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Question. Isaac Inc. began operations in January 2006.;For certain of its property sales, Isaac recognizes income in the period of;sale for financial reporting purposes. However, for income tax purposes, Isaac;recognizes income when it collects cash from the buyer's installment payments.;In 2006, Isaac made $600 million of this type of sales. Scheduled collections;for these sales are as follows;2006;$ 60 million;2007;120 million;2008;120 million;2009;150 million;2010;150 million;600 million;Assume that Isaac has a 30% income tax rate and that there were no other;differences in income for financial statement and tax purposes. Ignoring;operating expenses and additional sales in 2007, what deferred tax liability;would Isaac report in its year-end 2007 balance sheet? (Points: 5)$54 million $144 million $126 million Cannot be;determined;Total future taxable income ($540 million)tax rate of 30% = $162 million.;2. Isaac Inc. began;operations in January 2006. For certain of its property sales, Isaac recognizes;income in the period of sale for financial reporting purposes. However, for;income tax purposes, Isaac recognizes income when it collects cash from the;buyer's installment payments. In 2006, Isaac made $600 million of this type of;sales. Scheduled collections for these sales are as follows;2006;$ 60 million;2007;120 million;2008;120 million;2009;150 million;2010;150 million;600 million;Assume that Isaac has a 30% income tax rate and that there were no other;differences in income for financial statement and tax purposes. Suppose that;in 2007, legislation revised the income tax rates, so that Isaac would be taxed;in 2008 and beyond at 40%, rather than 30%. Assume that there were no other differences;in income for financial statement and tax purposes. Ignoring operating expenses;and additional sales in 2007, what deferred tax liability would Isaac report in;its year-end 2007 balance sheet? (Points: 5)$168 million $144 million $126 million None of the above;Total future taxable income ($420 million)tax rate of 40% = $168 million.;3. For its first year of;operations Tringali Corporation's reconciliation of pretax accounting income to;taxable income is as follows;Pretax;accounting income;$300,000;Permanent;difference;(15,000);285,000;Temporary;difference-depreciation;(20,000);Taxable;income;$265,000;Tringali's tax rate is 40%. What should Tringali report as its income tax;expense for its first year of operations? (Points: 5)$120,000 $114,000 $106,000 $8,000.;$265,00040% = $106,000;4. At the end of the;current year, Newsmax Inc. has $400,000 of subscriptions received in advance;included in its balance sheet. A footnote reveals that the entire $400,000 will;be earned in next year. In the absence of other temporary differences, in the;balance sheet one would also expect to find a: (Points: 5)Noncurrent deferred tax liability;Noncurrent deferred tax asset. Current deferred tax liability Current deferred tax asset.;5. In reconciling net;income to taxable income, interest earned on municipal bonds is: (Points: 5)Ignored A temporary difference A reversing difference A permanent difference.;6. In its first year of;operations Woodmount Corporation reported pretax accounting income of $500;million for the current year. Depreciation reported in the tax return in excess;of depreciation in the income statement was $60 million. The excess tax will;reverse itself evenly over the next three years. The current year's tax rate of;40% will be reduced under the current law to 35% next year and 30% for all;subsequent years. At the end of the current year, the deferred tax liability;related to the excess depreciation at the end of the current year will be;(Points: 5)$21 million $24 million $18 million $19 million;7. Bumble Bee Co. had;taxable income of $7,000, MACRS depreciation of $5,000, book depreciation of;$2,000, and accrued warranty expense of $400 on the books although no warranty;work was performed. What is Bumble Bee's pretax accounting income? (Points: 5)$4,400 $3,600 $9,600 $2,600;$7,000 400 + 3,000 = $9,600;8. Puritan Corp. reported;the following pretax accounting income and taxable income for its first three;years of operations;2005;$ 350,000;2006;(600,000);2007;700,000;Puritan's tax rate is 40% for all years. Assuming that Puritan elected a loss;carryback, what would be the net loss in 2006 reported in its income statement?;(Points: 5)$360,000 $240,000 $460,000 None of the above is correct;9. Reliable Corp. had a;pretax accounting income of $30 million this year. This included the collection;of $40 million of life insurance proceeds when several key executives died in a;plane crash. Temporary differences for the current year netted out to zero.;Reliable has had a 40% tax rate and taxable income of $120 million over the;previous two years and plans to elect an operating loss carryback for any NOL.;In the current year financial statements, Reliable would report: (Points: 5)Net income of $34 million A tax benefit of $10 million Net income of $30 million A deferred tax asset of $4 million;10. Clinton Corp. had the;following pretax income (loss) over its first three years of operations;2004;$1,200,000;2005;(900,000;2006;1,500,000;For each year there were no deferred income taxes and the tax rate was 40%. For;its 2005 tax return, Clinton did not elect a loss carryback. No valuation;account was deemed necessary for the deferred tax asset as of December 31, 2005. What;was Clinton's income tax expense in the year 2006? (Points: 5)600,000 440,000 240,000 160,000;$1,500,000 40% = $600,000;The tax benefit from the carryforward was recognized in 2008;11. On its tax return at;the end of the current year Webnet Inc. has $6 million of tax depreciation in;excess of depreciation in its income statement. A footnote reveals that $1;million of the $6 million difference will reverse itself next year, and the;remainder will reverse over the next 4 years. In the absence of other temporary;differences, in the balance sheet at the end of the current year Webnet would report;(Points: 5)Both a current deferred tax asset;and a noncurrent deferred tax asset. A noncurrent deferred tax asset. Both a current deferred tax;liability and a noncurrent deferred tax liability. A noncurrent deferred tax liability.;12. Information for Hobson;International Corp. for the current year ($ in millions);Income;from continuing operations before tax;$150;Extraordinary;loss (pretax);30;Temporary;differences (all related to operating income);Accrued;warranty expense in excess of write-offs;included;in operating income;10;Depreciation;deducted on tax return in excess of;depreciation;expense;25;Permanent;differences (all related to operating income);Nondeductible;portion of travel & entertainment expense;5;The;applicable enacted tax rate for all periods is 40%.;What should Hobson International report as income from continuing operations?;(Points: 5)$94 million $90 million $88 million None of the above.;13. Information for Hobson;International Corp. for the current year ($ in millions);Income;from continuing operations before tax;$150;Extraordinary;loss (pretax);30;Temporary;differences (all related to operating income);Accrued;warranty expense in excess of write-offs;included;in operating income;10;Depreciation;deducted on tax return in excess of;depreciation;expense;25;Permanent;differences (all related to operating income);Nondeductible;portion of travel & entertainment expense;5;The;applicable enacted tax rate for all periods is 40%.;What should Hobson International report as net income? (Points: 5)$70 million $72 million $75 million None of the above;14. Information for Hobson;International Corp. for the current year ($ in millions);Income;from continuing operations before tax;$150;Extraordinary;loss (pretax);30;Temporary;differences (all related to operating income);Accrued;warranty expense in excess of write-offs;included;in operating income;10;Depreciation;deducted on tax return in excess of;depreciation;expense;25;Permanent;differences (all related to operating income);Nondeductible;portion of travel & entertainment expense;5;The;applicable enacted tax rate for all periods is 40%.;What is Hobson's income tax payable for the current year? (Points: 5)$52 million $50 million $48 million $44 million;15. Information for Hobson;International Corp. for the current year ($ in millions);Income;from continuing operations before tax;$150;Extraordinary;loss (pretax);30;Temporary;differences (all related to operating income);Accrued;warranty expense in excess of write-offs;included;in operating income;10;Depreciation;deducted on tax return in excess of;depreciation;expense;25;Permanent;differences (all related to operating income);Nondeductible;portion of travel & entertainment expense;5;The;applicable enacted tax rate for all periods is 40%.;How should Hobson International report tax on the extraordinary item? (Points;5)A tax receivable of $12 million in;the balance sheet. A tax benefit of $12 million to net against the $30 million pretax loss.;A deferred tax asset of $12;million in the balance sheet. None of the above.;The extraordinary loss is reported in;the