011.
Solution 13-155
(a)
2010
Inventory of Premium Mugs............................................................
Cash ...................................................................................
(720,000 × $.90 = $864,000)
648,000
648,000
Cash .............................................................................................. 2,800,000
Sales ..................................................................................
(5,600,000 × $.50 = $2,800,000)
Cash ..............................................................................................
Premium Expense ..........................................................................
Inventory of Premium Mugs ................................................
[2,800,000 ÷ 10 = 280,000 × ($1.00 – $.60) = $112,000
280,000 × $.90 = $252,000]
112,000
140,000
Premium Expense ..........................................................................
Estimated Liability for Premiums .........................................
(2,000,000 ÷ 10 = 200,000 × $.50 = $100,000)
100,000
2011
Inventory of Premium Mugs............................................................
Cash ..................................................................................
(800,000 × $.90 = $720,000)
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
2,800,000
252,000
100,000
720,000
720,000
lOMoARcPSD|19958401
13 - 44 Test Bank for Intermediate Accounting, Thirteenth Edition
Cash ............................................................................................... 3,375,000
Sales ...................................................................................
(6,750,000 × $.50 = $3,375,000)
Cash ...............................................................................................
Estimated Liability for Premiums ....................................................
Premium Expense ..........................................................................
Inventory of Premium Mugs ...............................................
[4,200,000 ÷ 10 = 420,000 × ($1.00 – $.60) = $168,000
420,000 × $.90 = $378,000]
168,000
100,000
110,000
Premium Expense ..........................................................................
Estimated Liability for Premiums .........................................
(2,700,000 ÷ 10 = 270,000 × $.50 = $135,000)
135,000
3,375,000
378,000
135,000
(b) Balance Sheet
Name
Inventory of Premium Mugs
Estimated Liability for Premiums
Class
Current Asset
Current Liability
2010
$396,000
100,000
2011
$738,000
135,000
Class
Operating Expense
2010
$240,000
2011
$245,000
Income Statement
Name
Premium Expense
Pr. 13-156—Warranties.
Miley Equipment Company sells computers for $1,500 each and also gives each customer a 2year warranty that requires the company to perform periodic services and to replace defective
parts. During 2010, the company sold 700 computers. Based on past experience, the company
has estimated the total 2-year warranty costs as $30 for parts and $60 for labor. (Assume sales
all occur at December 31, 2010.)
In 2011, Miley incurred actual warranty costs relative to 2010 computer sales of $10,000 for parts
and $18,000 for labor.
Instructions
(a) Under the expense warranty treatment, give the entries to reflect the above transactions
(accrual method) for 2010 and 2011.
(b) Under the cash basis method, what are the Warranty Expense balances for 2010 and 2011?
(c) The transactions of part (a) create what balance under current liabilities in the 2010 balance
sheet?
Solution 13-156
(a)
2010
Accounts Receivable ...................................................................... 1,050,000
Sales ...................................................................................
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
1,050,000
lOMoARcPSD|19958401
Current Liabilities and Contingencies
Warranty Expense ..........................................................................
Estimated Liability Under Warranties ..................................
2011
Estimated Liability Under Warranties ..............................................
Inventory.............................................................................
Accrued Payroll ..................................................................
13 - 45
63,000
63,000
28,000
(b)
2010
2011
$0.
$28,000.
(c)
2010
Current Liabilities—Estimated Liability Under Warranties $31,500.
(The remainder of the $63,000 liability is a long-term liability.)
10,000
18,000
IFRS QUESTIONS
Short Answer:
1. How does the expense warranty approach differ from the sales warranty approach?
1. The expense warranty approach and the sales warranty approach are both variations of
the accrual method of accounting for warranty costs. The expense warranty approach
charges the estimated future warranty costs to operating expense in the year of sale or
manufacture. The sales-warranty approach defers a certain percentage of the original
sales price until some future time when actual costs are incurred or the warranty expires.
2. When must a company recognize an asset retirement obligation?
2. An asset retirement obligation must be recognized when a company has an existing legal
obligation associated with the retirement of a long-lived asset and when the amount can
be reasonably estimated.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
CHAPTER 19
ACCOUNTING FOR INCOME TAXES
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer
F
F
T
T
F
T
F
T
F
T
F
T
T
F
F
T
T
T
F
F
No.
Description
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Taxable income.
Use of pretax financial income.
Taxable amounts.
Deferred tax liability.
Deductible amounts.
Deferred tax asset.
Need for valuation allowance account.
Positive and negative evidence.
Computation of income tax expense.
Taxable temporary differences.
Taxable temporary difference examples.
Permanent differences.
Applying tax rates to temporary differences.
Change in tax rates.
Accounting for a loss carryback.
Tax effect of a loss carryforward.
Possible source of taxable income.
Classification of deferred tax assets and liabilities.
Classification of deferred tax accounts.
Method used for accounting for income taxes.
MULTIPLE CHOICE—Conceptual
Answer
b
c
b
a
a
b
c
d
b
c
d
c
d
d
d
b
a
d
No.
Description
21.
22.
23.
24.
P
25.
S
26.
P
27.
S
28.
S
29.
S
30.
S
31.
32.
33.
34.
35.
36.
37.
38.
Differences between taxable and accounting income.
Differences between taxable and accounting income.
Determination of deferred tax expense.
Differences arising from depreciation methods.
Temporary difference and a revenue item.
Effect of future taxable amount.
Causes of a deferred tax liability.
Distinction between temporary and permanent differences.
Identification of deductible temporary difference.
Identification of taxable temporary difference.
Identification of future taxable amounts.
Identify a permanent difference.
Identification of permanent differences.
Identification of temporary differences.
Difference due to the equity method of investment accounting.
Difference due to unrealized loss on marketable securities.
Identification of deductible temporary differences.
Identification of temporary difference.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 2
Test Bank for Intermediate Accounting, Thirteenth Edition
MULTIPLE CHOICE—Conceptual (cont.)
Answer
c
c
b
a
d
c
d
c
b
d
d
c
c
No.
S
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
S
50.
51.
Description
Accounting for change in tax rate.
Appropriate tax rate for deferred tax amounts.
Recognition of tax benefit of a loss carryforward.
Recognition of valuation account for deferred tax asset.
Definition of uncertain tax positions.
Recognition of tax benefit with uncertain tax position.
Reasons for disclosure of deferred income tax information.
Classification of deferred income tax on the balance sheet.
Classification of deferred income tax on the balance sheet.
Basis for classification as current or noncurrent.
Income statement presentation of a tax benefit from NOL carryforward.
Classification of a deferred tax liability.
Procedures for computing deferred income taxes.
P
These questions also appear in the Problem-Solving Survival Guide.
These questions also appear in the Study Guide.
*This topic is dealt with in an Appendix to the chapter.
S
MULTIPLE CHOICE—Computational
Answer
c
b
a
a
d
c
b
d
c
d
b
d
a
a
a
c
a
b
a
a
d
b
c
d
b
d
b
b
No.
Description
52
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
Calculate book basis and tax basis of an asset.
Calculate deferred tax liability balance.
Calculate current/noncurrent portions of deferred tax liability.
Calculate income tax expense for the year.
Calculate amount of deferred tax asset to be recognized.
Calculate current deferred tax liability.
Determine income taxes payable for the year.
Calculate amount of deferred tax asset to be recognized.
Calculate current/noncurrent portions of deferred tax liability.
Calculate amount deducted for depreciation on the tax return.
Calculate amount of deferred tax asset to be recognized.
Calculate deferred tax asset with temporary and permanent differences.
Calculate amount of DTA valuation account.
Calculate current portion of provision for income taxes.
Calculate deferred portion of income tax expense.
Computation of total income tax expense.
Calculate installment accounts receivable.
Computation of pretax financial income.
Calculate deferred tax liability amount.
Calculate income tax expense for the year.
Calculate income tax expense for the year.
Computation of income tax expense.
Computation of income tax expense.
Computation of warranty claims paid.
Calculate taxable income for the year.
Calculate deferred tax asset amount.
Calculate deferred tax liability balance.
Calculate income taxes payable amount.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 3
MULTIPLE CHOICE—Computational (cont.)
Answer
a
b
b
a
c
d
b
b
d
d
b
a
a
d
c
No.
Description
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
Calculate deferred tax asset amount.
Calculate taxable income for the year.
Calculate pretax financial income.
Calculate deferred tax liability with changing tax rates.
Calculate deferred tax liability amount.
Calculate income tax expense with changing tax rates.
Determine change in deferred tax liability.
Calculate deferred tax liability with changing tax rates.
Calculate loss to be reported after NOL carryback.
Calculate loss to be reported after NOL carryback.
Calculate loss to be reported after NOL carryforward.
Determine income tax refund following an NOL carryback.
Calculate income tax benefit from an NOL carryback.
Calculate income tax payable after NOL carryforward.
Calculate deferred tax asset after NOL carryforward.
MULTIPLE CHOICE—CPA Adapted
Answer
a
a
c
d
d
b
a
a
c
c
No.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
Description
Determine current income tax liability.
Determine current income tax liability.
Deferred tax liability arising from depreciation methods.
Deferred tax liability when using equity method of investment accounting.
Calculate deferred tax liability and income taxes currently payable.
Determine current income tax expense.
Deferred income tax liability from temporary and permanent differences.
Deferred tax liability arising from installment method.
Differences arising from depreciation and warranty expenses.
Deferred tax asset arising from warranty expenses.
EXERCISES
Item
E19-105
E19-106
E19-107
E19-108
E19-109
E19-110
E19-111
E19-112
E19-113
Description
Computation of taxable income.
Future taxable and deductible amounts (essay).
Deferred income taxes.
Deferred income taxes.
Recognition of deferred tax asset.
Permanent and temporary differences.
Permanent and temporary differences.
Temporary differences.
Operating loss carryforward.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Test Bank for Intermediate Accounting, Thirteenth Edition
19 - 4
PROBLEMS
Item
P19-114
P19-115
P19-116
P19-117
Description
Differences between accounting and taxable income and the effect on deferred
taxes.
Multiple temporary differences.
Deferred tax asset.
Interperiod tax allocation with change in enacted tax rates.
CHAPTER LEARNING OBJECTIVES
1.
Identify differences between pretax financial income and taxable income.
2.
Describe a temporary difference that results in future taxable amounts.
3.
Describe a temporary difference that results in future deductible amounts.
4.
Explain the purpose of a deferred tax asset valuation allowance.
5.
Describe the presentation of income tax expense in the income statement.
6.
Describe various temporary and permanent differences.
7.
Explain the effect of various tax rates and tax rate changes on deferred income taxes.
