Sample Questions Mid Term Exam

pdf

School

University of Manitoba *

*We aren’t endorsed by this school

Course

3120

Subject

Accounting

Date

Apr 3, 2024

Type

pdf

Pages

Uploaded by daveroj

1 Sample Questions for Mid Term Exam Question 1 1. Bravo Industries intends to retire $950,000 in short-term debt using proceeds from the sale of 30,000 common shares. The shares sell for $25 each. Under ASPE how much of its short- term debt can Bravo exclude from current liabilities if the sale occurs after the statement of financial position date but before the statement of financial position is issued? a. $200,000 b. $950,000 c. $750,000 d. $0 2. Computers Are Us sells PCs with a three-year warranty included. They expect that 50% of all claims will occur in the first year of the warranty; 40% in the second year; and 10% in the third year. They expect, on average, $100 worth of claims per computer. What warranty liability and expense will they record when each computer is sold? a. $50 b. $100 c. Cannot tell from the information given. d. Nothing 3. Under ASPE, a contingent liability is recognized in income and as a liability when a. the liability is likely to be paid. b. the liability can be reasonably estimated. c. the liability is both likely to be paid and can be reasonably measured. d. contingent liabilities are never recorded. 4. A provision is a liability for which ________ is/are uncertain a. the timing or amount b. the amount c. neither the timing nor the amount d. the timing 5. On May 15, 2019, RL Enterprises issues a $312,000, six-month, zero-interest-bearing note to Federal Bank. The present value of the note is $300,000. Which of the following must be recorded as part of this transaction? a. a credit to Notes Payable of $300,000 b. a debit to Discount on Notes Payable of $12,000 c. a debit to cash of $312,000 d. a credit to Discount on Notes Payable of $12,000 6. What is the term used for bonds that pay no interest unless the issuing company is profitable? a. Income bonds

2 b. Collateral trust bonds c. Revenue bonds d. Debenture bonds 7. Earlier in the year, Oliver Industries issued $1 millions of 7% bonds at face value. Oliver decided to use the fair value option for these bonds. Now, on December 31, the value of the bonds has dropped to $925,000 due to an increase in interest rates. In this situation, Oliver should record a ________ in its Bonds Payable account. a. $925,000 credit b. $75,000 debit c. $925,000 debit d. $75,000 credit 8. On January 1, 2019, Woodall Enterprises sold property to Mattson Company that originally cost Woodall $1,470,000. Mattson gave Woodall a $2,100,000 zero-interest-bearing note payable in three equal annual instalments of $700,000, with the first payment due December 31, 2019. The prevailing rate of interest for a note of this type is 10%. The present value of a $2,100,000 note payable in three equal annual installments of $700,000 at a 10% rate of interest is $1,740,800. What is the amount of interest income that should be recognized by Woodall in 2019, using the effective interest method? a. $174,080. b. $70,000. c. $0 d. $210,000. 9. Ruskin Corporation issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2018. Interest is paid on June 30 and December 31. The proceeds from the bonds are $19,604,144. Using straight-line amortization, the interest expense for 2020 is a. $1,579,793. b. $1,560,000. c. $1,569,192. d. $1,540,208. 10. JT Engineering would like to begin manufacturing widgets. JT would like to lease the equipment necessary to do so rather than purchasing it. The company has never made widgets before and would like to lease the equipment through a lessor with a high degree of product knowledge. Which type of lessor should JT consider for this lease a. any type of lessor should be equally capable. b. a bank. c. a captive leasing company. d. an independent

