Question 56
Under the liability method, an increase in a firm’s future tax rate will:
A) reduce both deferred tax assets and deferred tax liabilities.
B) reduce deferred tax assets and increase deferred tax liabilities. C) increase both deferred tax assets and deferred tax liabilities. D) increase deferred tax assets and reduce deferred tax liabilities. The correct answer was C) Both deferred tax assets and deferred tax liabilities are revalued upward when the future tax rate increases and revalued downward when the future tax rate decreases.
This question tested from Session 9, Reading 38, LOS g
Question 57
Caruso Inc. issued a bond several years ago with proceeds of $500,000. This year, when the market value of the bond was $610,000 and the book value was $575,000, Caruso called the bond at the call price of $600,000. Which of the following amounts represents the correct r
ecording of the debt retirement transaction?
A) $10,000 gain on statement of change in equity.
B) $10,000 loss on income statement. C) $25,000 loss on income statement. D) $100,000 loss on statement of change in equity. The correct answer was C) The book value of the bond is $575,000 and the retirement amount is $25,000 greater at $600,000. This will be shown as a loss of $25,000 (from debt retirement) on the income statement.
This question tested from Session 9, Reading 39, LOS g
Question 58 Luxury Inc.’s financial statements for the year ended December 31, 20X2 included the following information (in $ millions): Income Statement
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| Sales | 59 | Cost of Goods Sold | (23) | Wage Expense | (15) | Interest Expense | (6) | Depreciation Expense | (8) | Income Taxes Paid | (4) | Net Income | 3 |
Balance Sheet
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| Dec 31, 20X1
| Dec 31, 20X2
| Cash | 8 | 12 | Accounts Receivable | 4 | 5 | Property, Plant & Equip. | 79
| 78
| Total Assets | 91 | 95 | Accounts Payable | 4 | 6 | Long-term Debt | 70 | 70 | Common Stock | 10 | 10 | Retained Earnings | 7
| 9
| Total Liabilities & Equity | 91 | 95 |
Cash flow from operations (CFO) for Luxury, Inc. for the year ended December 31, 20X2 was:
A) $13 million.
B) $11 million. C) $12 million. D) $3 million. The correct answer was C) Using the indirect method, CFO is net income plus depreciation expense less increase in accounts receivable plus increase in accounts payable. 3 + 8 – 1 + 2 = $12 million.
This question tested from Session 8, Reading 34, LOS f, (Part 1)
Question 59
Which of the following items is least likely to be found in a company’s financial statement footnotes? Information about:
A) debt agreement terms.
B) the uncertainty regarding key assumptions. C) major shareholders. D) leases and off-balance-sheet financing. The correct answer was C) Information about major shareholders is not a disclosure that is generally found in the financial statement footnotes. In contrast, information about the other three answer choices is generally found in the footnotes.
This question tested from Session 8, Reading 33, LOS f
Question 60 On December 31, 20X1, York Company executes a 6-year lease with annual payments of $1,500,000 for a crane for its construction business. Title to the crane passes to York at the end of the lease. The interest rate implicit in the lease is 5%. York Company’s incremental borrowing rate is 8%. The fair market value of the crane at the time the lease was signed was $8,500,000. If the lease is accounted for as a capital lease, the crane will be depreciated on a straight-line basis over its economic life of 9 years. Treating the lease as an operating lease, York’s income statement for the year ended December 31, 20X2 is as follows ($ thousands): Sales | $34,000 | Cost of Goods Sold | 17,200
| Gross Profit | 16,800 | Depreciation | (3,400) | Lease Expense | (1,500) | Sales and Administration | (4,200) | Operating Profit | 7,700 |
After considering whether the crane lease should be reclassified as a capital lease, York’s operating profit for 20X2 should:
A) decrease to $6,854,000.
B) remain unchanged because reclassifying the lease will only affect taxes and net profit. C) increase to $8,354,000. D) remain unchanged because the lease is appropriately classified as an operating lease.
The correct answer was C) increase to $8,354,000. You can select the correct answer without performing the calculations. The crane lease should be classified as a capital lease because of the title transfer at the end of the lease period. Treating the lease as a capital lease will cause operating income to increase because depreciation on the asset (the expense item for a capital lease) will be less than the lease payment (the expense item for an operating lease). The lesser of the lease’s implicit interest rate of 5% and York Company’s incremental borrowing rate of 8% is used to capitalize the lease. The present value of the lease payments is $7,613,538 (N = 6, I/Y = 5, PMT = $1,500,000, FV=0, CPT PV). Depreciation expense is $7,613,538 / 9 = $845,949 per year. Adjusting the income statement to remove operating lease expense and increase depreciation expense results in operating income of ($7,700,000 + $1,500,000 - $845,949 =) $8,354,051. This question tested from Session 9, Reading 40, LOS b | 
发表于 2008-5-26 12:32
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