8.
Apply accounting procedures for a loss carryback and a loss carryforward.
9.
Describe the presentation of deferred income taxes in financial statements.
10.
*11.
Indicate the basic principles of the asset-liability method.
Understand and apply the concepts and procedures of interperiod tax allocation.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 5
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item
Type
1.
2.
TF
TF
3.
4.
24.
TF
TF
MC
5.
6.
56.
Item
Item
MC
MC
23.
95.
25.
52.
53.
MC
MC
MC
54.
55.
58.
TF
TF
MC
59.
61.
62.
MC
MC
MC
63.
106.
107.
7.
TF
8.
TF
64.
9.
26.
TF
MC
65.
66.
MC
MC
67.
99.
10.
11.
12.
P
27.
S
28.
TF
TF
TF
MC
MC
S
29.
30.
S
31.
32.
33.
MC
MC
MC
MC
MC
34.
35.
36.
37.
38.
13.
14.
TF
TF
S
39.
40.
MC
MC
83.
84.
15.
16.
TF
TF
17.
41.
TF
MC
42.
88.
18.
19.
43.
TF
TF
MC
44.
45.
46.
MC
MC
MC
47.
48.
49.
20.
TF
51.
MC
S
Note:
21.
22.
Type
P
S
Type
Item
Type
Item
Learning Objective 1
MC
96. MC
114.
MC
105.
E
115.
Learning Objective 2
MC
97. MC
107.
MC
98. MC
108.
MC
106.
E
114.
Learning Objective 3
MC
108.
E
114.
E
109.
E
115.
E
113.
E
116.
Learning Objective 4
MC
Learning Objective 5
MC
100. MC
MC
113.
E
Learning Objective 6
MC
68. MC
73.
MC
69. MC
74.
MC
70. MC
75.
MC
71. MC
76.
MC
72. MC
77.
Learning Objective 7
MC
85. MC
87.
MC
86. MC
117.
Learning Objective 8
MC
89. MC
91.
MC
90. MC
92.
Learning Objective 9
S
MC
50. MC
100.
MC
57. MC
101.
MC
60. MC
102.
Learning Objective 10
Type
Item
Type
Item
Type
P
P
116.
P
E
E
P
115.
116.
P
P
78.
79.
80.
81.
82.
MC
MC
MC
MC
MC
110.
111.
112.
114.
116.
E
E
E
P
P
MC
MC
93.
94.
MC
MC
113.
E
MC
MC
MC
103.
104.
116.
MC
MC
P
P
P
P
MC
MC
MC
MC
MC
MC
P
TF = True-False
MC = Multiple Choice
E = Exercise
P = Problem
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 6
Test Bank for Intermediate Accounting, Thirteenth Edition
TRUE-FALSE—Conceptual
1.
Taxable income is a tax accounting term and is also referred to as income before taxes.
2.
Pretax financial income is the amount used to compute income tax payable.
3.
Taxable amounts increase taxable income in future years.
4.
A deferred tax liability represents the increase in taxes payable in future years as a result
of taxable temporary differences existing at the end of the current year.
5.
Deductible amounts cause taxable income to be greater than pretax financial income in
the future as a result of existing temporary differences.
6.
A deferred tax asset represents the increase in taxes refundable in future years as a result
of deductible temporary differences existing at the end of the current year.
7.
A company reduces a deferred tax asset by a valuation allowance if it is probable that it
will not realize some portion of the deferred tax asset.
8.
Companies should consider both positive and negative evidence to determine whether it
needs to record a valuation allowance to reduce a deferred tax asset.
9.
A company should add a decrease in a deferred tax liability to income tax payable in
computing income tax expense.
10.
Taxable temporary differences will result in taxable amounts in future years when the
related assets are recovered.
11.
Examples of taxable temporary differences are subscriptions received in advance and
advance rental receipts.
12.
Permanent differences do not give rise to future taxable or deductible amounts.
13.
Companies must consider presently enacted changes in the tax rate that become effective
in future years when determining the tax rate to apply to existing temporary differences.
14.
When a change in the tax rate is enacted, the effect is reported as an adjustment to
income tax payable in the period of the change.
15.
Under the loss carryback approach, companies must apply a current year loss to the most
recent year first and then to an earlier year.
16.
The tax effect of a loss carryforward represents future tax savings and results in the
recognition of a deferred tax asset.
17.
A possible source of taxable income that may be available to realize a tax benefit for loss
carryforwards is future reversals of existing taxable temporary differences.
18.
An individual deferred tax asset or liability is classified as current or noncurrent based on
the classification of the related asset/liability for financial reporting purposes.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 7
19.
Companies should classify the balances in the deferred tax accounts on the balance
sheet as noncurrent assets and noncurrent liabilities.
20.
The FASB believes that the deferred tax method is the most consistent method for
accounting for income taxes.
True-False Answers—Conceptual
Item
1.
2.
3.
4.
5.
Ans.
F
F
T
T
F
Item
6.
7.
8.
9.
10.
Ans.
T
F
T
F
T
Item
11.
12.
13.
14.
15.
Ans.
F
T
T
F
F
Item
16.
17.
18.
19.
20.
Ans.
T
T
T
F
F
MULTIPLE CHOICE—Conceptual
21.
Taxable income of a corporation
a. differs from accounting income due to differences in intraperiod allocation between the
two methods of income determination.
b. differs from accounting income due to differences in interperiod allocation and
permanent differences between the two methods of income determination.
c. is based on generally accepted accounting principles.
d. is reported on the corporation's income statement.
22
Taxable income of a corporation differs from pretax financial income because of
a.
b.
c.
d.
23.
Permanent
Differences
No
No
Yes
Yes
Temporary
Differences
No
Yes
Yes
No
The deferred tax expense is the
a. increase in balance of deferred tax asset minus the increase in balance of deferred tax
liability.
b. increase in balance of deferred tax liability minus the increase in balance of deferred
tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of deferred tax
liability.
d. decrease in balance of deferred tax asset minus the increase in balance of deferred
tax liability.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 8
24.
Test Bank for Intermediate Accounting, Thirteenth Edition
Machinery was acquired at the beginning of the year. Depreciation recorded during the life
of the machinery could result in
Future
Taxable Amounts
Yes
Yes
No
No
a.
b.
c.
d.
Future
Deductible Amounts
Yes
No
Yes
No
P
25.
A temporary difference arises when a revenue item is reported for tax purposes in a
period
After it is reported
Before it is reported
in financial income
in financial income
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
S
26.
At the December 31, 2010 balance sheet date, Unruh Corporation reports an accrued
receivable for financial reporting purposes but not for tax purposes. When this asset is
recovered in 2011, a future taxable amount will occur and
a. pretax financial income will exceed taxable income in 2011.
b. Unruh will record a decrease in a deferred tax liability in 2011.
c. total income tax expense for 2011 will exceed current tax expense for 2011.
d. Unruh will record an increase in a deferred tax asset in 2011.
P
27.
Assuming a 40% statutory tax rate applies to all years involved, which of the following
situations will give rise to reporting a deferred tax liability on the balance sheet?
I.
II.
III.
IV.
a.
b.
c.
d.
S
28.
A revenue is deferred for financial reporting purposes but not for tax purposes.
A revenue is deferred for tax purposes but not for financial reporting purposes.
An expense is deferred for financial reporting purposes but not for tax purposes.
An expense is deferred for tax purposes but not for financial reporting purposes.
item II only
items I and II only
items II and III only
items I and IV only
A major distinction between temporary and permanent differences is
a. permanent differences are not representative of acceptable accounting practice.
b. temporary differences occur frequently, whereas permanent differences occur only
once.
c. once an item is determined to be a temporary difference, it maintains that status;
however, a permanent difference can change in status with the passage of time.
d. temporary differences reverse themselves in subsequent accounting periods, whereas
permanent differences do not reverse.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 9
S
29.
Which of the following are temporary differences that are normally classified as expenses
or losses that are deductible after they are recognized in financial income?
a. Advance rental receipts.
b. Product warranty liabilities.
c. Depreciable property.
d. Fines and expenses resulting from a violation of law.
S
30.
Which of the following is a temporary difference classified as a revenue or gain that is
taxable after it is recognized in financial income?
a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
c. An installment sale accounted for on the accrual basis for financial reporting purposes
and on the installment (cash) basis for tax purposes.
d. Interest received on a municipal obligation.
S
31.
Which of the following differences would result in future taxable amounts?
a. Expenses or losses that are tax deductible after they are recognized in financial
income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in
taxable income.
d. Expenses or losses that are tax deductible before they are recognized in financial
income.
32.
Stuart Corporation's taxable income differed from its accounting income computed for this
past year. An item that would create a permanent difference in accounting and taxable
incomes for Stuart would be
a. a balance in the Unearned Rent account at year end.
b. using accelerated depreciation for tax purposes and straight-line depreciation for book
purposes.
c. a fine resulting from violations of OSHA regulations.
d. making installment sales during the year.
33.
An example of a permanent difference is
a. proceeds from life insurance on officers.
b. interest expense on money borrowed to invest in municipal bonds.
c. insurance expense for a life insurance policy on officers.
d. all of these.
34.
Which of the following will not result in a temporary difference?
a. Product warranty liabilities
b. Advance rental receipts
c. Installment sales
d. All of these will result in a temporary difference.
35.
A company uses the equity method to account for an investment. This would result in what
type of difference and in what type of deferred income tax?
a.
b.
c.
d.
Type of Difference
Permanent
Permanent
Temporary
Temporary
Deferred Tax
Asset
Liability
Asset
Liability
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 10 Test Bank for Intermediate Accounting, Thirteenth Edition
36.
A company records an unrealized loss on short-term securities. This would result in what
type of difference and in what type of deferred income tax?
a.
b.
c.
d.
S
Type of Difference
Temporary
Temporary
Permanent
Permanent
Deferred Tax
Liability
Asset
Liability
Asset
37.
Which of the following temporary differences results in a deferred tax asset in the year the
temporary difference originates?
I. Accrual for product warranty liability.
II. Subscriptions received in advance.
III. Prepaid insurance expense.
a. I and II only.
b. II only.
c. III only.
d. I and III only.
38.
Which of the following is not considered a permanent difference?
a. Interest received on municipal bonds.
b. Fines resulting from violating the law.
c. Premiums paid for life insurance on a company’s CEO when the company is the
beneficiary.
d. Stock-based compensation expense.
39.
When a change in the tax rate is enacted into law, its effect on existing deferred income
tax accounts should be
a. handled retroactively in accordance with the guidance related to changes in
accounting principles.
b. considered, but it should only be recorded in the accounts if it reduces a deferred tax
liability or increases a deferred tax asset.
c. reported as an adjustment to tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date of the
enactment of the tax rate change, but not subsequent to the date of the change.