3 11. On January 1, 2020, Hammons Company signed a five-year non-cancellable lease for equipment. Hammons was required to make annual payments of $150,000 at the beginning of each year with the title passing to Hammons at the end of the lease. Hammons appropriately accounts for this lease transaction as a capital lease. Hammons uses the straight-line method of depreciation for all of its fixed assets, and the leased equipment has an estimated useful life of 7 years with no salvage value. If the minimum lease payments were determined to have a present value of $625,479 at an effective interest rate of 10%, what should Hammons record as interest expense in 2020? a. $47,548 b. $87,453 c. $62,547 d. $102,453 12. Allan Company leased equipment to Harlan Company on May 1, 2019. The lease expires on May 1, 2020. During 2019, Harlan paid $1,080,000 in rentals to Allan for the 8-month period. Allan incurred maintenance and other related costs under the terms of the lease of $96,000 in 2019 as well as $540,000 in depreciation. Ignoring income taxes, the amount of expense incurred by Harlan from this lease for the year ended December 31, 2019, should be a. $1,080,000 b. $540,000 c. $984,000 d. $1,176,000. 13. On January 4, 2020, Salgado Leasing Company leases equipment to Dotson Manufacturing with 5 equal annual payments of $80,000 each, payable beginning January 4, 2020. Dotson agrees to guarantee the $50,000 residual value of the asset at the end of the lease term. Dotson’s incremental borrowing rate is 10%, however it knows that Salgado’s implicit interest rate is 8%. What journal entry would Dotson make at January 4, 2020 to record the lease? a. Dr. Leased Equipment 378,000 Cr. Cash 80,000 Cr. Lease Liability 298,999 b. Dr. Leased Equipment 298,999 Cr. Lease Liability 298,999 c. Dr. Leased Equipment 344,970 Cr. Cash 80,000

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

4 Cr. Lease Liability 264,970 d. Dr. Leased Equipment 378,000 Cr. Leased Liability 378,000 14. Haskins Rentals purchased a warehouse in 2013, and they plan to lease the warehouse to a manufacturing company. At the time of purchase, the warehouse had an estimated economic life of 50 years. Haskins leased the warehouse to Ulrich Textiles in 2021, and the 20-year lease agreement included a bargain-purchase option. If Ulrich uses straight-line depreciation for their buildings, they should depreciate the building over ________ years. a. 42 b. 20 c. 50 d. 35 15. Holman Industries had a deferred tax asset of $10,000 and a deferred tax liability of $15,000 at the beginning of 2019. At the end of 2019, they had pre-tax accounting income of $750,000 and a tax rate of 40%. They also had the following items included in their pre-tax income: Dividends Income 60,000 Accrued Warranty cost, estimated to be paid in 2020 130,000 Installment sales revenue, will be collected in 2020 65,000 Proceeds received on a life insurance policy 95,000 Prepaid rent expense, will be used in 2020 30,000 On December 31, 2019, what will the ending balance of deferred tax asset? a. $10,000 b. $35,000 c. $75,000 d. $15,000 16. In 2019, Coleman Stoves deducted an insurance expense of $126,000 for tax purposes, but the expense was not yet recognized for accounting purposes. In 2020, 2021, and 2022, Coleman did not report an insurance expense for tax purposes, but they reported $42,000 of insurance expense for accounting purposes in each of these years. Coleman Stoves had a tax rate of 40% and income taxes payable of $108,000 at the end of 2019. Therefore, Coleman’s income tax expense for 2019 would be a. $151,200 b. $126,000 c. $108,000. d. $158,400.

5 17. In their 2019 financial statements, Clark Company reported estimated losses on disposal of unused plant facilities of $2,400,000. When they sold the facilities in March 2020, they recognized the $2,400,000 loss for tax purposes. In addition, Clark Company paid $100,000 in premiums in 2019 for a two-year life insurance policy in which the company was the beneficiary. Clark paid $780,000 in income taxes in 2019 when their tax rate was 30%. If their 2020 tax rate is also 30%, how much would Clark have reported as a net deferred tax asset or liability on their December 31, 2019 statement of financial position? a. $360,000 asset b. $360,000 liability c. $720,000 asset d. $680,000 asset 18. Deferred tax expense increases when deferred tax liabilities decrease and deferred tax assets increase. a. True b. False 19. Multiplying the cumulative temporary difference by the tax rate will yield which of the following? a. permanent difference b. future taxable amounts c. deferred tax balance d. income tax expense Question 1 Question Answer Comment 1 C 2 B 3 C 4 A 5 A 6 A 7 B 8 A 9 A Amortized cost added to interest 20,000,000- 19,604,144 = 19,792+ Interest expense = 20,000,000 x7.8% 10 C 11 A Hammons will pay $150,000 at the beginning of 2020 and accumulate interest on the remaining balance of the lease during 2020. Therefore, the interest expense will be ($625,479 – $150,000) * 10% = $47,548

