SOUTHERN CONNECTICUT STATEU NIVERSITY

FINAL EXAMINATION

NAME_________________________

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

                      Permanent              Temporary

                     Differences             Differences

            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

                               Future                           Future

                      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

            a.    maintenance.

            b.    property taxes.

            c.    insurance.

            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

                                                                                                                   2001                                                                                                                   2000       

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

                                                                                                               $700,000                                                                                                                $611,700

Accounts payable                                                                                    $   90 ,000       $   84,000

Accrued liabilities                                                                                      54,000                                                                                                                    63,000

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 )

                                                                                                               $700,000                                                                                                                $611,700

                                                                                                                          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

Instructions

Prepare a statement of cash flows for Roswell Corporation for the year 2001 . (Use the indirect method.)