Exam 2: Asset and Liability Valuation and Income Measurement

H.Solo Company purchased a new piece of equipment with a list price of $175,000 and subject to a 5 percent discount if paid within 45 days.H.Solo paid within the discount period.The company also paid $1,500 to obtain title to the equipment and $600 as the license fee for the first year of operation.It paid $2,500 to level the area in which the equipment would be located and $12,500 to relocate other equipment that would have interfered with the proper operation of the new equipment.H.Solo paid $400 for property and liability insurance for the first year of operation.What is the acquisition cost of this equipment that H.Solo should record in its accounting records? Indicate the treatment of any amount not included in acquisition cost.

Shareholders' equity consists of what three components:

The difference between income tax payable and income tax expense is reported on the balance sheet as either ___________________________________ or a ___________________________________. deferred tax asset,deferred tax liability or deferred tax liability,deferred tax asset

Revenues and expenses that firms include in both net income to shareholders and in taxable income,but in different periods are referred to as _____________________________________________.

The analytical framework used to evaluate transactions is reproduced below: Using this analytical framework indicate the effect of each of the following transactions for Staples Corporation: 1.Staples recorded cash sales of $25,000.The merchandise had cost $19,000 to manufacture. 2.Staples purchased $8,500 of raw material inventory on account. 3.The company paid $2,500 for property insurance for the next 12 months. 4.Staples paid its employees $5,000 for the month. 5.The company purchased $1,000 of supplies on account. 6.Staples issued $25,000 of long-term debt. 7.The company used $10,000 of excess cash to purchase marketable securities. 8.Staples purchased a machine for $16,000 using $8,000 cash with the balance on account. 9.Staples paid $2,500 for interest expense on the long-term debt. 10.At the end of the year the marketable securities that Staples purchased in transaction 7 were now worth $14,500. 11.Depreciation for the period was $1,500. 12.Staples examined the equipment and determined that its fair value was $10,000.

Balance Sheet Equation Refer to Balance Sheet Equation.ORP Corporation sells land with a book value of $12,000 for $9,000.This transaction results in ORP recording an increase in cash of $9,000,a decrease in non-cash assets of $12,000 and a decrease in ______________________________ of $3,000. retained earnings

A change in the _________________________ or _________________________ will not change a preset series of cash flows,however it will change the present value of those cash flows.

The financial statement disclosures for Able Company,a retail chain,revealed the following information regarding the firm's income taxes: Required: a.Assuming that Able had no significant permanent differences between book income and taxable income,did income before taxes for financial reporting exceed or fall short of taxable income for 2010? Explain. b.Did income before taxes for financial reporting exceed or fall short of taxable income for 2011? Explain. c.Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2010? For 2011? d.Able does not contract with an insurance agency for property and liability insurance; instead,it self-insures.Able recognizes an expense and a liability each year for financial reporting to reflect its average expected long-term property and liability losses.When it experiences an actual loss,it charges that loss against the liability.The income tax law permits self-insured firms to deduct such losses only in the year sustained. Why are deferred taxes related to self-insurance disclosed as a deferred tax asset instead of a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2009 and 2011. e.Able treats certain storage and other inventory costs as expenses in the year incurred for financial reporting but must include these in inventory for tax reporting.Why are deferred taxes related to inventory disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2009 and 2011. f.Firms must recognize expenses related to postretirement health care and pension obligations as employees provide services,but claim an income tax deduction only when they make cash payments under the benefit plan.Why are deferred taxes related to health care obligation disclosed as a deferred tax asset? Why are deferred taxes related to pensions disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for these deferred tax items between 2009 and 2011. g.Firms must recognize expenses related to uncollectible accounts when they recognize sales revenues,but claim an income tax deduction when they deem a particular customer's accounts uncollectible.Why are deferred taxes related to this item disclosed as a deferred tax asset? Suggest reasons for the direction of the change in amounts for this deferred tax asset between 2009 and 2011. h.Able uses the straight-line depreciation method for financial reporting and accelerated depreciation methods for income tax purposes.Why are deferred taxes related to depreciation disclosed as a deferred tax liability? Suggest reasons for the direction of the change in amounts for this deferred tax liability between 2009 and 2011.

The income statement approach to measuring income tax expense

For each of the items below,determine whether the items are temporary differences or permanent differences. For each temporary difference,determine whether a deferred tax asset or deferred tax liability is created by the temporary difference described.Assume that each of the temporary differences described is an originating difference. 1.Accrued bad debt expense 2.The dividends received deduction 3.Installment sales revenue 4.Insurance payments for executives for which the company is the beneficiary 5.Fines paid for law violations 6.Municipal bond interest 7.Accrued warranty expense 8.Revenues received in advance 9.Expenses paid for in advance (prepaid insurance) 10.Tax depreciation expense exceeds GAAP (book)depreciation expense

Use of acquisition costs generally results in more reliable asset and liability valuations than do

The analytical framework used to evaluate transactions is reproduced below: Using this analytical framework indicate the effect of each of the following transactions for CX Corporation: 1.CX Corporation purchases land for $450,000 cash. 2.At the end of the period CX Corporation receives an appraisal that values the land at $540,000. 3.During the next period CX Corporation sells the land for $665,000. 4.CX pays taxes at a rate of 40%.

There are three valuation methods that reflect historical values: acquisition cost,adjusted acquisition cost,and present value of cash flows using historical interest rates.For each of three methods discuss what the valuation represents and provide an example of a balance sheet item that is valued using the method.In addition,for each of the three methods valuation methods explain its advantages and disadvantages.

Valuation methods that reflect current valuesor a combination of historical and current values include all of the following except:

On January 1,2010,Starlight Company's balance sheet reported a deferred tax liability of $185,000 and a deferred tax asset of $99,900.The future taxable amounts that existed as of January 1,2010 will reverse equally over the next four years beginning in 2010,while the future deductible amounts that existed as of January 1,2010 will reverse equally over the next three years beginning in 2010.The enacted income tax rate for all tax years as of January 1,2010 was 37%.On February 1,2010,the tax laws were amended resulting in income tax rates of 38% for 2010 and 2011; the income tax rate will be 40% for tax years 2012 and later. Required: Prepare the journal entry on February 1,2010 to record the impact of the amended income tax rates.

If a portfolio manager had to estimate the fair value of publicly traded bonds,which of the following would he/she most likely identify as the level of inputs to determine this?

The analytical framework used to evaluate transactions is reproduced below: Using this analytical framework indicate the effect of each of the following transactions for Wisco Corporation: 1.Wisco sold merchandise for $225,000 on account which cost $170,000 to manufacture. 2.Wisco purchased for cash $110,000 of raw material inventory. 3.The company paid $25,000 in advance for an advertising campaign that would be aired next year. 4.Wisco paid its employees $15,000 for the month. 5.The company purchased $7,000 of supplies on account. 6.Wisco issued $25,000 of long-term debt. 7.The company used $10,000 of excess cash to purchase marketable securities. 8.Wisco purchased a machine for $22,000 in cash. 9.At the end of the year Wisco paid dividends of $5,000. 10.At the end of the year the marketable securities that Wisco purchased in transaction 7 were now worth $11,500. 11.Depreciation for the period was $1,500.

The analytical framework used to evaluate transactions is reproduced below: Using this analytical framework indicate the effect of each of the following transactions for TX Corporation: 1.TX Corporation purchased marketable securities for $150,000 for cash. 2.At the end of the period TX Corporation revalued the securities to $125,000. 3.During the next period TX Corporation sells the securities for $165,000.

Relevant asset valuations refer to all of the following except:

All of the following can be used to describe reliability of accounting information except: