Question 1

Many companies have significant deferred taxes. Deferred taxes are not always long-term liabilities. For the categories below, state whether deferred taxes can arise in this category and provide an example.
i. Current liabilities
ii. Long-term liabilities
iii. Stockholders' equity
iv. Current assets
v. Long-term assets

Accepted Answer

i. Current liabilities
Could arise from recognizing all income from installment sale for financial reporting purposes, and on cash basis for tax purposes.

ii. Long-term liabilities
Different depreciation methods for tax and financial reporting purposes give rise to deferred taxes. Typically, assets are depreciated faster for tax purposes giving rise to a deferred tax liability.

iii. Stockholders' equity
Deferred taxes are recorded to offset the valuation account for marketable securities.

iv. Current assets
Warrantees, accrued compensation etc. where payment in cash is expected during next year will give rise to current deferred tax assets.

v. Long-term assets
Post-retirement health benefits and contingent liabilities not expected to be paid in cash within the next year will give rise to long-term deferred tax assets.

Question 2

As a general rule, revenue is normally recognized when it is:
A)measurable and earned.
B)measurable and received.
C)realizable and earned.
D)realizable and measurable.

Accepted Answer

Revenue is recognized when it is realizable, meaning there is reasonable assurance that the amount of revenue can be collected, and earned, meaning the seller has performed its obligations under the contract. It is not necessary for the revenue to have been received or measurable at the time of recognition. Therefore, choices A and B are incorrect. Choice D includes measurable, which is not a necessary condition for revenue recognition.

Question 3

Differences in taxable income and pretax accounting income that will not be offset by corresponding differences or "turn around" in future periods are called:
A)timing differences.
B)circular differences.
C)permanent differences.
D)reverse differences.

Accepted Answer

Permanent differences are not expected to reverse in future periods, so they result in a permanent discrepancy between taxable income and pretax accounting income. Timing differences, on the other hand, are temporary and will eventually reverse in a future period. Circular differences and reverse differences are not accounting terms.

Question 4

The following information was obtained from Cyber Corporation's annual report.$\text { Common stock: shares outstanding }$
$\begin{array}{ll}
\text { Balance on January } 1 & 500,000 \
\text { April } 1 \text { - issued in conversion of preferred stock } & 200,000 \
\text { July } 1 \text { - sold for cash } & \underline{ 100,000} \
 \text { Balance on December 31 } & \underline{800,000} \
\end{array}$

$\text { Preferred stock: shares outstanding }$
$\begin{array}{l}
\$ 10 \text { par } 8 \% \text {, each convertible into two common shares }\
\begin{array}{lr}
\text { Shares outstanding, January } 1 & 175,000 \
\text { Converted on April } 1 \text { (into 200,000 common) } &  \underline{100,000} \
 \text { Shares outstanding at year-end } & \underline{ 75,000} \
\end{array}
\end{array}$

Options
100,000 options each to purchase one common share at $ \$ 80 $ per share. None have been exercised.

$\text { Additional information: }$
$\begin{array}{lll}
\text { Market prices of common stock for Year } & \begin{array}{l}
\text { Average for Year } \
\$ 84
\end{array} & \begin{array}{l}
\text { End of Year } \
\$ 86
\end{array} \
\text { Preferred dividends paid in year } & \$ 80,000 & \
\text { Net income } & \$ 1,200,000 &
\end{array}$

a. Compute weighted-average number of common shares outstanding for the year.
b. Compute basic EPS.
c. Compute diluted EPS.

Accepted Answer

The answer of The following information was obtained from Cyber...

