Practice Exam 2 Key (2)

Practice Exam 2 Key

 Fragrance International, a large perfume manufacturer, reported the following in its 2011 annual report to shareholders:ACCUMULATED OTHER COMPREHENSIVE INCOMEThe components of accumulated other comprehensive income (loss) ("AOCI") included in the accompanying consolidated balance sheets consist of the following:

   CONSOLIDATED STATEMENTS OF CASH FLOWS

   Investments sold during 2011 originally cost $3.0 million.

Spiceland - Chapter 12 

1. Required:Prepare journal entries that Fragrance International recorded at 6/30/11 to (1) record any necessary changes to the fair value adjustment for available-for-sale securities and (2) record any tax effects associated with those changes. 

AACSB: AnalyticBloom's: ApplicationLearning Objective: 12-03 Demonstrate how to identify and account for investments classified for reporting purposes as available-for-sale securities.Level of Learning: HardSpiceland - Chapter 12 #144 

2. On January 1, 2011, American Corporation purchased 25% of the outstanding voting shares of Short Supplies common stock for $210,000 cash. On that date, Short's book value and fair value were both $840,000. The equity method is deemed appropriate for this investment. Short's net income reported on December 31, 2011, was $80,000. During 2011, Short also paid cash dividends in the amount of $24,000.Required:Compute the amount that would be reported for the investment on American Corporation's financial statements at December 31, 2011. 

AACSB: AnalyticBloom's: ApplicationLearning Objective: 12-05 Demonstrate how to identify and account for investments accounted for under the equity method.Level of Learning: MediumSpiceland - Chapter 12 #153 

3. All investment securities are initially recorded at: A. Cost.B. Present value.C. Equity value.D. None of the above is correct.

AACSB: Reflective thinkingBloom's: KnowledgeLearning Objective: 12-03 Demonstrate how to identify and account for investments classified for reporting purposes as available-for-sale securities.Level of Learning: EasySpiceland - Chapter 12 #62 

4. The investment category for which the investor's "positive intent and ability to hold" is important is: A. Securities reported under the equity method.B. Trading securities.C. Securities classified as held to maturity.D. Securities available for sale.

AACSB: Reflective thinkingBloom's: KnowledgeLearning Objective: 12-01 Demonstrate how to identify and account for investments classified for reporting purposes as held-to-maturity.Level of Learning: EasySpiceland - Chapter 12 #32 

5. Investments in securities available for sale are reported at: A. Discounted present value.B. Lower of cost or market.C. Historical cost.D. Fair value on the reporting date.

AACSB: Reflective thinkingBloom's: KnowledgeLearning Objective: 12-03 Demonstrate how to identify and account for investments classified for reporting purposes as available-for-sale securities.Level of Learning: EasySpiceland - Chapter 12 #61 

6. On July 1, 2011, Clearwater Inc. purchased 6,000 shares of the outstanding common stock of Mountain Corporation at a cost of $140,000. Mountain had 30,000 shares of outstanding common stock. The total book value and total fair value of Mountain's individual net assets on July 1, 2011 are both $700,000. The total fair value of the 30,000 shares of Mountain's common stock on December 31, 2011 is $760,000. Both companies have a January through December fiscal year. The following data pertain to Mountain Corporation during 2011:

   Required:(1.) Prepare the necessary entries for 2011 under the equity method (other than for the purchase).(2.) Prepare any necessary entries for 2011 (other than for the purchase) that would be required if the securities are classified as available for sale. 

AACSB: AnalyticBloom's: ApplicationLearning Objective: 12-03 Demonstrate how to identify and account for investments classified for reporting purposes as available-for-sale securities.Learning Objective: 12-05 Demonstrate how to identify and account for investments accounted for under the equity method.Level of Learning: HardSpiceland - Chapter 12 #156 

7. Jeremiah Corporation purchased securities during 2011 and classified them as securities available for sale:

   All declines are considered to be temporary. How much gain will be reported by Jeremiah Corporation in the December 31, 2011, income statement relative to the portfolio? A. $0.B. $16,000.C. $20,000.D. None of the above is correct.

Unrealized gains and losses are not included in earnings for securities available for sale.

