CPA Financial Accounting and Reporting (FAR) : Expenses
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Example Questions
Example Question #1 : Income Taxes
In Year 1, a company has revenues of $600,000 and expenses of $400,000. Of the expenses, $70,000 represents a warranty on a company product. However, the company only paid $30,000 as a result of this warranty. The remainder is expected to be paid in a future year in which company officials believe there is a 60% chance that the company will have taxable income to be reduced by this warranty cost. The relevant tax rate is 30% for Year 1 and 32% for periods after that. What is the total amount of income tax expense to be recognized in Year 1?
$49,000
$62,000
$59,200
$70,000
$59,200
Reported net income of $200K ($600K revenue - $400K expenses) must be adjusted to $240K to exclude the portion of the warranty expenses that weren't paid in Year 1. This means the the current portion of income expense is $72K ($240K x 30%). The remaining $40K deduction is deferred to a future year, so the company recognizes a deferred benefit of $12,800 ($40K x 32%). Total Year 1 tax expense is equal to $72K - $12,800.
Example Question #2 : Income Taxes
The Faulkner Company had an enacted income tax rate of 25%. The company ended Year 1 with a deferred income tax liability of $30,000, a deferred income tax asset of $40,000, and a valuation allowance of $9,000. The enacted tax rate at the beginning of Year 2 was raised to 28%. The company ended Year 2 with a deferred income tax liability of $60,000, a deferred income tax asset of $30,000, and a valuation allowance of $14,000. On the company's Year 2 income statement, what is the amount of income tax expense (deferred) that is reported?
$40,000
$20,000
$10,000
$45,000
$45,000
The deferred tax liability increases by $30K from Year 1 to Year 2 ($30K to $60K) and the deferred asset decreased by $10K ($40K to $30K). The valuation allowance increased by $5K ($9K to $14K). Therefore, a balancing expense of $45K must be booked ($30K + $10K + $5K).
Example Question #3 : Income Taxes
A firm's ending inventory balance was overstated by $1,000. Which of the following statements is correct according to a periodic inventory system?
The gross margin was understated by $1,000
The retained earnings were overstated by $1,000
The cost of goods sold was overstated by $1,000
The cost of goods sold available for sale was overstated by $1,000
The retained earnings were overstated by $1,000
An ending inventory balance that is overstated by $1,000 implies that cost of goods sold is understated by the same $1,000.
Example Question #4 : Income Taxes
The Motown Company produces cars. When a customer buys a car, the company issues a warranty guaranteeing that any defects found within three years will be fixed free of charge. Cars are sold during Year 3 and none are brought in for repair, though the company expects to incur $3,000,000 before the time limit expires. Motown has considerable evidence to believe that it will continue to be profitable for the foreseeable future. Which of the following results from sales that are made in Year 3?
No recognition of any deferred income taxes should be made
A deferred tax liability should be recognized
A current deferred tax asset is recognized along with a non-current deferred tax liability
A deferred tax asset should be recognized
A deferred tax asset should be recognized
A deferred tax asset will be recognized in Year 3, because the company reasonably expects to pay out warranty expenses incurred in Year 3, in future years.
Example Question #5 : Income Taxes
ABC Company recorded goods in transit purchased FOB shipping point at year end as purchases. The goods were excluded from ending inventory. What effect does the omission have on ABC's assets and retained earnings at year end?
No effect
Retained earnings understated
Assets understated
Both assets and retained earnings understated
Both assets and retained earnings understated
Because the goods are in transit, the buyer should have included them in inventory. By not including them, inventory and assets are understated.
Example Question #1 : Expenses
Under US GAAP, which of the following approaches would be used to determine income tax expense?
Border approach
Net of tax and liability approach
The asset and liability approach
Perpetual expense approach
The asset and liability approach
The asset and liability approach is also known as the balance sheet approach and it is the approach used in US GAAP to determine income tax expense. The other approaches are distractors.
Example Question #1 : Accounting For Leases
Which of the following is not among the criteria that must be met to record a lease as a capital lease?
The lease contains a bargain purchase option
The lease transfers title to the lessee at the expiration of the lease
The present value of the lease payments is 90% or more of the fair value of the leased asset at the inception of the lease
The lease term is 85% or greater than the life of the asset
The lease term is 85% or greater than the life of the asset
To record a lease as a capital lease, at least one of the following criteria must be met: ownership of the asset transfers at the end of the lease term; the lease contains a bargain purchase option; the PV of the lease payments is at least 90% of the FV at inception; and the lease term is at least 75% of the asset's useful life.
Example Question #1 : Accounting For Leases
The Global Group leases an asset from Earth Co for 8 years. The life of the asset is expected to be 10 years. If the lease does NOT contain a bargain purchase option or a transfer of title, which of the following is correct?
The leased asset would be depreciated by the Global Group over 8 years
The leased asset would be accounted for by the Global Group as an operating lease
The leased asset would be depreciated by the Global Group over 10 years
The leased asset would be depreciated using the same method for book purposes as for tax purposes
The leased asset would be depreciated by the Global Group over 8 years
In a lease does not contain a bargain purchase option, the asset will be depreciated over the life of the lease, rather than over the useful life of the asset.
Example Question #2 : Accounting For Leases
In Year 3, Meyer Corp sold an asset for $900,000 to Sailer Corp and simultaneously leased it back for 5 years. The assets remaining life was 53 years, and the carrying value on the date of the sale was $640,000. The annual lease payments were $180,000 per year. How much gain should be recognized by Meyer in Year 3?
$180,000
$260,000
$52,000
$36,000
$260,000
The gain recognized will be equal to the purchase price of the asset minus the asset's carrying value on the date of the sale. The full gain will be recognized at the time of the sale.
Example Question #1 : Accounting For Leases
ABC leased equipment to DEF under a noncancellable lease with a transfer of title. Will ABC record depreciation expense on the leased asset and interest revenue related to the lease?
Neither
Depreciation expense
Both
Interest revenue
Interest revenue
DEF will capitalize the lease due to the transfer of title and will incur both depreciation and interest expense.
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