MGMT 501

Financial Accounting Final Exam Review

Multiple Choice Practice

1. What is an example of what would create a deferred tax asset?
A) Depreciation Expense
B) Deferred Revenue
C) Prepaid Expenses
D) Goodwill and other intangible assets
Answer: B The when the cash is received, it will be taxable. For GAAP purposes, the
company will not accrued taxes on the revenue until it is earned. Deferred Tax Assets arise
when revenues are recognized later in the financial statements than in the tax return

2. Depreciation Exepense is typically

A) Accelerated for Tax purposes creating a deferred tax liability
B) Accelerated for book (GAAP) purposes creating a deferred tax asset
C) The same for both Tax and book(GAAP) purposes.
D) Accelerated for Tax purposes creating a deferred tax asset
Answer: A

3. How do deferred tax liabilities differ from other liabilities?

A) Amount is not owed to the IRS
B) Not interest is accrued
C) Not recognized at present valueAccelerated for book (GAAP) purposes creating a
deferred tax asset
D) All of the above
Answer: D

4. Do deferred tax assets and liabilities result from Temporary or Permanent Tax-to-Book
differences?
Answer: Temporary

5. Permanent differences:
A) Never Reverse
B) Result from revenue reported for GAAP but not for taxes
C) Result from expenses reported to the IRS but not included in expenses for GAAP
D) All of the above
Answer: D

6. Due to permanent differences:

A) Statutory rate > Effective Rate
B) Statutory rate < Effective Rate
C) Statutory rate = Effective Rate
D) None of the above
Answer: A
6. For small stock dividends, by what amount are retained earnings reduced?
A) Par value of the dividend
B) Book value of the dividend
C) Par value of the stock
D) Market value of the dividend
Answer: D
Rationale: For small stock dividends, retained earnings are reduced by the market value of
the shares. For large stock dividends, retained earnings are reduced by the par value of the
shares.

7. If a company issues 10,000 shares of $1 par value common stock at a market price of $50 per
share, which of the following is the correct balance sheet entry?
A) Increase common stock and cash by $10,000
B) Increase cash by $500,000 and increase earned capital by $500,000
C) Increase revenues by $500,000
D) Increase cash by $500,000 and increase contributed capital by $500,000
Answer: D
Rationale: Cash increases by the number of shares issued times the market price; contributed
capital also increases by the same amount. The latter is broken down into two segments: 1)
common stock, which increases by the original par value of the shares sold, and 2) additional
paid-in capital, which makes up the balance. Revenue is an income statement category and
therefore irrelevant in this case.

8. Which is not an item that should be included in the computation of ‘other comprehensive
income’?
A) Interest expense
B) Foreign currency translation adjustment
C) Unrealized gains (losses)
D) Adjustments to pension plans
Answer: A
Rationale: Interest expense is a non-operating expense shown on the income statement,
while the other three items should be categorized within comprehensive income.

9. During May, 2024, Riptide Corporation announced a 2-for-1 stock split. This brought the
number of shares outstanding from 25,000,000 shares to _____ shares, and its $2.00 par
value to _____ per share.
A) 12,500,000; $4.00
B) 12,500,000; $2.00
C) 50,000,000; $2.00
D) 50,000,000; $1.00
Answer: D
Rationale: In a 2-for-1 stock split, the company distributes one additional share of stock for
each share owned by a current shareholder, and the par value is adjusted so the total par value
of shares issued remains the same.
 25,000,000 × 2 = 50,000,000 shares
Par value = $2.00/2 = $1.00 per share

10. If a company feels that its shares are undervalued and it wants to send a signal to the
market, the company may:
A) Issue more stock (as allowed under its charter)
B) Decrease regular cash dividends in an attempt to increase share price
C) Repurchase shares
D) Do nothing and wait - the market will realize the undervaluation
Answer: C
Rationale: One reason a company may repurchase shares is if it feels that the market
undervalues them. The logic is that the repurchase sends a “signal” to the market and the
company is able to realize a subsequent “gain” on resale of the shares. However, these gains
are never reflected on the income statement. Instead, the excess of the resale price over the
original repurchase price is credited to additional paid-in capital.

11. Venus Company plans to issue a large stock dividend. In accounting for this transaction,
what effects occur to the contributed capital section of stockholders’ equity?

A) Common stock increases by the total market value of the dividend.

B) Common stock increases by the number of dividend shares × par value per share, and
retained earnings decreases for the same amount.
C) Common stock increases by the number of dividend shares × par value per share, and
retained earnings increases for the balance.
D) Retained earnings increases by the number of dividend shares × par value per share, and
additional paid-in capital increases for the balance.
Answer: B
Rationale: Common stock increased by: Dividend shares × Par value per share.
Retained earnings is decreased by the same amount.