AACSB: AnalyticBloom's: ApplicationLearning Objective: 12-03 Demonstrate how to identify and account for investments classified for reporting purposes as available-for-sale securities.Level of Learning: HardSpiceland - Chapter 12 #73 

8. If Pop Company owns 15% of the common stock of Son Company, then Pop Company typically: A. Would record 15% of the net income of Son Company as investment income each year.B. Would record dividends received from Son Company as investment revenue.C. Would increase its investment account by 15% of Son Company income each year.D. All of the above are correct.

AACSB: Reflective thinkingBloom's: ApplicationLearning Objective: 12-03 Demonstrate how to identify and account for investments classified for reporting purposes as available-for-sale securities.Level of Learning: MediumSpiceland - Chapter 12 #87 

 Instructions: The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

Spiceland - Chapter 12 

9. According to GAAP, companies can elect the fair value option when accounting for many investments.Required:Describe how accounting for a held-to-maturity investment, an available-for-sale investment, and an equity-method investment is affected by a company electing the fair value option. 

When a company elects the fair value option for held-to-maturity or available-for-sale investments, it simply reclassifies those investments as trading securities and accounts for them in that fashion. When a company elects the fair value option for a significant-influence investment that normally would be accounted for under the equity method, that investment is not reclassified as a trading security. Rather, the investment still appears on the balance sheet as a significant-influence investment, but the amount that is accounted for at fair value is indicated on the balance sheet either parenthetically on a single line that includes the total amount of significant-influence investment or on a separate line. As with trading securities, unrealized gains and losses are included in earnings in the period in which they occur.

AACSB: Reflective thinkingBloom's: KnowledgeLearning Objective: 12-07 Explain how electing the fair value option affects accounting for investments.Level of Learning: MediumSpiceland - Chapter 12 #176 

10. Selecting the fair value option for an available-for-sale investment is equivalent to reclassifying that investment as a trading security. TRUE

AACSB: Reflective thinkingBloom's: ComprehensionLearning Objective: 12-07 Explain how electing the fair value option affects accounting for investments.Level of Learning: MediumSpiceland - Chapter 12 #16 

11. The following information is related to the defined benefit pension plan of Dreamworld Company for the year:

   Assuming no other relevant data exist, what is the pension expense for the year? A. $190,000.B. $92,400.C. $60,000.D. $170,000.

AACSB: AnalyticBloom's: ApplicationLearning Objective: 17-06 Describe how pension expense is a composite of periodic changes that occur in both the pension obligation and the plan assets.Level of Learning: HardSpiceland - Chapter 17 #69 

12. Which of the following is not a way of measuring the pension obligation? A. Accumulated benefit obligation.B. Vested benefit obligation.C. Retiree benefit obligation.D. Projected benefit obligation.

AACSB: Reflective thinkingBloom's: KnowledgeLearning Objective: 17-02 Distinguish among the vested benefit obligation; the accumulated benefit obligation; and the projected benefit obligation.Level of Learning: EasySpiceland - Chapter 17 #32 

 The following incomplete (columns have missing amounts) pension spreadsheet is for the current year for First Republic Corporation (FRC).

Spiceland - Chapter 17 

13. What was the net pension asset/liability reported in the balance sheet at the end of the year? A. Net pension asset of $50.B. Net pension asset of $24.C. Net pension liability of $50.D. Net pension liability of $24.

AACSB: AnalyticBloom's: AnalysisLearning Objective: 17-05 Describe the funded status of pension plans and how that amount is reported.Learning Objective: 17-08 Understand the interrelationships among the elements that constitute a defined benefit pension plan.Level of Learning: HardSpiceland - Chapter 17 #72 

14. Amortizing a net loss for pensions will: A. increase retained earnings and increase accumulated other comprehensive income.B. decrease retained earnings and decrease accumulated other comprehensive income.C. increase retained earnings and decrease accumulated other comprehensive income.D. decrease retained earnings and increase accumulated other comprehensive income.

AACSB: Reflective thinkingBloom's: SynthesisLearning Objective: 17-07 Record for pension plans the periodic expense and funding as well as new gains and losses and new prior service cost as they occur.Level of Learning: EasySpiceland - Chapter 17 #89 

15. The net pension liability (PBO minus plan assets) is increased by: A. Service cost.B. Expected return on plan assets.C. Amortization of prior service cost.D. Cash contributions to plan assets.