income statement net of $12 tax benefit [$30 ($30 40%) = $18].;Chapter 17;16. Beresford Inc.;purchased several investment securities during 2005, its first year of;operations. The following information pertains to these securities. The;fluctuations in their fair values are not considered permanent.;Fair Value;Fair Value;Amortized;Amortized;Held;to Maturity Securities;12/31/05;12/31/06;Cost 12/31/05;Cost 12/31/06;ABC;Co. Bonds;$375,000;$400,000;$367,500;$360,000;Fair Value;Fair Value;Cost;Trading;Securities;12/31/05;12/31/06;x;DEF;Co. Stock;$48,000;$59,500;$66,000;GEH;Inc. Stock;$47,000;$77,000;$39,000;IJK;Inc. Stock;$44,000;$38,500;$32,900;Fair Value;Fair Value;Cost;Available;for Sale Securities;12/31/05;12/31/06;x;LMN;Co. Stock;$130,500;$150,400;$140,000;What balance sheet amount would Beresford report for its total investment;securities at 12/31/05? (Points: 5)$637,000 $644,500 $645,400 None of the above is correct.;The held-to-maturity securities are reported;at amortized cost, and the others are reported at fair value.;17. Beresford Inc.;purchased several investment securities during 2005, its first year of;operations. The following information pertains to these securities. The;fluctuations in their fair values are not considered permanent.;Fair Value;Fair Value;Amortized;Amortized;Held;to Maturity Securities;12/31/05;12/31/06;Cost 12/31/05;Cost 12/31/06;ABC;Co. Bonds;$375,000;$400,000;$367,500;$360,000;Fair Value;Fair Value;Cost;Trading;Securities;12/31/05;12/31/06;x;DEF;Co. Stock;$48,000;$59,500;$66,000;GEH;Inc. Stock;$47,000;$77,000;$39,000;IJK;Inc. Stock;$44,000;$38,500;$32,900;Fair Value;Fair Value;Cost;Available;for Sale Securities;12/31/05;12/31/06;x;LMN;Co. Stock;$130,500;$150,400;$140,000;What total holding gain would Beresford report in its 2006 income statement;relative to its investment securities? (Points: 5)$55,900 $36,000 $80,900 $48,200;This is the difference between the fair value;of trading securities at 12/31/06 and at 12/31/05;18. Beresford Inc.;purchased several investment securities during 2005, its first year of;operations. The following information pertains to these securities. The;fluctuations in their fair values are not considered permanent.;Fair Value;Fair Value;Amortized;Amortized;Held;to Maturity Securities;12/31/05;12/31/06;Cost 12/31/05;Cost 12/31/06;ABC;Co. Bonds;$375,000;$400,000;$367,500;$360,000;Fair Value;Fair Value;Cost;Trading;Securities;12/31/05;12/31/06;x;DEF;Co. Stock;$48,000;$59,500;$66,000;GEH;Inc. Stock;$47,000;$77,000;$39,000;IJK;Inc. Stock;$44,000;$38,500;$32,900;Fair Value;Fair Value;Cost;Available;for Sale Securities;12/31/05;12/31/06;x;LMN;Co. Stock;$130,500;$150,400;$140,000;What holding gain would Beresford report in a separate part of shareholders;equity in its 12/31/06 balance sheet? (Points: 5)$55,100 $26,500 $10,400 None of the above is correct.;19. Hawk Corporation;purchased ten thousand shares of Diamond Corporation stock in 2003 for $50 per;share and classified the investment as securities available for sale. Diamond's;market value was $60 per share on December 31, 2004 and $65 on December 31;2005. During 2006, Hawk sold all of its Diamond stock at $70 per share. In its;2006 income statement, Hawk would report: (Points: 5)A gain of $ 50,000 A gain of $150,000. A gain of $200,000 A gain of $300,000.;In 2004-2006, Hawk accumulated an unrealized;gain and fair value adjustment of ($65 50) 10,000 shares = $150,000. An additional;increase of $50,000 occurred in 2009, so the total gain realized in the income;statement would be $200,000.;20. Goofy Inc. bought;15,000 shares of Crazy Co.'s stock for $150,000 on May 5, 2005, and classified;the stock as available for sale. The market value of the stock declined to;$118,000 by December 31, 2005. Goofy reclassified this investment as trading;securities in December of 2006 when the market value had risen to $125,000.;What effect on 2006 income should be reported by Goofy for the Crazy Co.;shares? (Points: 5)$0 $25,000 net loss $7,000 net gain. $32,000 net loss.;Unrealized loss of $32,000 recorded in an;allowance during 2005, but not included in the income statement. When the;shares are reclassified in 2006, the $32,000 goes into the income statement. In;addition, $7,000 unrealized gain for 2006 goes directly to income;21. Hobson Company bought;the securities listed below during 2005. These securities were classified as;trading securities. In its December 31, 2005, income statement Hobson reported;a net unrealized loss of $13,000 on these securities. Pertinent data at the end;of December 2006 are as follows;Security;Cost;Fair