Sample Questions Mid Term Exam

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University of Manitoba *

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3120

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Accounting

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Apr 3, 2024

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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

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

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