40.
Tax rates other than the current tax rate may be used to calculate the deferred income tax
amount on the balance sheet if
a. it is probable that a future tax rate change will occur.
b. it appears likely that a future tax rate will be greater than the current tax rate.
c. the future tax rates have been enacted into law.
d. it appears likely that a future tax rate will be less than the current tax rate.
41.
Recognition of tax benefits in the loss year due to a loss carryforward requires
a. the establishment of a deferred tax liability.
b. the establishment of a deferred tax asset.
c. the establishment of an income tax refund receivable.
d. only a note to the financial statements.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 11
42.
Recognizing a valuation allowance for a deferred tax asset requires that a company
a. consider all positive and negative information in determining the need for a valuation
allowance.
b. consider only the positive information in determining the need for a valuation
allowance.
c. take an aggressive approach in its tax planning.
d. pass a recognition threshold, after assuming that it will be audited by taxing
authorities.
43.
Uncertain tax positions
I. Are positions for which the tax authorities may disallow a deduction in whole or
in part.
II. Include instances in which the tax law is clear and in which the company believes
an audit is likely.
III. Give rise to tax expense by increasing payables or increasing a deferred
tax liability.
a. I, II, and III.
b. I and III only.
c. II only.
d. I only.
44.
With regard to uncertain tax positions, the FASB requires that companies recognize a tax
benefit when
a. it is probable and can be reasonably estimated.
b. there is at least a 51% probability that the uncertain tax position will be approved by
the taxing authorities.
c. it is more likely than not that the tax position will be sustained upon audit.
d. Any of the above exist.
45.
Major reasons for disclosure of deferred income tax information is (are)
a. better assessment of quality of earnings.
b. better predictions of future cash flows.
c. that it may be helpful in setting government policy.
d. all of these.
46.
Accounting for income taxes can result in the reporting of deferred taxes as any of the
following except
a. a current or long-term asset.
b. a current or long-term liability.
c. a contra-asset account.
d. All of these are acceptable methods of reporting deferred taxes.
47.
Deferred taxes should be presented on the balance sheet
a. as one net debit or credit amount.
b. in two amounts: one for the net current amount and one for the net noncurrent amount.
c. in two amounts: one for the net debit amount and one for the net credit amount.
d. as reductions of the related asset or liability accounts.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 12 Test Bank for Intermediate Accounting, Thirteenth Edition
S
48.
Deferred tax amounts that are related to specific assets or liabilities should be classified
as current or noncurrent based on
a. their expected reversal dates.
b. their debit or credit balance.
c. the length of time the deferred tax amounts will generate future tax deferral benefits.
d. the classification of the related asset or liability.
49.
Tanner, Inc. incurred a financial and taxable loss for 2010. Tanner therefore decided to
use the carryback provisions as it had been profitable up to this year. How should the
amounts related to the carryback be reported in the 2010 financial statements?
a. The reduction of the loss should be reported as a prior period adjustment.
b. The refund claimed should be reported as a deferred charge and amortized over five
years.
c. The refund claimed should be reported as revenue in the current year.
d. The refund claimed should be shown as a reduction of the loss in 2010.
50.
A deferred tax liability is classified on the balance sheet as either a current or a noncurrent
liability. The current amount of a deferred tax liability should generally be
a. the net deferred tax consequences of temporary differences that will result in net
taxable amounts during the next year.
b. totally eliminated from the financial statements if the amount is related to a noncurrent
asset.
c. based on the classification of the related asset or liability for financial reporting
purposes.
d. the total of all deferred tax consequences that are not expected to reverse in the
operating period or one year, whichever is greater.
51.
All of the following are procedures for the computation of deferred income taxes except to
a. identify the types and amounts of existing temporary differences.
b. measure the total deferred tax liability for taxable temporary differences.
c. measure the total deferred tax asset for deductible temporary differences and
operating loss carrybacks.
d. All of these are procedures in computing deferred income taxes.
Multiple Choice Answers—Conceptual
Item
21.
22.
23.
24.
25.
Ans.
b
c
b
a
a
Item
26.
27.
28.
29.
30.
Ans.
b
c
d
b
c
Item
31.
32.
33.
34.
35.
Ans.
d
c
d
d
d
Item
36.
37.
38.
39.
40.
Ans.
b
a
d
c
c
Item
41.
42.
43.
44.
45.
Ans.
b
a
d
c
d
Item
46.
47.
48.
49.
50.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
Ans.
Item
Ans.
c
b
d
d
c
51.
c
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 13
MULTIPLE CHOICE—Computational
Use the following information for questions 52 and 53.
At the beginning of 2010, Pitman Co. purchased an asset for $600,000 with an estimated useful
life of 5 years and an estimated salvage value of $50,000. For financial reporting purposes the
asset is being depreciated using the straight-line method; for tax purposes the double-decliningbalance method is being used. Pitman Co.’s tax rate is 40% for 2010 and all future years.
52.
At the end of 2010, what is the book basis and the tax basis of the asset?
Book basis
Tax basis
a. $440,000
$310,000
b. $490,000
$310,000
c. $490,000
$360,000
d. $440,000
$360,000
53.
At the end of 2010, which of the following deferred tax accounts and balances is reported
on Pitman’s balance sheet?
Account
_
Balance
a. Deferred tax asset
$52,000
b. Deferred tax liability
$52,000
c. Deferred tax asset
$78,000
d. Deferred tax liability
$78,000
54.
Lehman Corporation purchased a machine on January 2, 2009, for $2,000,000. The
machine has an estimated 5-year life with no salvage value. The straight-line method of
depreciation is being used for financial statement purposes and the following MACRS
amounts will be deducted for tax purposes:
2009
2010
2011
$400,000
640,000
384,000
2012
2013
2014
$230,000
230,000
116,000
Assuming an income tax rate of 30% for all years, the net deferred tax liability that should
be reflected on Lehman's balance sheet at December 31, 2010, should be
a.
b.
c.
d.
Deferred Tax Liability
Current
Noncurrent
$0
$72,000
$4,800
$67,200
$67,200
$4,800
$72,000
$0
Use the following information for questions 55 through 57.
Mathis Co. at the end of 2010, its first year of operations, prepared a reconciliation between
pretax financial income and taxable income as follows:
Pretax financial income
$ 500,000
Estimated litigation expense
1,250,000
Installment sales
(1,000,000)
Taxable income
$ 750,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 14 Test Bank for Intermediate Accounting, Thirteenth Edition
The estimated litigation expense of $1,250,000 will be deductible in 2012 when it is expected to
be paid. The gross profit from the installment sales will be realized in the amount of $500,000 in
each of the next two years. The estimated liability for litigation is classified as noncurrent and the
installment accounts receivable are classified as $500,000 current and $500,000 noncurrent. The
income tax rate is 30% for all years.
55.
The income tax expense is
a. $150,000.
b. $225,000.
c. $250,000.
d. $500,000.
56.
The deferred tax asset to be recognized is
a. $0.
b. $75,000 current.
c. $375,000 current.
d. $375,000 noncurrent.
57.
The deferred tax liability—current to be recognized is
a. $75,000.
b. $225,000.
c. $150,000.
d. $300,000.
Use the following information for questions 58 through 60.
Hopkins Co. at the end of 2010, its first year of operations, prepared a reconciliation between
pretax financial income and taxable income as follows:
Pretax financial income
Estimated litigation expense
Extra depreciation for taxes
Taxable income
$ 750,000
1,000,000
(1,500,000)
$ 250,000
The estimated litigation expense of $1,000,000 will be deductible in 2011 when it is expected to
be paid. Use of the depreciable assets will result in taxable amounts of $500,000 in each of the
next three years. The income tax rate is 30% for all years.
58.
Income tax payable is
a. $0.
b. $75,000.
c. $150,000.
d. $225,000.
59.
The deferred tax asset to be recognized is
a. $75,000 current.
b. $150,000 current.
c. $225,000 current.
d. $300,000 current.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 15
60.
The deferred tax liability to be recognized is
Current
Noncurrent
a. $150,000
$300,000
b. $150,000
$225,000
c. $0
$450,000
d. $0
$375,000
61.
Eckert Corporation's partial income statement after its first year of operations is as follows:
Income before income taxes
Income tax expense
Current
Deferred
Net income
$3,750,000
$1,035,000
90,000
1,125,000
$2,625,000
Eckert 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 $1,500,000. No other differences existed between book income
and taxable income except for the amount of depreciation. Assuming a 30% tax rate, what
amount was deducted for depreciation on the corporation's tax return for the current year?
a. $1,200,000
b. $1,425,000
c. $1,500,000
d. $1,800,000
62.
Cross Company reported the following results for the year ended December 31, 2010, its
first year of operations:
2007
Income (per books before income taxes)
$ 750,000
Taxable income
1,200,000
The disparity between book income and taxable income is attributable to a temporary
difference which will reverse in 2011. What should Cross record as a net deferred tax
asset or liability for the year ended December 31, 2010, assuming that the enacted tax
rates in effect are 40% in 2010 and 35% in 2011?
a. $180,000 deferred tax liability
b. $157,500 deferred tax asset
c. $180,000 deferred tax asset
d. $157,500 deferred tax liability
63.
In 2010, Krause Company accrued, for financial statement reporting, estimated losses on
disposal of unused plant facilities of $1,500,000. The facilities were sold in March 2011
and a $1,500,000 loss was recognized for tax purposes. Also in 2010, Krause paid
$100,000 in premiums for a two-year life insurance policy in which the company was the
beneficiary. Assuming that the enacted tax rate is 30% in both 2010 and 2011, and that
Krause paid $780,000 in income taxes in 2010, the amount reported as net deferred
income taxes on Krause's balance sheet at December 31, 2010, should be a
a. $420,000 asset.
b. $360,000 asset.
c. $360,000 liability.
d. $450,000 asset.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 16 Test Bank for Intermediate Accounting, Thirteenth Edition
64.
Horner Corporation has a deferred tax asset at December 31, 2011 of $80,000 due to the
recognition of potential tax benefits of an operating loss carryforward. The enacted tax
rates are as follows: 40% for 2008–2010; 35% for 2011; and 30% for 2012 and thereafter.
Assuming that management expects that only 50% of the related benefits will actually be
realized, a valuation account should be established in the amount of:
a. $40,000
b. $16,000
c. $14,000
d. $12,000
65.