Value;X;$380,000;$352,000;Y;180,000;160,000;Z;420,000;414,000;What amount of loss on these securities should Hobson include in its income;statement for the year ended December 31, 2006? (Points: 5)$41,000 $54,000 $13,000 $ 0.;22. If Pop Company;exercises significant influence over Son Company and owns 40% of its common;stock, then Pop Company: (Points: 5)Would record dividends received from Son Company as investment revenue.;Would increase its investment;account when Son Company declares dividends. Would record 40% of the net income;of Son Company as investment income each year. All of the above are correct.;23. Jack Corporation;purchased a 20% interest in Jill Corporation for $1,500,000 on January 1, 2006.;Jack can significantly influence Jill. On December 10, 2006, Jill declared and;paid $1 million in dividends. Jill reported a net loss of $6 million for the;year. What amount of loss should Jack report in its income statement for 2006;relative to its investment in Jill? (Points: 5)$1 000,000 $1,200,000 $1,400,000 $1,500,000.;24. When the investor's;level of influence changes, it may be necessary to change from the equity;method to another method. When the level of ownership falls from a range of 20%;to 50% to less than 20%, the equity method would be discontinued and the;investment account balance would be carried over at: (Points: 5)Amortized cost on the date of;ownership change. Fair market value on the date of;ownership change. Discounted present value on the;date of ownership change. The current balance, and this balance would serve as the new;cost".;25. When the equity method;of accounting for investments is used by the investor, the amortization of;additional depreciation due to differences between book values and fair values of;investee assets on the date of acquisition: (Points: 5)Reduces the investment account and;increases investment revenue. Increases the investment account;and increases investment revenue. Reduces the investment account and reduces investment revenue. Increases the investment account;and reduces investment revenue.;26. Assume that, on 1/1/05;Sosa Enterprises paid $3,000,000 for its investment in 36,000 shares of Orioles;Co. Further, assume that Orioles has 120,000 total shares of stock issued and;estimates an 8 year remaining useful life and straight-line depreciation with;no residual value for its depreciable assets.;The book value and fair value of Orioles' identifiable net assets were;$7,000,000 and $10,000,000, respectively, at 1/1/05. The difference between the;fair value and book value of Orioles is attributable to $1,800,000 of goodwill;and the remainder to depreciable equipment.;The following information pertains to Orioles during 2005;Net;Income;$600,000;Dividends;declared and paid;$360,000;Market;price of common stock on 12/31/06;$80/share;What amount would Sosa Enterprises report in its year-end 2005 balance sheet;for its investment in Orioles Co.? (Points: 5)$3,200,000 $3,180,000 $3,135,000 $3,027,000;27. Jay Company acquired a;wholly owned foreign subsidiary on January 1. The equity section of the;December 31 consolidated balance sheet follows;Common;stock;$500,000;Additional;paid-in capital;200,000;Retained;earnings;900,000;$1,600,000;Minus;Contra accounts;600,000;Total;equity;$1,000,000;The contra account balance appropriately represents adjustments in translating;the foreign subsidiary?s financial statements into U.S. dollars.;The consolidated income statement included the excess of cost of investments in;certain debt and equity securities over their fair values, which is considered;temporary, as follows;Available-for-sale;securities;$200,000;Trading;securities;100,000;The amounts for retained earnings and the contra accounts in the consolidated;statement of equity respectively for the year ended December 31 are (Points: 5)$1,200,000 and $900,000 $1,100,000 and $800,000 $900,000 and $600,000 $1,000,000 and $700,000;28. A corporation that uses;the equity method of accounting for its investment in a 40%-owned investee that;earned $20,000 and paid $5,000 in dividends made the following entries;Investment;in subsidiary;$8,000;Equity;in earnings of subsidiary;$8,000;Cash;$2,000;Dividend;revenue;$2,000;What effect will these entries have on the parent?s statement of financial;position? (Points: 5)Financial position will be fairly;stated. Investment understated, retained;earnings understated. Investment overstated, retained earnings overstated. Investment overstated, retained;earnings understated.

 

Paper#49526 | Written in 18-Jul-2015

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