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.

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:

The traditional accounting model delays the recognition of value changes of assets and liabilities until what event occurs?

________________________________________ is the net amount that a firm would receive if it sold an asset or the net amount it would have to pay to settle a liability.

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

Balance Sheet Equation Refer to Balance Sheet Equation. If ORP Corporation sells $25,000 of its product on account, it will see an increase in non-cash assets and ___________________________________.

Balance Sheet Equation Refer to Balance Sheet Equation. The payment of dividends by a firm reduces cash and ______________________________.

Balance Sheet Equation Refer to Balance Sheet Equation. To recognize the cost of goods sold ORP Corporation will reduce retained earnings and reduce ______________________________.

When income tax expense differs from income taxes currently payable on taxable income companies recognize deferred tax assets and deferred tax liabilities. What type of event would create a deferred tax asset and deferred tax liability?

The application of GAAP requires firms to write down assets whose fair values decrease below their book values, but does not allow firms to revalue upward the values of assets whose fair values have increased. This asymmetric treatment rests on the ________________________________________.

Acquisition costs includes all costs necessary to get an asset ready for its _________________________.

Current replacement cost represents

Plaxo Corporation has a tax rate of 35% and uses the straight-line method of depreciation for its equipment, which has a useful life of four years. Tax legislation requires the company to depreciate its equipment using the following schedule: year 1- 50%, year 2 - 30%, year 3 - 15% and year 4 - 5%. In 2006 Plaxo purchases a piece of equipment with a four year life and an original cost of $100,000. What amount will Plaxo record as a deferred tax asset or liability in 2006?

Fish Farm Corporation purchases a new tract of land on which it is going to build new growing and holding tanks in order to expand its business, which of the following costs would not be part of the cost of the land?

Why might income tax expense on the income statement differ from actual income taxes paid to the government?

The following problem requires present value information: Biotech sold a patent on a new blood analyzer to Pharma. The sales agreement which was signed on January 1, 2006 requires Pharma to pay Biotech $1 million immediately. In addition, Pharma is required to pay $600,000 each December 31 for 20 years starting with December 31, 2006. Pharma and Biotech judge that a 10 percent is an appropriate interest rate for this arrangement.

Permanent tax differences are revenues and expenses

Net income equals revenues plus ____________________ minus expenses and ____________________.

The net amount a firm would receive if it sold an asset or the net amount it would pay to settle a liability is referred to as

The use of acquisition cost as a valuation method is justified on the basis that acquisition cost