Question 61
A company takes a $10 million asset impairment writedown in 20X3. The most likely effects of this will be to:
A) decrease net income and taxes payable in 20X3.
B) increase return on equity and operating cash flow in 20X4. C) increase operating cash flow and deferred tax assets in 20X3. D) increase reported net income in 20X4.
The correct answer was D) increase reported net income in 20X4. The impairment writedown in 20X3 will reduce depreciation expense in 20X4, which will increase 20X4 EBIT and net income. Operating cash flow and taxes payable are not affected because an impairment cannot be deducted from income for tax reporting purposes.
This question tested from Session 9, Reading 37, LOS d
Question 62 Selected information from Willingham Corp.’s financial statements for the year ended December 31 included the following (in $ millions): Accounts Payable | 12 | Long-term Debt | 32 | Common Stock | 10 | Retained Earnings | 16 | Total Liabilities and Equity | 70 |
During the year, Willingham paid $14 million cash to purchase a franchise and fully expensed the franchise cost. If the company had elected to amortize the franchise cost over 7 years instead of expensing it, Willingham’s total asset-to-equity ratio would be closest to:
A) 1.84.
B) 2.16. C) 3.15. D) 2.69.
The correct answer was B) 2.16. Given that total assets must equal total liabilities and equity, Willingham’s total asset-to-equity ratio was 70 / (10 + 16) = 2.69. If the franchise cost were amortized, retained earnings would be $12 million higher ($14 million cost less 14 / 7 = $2 million of amortization). The total asset-to-equity ratio would decrease to (70 + 12) / (10 + 16 + 12) = 2.16. This question tested from Session 9, Reading 36, LOS a
Question 63 Hally Inc. incurred costs (payable to a third party) to acquire a 20-year patent for a specially designed type of running shoe. Hally also incurs advertising and promotion costs to market this product. Which of the following treatments is correct for Hally’s patent costs and advertising and promotion costs, respectively? Patent costs Advertising and promotion costs
A) Capitalize and amortize Capitalize and amortize
B) Expense as incurred Expense as incurred
C) Expense as incurred Capitalize and amortize
D) Capitalize and amortize Expense as incurred The correct answer was D) Capitalize and amortize Expense as incurred The patent is an example of an identifiable intangible asset that is long-term in nature and lacks physical substance. The value of such an asset is based on the rights or privileges conveyed to Hally over a finite period. Accordingly, the cost of an identifiable intangible asset is amortized over its useful life. The advertising and promotion costs do not have a clear period of benefit. Therefore, advertising and promotion costs should be expensed as incurred. This question tested from Session 8, Reading 33, LOS e
Question 64
Majestic Inc. has issued two separate bonds. Bond X is a $500,000, 8% coupon bond maturing in six years. Bond Y is a $750,000 face value zero-coupon bond maturing in six years. Assume the current market rate of interest on both of these bonds is 8%. Based on this information, which of the following statements contrasting the cash flow effects of issuing Bonds X and Y is most accurate? For the period of issuance:
Bond X Bond Y A) CFF is higher than for Bond Y CFO is lower than for Bond X B) CFF is higher than for Bond Y CFO is higher than for Bond X C) CFF is lower than for Bond Y CFO is higher than for Bond X D) CFF is lower than for Bond Y CFO is lower than for Bond X The correct answer was B) CFF for Bond X is +$500,000. CFF for Bond Y is $750,000 / (1.08)6 = $472,627 or $750,000 / (1.04)12 = $468,448. Therefore, at issuance, CFF for Bond X is higher than CFF for Bond Y. With zero-coupon bonds, there is no coupon, so for operating cash flow purposes there is no interest expense deducted. This severely overstates CFO for Bond Y. Therefore, CFO for Bond Y is higher than CFO for Bond X. This question tested from Session 9, Reading 39, LOS c
Question 65
Home Products, Inc. purchased security equipment for its headquarters that cost $2,000,000 on January 1, 20X0. Home Products is depreciating the equipment over 10 years on a straight-line basis for financial reporting and using the double declining balance method for tax purposes. The salvage value of the equipment is $200,000. Home Products’ tax rate is 40%. Depreciation expense related to this equipment will reduce Home Products' income tax expense reported on December 31, 20X0 by:
A) $72,000.
B) $400,000. C) $88,000. D) $80,000.
The correct answer was A) $72,000. The security equipment is being depreciated over 10 years. The depreciable basis is $2,000,000 - $200,000 = $1,800,000. Depreciation expense for this asset is $1,800,000 / 10 = $180,000. To determine the difference in income tax expense, apply tax rate to the income or expense item, in this case $180,000 × 0.40 = $72,000 decrease in income tax expense due the purchase of the equipment. This question tested from Session 9, Reading 37, LOS a | 
发表于 2008-5-26 12:34
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