6 12 A This is an operating lease as it is short- term. Harlan’s expenses should be only what they paid in rental costs, not any costs associated with maintenance or depreciation expenses. Therefore, Harlan’s total expenses should be $1,080,000 13 A Payments are at the beginning of the period, so you need to use the PV Annuity Due to calculate the present value of the annual lease payments. Therefore, $80,000 * 4.31213 = $344,970. Because the residual value is guaranteed, Dotson also needs to add the present value of the residual value, or $50,000 * 0.68058 = $34,029. Therefore, the journal entry should capitalize $344,970 + $34,029 = $378,999 to Leased Equipment. They also have a cash payment of $80,000 (Cr.) for their first annual lease payment, and the remainder ($378,999 – $80,000 = $298,999) would be credited to Lease Liability 14 A If the lease contains a bargain-purchase option, the warehouse should be depreciated over the economic life, which in this case is 42 years (50 years – 8 years). Useful life starting from lease time 15 A Deferred tax asset created in 2019 = 130,000 – 95,000 deferred liab = 35,000 Less; decrease in deferred tax asset, beg (to be reversed) 10,000 = 25,000 x 40% = 10,000 16 D The deducted insurance expense will create a deferred tax liability of $126,000 * 40% = $50,400. This will be added to the income taxes payable to determine the income tax expense for 2019. Therefore, the income tax expense will be $108,000 + $50,400 = $158,400 17 C The only factor considered for the deferred taxes is the loss on the plant facility, not the insurance premiums (such premiums are a permanent difference). Because they had an estimated loss, they would have paid more in taxes in 2019, allowing a deferred tax asset for the loss on disposal of facilities. With a 30% tax rate, this deferred tax asset would be $2,400,000 * 30% = $720,000. 18 B 19 C Question 2 (Chapter 13) Ex 3-16 Crude Oil Limited purchased an oil tanker depot on July 2, 2020 at a cost of $600,000 and expects to operate the depot for 10 years. After the 10 years, Crude Oil is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $75,000 to do this at the end of the depot's useful life. Crude Oil follows ASPE. Instructions

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

7 a. Prepare the journal entries to record the acquisition of the depot and the accrual for the asset retirement obligation for the depot on July 2, 2020. The effective interest rate of 6%. Use a financial calculator, Round amounts to the nearest dollar b. Prepare any journal entries required for the depot and the asset retirement obligation at December 31, 2020. Crude Oil uses straight-line depreciation. The estimated residual value of the depot is zero. c. Show how all relevant amounts will be reported on Crude Oil Limited's financial statements at December 31, 2020. d. On June 30, 2030, Crude Oil pays a demolition firm to dismantle the depot and remove the tanks at a cost of $80,000. Prepare the journal entry for the settlement of the asset retirement obligation. Answer: Using a financial calculator: PV ? Yields $ 41,879.61 I 6% N 10 PMT 0 FV $ (75,000) Type 0 a. Oil Tanker Depot 600,000 Cash 600,000 To record purchase of depot Oil Tanker Depot 41,879 Asset Retirement Obligation 41,879 To record asset retirement obligation b. December 31, 2020 Depreciation Expense 1 32,094 Accumulated Depreciation – Oil Tanker Depot 32,094 1 ($600,000 + $41,879) ÷ 10 X 6/12 To record depreciation expense Accretion Expense 2 1,256 Asset Retirement Obligation 1,256 2 ($41,879 X 6% X 6/12) To record accretion expense