Watson Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2011
$1,200,000
Tax exempt interest
(100,000)
Originating temporary difference
(300,000)
Taxable income
$800,000
The temporary difference will reverse evenly over the next two years at an enacted tax
rate of 40%. The enacted tax rate for 2011 is 28%. What amount should be reported in its
2011 income statement as the current portion of its provision for income taxes?
a. $224,000
b. $320,000
c. $336,000
d. $480,000
Use the following information for questions 66 and 67.
Mitchell Corporation prepared the following reconciliation for its first year of operations:
Pretax financial income for 2011
Tax exempt interest
Originating temporary difference
Taxable income
$ 900,000
(75,000)
(225,000)
$600,000
The temporary difference will reverse evenly over the next two years at an enacted tax rate of
40%. The enacted tax rate for 2011 is 35%.
66.
What amount should be reported in its 2011 income statement as the deferred portion of
income tax expense?
a. $90,000 debit
b. $120,000 debit
c. $90,000 credit
d. $105,000 credit
67.
In Mitchell’s 2011 income statement, what amount should be reported for total income tax
expense?
a. $330,000
b. $315,000
c. $300,000
d. $210,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
68.
19 - 17
Ewing Company sells household furniture. Customers who purchase furniture on the
installment basis make payments in equal monthly installments over a two-year period,
with no down payment required. Ewing's gross profit on installment sales equals 40% of
the selling price of the furniture.
For financial accounting purposes, sales revenue is recognized at the time the sale is
made. For income tax purposes, however, the installment method is used. There are no
other book and income tax accounting differences, and Ewing's income tax rate is 30%.
If Ewing's December 31, 2011, balance sheet includes a deferred tax liability of $300,000
arising from the difference between book and tax treatment of the installment sales, it
should also include installment accounts receivable of
a. $2,500,000.
b. $1,000,000.
c. $750,000.
d. $300,000.
69.
Ferguson Company has the following cumulative taxable temporary differences:
12/31/11
$1,350,000
12/31/10
$960,000
The tax rate enacted for 2011 is 40%, while the tax rate enacted for future years is 30%.
Taxable income for 2011 is $2,400,000 and there are no permanent differences.
Ferguson's pretax financial income for 2011 is
a. $3,750,000.
b. $2,790,000.
c. $2,010,000.
d. $1,050,000.
Use the following information for questions 70 through 72.
Lyons Company deducts insurance expense of $84,000 for tax purposes in 2010, but the
expense is not yet recognized for accounting purposes. In 2011, 2012, and 2013, no insurance
expense will be deducted for tax purposes, but $28,000 of insurance expense will be reported for
accounting purposes in each of these years. Lyons Company has a tax rate of 40% and income
taxes payable of $72,000 at the end of 2010. There were no deferred taxes at the beginning of
2010.
70.
What is the amount of the deferred tax liability at the end of 2010?
a. $33,600
b. $28,800
c. $12,000
d. $0
71.
What is the amount of income tax expense for 2010?
a. $105,600
b. $100,800
c. $84,000
d. $72,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 18 Test Bank for Intermediate Accounting, Thirteenth Edition
72.
Assuming that income tax payable for 2011 is $96,000, the income tax expense for 2011
would be what amount?
a. $129,600
b. $107,200
c. $96,000
d. $84,800
Use the following information for questions 73 and 74.
Kraft Company made the following journal entry in late 2010 for rent on property it leases to
Danford Corporation.
Cash
60,000
Unearned Rent
60,000
The payment represents rent for the years 2011 and 2012, the period covered by the lease. Kraft
Company is a cash basis taxpayer. Kraft has income tax payable of $92,000 at the end of 2010,
and its tax rate is 35%.
73.
What amount of income tax expense should Kraft Company report at the end of 2010?
a. $53,000
b. $71,000
c. $81,500
d. $113,000
74.
Assuming the taxes payable at the end of 2011 is $102,000, what amount of income tax
expense would Kraft Company record for 2011?
a. $81,000
b. $91,500
c. $112,500
d. $123,000
75.
The following information is available for Kessler Company after its first year of
operations:
Income before taxes
Federal income tax payable
Deferred income tax
Income tax expense
Net income
$250,000
$104,000
(4,000)
100,000
$150,000
Kessler estimates its annual warranty expense as a percentage of sales. The amount
charged to warranty expense on its books was $95,000. Assuming a 40% income tax rate,
what amount was actually paid this year for warranty claims?
a. $105,000
b. $100,000
c. $95,000
d. $85,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 19
Use the following information for questions 76–78.
At the beginning of 2010; Elephant, Inc. had a deferred tax asset of $4,000 and a deferred tax
liability of $6,000. Pre-tax accounting income for 2010 was $300,000 and the enacted tax rate is
40%. The following items are included in Elephant’s pre-tax income:
Interest income from municipal bonds
Accrued warranty costs, estimated to be
paid in 2011
Operating loss carryforward
Installment sales revenue, will be collected
in 2011
Prepaid rent expense, will be used in 2011
$24,000
$52,000
$38,000
$26,000
$12,000
76.
What is Elephant, Inc.’s taxable income for 2010?
a. $300,000
b. $252,000
c. $348,000
d. $452,000
77.
Which of the following is required to adjust Elephant, Inc.’s deferred tax asset to its correct
balance at December 31, 2010?
a. A debit of $20,800
b. A credit of $15,200
c. A debit of $15,200
d. A debit of $16,800
78.
The ending balance in Elephant, Inc’s deferred tax liability at December 31, 2010 is
a. $9,200
b. $15,200
c. $10,400
d. $31,200
Use the following information for questions 79 and 80.
Rowen, Inc. had pre-tax accounting income of $900,000 and a tax rate of 40% in 2010, its first
year of operations. During 2010 the company had the following transactions:
Received rent from Jane, Co. for 2011
Municipal bond income
Depreciation for tax purposes in excess of book
depreciation
Installment sales revenue to be collected in
2011
79.
$32,000
$40,000
$20,000
$54,000
For 2010, what is the amount of income taxes payable for Rowen, Inc?
a. $301,600
b. $327,200
c. $343,200
d. $386,400
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 20 Test Bank for Intermediate Accounting, Thirteenth Edition
80.
At the end of 2010, which of the following deferred tax accounts and balances is reported
on Rowen, Inc.’s balance sheet?
_
Balance
Account
a. Deferred tax asset
$12,800
b. Deferred tax liability
$12,800
c. Deferred tax asset
$20,800
d. Deferred tax liability
$20,800
81.
Based on the following information, compute 2011 taxable income for South Co. assuming
that its pre-tax accounting income for the year ended December 31, 2011 is $230,000.
Future taxable
Temporary difference
(deductible) amount
Installment sales
$192,000
Depreciation
$60,000
Unearned rent
($200,000)
a.
b.
c.
d.
82.
$282,000
$178,000
$482,000
$222,000
Fleming Company has the following cumulative taxable temporary differences:
12/31/11
12/31/10
$640,000
$900,000
The tax rate enacted for 2011 is 40%, while the tax rate enacted for future years is 30%.
Taxable income for 2011 is $1,600,000 and there are no permanent differences. Fleming’s
pretax financial income for 2011 is:
a.
b.
c.
d.
83.
$960,000
$1,340,000
$1,730,000
$2,240,000
Larsen Corporation reported $100,000 in revenues in its 2010 financial statements, of
which $44,000 will not be included in the tax return until 2011. The enacted tax rate is 40%
for 2010 and 35% for 2011. What amount should Larsen report for deferred income tax
liability in its balance sheet at December 31, 2010?
a. $15,400
b. $17,600
c. $19,600
d. $22,400
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
84.
19 - 21
Duncan Inc. uses the accrual method of accounting for financial reporting purposes and
appropriately uses the installment method of accounting for income tax purposes. Profits
of $300,000 recognized for books in 2010 will be collected in the following years:
Collection of Profits
2011
$ 50,000
2012
$100,000
2013
$150,000
The enacted tax rates are: 40% for 2010, 35% for 2011, and 30% for 2012 and 2013.
Taxable income is expected in all future years. What amount should be included in the
December 31, 2010, balance sheet for the deferred tax liability related to the above
temporary difference?
a. $17,500
b. $75,000
c. $92,500
d. $120,000
85.
At December 31, 2010 Raymond Corporation reported a deferred tax liability of $90,000
which was attributable to a taxable type temporary difference of $300,000. The temporary
difference is scheduled to reverse in 2014. During 2011, a new tax law increased the
corporate tax rate from 30% to 40%. Raymond should record this change by debiting
a. Retained Earnings for $30,000.
b. Retained Earnings for $9,000.
c. Income Tax Expense for $9,000.
d. Income Tax Expense for $30,000.
86.
Palmer Co. had a deferred tax liability balance due to a temporary difference at the
beginning of 2010 related to $600,000 of excess depreciation. In December of 2010, a
new income tax act is signed into law that lowers the corporate rate from 40% to 35%,
effective January 1, 2012. If taxable amounts related to the temporary difference are
scheduled to be reversed by $300,000 for both 2011 and 2012, Palmer should increase or
decrease deferred tax liability by what amount?
a. Decrease by $30,000
b. Decrease by $15,000
c. Increase by $15,000
d. Increase by $30,000
87.
A reconciliation of Gentry Company's pretax accounting income with its taxable income for
2010, its first year of operations, is as follows:
Pretax accounting income
Excess tax depreciation
Taxable income
$3,000,000
(90,000)
$2,910,000
The excess tax depreciation will result in equal net taxable amounts in each of the next
three years. Enacted tax rates are 40% in 2010, 35% in 2011 and 2012, and 30% in 2013.
The total deferred tax liability to be reported on Gentry's balance sheet at December 31,
2010, is
a. $36,000.
b. $30,000.
c. $31,500.
d. $27,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 22 Test Bank for Intermediate Accounting, Thirteenth Edition
88.
Khan, Inc. reports a taxable and financial loss of $650,000 for 2011. Its pretax financial
income for the last two years was as follows:
2009
2010
$300,000
400,000
The amount that Khan, Inc. reports as a net loss for financial reporting purposes in 2011,
assuming that it uses the carryback provisions, and that the tax rate is 30% for all periods
affected, is
a. $650,000 loss.
b. $ -0-.
c. $195,000 loss.
d. $455,000 loss.
Use the following information for questions 89 and 90.
Wilcox Corporation reported the following results for its first three years of operation:
2010 income (before income taxes)
2011 loss (before income taxes)
2012 income (before income taxes)
$ 100,000
(900,000)
1,000,000
There were no permanent or temporary differences during these three years. Assume a corporate
tax rate of 30% for 2010 and 2011, and 40% for 2012.
89.
