SOUTHERN CONNECTICUT STATEU NIVERSITY
ACC 311 Dr. Wafeek Abdelsayed
Intermediate Accounting II Spring 2002
Part I: Multiple Choice- 3 Points each (60 points)
Please place your answer legibly in capital letters at the space provided to the left of each question.
_____________1. The rationale for interperiod income tax allocation is to
a. recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date.
b. recognize a distribution of earnings to the taxing agency.
c. reconcile the tax consequences of permanent and temporary differences appearing on the current year's financial statements.
d. adjust income tax expense on the income statement to be in agreement with income taxes payable on the balance sheet.
_____________2. 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.
_____________3. Taxable income of a corporation differs from pretax financial income because of
a. No No
b. No Yes
c. Yes Yes
d. Yes No
_____________4. Oswald Corporation's partial income statement after its first year of operations is as follows:
Income before income taxes $1, 7 50,000
Income tax expense
Current $ 483 ,000
Deferred 42 ,000 52 5,000
Net income $ 1,22 5,000
Oswald 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 $ 7 00,000. 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. $ 56 0,000.
b. $ 66 5,000.
c. $ 7 00,000.
d. $ 84 0,000.
_____________5. Bass Corp.'s 2001 income statement showed pretax accounting income of $ 375 ,000. To compute the federal income tax liability, the following 2001 data are provided:
Income from exempt municipal bonds $1 5 ,000
Depreciation deducted for tax purposes in excess of depreciation
deducted for financial statement purposes 3 0,000
Estimated federal income tax payments made 75 ,000
Enacted corporate income tax rate 30%
If the alternate minimum tax provisions are ignored, what amount of current federal income tax liability should be included in Bass ' s December 31, 2001 balance sheet?
a. $ 24 ,000.
b. $ 33 ,000.
c. $ 37 , 5 00.
d. $ 99 ,000.
_____________6. 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.
_____________7. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in
Taxable Amounts Deductible Amounts
a. Yes Yes
b. Yes No
c. No Yes
d. No No
_____________8. Interperiod tax allocation results in a deferred tax liability from
a. an income item partially recognized for financial purposes but fully recognized for tax purposes in any one year.
b. the amount of deferred tax consequences attributed to temporary differences that result in net deductible amounts in future years.
c. an income item fully recognized for tax and financial purposes in any one year.
d. the amount of deferred tax consequences attributed to temporary differences that result in net taxable amounts in future years.
_____________9. Lang , 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 $ 6 00,000 will be collected in the following years when the enacted tax rates are:
Collection of Income Enacted Tax Rates
2001 $ 6 0,000 35%
2002 12 0,000 30%
200 3 18 0,000 30%
200 4 2 4 0,000 25%
The installment income is Lang 's only temporary difference. What amount should be included in the deferred income tax liability in Lang 's December 31, 2001 balance sheet?
a. $ 1 5 0 ,000.
b. $ 171 , 0 00.
c. $ 189 , 0 00.
d. $ 210 ,000.
_____________10. The methods of accounting for a lease by the lessee are
a. operating and capital lease method.
b. operating, sales, and capital lease method.
c. operating and leveraged lease method.
d. none of these.
_____________11. Which of the following is NOT a correct statement of one of the capitalization criteria?
a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic life of the leased property.
d. The minimum lease payments (excluding executory costs) equals or exceeds 90% of the fair value of the leased property.
_____________12. Minimum lease payments may include a
a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these.
_____________13. Executory costs include
b. property taxes.
d. all of these.
_____________14. In computing the present value of the minimum lease payments, the lessee should
a. use its incremental borrowing rate in all cases.
b. use either its incremental borrowing rate or the implicit rate of the lessor , whichever is higher, assuming that the implicit rate is known to the lessee.
c. use either its incremental borrowing rate or the implicit rate of the lessor , whichever is lower, assuming that the implicit rate is known to the lessee.
d. none of these.
_____________15. The obligations under capital leases should be disclosed as
a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainders in noncurrent liabilities.
d. deferred credits.
_____________16. Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases?
Lease A Lease B
a. Operating lease Capital lease
b. Operating lease Operating lease
c. Capital lease Capital lease
d. Capital lease Operating lease
_____________17. On December 31, 2001 , Sanford , Inc. leased machinery with a fair value of $ 42 0,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $ 8 0,000 beginning December 31, 2001 . The lease is appropriately accounted for by Sanford as a capital lease. Sanford 's incremental borrowing rate is 11%. Sanford knows the interest rate implicit in the lease payments is 10%.
The present value of an annuity due of 1 for 6 years at 10% is 4.7908.
The present value of an annuity due of 1 for 6 years at 11% is 4.6959.
In its December 31, 2001 balance sheet, Sanford should report a lease liability of
a. $ 303 , 264 .
b. $ 34 0,000.
c. $ 375 , 672 .
d. $ 383 , 264 .
_____________18. On December 1, 2001 , Morales Corporation leased office space for 10 years at a monthly rental of $ 10 0,000. On that date Morales paid the landlord the following amounts:
Rent deposit $ 10 0,000
First month's rent 10 0,000
Last month's rent 10 0,000
Installation of new walls and offices 54 0,000
$ 84 0,000
The entire amount of $ 84 0,000 was charged to rent expense in 2001 . What amount should Morales have charged to expense for the year ended December 31, 2001 ?
a. $ 10 0,000.
b. $ 104 ,5 0 0.
c. $2 04 , 50 0.
d. $ 55 0,000.
_____________19. When preparing a statement of cash flows (indirect method), which of the following is not an adjustment to reconcile net income to net cash provided by operating activities?
a. A change in interest payable
b. A change in dividends payable
c. A change in income taxes payable
d. All of these are adjustments.
_____________20. When preparing a statement of cash flows, a decrease in accounts receivable during a period would cause which one of the following adjustments in determining cash flow from operating activities?
Direct Method Indirect Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
Part II: Problem I (40 points)
The following information is taken from Roswell Corporation's financial statements December 31
Cash $ 9 2,000 $ 27,000
Accounts receivable 95,000 80,000
Allowance for doubtful accounts (4,500) (3,100)
Inventory 1 4 5,000 175,000
Prepaid expenses 7,500 6,800
Land 93 ,000 60,000
Buildings 287,000 244,000
Accumulated depreciation (3 5 ,000) (13,000)
Patents 20,000 35,000
Accounts payable $ 90 ,000 $ 84,000
Bonds payable 12 5 ,000 60,000
Common stock 100,000 100,000
Retained earnings—appropriated 80,000 10,000
Retained earnings—unappropriated 2 66 ,000 302,700
Treasury stock, at cost (15,000 ) (8,000 )
For 2001 Year
Net income $ 53 ,300
Depreciation expense 22 ,000
Amortization of patents 7 ,000
Cash dividends declared and paid 2 0 ,000
Gain or loss on sale of patents none
Prepare a statement of cash flows for Roswell Corporation for the year 2001 . (Use the indirect method.)