8 d. June 30, 2030 Asset Retirement Obligation 75,000 Loss on Settlement of ARO 5,000 Cash 80,000 Question 3 (Chapter 13) Ex (3-21) Selzer Equipment Limited sold 500 Rollomatics on account during 2020 for $6,000 each. Ignore any cost of goods sold. During 2020, Selzer spent $30,000 servicing the two-year warranties that are included in each sale of the Rollomatic. All servicing transactions were paid in cash. Instructions a. Prepare the 2020 entries for Selzer using the assurance-type (expense-based) approach for warranties. Assume that Selzer estimates (accurately) that the total cost of servicing the warranties will be $120,000 for two years and payments for completed warranty repairs are paid in cash. b. Prepare the 2020 entries for Selzer assuming that the warranties are not an integral part of the sale, but rather a separate service that is considered to be bundled with the selling price. Use the service-type (revenue-based) approach for warranties. Assume that, of the sales total, $160,000 is identified as relating specifically to sales of warranty contracts. Selzer estimates the total cost of servicing the warranties will be $120,000 for two years. Because the repair costs are not incurred evenly, warranty revenues are recognized based on the proportion of costs incurred out of the total estimated costs. Do not round intermediate calculations and round final amounts to the nearest dollar. c. What amounts would be shown on Selzer's income statement under parts (a) and (b)? c. Balance Sheet: Property, Plant, and Equipment: Oil Tanker Depot $641,879 Less: Accumulated Depreciation 32,094 $609,785 Long-term Liabilities: Asset Retirement Obligation 43,135 ($41,879 + $1,256) Income Statement: Operating Expenses Depreciation Expense 32,094 Accretion Expense 1,256

9 Answer: a. Accounts Receivable ............................................... 3,000,000 Sales Revenue 1 ............................................ 3,000,000 1 (500 X $6,000) To record sales on account Warranty Expense ................................................... 30,000 Cash ............................................................. 30,000 To record payment of warranty expense Warranty Expense 2 .................................................. 90,000 Warranty Liability ....................................... 90,000 2 ($120,000 – $30,000) To accrue warranty expense b. Accounts Receivable ............................................... 3,000,000 Sales Revenue ............................................. 2,840,000 Unearned Revenue ...................................... 160,000 To record sales on account Warranty Expense ................................................... 30,000 Cash. ............................................................ 30,000 To record payment of warranty expense Unearned Revenue .................................................. 40,000 Warranty Revenue 3 ..................................... 40,000 3 [$160,000 X ($30,000/$120,000)] To remeasure unearned revenue C. Sales Revenue $3,000,000 $2,840,000 Warranty Revenue 0 40,000 Warranty Expense (120,000) (30,000) Net Income $2,880,000 $2,850,000

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

10 Question 4 (Chapter 14) (P.14-16) Twilight Corp. wanted to raise cash to fund its expansion by issuing long-term bonds. The corporation hired an investment banker to manage the issue (best efforts underwriting) and also hired the services of a lawyer and an audit firm. On June 1, 2023, Twilight sold $500,000 in long-term bonds. The bonds will mature in 10 years and have a stated interest rate of 8%. Other bonds that Twilight has issued with identical terms are traded based on a market rate of 10%. The bonds pay interest semi-annually on May 31 and November 30. The bonds are to be accounted for using the effective interest method. On June 1, 2025 Twilight decided to retire 20% of the bonds. At that time the bonds were selling at 98. Instructions (Round all values to the nearest dollar) a) Prepare the journal entry for the issuance of the bonds on June 1, 2023. b) What was the interest expense related to these bonds that would be reported on Twilight’s calendar 2023 income statement? c) Prepare all entries from after the issue of the bond until December 31, 2023. d) Calculate the gain or loss on the partial retirement of the bonds on June 1, 2025. e) Prepare the journal entries to record the partial retirement on June 1, 2025. Solution PV of bonds (i.e., selling price) N 20 %i 5 PMT 20,000 (500,000x 4%) FV 500,000 CPT PV => $437,689 a) Cash 437,689 Bonds Payable 437,689 b) Date Cash Interest Expense Discount Amortization Carrying Value of Bonds Jun 1/23 437,689 Nov 30/23 20,000 21,885 1,885 439,574 May 31/24 20,000 21,979 1,979 441,553 Nov 30/24 20,000 22,078 2,078 443,631 May 31/25 20,000 22,182 2,182 445,813

