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. 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

million2008 120

million2009 150

million2010 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 $300,000Permanent difference (15,000) 285,000Temporary 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.

$265,000 40% = $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 $ 350,0002006 (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% = $600,000The 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 $150Extraordinary loss (pretax) 30Temporary differences (all related to operating income):

Accrued warranty expense in excess of write-offs included in operating income 10Depreciation deducted on tax return in excess of depreciation expense 25Permanent 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.





5


What should Hobson International report as net income? (Points: 5)

$70 million

$72 million

$75 million

None of the above





5


What is Hobson's income tax payable for the current year? (Points: 5)

$52 million

$50 million

$48 million

$44 million





5


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 AmortizedHeld 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.



12/31/05 12/31/06 Cost 12/31/05

Cost 12/31/06


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



12/31/05 12/31/06 Cost 12/31/05

Cost 12/31/06


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 $352,000Y 180,000 160,000Z 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 $600,000Dividends declared and paid $360,000Market 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 200,000Retained earnings 900,000 $1,600,000 Minus: Contra accounts 600,000Total 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.

29. When bonds with detachable stock warrants are purchased, the amount debited to investment in stock warrants relative to the total amount paid. (Points: 5)

Increases any premium or decreases any discount on the bonds.

Increases the premium on the investment in bonds.

Has no effect on the investment of bond premium or discount because the warrants are purchased separately.

Increases the discount on investment in bonds.

30. Ratliff Co., organized on January 2, Year 3, had pretax accounting income of $500,000 and taxable income of $800,000 for the year ended December 31, Year 3. Ratliff expected to maintain this level of taxable income in future years. The only temporary difference is for accrued product warranty costs expected to be paid as follows:

Year 4 $100,000 Year 5 50,000Year 6 50,000Year 7 100,000

The applicable enacted income tax rate is 30%. In Ratliff’s December 31, Year 3, balance sheet, the deferred income tax asset and related valuation allowance should be

Choice Deferred Tax Asset Valuation Allowance1 $90,000 $90,000 2 $0 $0 3 $90,000 $0 4 $0 $90,000 (Points: 5)

Choice 1

Choice 2

Choice 3

Choice 4

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