Assuming that Wilcox elects to use the carryback provision, what income (loss) is reported
in 2011? (Assume that any deferred tax asset recognized is more likely than not to be
realized.)
a. $(900,000)
b. $ -0c. $(870,000)
d. $(550,000)
90.
Assuming that Wilcox elects to use the carryforward provision and not the carryback
provision, what income (loss) is reported in 2011?
a. $(900,000)
b. $(540,000)
c. $ -0d. $(870,000)
Rodd Co. reports a taxable and pretax financial loss of $400,000 for 2011. Rodd's taxable
and pretax financial income and tax rates for the last two years were:
91.
2009
2010
$400,000
400,000
30%
35%
The amount that Rodd should report as an income tax refund receivable in 2011,
assuming that it uses the carryback provisions and that the tax rate is 40% in 2011, is
a. $120,000.
b. $140,000.
c. $160,000.
d. $180,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
92.
19 - 23
Nickerson Corporation began operations in 2007. There have been no permanent or
temporary differences to account for since the inception of the business. The following
data are available:
Year
Enacted Tax Rate
Taxable Income
Taxes Paid
2009
45%
$750,000
$337,500
2010
40%
900,000
360,000
2011
35%
2012
30%
In 2011, Nickerson had an operating loss of $930,000. What amount of income tax
benefits should be reported on the 2011 income statement due to this loss?
a. $409,500
b. $373,500
c. $372,000
d. $279,000
Use the following information for questions 93 and 94.
Operating income and tax rates for C.J. Company’s first three years of operations were as
follows:
Income _
Enacted tax rate
2010
$100,000
35%
2011
($250,000)
30%
2012
$420,000
40%
93.
Assuming that C.J. Company opts to carryback its 2011 NOL, what is the amount of
income tax payable at December 31, 2012?
a. $68,000
b. $168,000
c. $123,000
d. $108,000
94.
Assuming that C.J. Company opts only to carryforward its 2011 NOL, what is the amount
of deferred tax asset or liability that C.J. Company would report on its December 31, 2011
balance sheet?
Amount _
Deferred tax asset or liability
a. $75,000
Deferred tax liability
b. $87,500
Deferred tax liability
c. $100,000
Deferred tax asset
d. $75,000
Deferred tax asset
Multiple Choice Answers—Computational
Item
52.
53.
54.
55.
56.
57.
Ans.
c
b
a
a
d
c
Item
58.
59.
60.
61.
62.
63.
Ans.
b
d
c
d
b
d
Item
64.
65.
66.
67.
68.
69.
Ans.
a
a
a
c
a
b
Item
70.
71.
72.
73.
74.
75.
Ans.
a
a
d
b
c
d
Item
76.
77.
78.
79.
80.
81.
82.
Ans.
b
d
b
b
a
b
b
Item
83.
84.
85.
86.
87.
88.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
Ans.
a
c
d
b
b
d
Item
89.
90.
91.
92.
93.
94.
Ans.
d
b
a
a
d
c
lOMoARcPSD|19958401
19 - 24 Test Bank for Intermediate Accounting, Thirteenth Edition
MULTIPLE CHOICE—CPA Adapted
95.
Munoz Corp.'s books showed pretax financial income of $1,500,000 for the year ended
December 31, 2011. In the computation of federal income taxes, the following data were
considered:
Gain on an involuntary conversion
$650,000
(Munoz has elected to replace the property within the statutory
period using total proceeds.)
Depreciation deducted for tax purposes in excess of depreciation
deducted for book purposes
100,000
Federal estimated tax payments, 2011
125,000
Enacted federal tax rate, 2011
30%
What amount should Munoz report as its current federal income tax liability on its
December 31, 2011 balance sheet?
a. $100,000
b. $130,000
c. $225,000
d. $255,000
96.
Haag Corp.'s 2011 income statement showed pretax accounting income of $750,000. To
compute the federal income tax liability, the following 2011 data are provided:
Income from exempt municipal bonds
$ 30,000
Depreciation deducted for tax purposes in excess of depreciation
deducted for financial statement purposes
60,000
Estimated federal income tax payments made
150,000
Enacted corporate income tax rate
30%
What amount of current federal income tax liability should be included in Hagg's
December 31, 2011 balance sheet?
a. $48,000
b. $66,000
c. $75,000
d. $198,000
97.
On January 1, 2011, Gore, Inc. purchased a machine for $720,000 which will be
depreciated $72,000 per year for financial statement reporting purposes. For income tax
reporting, Gore elected to expense $80,000 and to use straight-line depreciation which will
allow a cost recovery deduction of $64,000 for 2011. Assume a present and future
enacted income tax rate of 30%. What amount should be added to Gore's deferred
income tax liability for this temporary difference at December 31, 2011?
a. $43,200
b. $24,000
c. $21,600
d. $19,200
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 25
98.
On January 1, 2011, Piper Corp. purchased 40% of the voting common stock of Betz, Inc.
and appropriately accounts for its investment by the equity method. During 2011, Betz
reported earnings of $360,000 and paid dividends of $120,000. Piper assumes that all of
Betz's undistributed earnings will be distributed as dividends in future periods when the
enacted tax rate will be 30%. Ignore the dividend-received deduction. Piper's current
enacted income tax rate is 25%. The increase in Piper's deferred income tax liability for
this temporary difference is
a. $72,000.
b. $60,000.
c. $43,200.
d. $28,800.
99.
Foltz Corp.'s 2010 income statement had pretax financial income of $250,000 in its first
year of operations. Foltz uses an accelerated cost recovery method on its tax return and
straight-line depreciation for financial reporting. The differences between the book and tax
deductions for depreciation over the five-year life of the assets acquired in 2010, and the
enacted tax rates for 2010 to 2014 are as follows:
2010
2011
2012
2013
2014
Book Over (Under) Tax
$(50,000)
(65,000)
(15,000)
60,000
70,000
Tax Rates
35%
30%
30%
30%
30%
There are no other temporary differences. In Foltz's December 31, 2010 balance sheet, the
noncurrent deferred income tax liability and the income taxes currently payable should be
Noncurrent Deferred
Income Taxes
Income Tax Liability
Currently Payable
a.
$39,000
$50,000
b.
$39,000
$70,000
c.
$15,000
$60,000
d.
$15,000
$70,000
100.
Didde Corp. prepared the following reconciliation of income per books with income per tax
return for the year ended December 31, 2011:
Book income before income taxes
Add temporary difference
Construction contract revenue which will reverse in 2012
Deduct temporary difference
Depreciation expense which will reverse in equal amounts in
each of the next four years
Taxable income
$1,200,000
160,000
(640,000)
$720,000
Didde's effective income tax rate is 34% for 2011. What amount should Didde report in its
2011 income statement as the current provision for income taxes?
a. $54,400
b. $244,800
c. $408,000
d. $462,400
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 26 Test Bank for Intermediate Accounting, Thirteenth Edition
101.
In its 2010 income statement, Cohen Corp. reported depreciation of $1,110,000 and interest
revenue on municipal obligations of $210,000. Cohen reported depreciation of $1,650,000
on its 2010 income tax return. The difference in depreciation is the only temporary
difference, and it will reverse equally over the next three years. Cohen's enacted income tax
rates are 35% for 2010, 30% for 2011, and 25% for 2012 and 2013. What amount should be
included in the deferred income tax liability in Hertz's December 31, 2010 balance sheet?
a. $144,000
b. $186,000
c. $225,000
d. $262,500
102.
Dunn, Inc. uses the accrual method of accounting for financial reporting purposes and
appropriately uses the installment method of accounting for income tax purposes.
Installment income of $900,000 will be collected in the following years when the enacted
tax rates are:
Collection of Income
Enacted Tax Rates
2010
$ 90,000
35%
2011
180,000
30%
2012
270,000
30%
2013
360,000
25%
The installment income is Dunn's only temporary difference. What amount should be
included in the deferred income tax liability in Dunn's December 31, 2010 balance sheet?
a. $225,000
b. $256,500
c. $283,500
d. $315,000
103.
For calendar year 2010, Kane Corp. reported depreciation of $1,200,000 in its income
statement. On its 2010 income tax return, Kane reported depreciation of $1,800,000.
Kane's income statement also included $225,000 accrued warranty expense that will be
deducted for tax purposes when paid. Kane's enacted tax rates are 30% for 2010 and
2011, and 24% for 2012 and 2013. The depreciation difference and warranty expense will
reverse over the next three years as follows:
Depreciation Difference
Warranty Expense
2011
$240,000
$ 45,000
2012
210,000
75,000
2013
150,000
105,000
$600,000
$225,000
These were Kane's only temporary differences. In Kane's 2010 income statement, the
deferred portion of its provision for income taxes should be
a. $200,700.
b. $112,500.
c. $101,700.
d. $109,800.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
104.
19 - 27
Wright Co., organized on January 2, 2010, had pretax accounting income of $880,000 and
taxable income of $1,600,000 for the year ended December 31, 2010 The only temporary
difference is accrued product warranty costs which are expected to be paid as follows:
2011
2012
2013
2014
$240,000
120,000
120,000
240,000
The enacted income tax rates are 35% for 2010, 30% for 2011 through 2013, and 25% for
2014. If Wright expects taxable income in future years, the deferred tax asset in Wright's
December 31, 2010 balance sheet should be
a. $144,000.
b. $168,000.
c. $204,000.
d. $252,000.
Multiple Choice Answers—CPA Adapted
Item
95.
96.
Ans.
a
a
Item
97.
98.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
c
d
99.
100.
d
b
101.
102.
a
a
103.
104.
c
c
DERIVATIONS — Computational
No. Answer
Derivation
52.
c
$600,000 – [($600,000 – $50,000)  5)] = $490,000;
$600,000 – (600,000  1/5  2) = $360,000.
53.
b
($490,000 – $360,000)  .40 = $52,000.
54.
a
($640,000 – $400,000) × 30% = $72,000.
55.
a
Income tax payable = ($750,000 × 30%) = $225,000
Change in deferred tax liability = ($1,000,000 × 30%) = $300,000
Change in deferred tax asset = ($1,250,000 × 30%) = $375,000
$225,000 + $300,000 – $375,000 = $150,000.
56.
d
($1,250,000 × 30%) = $375,000.
57.
c
($500,000 × 30%) = $150,000.
58.
b
($250,000 × 30%) = $75,000.
59.
d
($1,000,000 × 30%) = $300,000.
60.
c
($1,500,000 × 30%) = $450,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 28 Test Bank for Intermediate Accounting, Thirteenth Edition
DERIVATIONS — Computational (cont.)
No. Answer
Derivation
61.
d
(30% × Temporary Difference) = $90,000;
Temporary Difference = ($90,000 ÷ 30%) = $300,000;
$1,500,000 + $300,000 = $1,800,000.