11 Interest expense for 2023 = 21,885 + (1 ÷ 6 x 21,979) = 25,548 c)Nov 30/23 Interest Expense 21,885 Cash 20,000 Bonds Payable 1,885 Dec 31/23 Interest Expense (1 ÷ 6 x $21,979) 3,663 Interest Payable (1 ÷ 6 x $20,000) 3,333 Bonds Payable 330 d) Per the amortization table in part b), the carrying value of the bond as of May 31, 2025 is $445,811. Cost to repurchase ($500,000 x 20% x.98) $98,000 Bond carrying value ($445,813 x 20%) 89,163 Loss on bond redemption $(8,837) e)Bonds Payable 89,163 Loss on Redemption of Bonds 8,837 Cash 98,000

12 Question 5 (chapter 14) EX20 On December 31, 2023, Riverside Inc. is in financial difficulty and cannot pay a $350,000 note (with $35,000 accrued interest payable) to Stockton Corp. Stockton agrees to forgive the accrued interest, extend the maturity date to December 31, 2025, and reduce the interest rate to 4%. The present value of the restructured cash flows is $299,500. Instructions Prepare entries for the following: a) the restructure on Riverside's books. b) the payment of interest on December 31, 2024. c) the restructure on Stockton’s books. Solution a) Old debt: PV = $350,000 + $35,000 = $385,000 New debt: PV (given) = $299,500 The new debt differs by more than 10%: $85,500 ÷ $385,000 = 22.2% Notes Payable (old) .......................................................................... 350,000 Interest Payable ................................................................................ 35,000 Notes Payable (new) ................................................................. 299,500 Gain on Restructuring of Debt .................................................. 85,500 b) Imputed interest rate FV (350000) PV 299500 PMT (14000) ($350,000 x 4%) N 2 CPT %i => 12.61% Interest Expense ($299,500 × 12.61%) ............................................ 37,767 Cash .......................................................................................... 14,000 Notes Payable ........................................................................... 23,767 c) Loss on Restructuring of Debt ......................................................... 85,500 Notes Receivable ...................................................................... 50,500 Interest Receivable .................................................................... 35,000

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

13 Question 6 (chapter 20) EX20-14 • Castle Leasing Corporation, which uses IFRS 16, signs a lease agreement on January 1, 2020, to lease electronic equipment to Wai Corporation, which also uses IFRS 16. • The term of the non-cancellable lease is two years and payments are required at the end of each year. • The following information relates to this agreement. Wai Corporation has the option to purchase the equipment for $13,000 upon the termination of the lease and this option is reasonably certain to be exercised. • The equipment has a cost and fair value of $135,000 to Castle Leasing Corporation. The useful economic life is two years, with a residual value of $13,000. • Wai Corporation is required to pay $5,000 each year to the lessor for insurance costs. Castle Leasing Corporation wants to earn a return of 10% on its investment. • Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs that have not yet been incurred by the lessor. Instructions a. calculate the lease payment that Castle Leasing would require from Wai Corporation. Round all amounts to the nearest dollar. b. What classification will Wai Corporation give to the lease? What classification will be given to the lease by Castle Leasing Corporation? c. What classification would be adopted by Wai Corporation and Castle Leasing Corporation if they had both been using ASPE? d. Prepare a lease amortization schedule for Castle Leasing for the term of the lease. Round to the nearest dollar. e. Prepare the journal entries on Castle Leasing’s books to reflect the payments received under the lease and to recognize income for the years 2020 and 2021. f. Assuming that Wai Corporation exercises its option to purchase the equipment on December 31, 2021, prepare the journal entry to reflect the sale on Castle Leasing’s books. g. What amount would Wai Corporation capitalize and recognize as a lease liability and corresponding right-to-use asset on signing the lease? Explain. Answer: a. Calculation of annual payments

