AC 612
Graded Assignment
Chapters 16 and 18
Note: there are ten multiple choice questions and four exercises in this
assignment.
Multiple Choice Questions:
1. Which of the following is true about trading securities?
a. They are reported at cost
b. Changes in fair value are ignored
c. Unrealized gains and losses are reported in net income
d. They are only for long-term investments
2. When an investor owns 20% to 50% of the voting stock of another company, the
investment is typically accounted for using the
a. fair value method.
b. consolidation method.
c. equity method.
d. cost method.
3. An investment in common stock where the investor has no significant influence is
reported using
a. consolidation.
b. the fair value through net income method.
c. the equity method.
d. historical cost.
4. Which of the following is a characteristic of available-for-sale debt securities?
a. Held primarily for sale in the short term
b. Carried at amortized cost
c. Changes in fair value reported in net income
d. Unrealized gains/losses reported in OCI
5. What does the term “fair value adjustment” refer to?
a. Adjusting cash for inflation
b. Recognizing investment income
c. Changing the carrying value of an investment to market value
d. Reducing income tax expense
6. A net operating loss (NOL) carryforward results in
a. a deferred tax liability.
b. a reduction in deferred tax assets.
c. a deferred tax asset.
d. a tax refund receivable.
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7. Which of the following tax differences will not reverse in a future period?
a. Prepaid rent differences
b. Interest on municipal bonds
c. Unearned revenues
d. Bad debt expense vs. write-offs
8. Which of the following would not require recognition of a deferred tax asset or
liability?
a. Prepaid rent
b. Meals and entertainment expense disallowed for tax
c. Accrued litigation expense
d. Depreciation method differences
9. Deferred tax liabilities result from
a. taxable temporary differences.
b. deductible temporary differences.
c. non-taxable income.
d. permanent differences.
10. An example of a permanent difference is
a. warranty expense.
b. depreciation method difference.
c. fines and penalties.
d. prepaid expenses.
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Exercise #1
Blather Co. purchased $600,000 of 8%, 5-year bonds from Extant, Inc. on January 1,
2024, with interest payable on June 30 and December 31. The bonds sold for $624,948
at an effective interest rate of 7%. Management intends to hold these bonds until they
mature. Blather uses the effective interest method to account for amortization of
premiums and discounts on its investments.
The fair value of the Extant, Inc. bonds at certain key dates was:
December 31, 2024:
$625,500
December 31, 2025:
612,000
Required
a. Prepare an effective interest method amortization table for the first four interest
periods under the bonds.
b. Prepare the journal entries necessary to account for this investment at each of
the following dates (round your answers to whole dollars):
(1) January 1, 2024
(2) June 30, 2024
(3) December 31, 2024
(4) June 30, 2025
(5) December 31, 2025
c. What would be different about your answers in items a. and b. if these bonds
were designated as “Available for Sale” rather than “Held to Maturity”?
d. What would be different about your answers in items a. and c. if these bonds
were designated as “Trading” rather than “Available for Sale”?
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Exercise #2
Marta Company reported net income of $75,000 for 2025 and declared and paid total
cash dividends of $30,000 to all its shareholders during 2025.
Marta’s common stock was trading at $13 per share at December 31, 2025.
Atlanta Incorporated purchased shares of Marta on December 31, 2024.
Required
Under each of the following separate scenarios answer the questions posed and show
the required journal entries:
a) Assume that
 Atlanta acquired 10,000 shares of in Marta (10% of the Marta’s outstanding
common stock) on December 31, 2024 for $135,000.
 How should Atlanta record its share of the net income and dividends of Marta
for 2025? Show all related journal entries.
 What amount should Atlanta report on its December 31, 2025 financial
statements for its investment in Marta?
b) Instead, assume that
 Atlanta acquired a 30% interest in Marta (30,000 common shares) on
December 31, 2024 for $405,000.
 How should Atlanta record its share of the net income and dividends of Marta
for 2025? Show all related journal entries.
 What amount should Atlanta report on its December 31, 2025 financial
statements for its investment in Marta?
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Exercise #3
In 2025, its first year of operations, Jefferson Co. reported $520,000 of pretax financial
income.
Temporary differences for 2025 were as follows:


Depreciation taken for tax purposes in excess of book
Accrued litigation liabilities not deductible for tax
$1,200,000
890,000
Use of the depreciable assets will result in taxable amounts of $400,000 in each of the
next three years. The estimated litigation loss of $890,000 will be deductible in 2026
when Jefferson expects the lawsuit will be settled.
Required
a. Compute Jefferson’s taxable income and income tax payable.
b. Prepare a schedule of future taxable and deductible amounts.
c. Compute the required deferred tax asset and/or deferred tax liability.
d. Prepare the journal entry to record income tax expense, deferred taxes, and
income taxes payable for 2025, assuming a tax rate of 20% for all years.
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Exercise #4
The records for Hamilton Co. show the following data for 2025:
 Revenue from installment sales recorded on the financial statements was $480,000.
Hamilton has not yet received any cash from customers related to these sales. This
revenue will be taxable in future years when cash is received. It is expected that
cash will be received equally over the next three years.
 Life insurance premiums for policies covering company officers were $3,800.
 Machinery was acquired in January for $300,000. Straight-line depreciation over a
five-year life (no salvage value) is used. For tax purposes, Hamilton can deduct
100% of the machinery’s cost for depreciation in 2025.
 Interest received on City of Boston bonds was $9,000.
 The estimated warranty liability related to 2025 sales was $21,600. Repair costs
under these warranties are expected to be paid in 2026.
 Pretax financial income is $900,000. The tax rate is 20% for 2025, 25% for 2026, and
30% thereafter.
Required
a. Compute Hamilton’s taxable income and income tax payable.
b. Prepare a schedule of future taxable and deductible amounts.
c. Compute the required deferred tax asset and/or deferred tax liability.
d. Prepare the journal entry to record income tax expense, deferred taxes, and
income taxes payable for 2025.
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