62.
b
($1,200,000 – $750,000) × 35% = $157,500.
63.
d
($1,500,000 × 30%) = $450,000.
64.
a
$80,000  .50 = $40,000.
65.
a
$800,000  .28 = $224,000.
66.
a
$225,000 × .40 = $90,000 debit.
67.
c
($600,000 × .35) + ($225,000 × .40) = $300,000.
68.
a
$300,000 ÷ 30% = $1,000,000 temporary difference
$1,000,000 ÷ 40% = $2,500,000.
69.
b
$2,400,000 + ($1,350,000 – $960,000) = $2,790,000.
70.
a
$84,000 × .40 = $33,600.
71.
a
$72,000 + ($84,000 × .40) = $105,600.
72.
d
$96,000 – ($28,000 × .40) = $84,800.
73.
b
$92,000 – ($60,000 × .35) = $71,000.
74.
c
$102,000 + ($30,000 × .35) = $112,500.
75.
d
$95,000 – ($4,000 ÷ .40) = $85,000.
76.
b
$300,000 – $24,000 + $52,000 – $38,000 – $26,000 – $12,000 = $252,000.
77.
d
($52,000  .40) – $4,000 = $16,800.
78.
b
($26,000 + $12,000)  .40 = $15,200.
79.
b
$900,000 + $32,000 – $40,000 – $20,000 – $54,000 = $818,000
$818,000  .40 = $327,200.
80.
a
$32,000  .40 = $12,800 DTA.
81.
b
$230,000 - $192,000 – $60,000 + $200,000 = $178,000.
82.
b
$1,600,000 – ($900,000 – $640,000) = $1,340,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
DERIVATIONS — Computational (cont.)
No. Answer
Derivation
83.
a
$44,000  .35 = $15,400.
84.
c
($50,000  .35) + [($100,000 + $150,000)  .30] = $92,500.
85.
d
$300,000  (.40 – .30) = $30,000 ITE.
86.
b
$300,000 × (.35 – .40) = $15,000 decrease.
87.
b
($30,000 × 35%) + ($30,000 × 35%) + ($30,000 × 30%) = $30,000.
88.
d
$650,000 – (30% × $650,000) = $455,000.
89.
d
($100,000 × 30%) = $30,000; $800,000 × 40% = $320,000;
($900,000 – $30,000 – $320,000) = $550,000.
90.
b
($900,000 × 40%) = $360,000; $900,000 – $360,000 = $540,000.
91.
a
($400,000 × 30%) = $120,000.
92.
a
($750,000 × .45) + [($930,000 – $750,000) × .40] = $409,500.
93.
d
[$420,000 – ($250,000 – $100,000)]  .40 = $108,000.
94.
c
$250,000  .40 = $100,000.
DERIVATIONS — CPA Adapted
No. Answer
Derivation
95.
a
($1,500,000 – $650,000 – $100,000) × 30% = $225,000;
$225,000 – $125,000 = $100,000.
96.
a
($750,000 – $30,000 – $60,000) × 30% = $198,000;
$198,000 – $150,000 = $48,000.
97.
c
($80,000 + $64,000 – $72,000) × 30% = $21,600.
98.
d
($360,000 – $120,000) × 40% = $96,000;
$96,000 × 30% = $28,800.
99.
d
($50,000 × 30%) = $15,000; ($250,000 – $50,000) × 35% = $70,000.
100.
b
($720,000 × 34%) = $244,800.
101.
a
($180,000 × 30%) + ($180,000 × 25%) + ($180,000 × 25%) = $144,000.
102.
a
($180,000 × 30%) + ($270,000 × 30%) + ($360,000 × 25%) = $225,000.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
19 - 29
lOMoARcPSD|19958401
19 - 30 Test Bank for Intermediate Accounting, Thirteenth Edition
DERIVATIONS — CPA Adapted (cont.)
No. Answer
Derivation
103.
c
($240,000 – $45,000) × 30% = $58,500;
($210,000 – $75,000) × 24% = $32,400;
($150,000 – $105,000) × 24% = $10,800;
$58,500 + $32,400 + $10,800 = $101,700.
104.
c
($240,000 + $120,000 + $120,000) × 30% = $144,000;
$240,000 × 25% = $60,000;
$144,000 + $60,000 = $204,000.
EXERCISES
Ex. 19-105—Computation of taxable income.
The records for Bosch Co. show this data for 2011:

Gross profit on installment sales recorded on the books was $360,000. Gross profit from
collections of installment receivables was $270,000.

Life insurance on officers was $3,800.

Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year
life (no salvage value) is used. For tax purposes, MACRS depreciation is used and Bosch
may deduct 14% for 2011.

Interest received on tax exempt Iowa State bonds was $9,000.

The estimated warranty liability related to 2011 sales was $19,600. Repair costs under
warranties during 2011 were $13,600. The remainder will be incurred in 2012.

Pretax financial income is $600,000. The tax rate is 30%.
Instructions
(a) Prepare a schedule starting with pretax financial income and compute taxable income.
(b) Prepare the journal entry to record income taxes for 2011.
Solution 19-105
(a)
(b)
Pretax financial income
Permanent differences
Life insurance
Tax-exempt interest
Temporary differences
Installment sales ($360,000 – $270,000)
Extra depreciation ($42,000 – $30,000)
Warranties ($19,600 – $13,600)
Taxable income
$600,000
3,800
(9,000)
(90,000)
(12,000)
6,000
$498,800
Income Tax Expense [$149,640 + ($30,600 – $1,800)] ...............
Deferred Tax Asset (30% × $6,000) .............................................
Deferred Tax Liability (30% × $102,000) ..........................
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
178,440
1,800
30,600
lOMoARcPSD|19958401
Accounting for Income Taxes
Income Tax Payable (30% × $498,800) ...........................
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
19 - 31
149,640
lOMoARcPSD|19958401
19 - 32 Test Bank for Intermediate Accounting, Thirteenth Edition
Ex. 19-106—Future taxable and deductible amounts.
Define temporary differences, future taxable amounts, and future deductible amounts.
Solution 19-106
Temporary differences are differences between the tax basis of an asset or liability and its
reported amount in the financial statements that will result in taxable amounts or deductible
amounts in future years.
Future taxable amounts increase taxable income in future years and cause a deferred tax liability
to be recorded. Future deductible amounts decrease taxable income in future years and cause a
deferred tax asset to be recorded.
Ex. 19-107—Deferred income taxes.
Pole Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax
financial income and taxable income as follows:
Pretax financial income
Extra depreciation taken for tax purposes
Estimated expenses deductible for taxes when paid
Taxable income
$ 420,000
(1,050,000)
840,000
$ 210,000
Use of the depreciable assets will result in taxable amounts of $350,000 in each of the next three
years. The estimated litigation expenses of $840,000 will be deductible in 2013 when settlement
is expected.
Instructions
(a) Prepare a schedule of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes
payable for 2010, assuming a tax rate of 40% for all years.
Solution 19-107
(a)
Future taxable (deductible) amounts
Extra depreciation
Litigation
(b)
2011
2012
$350,000
$350,000
2013
Total
$350,000 $1,050,000
(840,000)
(840,000)
Income Tax Expense ($84,000 + $420,000 – $336,000) ..............
Deferred Tax Asset ($840,000 × 40%) .........................................
Deferred Tax Liability ($1,050,000 × 40%) .......................
Income Tax Payable ($210,000 × 40%) ...........................
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
168,000
336,000
420,000
84,000
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 33
Ex. 19-108—Deferred income taxes.
Hunt Co. at the end of 2010, its first year of operations, prepared a reconciliation between pretax
financial income and taxable income as follows:
Pretax financial income
$ 750,000
Estimated expenses deductible for taxes when paid
1,200,000
Extra depreciation
(1,350,000)
Taxable income
$ 600,000
Estimated warranty expense of $800,000 will be deductible in 2011, $300,000 in 2012, and
$100,000 in 2013. The use of the depreciable assets will result in taxable amounts of $450,000 in
each of the next three years.
Instructions
(a) Prepare a table of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income
taxes payable for 2010, assuming an income tax rate of 40% for all years.
Solution 19-108
(a)
(b)
2011
Future taxable (deductible) amounts
Warranties
$(800,000)
Excess depreciation
450,000
2012
2013
Total
$(300,000) $(100,000) $(1,200,000)
450,000
450,000
1,350,000
Income Tax Expense [$240,000 + ($540,000 – $480,000)]...........
Deferred Tax Asset ($1,200,000 × 40%).......................................
Deferred Tax Liability ($1,350,000 × 40%) .......................
Income Tax Payable ($600,000 × 40%) ...........................
300,000
480,000
540,000
240,000
Ex. 19-109—Recognition of deferred tax asset.
(a)
(b)
Describe a deferred tax asset.
When should a deferred tax asset be reduced by a valuation allowance?
Solution 19-109
(a)
A deferred tax asset is the deferred tax consequences attributable to deductible temporary
differences and operating loss carryforwards.
(b)
A deferred tax asset should be reduced by a valuation allowance if, based on all available
evidence, it is more likely than not that some portion or all of the deferred tax asset will not
be realized. More likely than not means a level of likelihood that is at least slightly more than
50%.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 34 Test Bank for Intermediate Accounting, Thirteenth Edition
Ex. 19-110—Permanent and temporary differences.
Listed below are items that are treated differently for accounting purposes than they are for tax
purposes. Indicate whether the items are permanent differences or temporary differences. For
temporary differences, indicate whether they will create deferred tax assets or deferred tax
liabilities.
1. Investments accounted for by the equity method.
2. Advance rental receipts.
3. Fine for polluting.
4. Estimated future warranty costs.
5. Excess of contributions over pension expense.
6. Expenses incurred in obtaining tax-exempt revenue.
7. Installment sales.
8. Excess tax depreciation over accounting depreciation.
9. Long-term construction contracts.
10. Premiums paid on life insurance of officers (company is the beneficiary).
Solution 19-110
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Temporary difference, deferred tax liability.
Temporary difference, deferred tax asset.
Permanent difference.
Temporary difference, deferred tax asset.
Temporary difference, deferred tax liability.
Permanent difference.
Temporary difference, deferred tax liability.
Temporary difference, deferred tax liability.
Temporary difference, deferred tax liability.
Permanent difference.
Ex. 19-111—Permanent and temporary differences.
Indicate and explain whether each of the following independent situations should be treated as a
temporary difference or a permanent difference.