14 1. Using tables Cost (fair value) of leased asset to lessor $135,000.00 Less: PV of residual value $13,000 X .82645 (PV of 1 at 10% for 2 periods) (10,743.85) Amount to be recovered through lease payments $124,256.15 Two periodic lease payments $124,256.15 ÷ 1.73554 1 $71,595.09 1 PV of ordinary annuity of 1 for 2 periods at 10% Calculation of lease receivable Annual payments ($71,595 X 2) $143,190 Residual value 13,000 Lease receivable $156,190 Calculation of unearned interest income Gross investment by lessee $156,190 Asset cost (fair value) 135,000 Unearned interest income $ 21,190 Castle Leasing Corporation should classify the lease as a finance lease because Castle is not a manufacturer or dealer and the lease meets the criteria for a capital lease (similar to the criteria discussed in part (c) below, but IFRS does not use numerical thresholds). Wai Corporation, the lessee, will treat the leased equipment as right-of-use asset (it does not meet the IFRS 16 exception of being a short-term or low value lease). b. For ASPE, a classification approach is used. A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized. Quantitative criteria are used. The lease is capitalized if any one of the following are applicable: 1. the term of the lease is greater than or equal to 75% of the remaining economic life of the asset, 2. the PV of the minimum lease payments is greater than or equal to 90% of the fair value of the asset, or 3. the transfer of title to the asset, perhaps represented by the presence of a bargain purchase option The lease is a capital lease for Wai, the lessee as both criteria 1 (2/2 = 100%) and 2 (100% as shown in part (a) above) have been met. c.For Castle Leasing, the lessor, the lease would receive the same treatment as under IFRS, as the two ASPE revenue recognition-based tests concerning collectibility and estimating unreimbursable costs are passed. Under ASPE, the lease would be considered a direct financing lease.

15 d. CASTLE LEASING CORPORATION (Lessor) Lease Amortization Schedule Date Annual Pmt. Excl. Ins. Costs Interest on Net Investment Net Investment Recovery Net Investment 1/1/20 12/31/20 12/31/21 $71,595 71,595 * $13,500 * 7,690 * $21,190 $58,095 63,905 $135,000 76,905 13,000 e. 1/1/20 Lease Receivable 1 .......................................... 156,190 Equipment Acquired for Lessee ............ 135,000 Unearned Interest Income ..................... 21,190 1 ($71,595 x 2 + $13,000) To record inception of lease 12/31/20 Cash ($71,595.09 + $5,000) ........................... 76,595 Insurance Expense ................................ 5,000 Lease Receivable .................................. 71,595 Collection of lease payment Unearned Interest Income .............................. 13,500 Interest Income ...................................... 13,500 To record interest 12/31/21 Cash .................................................. 76,595 Insurance Expense ................................ 5,000 Lease Receivable .................................. 71,595 Collection of lease payment Unearned Interest Income .............................. 7,690 Interest Income ...................................... 7,690 To record interest f. 12/31/21 Cash .................................................. 13,000 Lease Receivable ................................. 13,000 Collection of lease payment