AACSB: Reflective thinkingBloom's: KnowledgeLearning Objective: 17-08 Understand the interrelationships among the elements that constitute a defined benefit pension plan.Level of Learning: EasySpiceland - Chapter 17 #93 

16. The following is an incomplete pension spreadsheet for the current year for Desperado Corporation.

   Required:1) Complete the pension spreadsheet.2) Prepare the journal entry to record pension expense for the year. 

AACSB: AnalyticBloom's: AnalysisLearning Objective: 17-07 Record for pension plans the periodic expense and funding as well as new gains and losses and new prior service cost as they occur.Learning Objective: 17-08 Understand the interrelationships among the elements that constitute a defined benefit pension plan.Level of Learning: HardSpiceland - Chapter 17 #165 

 The following incomplete (columns have missing amounts) pension spreadsheet is for Old Tucson Corporation (OTC).

Spiceland - Chapter 17 

17. What was the prior service cost at the beginning of the year? A. $48.B. $54.C. $56.D. $60.

Beginning prior service cost = $54 + $6 = $60

AACSB: AnalyticBloom's: AnalysisLearning Objective: 17-08 Understand the interrelationships among the elements that constitute a defined benefit pension plan.Level of Learning: EasySpiceland - Chapter 17 #95 

18. The amount of cash paid annually for unfunded postretirement health benefit plans, assuming they are not independently insured, usually is equal to: A. The amount required by the actuarial formula.B. The present value of future benefits.C. The amount necessary to cover future benefits.D. The amount necessary to pay the current year's health care cost.

AACSB: Reflective thinkingBloom's: ComprehensionLearning Objective: 17-10 Explain how the obligation for postretirement benefits is measured and how the obligation changes.Level of Learning: MediumSpiceland - Chapter 17 #116 

19. Pension data for Goldman Company included the following for the current calendar year:

   Required:Determine pension expense for the year. 

AACSB: AnalyticBloom's: ApplicationLearning Objective: 17-06 Describe how pension expense is a composite of periodic changes that occur in both the pension obligation and the plan assets.Level of Learning: MediumSpiceland - Chapter 17 #146 

20. Waddle Company amended its defined benefit pension plan on January 1, 2011, to increase retirement benefits earned with each service year. The actuary estimated the prior service cost to be $216,000. Waddle's 80 present employees are expected to retire at the rate of about 10 each year at the end of each of the next 8 years.Required:1. Using the service method, calculate the amount of prior service cost to be amortized to pension expense in 2011.2. Using the straight-line method, calculate the amount of prior service cost to be amortized to pension expense in 2011. 

Requirement 1

   Requirement 2$216,000/ 8 years = $27,000 per year

AACSB: AnalyticBloom's: ApplicationLearning Objective: 17-06 Describe how pension expense is a composite of periodic changes that occur in both the pension obligation and the plan assets.Level of Learning: HardSpiceland - Chapter 17 #148 

21. Tobac Company reported a pretax operating loss of $50,000 for financial reporting and tax purposes in 2011. The enacted tax rate is 40% for 2011 and subsequent years. Assume that Tobac requests a refund of taxes already paid by electing a loss carryback. Taxable income, tax rates, and income taxes paid in Tobac's first four years of operations were as follows:

   Required:1.) Prepare the journal entry to record Tobac's income taxes for the year 2011. Show well-labeled computations.2.) Compute Tobac's net loss for 2011. 

   (2.) Net loss for 2011 is $32,100 ($50,000 - 17,900 tax benefit of NOL)

AACSB: AnalyticBloom's: ApplicationLearning Objective: 16-07 Describe when and how an operating loss carryforward and an operating loss carryback are recognized in the financial statements.Level of Learning: HardSpiceland - Chapter 16 #130 

22. Giada Foods reported $940 million in income before income taxes for 2011, its first year of operations. Tax depreciation exceeded depreciation for financial reporting purposes by $100 million. The company also had non-tax-deductible expenses of $80 million relating to permanent differences. The income tax rate for 2011 was 35%, but the enacted rate for years after 2011 is 40%. The balance in the deferred tax liability in the December 31, 2011, balance sheet is: A. $16 millionB. $35 millionC. $40 millionD. $56 million

$100,000 x 40% = $40,000 deferred tax liabilityPermanent differences have no effect on deferred taxes.

