accounting

  

QUESTION 1

 At January 1, 2018, Silver leased restaurant equipment from Sunshine Corporation under an eight-year lease agreement in an operating lease. The lease agreement specifies annual payments of $15,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2024. The equipment was acquired recently by Sunshine at a cost of $100,000 (its fair value) and was expected to have a useful life of 10 years with no salvage value at the end of its life. (Because the lease term is only 8 years, the asset does have an expected residual value at the end of the lease term of $18,941, which is unguaranteed by Silver.) Sunshine seeks a 9% return on its lease investments. The amortization of the right-of-use asset in 2018 Silver income statement would be:


 

  

 

$8,206.


 

 

$9,430.


 

 

$10,375.


 

 

$11,248.


  

QUESTION 2

 Rainbow Services acquired an asset for $120 million in 2018. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset’s cost is depreciated by MACRS, i.e., $40,000 in 2018, $53,440 in 2019, $17,772 in 2020 and $8,788 in 2021. The enacted tax rate is 40%.  The amount of book-tax difference for the depreciable asset and balance to be reported in the deferred tax liability account in 2018 should be:


 

  

 

Book-tax   difference: $40,000; deferred tax liability: $16,000.


 

 

Book-tax   difference: $30,000: deferred tax liability: $12,000.


 

 

Book-tax   difference: $20,000: deferred tax liability: $8,000.

 


 

 

Book-tax   difference: $10,000: deferred tax liability: $4,000.

  

QUESTION 3

 Newman Labs leased chronometers from Brookvale Instruments on January 1, 2018 under a five-year lease agreement in a finance lease. The lease agreement specifies quarterly payments of $12,500 beginning January 1, 2018, the beginning of the lease, and at March 31, June 30, September 30, and December 31 thereafter.  Brookvale Instruments manufactured the chronometers at a cost of $160,000. The chronometers have a fair value of $210,000, with economic life of 6 years.  Estimated residual value at the end of lease term is $16,819, unguaranteed by Newman.  Brookvale seeks a 10% return on its lease investments.  The amount of sales revenues recorded by Brookvale on January 1, 2018 would be:


 

  

 

$210,000.


 

 

$204,382.


 

 

$199,736.


 

 

$182,342.


  

QUESTION 4

 Douglas Company started the period with a deferred tax asset of $200.  As of the end of the period, Douglas identifies future deductible amounts of $1,000. Douglas has a tax rate of 30%, and calculates that taxes payable will be $420. Douglas’s tax expense journal entry would include a.


 

  

 

Debit   to income tax expense of $520.


 

 

Debit   to income tax expense of $320.


 

 

Credit   to income tax expense of $420.


 

 

Debit   to income tax expense of $100.


  

QUESTION 5

 At January 1, 2018, Silver leased restaurant equipment from Sunshine Corporation under an eight-year lease agreement in a finance lease. The lease agreement specifies annual payments of $15,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2024. The equipment was acquired recently by Sunshine at a cost of $100,000 (its fair value) and was expected to have a useful life of 10 years with no salvage value at the end of its life. (Because the lease term is only 8 years, the asset does have an expected residual value at the end of the lease term of $18,941, which is unguaranteed by Silver.) Sunshine seeks a 9% return on its lease investments. The total decrease in earnings (pretax) in Silver December 31, 2018, income statement would be:


 

  

 

$12,375.


 

 

$14,430.


 

 

$18,106.


 

 

$20,450.


  

QUESTION 6

 Superior Corporation reports pretax accounting income of $500,000, but due to a single temporary difference, taxable income is only $300,000.  At beginning of the year, no temporary differences existed.  Assuming a tax rate of 30%, the amount of deferred tax liability or deferred tax asset to be reported this year would be:


 

  

 

Deferred   tax liability of $60,000.


 

 

Deferred   tax liability of $90,000.


 

 

Deferred   tax asset of $60,000.


 

 

 

Deferred   tax asset of $90,000.
 


  

QUESTION 7

 Mayflower Company leased a tooling machine on January 1, 2018, for a four-year period ending December 31, 2021. The lease agreement specified annual payments of $30,000 beginning with the first payment at the beginning of the lease, and each December 31 through 2020. The company had the option to purchase the machine on December 30, 2021, for $40,000 when its fair value was expected to be $56,000 a sufficient difference that exercise seems reasonably certain. The machine's estimated useful life was six years with no salvage value. Mayflower was aware that the lessor’s implicit rate of return was 10%.  The amount Mayflower should record as a right-of-use asset and lease liability for this finance lease should be:


 

  

 

$104,605


 

 

$112,345.


 

 

$125,648.


 

 

$131,926.


  

QUESTION 8

 Southern Company leased equipment from Rainbow Industries. The lease agreement qualifies as a finance lease and requires annual lease payments of $100,000 over a six-year lease term (also the asset’s useful life), with the first payment at January 1, 2018, the beginning of the lease. The interest rate is 8%. The asset being leased cost Rainbow $480,000 to produce.  The total increase in earnings (pretax) on  Rainbow’s December 31, 2018, income statement would be:


 

  

 

$64,274.


 

 

$51,213.


 

 

$32,534.


 

 

$0.