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

16 g) Upon signing the lease, Wai Corporation, the lessee, should record a right-of-use asset and lease liability at the present value of the two lease payments of $71,595 each plus the present value of the option to purchase the equipment for $13,000, and therefore the same amount used by the lessor or $135,000. The lessee includes the option payment, as there is reasonable assurance that Wai will exercise the option to purchase. Question 7 (Chapter 20) ( Ex 20-9 On January 1, 2020, Lavery Corp., which follows ASPE, leased equipment to Flynn Ltd., which follows IFRS 16. Both Lavery and Flynn have calendar year ends. The following information concerns this lease. • The term of the non-cancellable lease is six years, with no renewal option. The equipment reverts to the lessor at the termination of the lease, at which time it is expected to have a residual value (not guaranteed) of $6,000. Flynn Ltd. depreciates all its equipment on a straight-line basis. • Equal rental payments are due on January 1 of each year, beginning in 2020. • The equipment’s fair value on January 1, 2020, is $144,000 and its cost to Lavery is $111,000. • The equipment has an economic life of seven years. • Lavery set the annual rental to ensure a 9% rate of return. Flynn’s incremental borrowing rate is 10% and the lessor’s implicit rate is unknown to the lessee. • Collectibility of lease payments is reasonably predictable and there are no important uncertainties about any unreimbursable costs that have not yet been incurred by the lessor. Instructions a. Explain why this lease would be set up as a right-of-use asset by Flynn and a manufacturer/dealer or sales-type lease by Lavery. b. Calculate the amount of the annual rental payment. Round to the nearest dollar. c. Prepare all necessary journal entries and adjusting entries for Flynn for 2020. Round to the nearest dollar. d. Prepare all necessary journal entries and adjusting entries for Lavery for 2020. Round to the nearest dollar

17 Answer a) The lease would be set up by Flynn as a right-of-use asset under IFRS 16 as the lease does not qualify for a short-term or low-value exemption. This lease is a capital lease to the lessor because the lease term (six years) exceeds 75% of the economic life of the asset (seven years) although no ownership transfer is included in the lease. Also, the present value of the minimum lease payments exceeds 90% of the fair value of the asset ($144,000/$144,000 = 100%) This is a sales-type lease to Lavery since the lease is a capital lease to Flynn, the lessee, and because the collectability of the lease payments is reasonably predictable, and the fair value of the equipment ($144,000) exceeds the lessor’s cost ($111,00 0) b) $144,000 – $6,000 X0.596271 */ 4.88972** =$28,718 *PV of $1 at 9% for 6 periods. **PV of an annuity due at 9% for 6 periods. I= 9% because lessor is following ASPE and the lower interest rate should be used c) Entries by Lessee (IFRS) Jan1,2020 Right of use asset 137,582 Lease Liability 108,864** Cash 28,718*** *PV of an annuity due at 10% for 6 periods ($28,718 X 4.79079) I = 10% because the implicit rate is not known by lessess Dec.31,2020 Dep. Expense 22,930 Acc. Dep 22,930 137,582 ÷ 6 years

18 Interest expense 10,886 Lease Liability 10,886 ($108,864) X 10% d) Entries by Lessor (ASPE, Sales Type lease) Jan1,2020 Lease receivable 178,308 COGS 107,422 Sales Revenue 140,422 Inventory 111,000 Unearned Interest Income 34,308 1. ($28,718 X 6) + $6,000 2. 111,000 – PV of residual value 3,578 3. Sales 144,000 – PV of residual value 3,578 4. Cost of Inventory 5. 178,308 – $144,000 Cash 28,718 Lease receivable 28,718 Dece.31,2020 Unearned Interest Income 10,375 Interest Income 10,375 (144,000 – $28,718) X 9%