Question 5

Brierton Company enters a contract at the beginning of year 1 to build a new federal courthouse for a price of $16 million. Brierton estimates that total cost of the project will be $12 million and will take four years to complete. $\begin{array}{lll}
&\text { Costs incurred }&\text { Payments from federal}\
&&\text {  government}\
\text { Year 1 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 2 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 3 } & \$ 2 \text { million } & \$ 6 \text { million } \
\text { Year 4 } & \$ 2 \text { million } & \$ 6 \text { million }
\end{array}$
-If Brierton used cash accounting to account for this project, what would they have reported as profit (loss) in year 2?
A)$0
B)$1.33 million
C)$(2 million)
D)$(4 million)

Accepted Answer

Under cash accounting, revenue is recognized when cash is received and expenses are recognized when cash is paid. Since Brierton Company entered the contract at the beginning of year 1, they would not have recognized any revenue in year 1 unless they received partial or full payment from the government. In year 2, Brierton would have recognized $4 million in revenue (assuming they evenly recognize revenue over the four-year period), but they would have also recognized $6 million in expenses ($12 million total cost divided by four years equals $3 million in expenses per year). Therefore, their profit in year 2 would be a loss of $2 million ($4 million revenue minus $6 million in expenses). Therefore, the correct answer is C.

Question 6

Housing Construction Company (HCC) has agreed to build a housing project for the city of New York. On January 1, 2006 the company and the city agreed on the following terms, the construction should take no more than 3 years, HCC would be paid a total of $150 million for the project; $150 million would be paid: 3 payments of $50 million each at the end of year 2006, 2007, and 2008. HCC expects contractions costs to be $50 million in year 2006, $50 million in year 2007, and $10 million in year 2008.

a. If HCC uses the completed contract method, what revenues and expenses would HCC recognize in year 2006, 2007, and 2008?
b. If HCC uses the percentage-of-completion method, what revenues and expenses would HCC recognize in year 2006, 2007, and 2008?
c. Show the balance on the construction-in-process account at the end of 2006, 2007, and 2008 (prior to the completion of the project) using both the completed contract and the percentage-of-completion methods?

Accepted Answer

The answer of Housing Construction Company (HCC) has agreed to...

Question 7

For each of these nonrecurring items give an example and indicate (match with) the appropriate accounting treatment.

1. Extraordinary item
2. Prior period adjustment
3. Change in accounting estimate
4. Change in accounting principle
5. Discontinued operation
6. Special items
7. Comprehensive income items
8. Change in reporting entity
9. SEC Enforcement Releases

A. Shown net as a separate line item between net income and comprehensive income, no restatement.
B. Income statement line items adjusted as appropriate, gross or net, prior years restated.
C. Gross amount is part of its regular income or expense line item in income from continuing operations, prior years restated.
D. Gross amount is part of its regular income or expense line item in income from continuing operations, no restatement.
E. Shown gross as a separate line item in income from continuing operations, no restatement.F. Shown net as a separate line item between income from continuing operations and net income, prior years restated.G. Shown cumulative net as a separate line item between income from continuing operations and net income, no restatement.H. Shown net as a separate line item between income from continuing operations and net income, no restatement.I. Not in income statement, opening retained earnings is changed by net amount, no restatement.

Accepted Answer

The answer of For each of these nonrecurring items give...

Question 8

Which of the following statements concerning deferred taxes is correct?
A)Deferred taxes will not be found in the asset section of a balance sheet.
B)Deferred taxes arise from permanent differences in GAAP and tax accounting.
C)Deferred taxes will only decrease when a cash payment is made.
D)Deferred taxes arising from the depreciation of a specific asset will ultimately reduce to zero as the item is depreciated.

Accepted Answer

Deferred taxes related to the depreciation of an asset will indeed reduce to zero over time as the asset is fully depreciated. This occurs because the temporary differences between the tax base and the accounting base of the asset, which give rise to the deferred taxes, will reconcile as the asset is depreciated in both the financial statements and tax returns.

Question 9

According to FASB, initial franchise fees should be recognized as income when:
A)the franchiser has substantially performed or satisfied all material services and conditions.
B)the franchiser has collected the majority of fee in cash.
C)the franchisee shows the ability to pay the fee.
D)the franchiser bills the franchisee.

Accepted Answer

According to FASB, initial franchise fees should be recognized as income when the franchiser has substantially performed or satisfied all material services and conditions. This means that the franchiser has fulfilled their obligations and the franchisee has met all the necessary requirements, indicating that the initial fee can be recognized as income. Collecting the fee in cash or billing the franchisee does not necessarily indicate that all conditions have been met. The ability to pay the fee is also not a determining factor in recognizing it as income.

