choose the correct answer and explain why is the correct
1.A CPA has been asked by a client to describe revenue. Which of the following statements would be best for the CPA to use in his/her description?
- Revenue is equal to the cash received from a customer for goods.
- Revenue is equal to the difference between the amount charged to the customer and the cost of the goods sold that results from an enhancement of assets.
- Revenue is the inflows of assets or settlements of liabilities from the sale of assets such as property, plant, and equipment or long-term investments.
- Revenue is the inflows or other enhancements of assets of an entity or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
2.Holt Company enters into a contract to build a new plant facility for Segal Company for $2,500,000. In the contract, Segal will pay a performance bonus of $100,000 if Holt is able to complete the facility by October 1, 20X6. The performance bonus is reduced by 50% for each of the first two weeks after October 1, 20X6. If the completion is delayed more than two weeks, then Holt forfeits the entire performance bonus. Holt’s prior experience with performance bonuses on similar contracts indicates the following probabilities of completion outcomes:
Completed by Probability
October 1, 20X6 80%
October 8, 20X6 10%
October 15, 20X6 5%
After October 15, 20X6 5%
How much should Holt record as the transaction price of the contract and why?
- $2,500,000 because the performance bonus is not guaranteed
- $2,600,000 because the most likely outcome is that Holt will deliver the facility by October 1, 20X6
- $2,461,250 because Holt should use the expected cost method
- $2,586,250 because Holt should use the expected value method
3. What method does a company use to determine the transaction price for a contract that includes variable consideration when the company has numerous other contracts with similar characteristics and there are more than two possible results?
a. Expected outcome method
b. Expected value method
c. Most likely value method
d. Most likely amount method
4. On January 1, 20X2, Dot Company sold a three-year, service-type extended warranty to Matrix Company for $36,000. The warranty took effect on the date of purchase (January 1, 20X2). What amount of Unearned Warranty Revenue should be reported on Dot’s December 31, 20X3, Balance Sheet?
5. On January 1, 20X5, Wren Co. leased a building to Brill under an operating lease for 10 years at $50,000 per year, payable the first day of each lease year. Wren paid $15,000 to a real estate broker as a finder’s fee. The building is depreciating $12,000 per year.
For 20X5, Wren incurred insurance and property tax expenses totaling $9,000. Wren’s net rental income for 20X5 should be
6. A company granted its employees 100,000 stock options on January 1, Year 1. The stock options had a grant date fair value of $15 per option and a three-year vesting period. On January 1, Year 2, the company estimated the fair value of the stock options to be $18 per option. Assuming that the company did not grant any additional options or modify the terms of any existing option grants during Year 2, what amount of share-based compensation expense should the company report for the year ended December 31, Year 2?
7.On January 1, year 1, the board of directors of a corporation granted 10,000 stock options to the CEO. Each option permits the purchase of one share of stock at $25 per share, the current market price of the stock. The options are exercisable on December 31, year 4, as long as the CEO is still employed. The options expire on December 31, year 5. The grant date fair value of each option is $5. The corporation must recognize
a. $50,000 of compensation expense when the options are exercised.
b.$50,000 of compensation expense in year 1.
c. $12,500 of compensation expense per year for four years.
d. $10,000 of compensation expense per year for five years.
8. A restricted stock award was granted at the beginning of 2005 calling for 3,000 shares of stock to be awarded to executives at the beginning of 2009. The fair value of one option was $20 at grant date. During 2007, 100 shares were forfeited because an executive left the firm.
What amount of compensation expense is recognized for 2007?
9. Select the correct statement about executive compensation plans involving stock.
a. The total amount of compensation expense for a restricted stock award plan is recognized when the stock is issued.
b. The total amount of compensation expense for a restricted stock award plan is determined at the grant date.
c. For stock-appreciation rights plans payable in cash, compensation expense is recognized only during the service period.
d. For stock-appreciation rights plans payable in cash, compensation expense recognized in any given reporting period cannot be negative.
10. Which of the following statements is a primary objective of accounting for income taxes?
a. To compare an enterprise’s federal tax liability to its state tax liability.
b. To identify all of the permanent and temporary differences of an enterprise.
c. To estimate the effect of the tax consequences of future events.
d. To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences.