AACSB: AnalyticBloom's: ApplicationLearning Objective: 16-05 Explain how a change in tax rates affects the measurement of deferred tax amounts.Level of Learning: HardSpiceland - Chapter 16 #66 

23. Alamo Inc. had $300 million in taxable income for the current year. Alamo also had a decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60 million. The company is subject to a tax rate of 40%. The total income tax expense for the year was: A. $390 million.B. $210 million.C. $150 million.D. $180 million.

AACSB: AnalyticBloom's: ApplicationLearning Objective: 16-01 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.Level of Learning: HardSpiceland - Chapter 16 #37 

 Information for Hobson International Corp. for the current year ($ in millions):

Spiceland - Chapter 16 

24. How should Hobson International report tax on the extraordinary item? A. A tax receivable of $12 million in the balance sheet.B. A tax benefit of $12 million to net against the $30 million pretax loss.C. A deferred tax asset of $12 million in the balance sheet.D. None of the above.

The extraordinary loss is reported in the income statement net of $12 tax benefit [$30 - ($30 x 40%) = $18].

AACSB: AnalyticBloom's: ApplicationLearning Objective: 16-10 Explain intraperiod tax allocation.Level of Learning: MediumSpiceland - Chapter 16 #101 

25. Puritan Corp. reported the following pretax accounting income and taxable income for its first three years of operations:

   Puritan's tax rate is 40% for all years.Assuming that Puritan elected a loss carryback, what would be the net loss in 2011 reported in Puritan's income statement? A. $360,000.B. $240,000.C. $460,000.D. $500,000.

AACSB: AnalyticBloom's: ApplicationLearning Objective: 16-07 Describe when and how an operating loss carryforward and an operating loss carryback are recognized in the financial statements.Level of Learning: HardSpiceland - Chapter 16 #85 

26. In 2011, Magic Table Inc. decides to add a 36-month warranty on its new product sales. Warranty costs are tax deductible when claims are settled. In its financial statements for 2011, Magic Table Inc incurs: A. An increase in a deferred tax asset.B. A decrease in a deferred tax asset.C. An increase in a deferred tax liability.D. A decrease in a deferred tax liability.

AACSB: Reflective thinkingBloom's: ComprehensionLearning Objective: 16-02 Identify and describe the types of temporary differences that cause deferred tax assets.Level of Learning: MediumSpiceland - Chapter 16 #51 

27. Which of the following creates a deferred tax liability? A. An unrealized loss from recording inventory at lower of cost or market.B. Accelerated depreciation in the tax return.C. Estimated warranty expense.D. Subscriptions collected in advance.

AACSB: Reflective thinkingBloom's: ComprehensionLearning Objective: 16-01 Describe the types of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes.Level of Learning: MediumSpiceland - Chapter 16 #20 

28. Which of the following causes a permanent difference between taxable income and pretax accounting income? A. The installment method used for sales of property.B. MACRS depreciation method used for equipment.C. Interest income on municipal bonds.D. Percentage-of-completion method for long-term construction contracts.

AACSB: Reflective thinkingBloom's: ComprehensionLearning Objective: 16-04 Explain why permanent differences have no deferred tax consequences.Level of Learning: EasySpiceland - Chapter 16 #58 

29. Two independent situations are described below. Each involves future deductible amounts and/or future taxable amounts produced by temporary differences:

   The enacted tax rate is 40% for both situations.Required:For each situation determine the:(a.) Income tax payable currently.(b.) Deferred tax asset - balance at year-end.(c.) Deferred tax asset change dr or (cr) for the year.(d.) Deferred tax liability - balance at year-end.(e.) Deferred tax liability change dr or (cr) for the year.(f.) Income tax expense for the year. 

AACSB: AnalyticBloom's: ApplicationLearning Objective: 16-06 Determine income tax amounts when multiple temporary differences exist.Level of Learning: HardSpiceland - Chapter 16 #127 

30. The valuation allowance account that is used in conjunction with deferred taxes relates: A. Only to deferred tax liabilities.B. To both deferred tax assets and liabilities.C. Only to deferred tax assets.D. Only to income taxes receivable due to net operating loss carrybacks.

AACSB: Reflective thinkingBloom's: KnowledgeLearning Objective: 16-03 Describe when and how a valuation allowance is recorded for deferred tax assets.Level of Learning: EasySpiceland - Chapter 16 #55