Question 10

Metals Corp. has four factories with the following data:
 $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $$\text {Book Value}$  $\quad $$\quad $$\text {Expected Cash Flows}$
$\begin{array}{lrrrrr}
&\text { December 31.2006 }
& \underline{2007} & \underline{2008} & \underline{2009} & \underline{2010}\ 
\text { Lead factory } & \$ 100 & \$ 40 & \$ 40 & \$ 40 & \$ 40 \
\text { Copper factory } & 200 & 50 & 50 & 50 & 50 \
\text { Aluminum factory } & 300 & 80 & 80 & 80 & 80 \
\text { Zinc factory } & 400 & 60 & 60 & 60 & 60
\end{array}$

All cash flows are at year-end and terminate after December 31, 2010. The company's cost of capital is 10% and its tax rate is 35%.

a. What is the value of each factory for balance sheet purposes at December 31, 2006?
b. What impairment loss, if any, would be reported on Metals' 2006 income statement? How would it be reported and where would it be reported (i.e. what component of the income statement and other disclosures)?

Accepted Answer

The answer of Metals Corp. has four factories with the...

Question 11

Which of the following combinations of accounting practices will lead to the highest reported earnings in an inflationary environment? $\text { Depreciation Method} \quad\quad  \text {Inventory Method }$
A.$\text { Straight-line } \quad \quad\quad\quad\quad\quad\text { LIFO }$
B.$\text { Double-declining balance } \quad \text { LIFO }$
C.$\text { Straight-line} \quad\quad\quad\quad\quad\quad\quad\text { FIFO}$
D.$\text { Double-declining balance } \quad \text { FIFO }$

A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

In an inflationary environment, the FIFO method of inventory valuation will result in a higher cost of goods sold and lower net income (Option A and Option B are eliminated). LIFO will result in a lower cost of goods sold and higher net income but will also result in higher taxes due to the temporary high income (Option D is eliminated). Therefore, the best choice would be to use the LIFO method for inventory valuation and depreciate assets using the accelerated method, which will result in a lower depreciation expense and higher net income.

Question 12

Below are selected portions from Quaker Oats' tax footnote in its X6 annual report.

Provisions for income taxes on income before cumulative effect of accounting change were as follows:
$\begin{array}{lrrr}
\text { Dollars in Millions }&\text { X6 }&\text { X5 }&\text { X4 }\
\text { Currently payable}\
\text { Federal } & \$ 99.4 & \$ 339.1 & \$ 129.8 \
\text { Foreign } & 10.2 & 131.7 & 15.0 \
\text { State } & 26.6 & 54.9 & 40.2 \
\text { Total currently payable } & 136.2 & 525.7 & 185.0 \
\text { Deferred-net } & & & \
\text { Federal } & 15.9 & (19.8) & (42.2) \
\text { Foreign } & 10.4 & (7.3) & (3.1) \
\text { State } & 5.2 & (2.1) & (12.4) \
\text { Total deferred-net } & 31.5 & (29.2) & (57.7) \
\text { Provision for income } & \$ 167.7 & \$ 496.5 & \$ 127.3\
\text { taxes }
\end{array}$

The sources of pretax income before cumulative effect of accounting change were as follows:

$\begin{array}{lrrrr}
\text { Dollars in Millions } &{\text { X6 }} & \text { X5 } & \text { X4 } \
\text { U.S. sources } & \$ 362.8 & \$ 925.4 & \$ 302.2 \
\text { Foreign sources } & 52.8 & 295.1 & 18.2 \
\hline\
\text {Income before income}\
\text { taxes and }\
\text {cumulative effect of }\
\text {accounting }\
\text {change}&\$415.6&\$1,220.5&\$320.4
\end{array}$ The components of the deferred income tax provision (benefit) were as follows:

$\begin{array}{lcccc}
\text { Dollars in Millions } & {\text { X6 }} & \text { X5 } & \text { X4 } \
\text { Accelerated tax depreciation } & \$ 3.7 & \$(23.8) & \$ 8.8 \
\text { Postretirement benefits } &  0.6 & (6.5) & (6.0)\
\text { Accrued expenses including }\ 
\text { restructuring charges } & 40.6 & 12.6 & (30.8) \
\text { Loss carryforwards } & (7.1) & 3.5 & (6.1) \
\text { Foreign gain deferral } & 9.8 & - & - \
\text { Other } & (16.1) & (15.0) & (23.6)\
\text {Provision (benefit) for deferred}\
 \text {income taxes}&\$31.5&\$(29.2)&\$(57.7)\
\end{array}$

Deferred tax assets and deferred tax liabilities were as follows:
$\begin{array}{lrcrc}
\text { Dollars in Millions } &\quad\quad\quad {\text { X6 }} &\quad\quad\quad\quad\quad {\text { X5 }} \
& \text { Assets } & \text { Liabilities } & \text { Assets } & \text { Liabilities } \
\text { Depreciation and amortization } & \$ 56.9 & \$ 400.1 & \$ 58.8 & \$ 405.6 \
\text { Postretirement benefits } & 100.3 & - & 100.9 & -\
\text { Other benefit plans } & 60.8 & 9.2 & 59.8 & 20.2 
 \
\text { Accrued expenses including }\
\quad \text { restructuring charges } & 80.3 & 7.9 & 147.9 & 10.4  \ 
\text { Loss carryforwards }& 14.5 & - & 13.5 & - \
\text { Other } & 13.3 & 33.2 & 15.9 & 22.8 \
\text { Subtotal } & 326.1 & 450.4 & 396.8 & 459.0 \
\text { Valuation allowance } & (14.2) & - & (20.0) & - \
\text {Total}& \$ 311.9 & \$ 450.4 & \$ 376.8 & \$ 459.0
\end{array}$
Required:

1a. What was the effective tax rate on all income for fiscal X6?
1b. What was the effective tax rate on foreign income for fiscal X6?

2a. How much did Quaker Oats record in deferred taxes for fiscal X6? Was this an asset or liability?
2b. What was the major item contributing to the deferred tax for X6? Explain fully how this arose.

Accepted Answer

The answer of Below are selected portions from Quaker Oats'...

Question 13

Which of the following measures of accounting income is typically reported in an income statement?
A)Net income
B)Comprehensive income
C)Continuing income
D)All of the above

Accepted Answer

All of the listed measures (Net income, Comprehensive income, and Continuing income) can be reported in an income statement, depending on the level of detail and the specific reporting requirements.

Question 14

You are reading the 2006 annual report of Curpen Corporation and you find the following items in its footnotes.

a. The useful life of machinery has been increased from 10 to 15 years.
b. The expected rate of return on plan assets has been increased to 10% from 8%.
c. The company has started to capitalize small tools purchased beginning in 2006.

For each of the above, determine the effect (higher, lower, or unchanged) of the change on the ratios listed below for the year 2006:

a. Debt-to-equity
b. Return on assets
c. Cash Flow from operations

Accepted Answer

The answer of You are reading the 2006 annual report...

Question 15

Which of the following is not a reason for economic income and accounting income to differ?
A)Transaction basis
B)The monetary assumption
C)Conservatism
D)Earnings management

Accepted Answer

The monetary assumption is a fundamental concept in accounting that assumes that all transactions are recorded in a single currency, typically the currency used in the country where the company operates. This concept does not affect the difference between economic income and accounting income. The other options - transaction basis, conservatism, and earnings management - all can lead to differences between economic income and accounting income.

Question 16

Companies can capitalize software development costs when the product is "technologically feasible". Some companies never capitalize their software costs - for example, Microsoft.

Viderics, a software development company capitalizes those software costs allowed under GAAP. The following information is taken from its financial statements.
$$\begin{array} { l c c c c } 
 & \text { X1 } & \text { X2 } & \text { X3 } & \text { X4 } \
\text { Capitalized software costs (in millions): }\
\text { Unamortized balance } & \$ 40 & \$ 50 & \$ 63 & \$ 96 \
\text { Amortized balance } & \$ 10 & \$ 15 & \$ 17 & \$ 27
\end{array}$$
a. If Viderics had not capitalized its software costs but expensed them instead what would they have reported as software expense each year, assuming unamortized balance of software costs was $35 in year X0?
b. What is the likely effect upon net income variability of expensing rather than capitalizing software development costs?
c. How might income be manipulated under either of these two methods (expensing and capitalizing)?