(a)
For accounting purposes, a company reports revenue from installment sales on the accrual
basis. For income tax purposes, it reports the revenues by the installment method, deferring
recognition of gross profit until cash is collected.
(b) Pretax accounting income and taxable income differ because 80% of dividends received
from U.S. corporations was deducted from taxable income, while 100% of the dividends
received was reported for financial statement purposes.
(c)
Estimated warranty costs (covering a three-year warranty) are expensed for accounting
purposes at the time of sale but deducted for income tax purposes when paid.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 35
Solution 19-111
(a)
Temporary difference. This difference in the timing of revenue recognition for pretax
financial income and taxable income will initially increase pretax financial income, but will
increase taxable income by the amount of deferred gross profits as cash is collected in
subsequent years. Assuming the estimate as to collectibility of installment receivables is
valid, the total amounts reported as gross profits for accounting purposes and for tax
purposes will be equal over the life of a group of installment receivables. The time lag
between the accrual for accounting purposes and the recognition for tax purposes will result
in credit entries to a company's deferred tax liability as long as installment sales are level or
increasing. The credit entries related to particular installment receivables will be "drawn
down," or reversed, however, when the receivables are collected.
(b)
Permanent difference. This difference in pretax financial income and taxable income will
never reverse because present tax laws allow a company that owns stock in another U.S.
corporation to deduct 80% of the dividends it receives from that company. Taxes will not be
paid on the dividends deducted and there are no tax consequences for those dividends,
even though they are recognized as income for book purposes.
(c)
Temporary difference. The full estimated three years of warranty expenses reduce the
current year's pretax financial income, but will reduce taxable income in varying amounts
each year as paid. Assuming the estimate for each warranty is valid, the total amounts
deducted for accounting and for tax purposes will be equal over the three-year period for
each warranty. This is an example of an expense that, in the first period, reduces pretax
financial income more than taxable income and, in later years, reverses and reduces taxable
income without affecting pretax financial income.
Ex. 19-112—Temporary differences.
There are four types of temporary differences. For each type: (1) indicate the cause of the
difference, (2) give an example, and (3) indicate whether it will create a taxable or deductible
amount in the future.
Solution 19-112
(a)
Revenues or gains are taxable after they are recognized in pretax financial income.
Examples are installment sales, long-term construction contracts, and the equity method of
accounting for investments. They result in future taxable amounts.
(b) Revenues or gains are taxable before they are recognized in pretax financial income.
Examples are subscriptions received in advance and rents received in advance. They result
in future deductible amounts.
(c)
Expenses or losses are deductible before they are recognized in pretax financial income.
Examples are extra depreciation, prepaid expenses, and pension funding in excess of
pension expense. They result in future taxable amounts.
(d)
Expenses or losses are deductible after they are recognized in pretax financial income.
Examples are warranty expenses, estimated litigation losses, and unrealized loss on
marketable securities. They result in future deductible amounts.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 36 Test Bank for Intermediate Accounting, Thirteenth Edition
Ex. 19-113—Operating loss carryforward.
In 2010, its first year of operations, Kimble Corp. has a $900,000 net operating loss when the tax
rate is 30%. In 2011, Kimble has $360,000 taxable income and the tax rate remains 30%.
Instructions
Assume the management of Kimble Corp. thinks that it is more likely than not that the loss
carryforward will not be realized in the near future because it is a new company (this is before
results of 2011 operations are known).
(a)
What are the entries in 2010 to record the tax loss carryforward?
(b)
What entries would be made in 2011 to record the current and deferred income taxes and to
recognize the loss carryforward? (Assume that at the end of 2011 it is more likely than not
that the deferred tax asset will be realized.)
Solution 19-113
(a)
(b)
Deferred Tax Asset ($900,000 × 30%)..........................................
Benefit Due to Loss Carryforward.....................................
270,000
Benefit Due to Loss Carryforward.................................................
Allowance to Reduce Deferred Tax Asset to
Expected Realizable Value...........................................
270,000
Income Tax Expense ($360,000 × 30%).......................................
Deferred Tax Asset............................................................
108,000
Allowance to Reduce Deferred Tax Asset to Expected
Realizable Value......................................................................
Benefit Due to Loss Carryforward.....................................
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
270,000
270,000
108,000
108,000
108,000
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 37
PROBLEMS
Pr. 19-114—Differences between accounting and taxable income and the effect on deferred
taxes.
The following differences enter into the reconciliation of financial income and taxable income of
Abbott Company for the year ended December 31, 2010, its first year of operations. The enacted
income tax rate is 30% for all years.
Pretax accounting income
Excess tax depreciation
Litigation accrual
Unearned rent revenue deferred on the books but appropriately
recognized in taxable income
Interest income from New York municipal bonds
Taxable income
1.
2.
3.
4.
$700,000
(320,000)
70,000
50,000
(20,000)
$480,000
Excess tax depreciation will reverse equally over a four-year period, 2011-2014.
It is estimated that the litigation liability will be paid in 2014.
Rent revenue will be recognized during the last year of the lease, 2014.
Interest revenue from the New York bonds is expected to be $20,000 each year until their
maturity at the end of 2014.
Instructions
(a) Prepare a schedule of future taxable and (deductible) amounts.
(b) Prepare a schedule of the deferred tax (asset) and liability.
(c) Since this is the first year of operations, there is no beginning deferred tax asset or liability.
Compute the net deferred tax expense (benefit).
(d) Prepare the journal entry to record income tax expense, deferred taxes, and the income
taxes payable for 2010.
Solution 19-114
(a)
2011
Future taxable (deductible) amounts:
Depreciation
$80,000
Litigation
Unearned rent
(b)
Temporary Differences
Depreciation
Litigation
Unearned rent
Totals
(c)
Deferred tax expense
Deferred tax benefit
Net deferred tax expense
Future Taxable
(Deductible)
Amounts
$320,000
(70,000)
(50,000)
$200,000
2012
2013
$80,000
$80,000
Tax Rate
30%
30%
30%
2014
Total
$80,000 $320,000
(70,000) (70,000)
(50,000) (50,000)
Deferred Tax
(Asset)
Liability
$96,000
$(21,000)
(15,000)
$(36,000)
$96,000
$96,000
(36,000)
$60,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 38 Test Bank for Intermediate Accounting, Thirteenth Edition
Solution 19-114 (cont.)
(d) Income Tax Expense ($144,000 + $60,000).................................
Deferred Tax Asset ......................................................................
Deferred Tax Liability .......................................................
Income Tax Payable ($480,000 × 30%) ...........................
204,000
36,000
96,000
144,000
Pr. 19-115—Multiple temporary differences.
The following information is available for the first three years of operations for Cooper Company:
1. Year
2010
2011
2012
Taxable Income
$500,000
330,000
400,000
2. On January 2, 2010, heavy equipment costing $600,000 was purchased. The equipment had
a life of 5 years and no salvage value. The straight-line method of depreciation is used for
book purposes and the tax depreciation taken each year is listed below:
2010
$198,000
2011
$270,000
Tax Depreciation
2012
2013
$90,000
$42,000
Total
$600,000
3. On January 2, 2011, $240,000 was collected in advance for rental of a building for a threeyear period. The entire $240,000 was reported as taxable income in 2011, but $160,000 of the
$240,000 was reported as unearned revenue at December 31, 2011 for book purposes.
4. The enacted tax rates are 40% for all years.
Instructions
(a) Prepare a schedule comparing depreciation for financial reporting and tax purposes.
(b) Determine the deferred tax (asset) or liability at the end of 2010.
(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2011.
(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2011.
(e) Compute the net deferred tax expense (benefit) for 2011.
(f) Prepare the journal entry to record income tax expense, deferred income taxes, and income
tax payable for 2011.
Solution 19-115
(a)
Year
2010
2011
2012
2013
2014
Depreciation
for Financial
Reporting Purposes
$120,000
120,000
120,000
120,000
120,000
$600,000
Depreciation for
Tax Purposes
$198,000
270,000
90,000
42,000
-0$600,000
Temporary
Difference
$ (78,000)
(150,000)
30,000
78,000
120,000
$ -0-
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 39
Solution 19-115 (cont.)
(b)
2011
Future taxable (deductible)
amounts:
Depreciation
$(150,000)
2012
$30,000
2013
2014
Total
$78,000
$120,000
$78,000
Deferred tax liability: $78,000 × 40% = $31,200 at the end of 2010.
(c)
Future taxable (deductible)
amounts:
Depreciation
Rent
2012
2013
2014
Total
$30,000
(80,000)
$78,000
(80,000)
$120,000
$228,000
(160,000)
(d)
Future Taxable
(Deductible)
Amounts
$228,000
(160,000)
$ 68,000
Temporary Differences
Depreciation
Rent
Totals
(e)
(f)
Tax
Rate
40%
40%
Deferred Tax
(Asset)
Liability
$91,200
$(64,000)
$(64,000)
$91,200
Deferred tax asset at end of 2011
Deferred tax asset at beginning of 2011
Deferred tax (benefit)
$(64,000)
-0$(64,000)
Deferred tax liability at end of 2011
Deferred tax liability at beginning of 2011
Deferred tax expense
$91,200
31,200
$60,000
Deferred tax (benefit)
Deferred tax expense
Net deferred tax benefit for 2011
$(64,000)
60,000
$ (4,000)
Income Tax Expense ($132,000 – $4,000)...................................
Deferred Tax Asset.......................................................................
Deferred Tax Liability........................................................
Income Tax Payable ($330,000 × 40%)............................
128,000
64,000
60,000
132,000
Pr. 19-116—Deferred tax asset.
Farmer Inc. began business on January 1, 2010. Its pretax financial income for the first 2 years
was as follows:
2010
2011
$240,000
560,000
The following items caused the only differences between pretax financial income and taxable
income.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 40 Test Bank for Intermediate Accounting, Thirteenth Edition
Pr. 19-116 (cont.)
1. In 2010, the company collected $180,000 of rent; of this amount, $60,000 was earned in
2010; the other $120,000 will be earned equally over the 2011–2012 period. The full $180,000
was included in taxable income in 2010.
2. The company pays $10,000 a year for life insurance on officers.
3. In 2011, the company terminated a top executive and agreed to $90,000 of severance pay.
The amount will be paid $30,000 per year for 2011–2013. The 2011 payment was made. The
$90,000 was expensed in 2011. For tax purposes, the severance pay is deductible as it is
paid.
The enacted tax rates existing at December 31, 2010 are:
2010
2011
30%
35%
2012
2013
40%
40%
Instructions
(a) Determine taxable income for 2010 and 2011.
(b) Determine the deferred income taxes at the end of 2010, and prepare the journal entry to
record income taxes for 2010.
(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2011.