11. A company has two temporary differences resulting in deferred tax consequences. One difference result in a deferred tax asset; the other difference results in a deferred tax liability. The deferred tax asset is greater than the deferred tax liability. How should the company report the deferred tax consequences of the temporary differences on the balance sheet?
a. Report the deferred tax asset in the noncurrent assets portion of the balance sheet and report the deferred tax liability in the noncurrent liabilities portion of the balance sheet.
b. Report a net noncurrent deferred tax asset in the noncurrent assets section of the balance sheet.
c. Report a net current deferred tax asset in the noncurrent assets section of the balance sheet.
d.Report a net noncurrent deferred tax liability in the noncurrent liability section of the balance sheet.
12. On June 30, 20X4, Ank Corp. pre-paid a $19,000 premium on an annual insurance policy. The premium payment was a tax-deductible expense in Ank’s 20X4 cash-basis tax return. The accrual-basis income statement will report a $9,500 insurance expense in 20X4 and 20X5.
Ank elected early application of FASB Statement No. 109, Accounting for Income Taxes. Ank’s income tax rate is 30% in 20X4 and 25% thereafter. In Ank’s December 31, 20X4 balance sheet, what amount related to the insurance should be reported as a deferred income tax liability?
13. Lake Corp., a newly organized company, reported pre-tax financial income of $100,000 for Year 1. Among the items reported in Lake’s Year 1 income statement are the following:
Premium on officer’s life insurance with Lake as owner and beneficiary $15,000
Interest received on municipal bonds 20,000
The enacted tax rate for Year 1 is 30% and 25% thereafter. In its December 31, Year 1 balance sheet, Lake should report a deferred income tax liability of
14. When accounting for income taxes, a temporary difference occurs in which of the following scenarios?
a. An item is included in the calculation of net income, but is neither taxable nor deductible.
b. An item is included in the calculation of net income in one year and in taxable income in a different year.
c. An item is no longer taxable, owing to a change in the tax law.
d. The accrual method of accounting is used.
15. For the year ended December 31, 20X4, Mont Co.’s books showed income of $600,000 before provision for income tax expense. To compute taxable income for federal income tax purposes, the following items should be noted:
Income from exempt municipal bonds $60,000
Depreciation deducted for tax purposes in excess of depreciation recorded on the book $120,000
Proceeds received from life insurance on death of officer $100,000
Estimated tax payments 0
Enacted corporate tax rate 30%
Ignoring the alternative minimum tax provisions, what amount should Mont report at December 31, 20X4 as its current federal income tax liability?
16. Lamb Corp. has taxable income of $240,000 and depreciation expense for tax purposes of $50,000 greater than financial reporting purposes. Lamb has a tax rate of 30%, and no other differences exist. Which of the following entries should Lamb make for deferred taxes?
a. $87,000 deferred tax asset.
b. $72,000 deferred tax asset.
c. $57,000 deferred tax liability.
d. $15,000 deferred tax liability.
17. Fern Co. has net income, before taxes, of $200,000, including $20,000 interest revenue from municipal bonds and $10,000 paid for officers’ life insurance premiums where the company is the beneficiary. The tax rate for the current year is 30%. What is Fern’s effective tax rate?
18. In its 20X5 income statement, Cere Co. reported income before income taxes of $300,000.
Cere estimated that, because of permanent differences, taxable income for 20X5 would be $280,000. During 20X5, Cere made estimated tax payments of $50,000, which were debited to income tax expense. Cere is subject to a 30% tax rate.
What amount should Cere report as income tax expense?
19. On its December 31, 20X5 balance sheet, Shin Co. has income tax payable of $13,000 and a current deferred tax asset of $20,000, before determining the need for a valuation account.
Shin had reported a deferred tax asset of $15,000 at December 31, 20X4. No estimated tax payments are made during 20X5. At December 31, 20X5, Shin determines that it is more likely than not that 10% of the deferred tax asset would not be realized.
In its 20X5 income statement, what amount should Shin report as total income tax expense?
20. Helene, Corp. reports a net operating loss in year 1 of $20,000. In year 2, the company reports income of $10,000. What amount of year 2 income may be offset by the carryforward of the year 1 net operating loss?