Accepted Answer

The answer of Companies can capitalize software development costs when...

Question 17

XYZ Company issued 10,000 options to its CEO on January 1, 2006, at the prevailing market price of $5 per share. The options were expected to vest over a 2-year period. The Black-Scholes value of the option was valued at $2 per share. On December 31, 2007, the CEO exercised all options. Market price on that day was $9 per share. Assume a 35% tax rate.

1. What will be the cumulative effect on the balance sheet as of December 31, 2007 before the exercise of option?
2. What will be the cumulative effect on the balance sheet as of December 31, 2007 after the exercise of option?

Accepted Answer

The answer of XYZ Company issued 10,000 options to its...

Question 18

Brierton Company enters a contract at the beginning of year 1 to build a new federal courthouse for a price of $16 million. Brierton estimates that total cost of the project will be $12 million and will take four years to complete. $\begin{array}{lll}
&\text { Costs incurred }&\text { Payments from federal}\
&&\text {  government}\
\text { Year 1 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 2 } & \$ 4 \text { million } & \$ 2 \text { million } \
\text { Year 3 } & \$ 2 \text { million } & \$ 6 \text { million } \
\text { Year 4 } & \$ 2 \text { million } & \$ 6 \text { million }
\end{array}$
-If Brierton used percentage-of-completion method to account for this project, what would they have reported as profit in year 2?
A)$0
B)$1.33 million
C)$1.50 million
D)$0.67 million

Accepted Answer

Using the percentage-of-completion method, revenue and expenses are recognized in proportion to the percentage of the project completed during the period.

In year 1, Brierton recognizes revenue of $4 million ($16 million contract price / 4 years) and expenses of $3 million ($12 million total cost / 4 years). This results in a gross profit of $1 million.

Assuming that Brierton completes 30% of the project in year 2, they would recognize revenue of $1.2 million ($4 million x 30%) and expenses of $0.9 million ($3 million x 30%). This results in a gross profit of $0.3 million ($1.2 million - $0.9 million).

Therefore, the answer is B) $1.33 million, which is not a choice in the question. The best choice is to choose the closest option, which is D) $0.67 million.

Question 19

Which of the following is correct?

I. If a company uses straight-line depreciation for financial reporting purposes, it is very likely they have a deferred tax liability with respect to its depreciable assets.
II. Straight-line depreciation yields an increasing rate of return on book value over the life of an asset.
III. Straight-line depreciation results in lower tax payments than accelerated depreciation methods over the life of an asset.
IV. If a company revises its estimate of the useful life of an asset upwards this will decrease annual depreciation expense.

A)I, II, III, and IV
B)I, II, and IV
C)I, II, and III
D)I and IV

Accepted Answer

The answer of Which of the following is correct?

I. If...

Question 20

The table below shows the differences in accounting treatments for goodwill in three selected countries.
$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\text { Accounting for goodwill in selected countries }$
$\begin{array}{lccc} 
&\text { Option to expense }&\text {Option to charge to }\
&\underline{ \text { immediately }} &\underline{ \text { equity }} & \underline{\text { Tax deductible }} \
\text { United States }& \text { No } & \text { No } & \text { No* } \
\text { Great Britain } & \text { No } & \text { No } & \text { Yes } \
\text { No } & \text { Yes } & \text { No } & \text { No }
\end{array}$
*Goodwill is tax deductible in the United States under limited circumstances, for the purposes of this question, assume it is not.

Given a company that has recognized significant acquisition goodwill, identify the country whose accounting and tax rules for goodwill would likely result in the highest valuation of the company. Justify and explain your answer.

Accepted Answer

The answer of The table below shows the differences in...

Quiz 6: Analyzing Operating Activities

As a general rule, revenue is normally recognized when it is:

Differences in taxable income and pretax accounting income that will not be offset by corresponding differences or "turn around" in future periods are called:

Which of the following statements concerning deferred taxes is correct?

According to FASB, initial franchise fees should be recognized as income when:

Which of the following measures of accounting income is typically reported in an income statement?

Which of the following is not a reason for economic income and accounting income to differ?