(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2011.
(e) Compute the net deferred tax expense (benefit) for 2011.
(f) Prepare the journal entry to record income taxes for 2011.
(g) Show how the deferred income taxes should be reported on the balance sheet at December
31, 2011.
Solution 19-116
(a)
Pretax financial income
Permanent differences:
Life insurance
Temporary differences:
Rent
Severance pay
Taxable income
(b)
Future taxable (deductible) amounts:
Rent
Tax rate
Deferred tax (asset) liability
2010
$240,000
2011
$560,000
10,000
250,000
10,000
570,000
120,000
-0$370,000
(60,000)
60,000
$570,000
2011
2012
Total
$(60,000)
35%
$(21,000)
$(60,000)
40%
$(24,000)
$(120,000)
$(45,000)
Income Tax Expense ($111,000 – $45,000)..................................
Deferred Tax Asset.......................................................................
Income Tax Payable ($370,000 × 30%)..........................
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
at end of
2010
66,000
45,000
111,000
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 41
Solution 19-116 (cont.)
(c)
Future taxable (deductible) amounts:
Rent
Severance pay
(d)
Temporary Difference
Rent
Severance pay
Totals
2012
2013
Total
$(60,000)
(30,000)
$(30,000)
$(60,000)
(60,000)
Future Taxable
(Deductible)
Amounts
$ (60,000)
(60,000)
$(120,000)
Tax
Rate
40%
40%
(e)
Deferred tax asset at end of 2011
Deferred tax asset at beginning of 2011
Net deferred tax (expense) for 2011
(f)
Income Tax Expense ($199,500 – $3,000)...................................
Deferred Tax Asset.......................................................................
Income Tax Payable ($570,000 × 35%)............................
(g)
Deferred Tax
(Asset)
Liability
$(24,000)
(24,000)
$(48,000)
$(48,000)
(45,000)
$ (3,000)
196,500
3,000
199,500
The deferred income taxes should be reported on the December 31, 2011 balance sheet as
follows:
Current assets
Deferred tax asset ($90,000* × 40%)
$36,000
Other assets
Deferred tax asset ($30,000 × 40%)
$12,000
*$60,000 + $30,000
Pr. 19-117—Interperiod tax allocation with change in enacted tax rates.
Murphy Company purchased equipment for $180,000 on January 2, 2010, its first day of
operations. For book purposes, the equipment will be depreciated using the straight-line method
over three years with no salvage value. Pretax financial income and taxable income are as
follows:
2011
2012
2010
Pretax financial income
$224,000
$260,000
$300,000
Taxable income
200,000
260,000
324,000
The temporary difference between pretax financial income and taxable income is due to the use
of accelerated depreciation for tax purposes.
Instructions
(a) Prepare the journal entries to record income taxes for all three years (expense, deferrals,
and liabilities) assuming that the enacted tax rate applicable to all three years is 30%.
(b)
Prepare the journal entries to record income taxes for all three years (expense, deferrals,
and liabilities) assuming that the enacted tax rate as of 2010 is 30% but that in the middle of
2011, Congress raises the income tax rate to 35% retroactive to the beginning of 2011.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 42 Test Bank for Intermediate Accounting, Thirteenth Edition
Solution 19-117
(a)
Book depreciation
Tax depreciation
Temporary difference
2010
2011
2012
(b)
2010
2011
2012
2010
$ 60,000
84,000
$(24,000)
2011
$60,000
60,000
$ -0-
2012
$60,000
36,000
$24,000
Total
$180,000
180,000
$ -0-
Income Tax Expense.........................................................
Deferred Tax Liability ($24,000 × .30)....................
Income Tax Payable ($200,000 × .30)...................
67,200
Income Tax Expense.........................................................
Income Tax Payable ($260,000 × .30)...................
78,000
Income Tax Expense.........................................................
Deferred Tax Liability........................................................
Income Tax Payable ($324,000 × .30)...................
90,000
7,200
Income Tax Expense.........................................................
Deferred Tax Liability ($24,000 × .30)....................
Income Tax Payable ($200,000 × .30)...................
67,200
Income Tax Expense.........................................................
Deferred Tax Liability.............................................
Income Tax Payable ($260,000 × .35)...................
92,200
Income Tax Expense.........................................................
Deferred Tax Liability........................................................
Income Tax Payable ($324,000 × .35)...................
105,000
8,400
*Future taxable amount
Deferred tax @ 30%
Deferred tax @ 35%
Adjustment
2008
$24,000
7,200
8,400
$ 1,200
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
7,200
60,000
78,000
97,200
7,200
60,000
1,200*
91,000
113,400
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 43
IFRS QUESTIONS
True/False Questions
1. Under iGAAP an affirmative judgment approach is used for recognizing deferred tax assets by
recognizing assets up to the amount that is probable to be realized.
2. Under U.S. GAAP, the rate used to compute deferred taxes is either the enacted tax rate, or a
substantially enacted tax rate (virtually certain).
3. Under iGAAP, a deferred tax liability is classified as current or noncurrent based on the
classification of the asset or liability to which it relates.
4. Under iGAAP, all tax effects are charged or credited to income.
5. Under iGAAP, all potential liabilities associated with uncertain tax positions are recognized.
Answers to True/False:
1. True
2. False
3. False
4. False
5. True
Multiple Choice Questions
1. Which of the following is false regarding accounting for deferred taxes under iGAAP?
a. A deferred tax liability is classified as current or noncurrent based on the classification
of the asset or liability to which it relates.
b. A deferred tax asset is recognized up to the amount that is probable to be realized.
c. Tax effects of certain items are recognized in equity.
d. The rate used to compute deferred taxes is either the enacted tax rate, or a
substantially enacted tax rate (virtually certain).
2. Jerome Co. has the following deferred tax liabilities at December 31, 2010:
Amount
$100,000
$250,000
$90,000
Related to
Installment sales, expected to be collected in 2011
Fixed asset, 10-year remaining useful life, 2010 tax depreciation exceeds
book depreciation
Prepaid insurance related to 2011
What amount would Jerome Co. report as a noncurrent deferred tax liability under iGAAP and
under U.S. GAAP?
iGAAP
U.S. GAAP
a. $0
$350,000
b. $440,000
$250,000
c. $250,000
$250,000
d. $440,000
$440,000
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 44 Test Bank for Intermediate Accounting, Thirteenth Edition
3. With regard to recognition of deferred tax assets, iGAAP requires
a.
Approach
Affirmative judgment
b.
Impairment approach
c.
Affirmative judgment
d.
Impairment approach
Recognition
Recognize an asset up to the amount that is probable
to be realized
Recognize asset in full, reduced by valuation
allowance if it’s more likely than not that all or a
portion of the asset won’t be realized
Recognize asset in full, reduced by valuation
allowance if it’s more likely than not that all or a
portion of the asset won’t be realized
Recognize an asset up to the amount that is probable
to be realized
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
Accounting for Income Taxes
19 - 45
4. Match the approach, iGAAP or U.S. GAAP, with the location where tax effects are reported:
a.
b.
c.
d.
Approach
iGAAP
U.S. GAAP
iGAAP
U.S. GAAP
Location
Charge or credit only taxable temporary differences to income
Charge or credit certain tax effects to equity
Charge or credit certain tax effects to equity
Charge or credit only deductible temporary differences to
income
5. Alice, Inc. has the following deferred tax assets at December 31, 2010:
Amount
$60,000
$25,000
$85,000
Related to
Rent revenue collected in advance related to 2011
Warranty liability, expected to be paid in 2011
Accrued liability related to a lawsuit expected to settle in 2014
What amount would Alice, Inc. report as a current deferred tax asset under iGAAP and under
U.S. GAAP?
_iGAAP_
U.S. GAAP
a $170,000
$170,000
b. $0
$85,000
c. $85,000
$170,000
d. $170,000
$85,000
Answers to Multiple Choice:
1. a
2. b
3. a
4. c
5. b
Short Answer:
1. Breifly describe some of the similarities and differences between U.S. GAAP and iGAAP
with respect to income tax accounting.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)
lOMoARcPSD|19958401
19 - 46 Test Bank for Intermediate Accounting, Thirteenth Edition
1. Both iGAAP and U.S. GAAP use the asset and liability approach for recording
deferred tax assets. In general, the differences between iGAAP and U.S. GAAP
involve limited differences in the exceptions to the asset-liability approach, some
minor differences in the recognition, measurement and disclosure criteria, and
differences in implementation guidance. Following are some key elements for
comparison

Under iGAAP, an affirmative judgment approach is used by which a
deferred tax asset is recognized up to the amount that is probable to be realized.
U.S. GAAP uses an impairment approach. In this situation, the deferred tax
asset is recognized in full. It is then reduced by a valuation account if it is more
likely than not that all or a portion of the deferred tax asset will not be realized.

iGAAP uses the enacted tax rate or substantially enacted tax rate
(Substantially enacted means virtually certain). For U.S. GAAP the enacted tax
rate must be used.

The tax effects related to certain items are reported in equity under iGAAP.
That is not the case under U.S. GAAP, which charges or credits the tax effects to
income.

U.S. GAAP requires companies to assess the likelihood of uncertain tax
positions being sustainable upon audit. Potential liabilities must be accrued and
disclosed if the position is “more likely than not” to be disallowed. Under iGAAP,
all potential liabilities must be recognized. With respect to measurement, iGAAP
uses an expected value approach to measure the tax liability which differs from
U.S. GAAP.

The classification of deferred taxes under iGAAP is always noncurrent. As
indicated in the chapter, U.S. GAAP classifies deferred taxes based on the
classification of the asset or liability to which it relates.
2. Describe the current convergence efforts of the FASB and IASB in the area of accounting
for taxes.
2. The FASB and the IASB have been working to address some of the differences in the
accounting for income taxes. Some of the issues under discussion are the term
“probable” under iGAAP for recognition of a deferred tax asset, which might be
interpreted to mean “more likely than not”. If changed, the reporting for impairments
of deferred tax assets will be essentially the same between U.S. GAAP and iGAAP. In
addition, the IASB is considering adoption of the classification approach used in U.S.
GAAP for deferred tax assets and liabilities. Also, U.S. GAAP will likely continue to
use the enacted tax rate in computing deferred taxes, except in situations where the
U.S. taxing jurisdiction is not involved. In that case, companies should use iGAAP
which is based on enacted rates or substantially enacted tax rates. Finally, the issue
of allocation of deferred income taxes to equity for certain transactions under iGAAP
must be addressed in order to conform to U.S. GAAP which allocates the effects to
income.
Downloaded by john mark tabula (johnmarktabula1@gmail.com)