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

19 Question 8 (Chapter 18) EX 18-24 Alliance Inc. reports the following incomes (losses) for both book and tax purposes (assume the carryback provision is used where possible): Year Accounting Income (Loss) Tax Rate 2017 $130,000 25% 2018 105,000 25% 2019 (305,000) 30% 2020 50,000 30% The tax rates listed were all enacted by the beginning of 2017. Instructions a. Prepare the journal entries for each of the years 2017 to 2020 to record income taxes, assuming at December 31, 2019, that it was more likely than not that the company would not be able to benefit from the remaining losses available to carry forward. b. Prepare the income tax section of the income statements for each of the years 2017 to 2020, beginning with the line “Income (loss) before income tax.” Answer:A. Year Entry 2017 Current Tax Expense 32,500 Income Tax Payable ($130,000 X 25%) 32,500 2018 Current Tax Expense 26,250 Income Tax Payable ($105,000 X 25%) 26,250 2019 Income Tax Receivable 58,750 Current Tax Benefit 1 58,750 (25% X ($130,000 + $105,000)) This leaves $305,000 - $235,000 = $70,000 of tax losses available for carryforward. No entry can be made to record any tax benefit from the remaining $70,000 of tax losses because it is not more likely than not that the company will actually benefit from them. However, the existence of the $70,000 loss carryforward should be disclosed in a note. 2020 In 2020, the company earned $50,000 of taxable income and it can deduct $50,000 of the $70,000 tax loss carryforward from this. They report a taxable income amount in 2020 of $-0-.

20 Because they are still uncertain about being able to benefit from the remaining $20,000 of tax losses in the future, no entry is made to recognize the benefit in the year, but this amount must be disclosed in a note. Income tax expense in 2020 is $-0-. b. Year 2017 Income (loss) before income tax $130,000 Income tax expense – current 32,500 Net income $97,500 2018 Income (loss) before income tax $105,000 Income tax expense – current 26,250 Net income $78,750 2019 Income (loss) before income tax $(305,000) Current tax benefit due to loss carryback 58,750 Net loss $(246,250) 2020 Income (loss) before income tax $50,000 Current tax expense -0- Net income $50,000

21 Question 9 (chapter 18) Ex18-19 • Jenny Corporation recorded warranty accruals as at December 31, 2020, in the amount of $150,000. • This reversing difference will cause deductible amounts of $50,000 in 2021, $35,000 in 2022, and $65,000 in 2023. • Jenny's accounting income for 2020 is $135,000 and the tax rate is 25% for all years. • There are no deferred tax accounts at the beginning of 2020. • Assume that the company reports accounting income of $155,000 in each of 2021 and 2022, and that there is no other reversing difference. • In addition, assume now that Jenny Corporation was informed on December 31, 2021, that the enacted rate for 2022 and subsequent years is 28%. Instructions a. Calculate the deferred tax balances at December 31, 2021 and 2022. b. Calculate taxable income and income tax payable for 2021 and 2022. c. Prepare the journal entries to record income taxes for 2021 and 2022. d. Prepare the income tax expense section of the income statements for 2021 and 2022, beginning with the line “Income before income tax.” Answer a. 2020 2021 2022 2023 Accounting Income 135,000 155,000 155,000 Warranty 150,000 (50,000) (35,000) (65,000) Taxable Income 105,000 120,000

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

22 Tax rate 25% 25% 28% 28% Tax payable 26,250 33,600 • Deferred Tax assets in 2020 = 150,000 x 25%= 37,500 • In 2021: • decrease in deferred tax asset = 50,000 x 25% = (12,500) • Increase in deferred tax asset because of change in tax rate = (35,000+65,000=100,000) x 3% = 3,000 • Total decrease in 2021 = 9,500 • Balance of Deferred tax assets in 2021 = 37,500 – 9,500 = 28,000 • In 2022 • Decrease in deferred tax assets = 35,000 x 28% = 9,800 • Balance of deferred tax assets in 2021 = 28,000 – 9,800 = 18,200 c) 2021 Current Tax Expense 26,250 Income Tax Payable 26,250 Deferred Tax Expense 9,500 Deferred Tax Asset 9,500 2022 Current Tax Expense 33,600 Income Tax Payable 33,600 Deferred Tax Expense 9,800 Deferred Tax Asset 9,800 d) 2021 Income before income tax $ 155,000 Income tax Current $ 26,250 Deferred 9,500 35,750 Net income $ 119,250

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

23 2022 Income before income tax $ 155,000 Income tax Current $ 33,600 Deferred 9,800 43,400 Net income $ 111,600

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Sample Questions Mid Term Exam

Related Documents