12. Stone Company reported net income of $4,500,000 in 2024. The weighted average number
of common shares outstanding during 2024 was 200,000 shares. Stone paid $250,000 in
dividends on preferred stock, which was convertible into 40,000 shares of common stock.
How much is basic earnings per share for 2024?
A) $22.50
B) $21.25
C) $18.75
D) $17.71
Answer: B
Rationale: ($4,500,000 – $250,000) / 200,000 = $21.25

How much is diluted earnings per share for 2024?

A) $22.50
B) $21.25
C) $18.75
 D) $17.71
Answer: C
Rationale: $4,500,000 / (200,000 + 40,000) = $18.75

13. Shroff Company has 50,000 shares of $100 par value, 4% cumulative preferred stock and
150,000 shares of $10 par value common stock. Sunny declares and pays cash dividends
amounting to $470,000.

If no arrearage on the preferred stock exists, how much in dividends per share is paid to the
common stockholders?

A) $3.13
B) $4.00
C) $5.40
D) $1.80

Answer: D
Rationale:
Distribution to
Preferred Common
$100 × 50,000 × 4% $200,000
Balance to common $270,000
Per share to common: $270,000/150,000 shares $1.80

14. In which one of the following intercorporate investment classifications are unrealized
gains and losses in marketable securities always reflected in the income statement of the
investor company?
A) Equity method securities
B) Passive securities
C) Trading securities
D) Available-for-sale securities
E) Purchase method securities
Answer: C
Rationale: Unrealized gains for trading securities are reflected in the income statement of the
investor company because the company holds these securities for active trading. Unrealized
gains and losses on some passive investments are reported in income, but not for debt
securities classified as AFS or HTM, or for equity method securities.

15. If Pandit & Pearlman, Inc. paid $8,000 at book value for its 25% stake in Zeff Company,
and in the next year total shareholders’ equity for Zeff Company increases by 75%, what will
Pandit & Pearlman’s interest of Zeff’s equity be?
A) $ 7,000
B) $ 1,750
C) $ 3,000
D) $14,000
 Answer: D
Rationale: If the investment is purchased at book value, the investment balance bears a
proportional relation to the stockholders’ equity of the investee company. $8,000 × 175% =
$14,000

16. If Trout Company buys 26% of Salmon Company’s stock, and pays $4,000 more than
current book value for these shares, what percentage of Salmon Company’s shareholder
equity belongs to Trout Company?
A) 25%
B) It depends on the dollar value of total shareholders’ equity for Salmon Company.
C) 35%
D) 26%
Answer: D
Rationale: Regardless of the purchase price, the investor company’s claim on the
stockholders’ equity of the investee company is determined by the percentage of the stock
that it owns.

17. When the fair value of a company’s available-for-sale investments is lower than its book
value, how should the unrealized loss be handled?
A) Written off as an impairment
B) Not reported
C) Recorded as an expense on the company’s income statement
D) Deducted from the investment account
E) Added to stockholders’ equity of the investor
Answer: D
Rationale: Available-for-sale securities are accounted for on a fair value basis. A decrease in
fair value results in a reduction of the investment account and a reduction of stockholders’
equity (through other comprehensive income/loss). Gains and losses on available-for-sale
securities are not recorded on the income statement unless they are realized. A loss of fair
value results in a reduction of stockholders’ equity rather than an addition to it.

18. Verdi Brothers owns 100% of Schweinfurt Company. At year-end, Schweinfurt owes
Verdi Brothers $52,000. If a consolidated balance sheet is prepared at year-end, how is the
$52,000 handled?
A) The $52,000 is eliminated on the consolidated balance sheet
B) The $52,000 is reported as goodwill on the consolidated balance sheet
C) The $52,000 is amortized as an intangible asset on the consolidated balance sheet
D) The $52,000 is shown as an unearned revenue on the consolidated balance sheet
Answer: A
Rationale: The $52,000 accounts payable on Schweinfurt’s balance sheet and the $52,000
accounts receivable on Verdi Brothers’ balance sheet are eliminated. In a consolidation, all
intercompany items are eliminated so that the consolidated statements show only the interests
of outsiders.

19. Under the equity method, how are unrealized gains (losses) reported?
A) As goodwill
 B) As a separate component of stockholders' equity
C) As part of net income
D) Not recognized
Answer: D
Rationale: In contrast to the fair value method, the equity method of accounting does not
recognize unrealized holding gains (losses) in either the balance sheet or the income
statement.

20. Under the equity method, which of the following does not cause a decrease in the
investment account?
A) The losses of the investee
B) Dividends paid by the investee
C) Declines in the fair value of the investment
D) All of the choices would decrease the investment account
Answer: C
Rationale: The investment account is not affected by changes in the investment's fair value
under the equity method.

21. Which type of lease would be considered a form of off-balance-sheet financing?

A) Finance lease
B) Deferred tax lease
C) Operating leases with terms greater than 12 months
D) None of the above
Answer: D
Rationale: All leases, other than short-term leases that do not include purchase options, are
reported on the balance sheet.

22. How are leases classified as operating leases initially reported in the lessee’s financial
statements?

I. As an asset that is amortized, similar to other company assets

II. As a footnote disclosure
III. As both a short-term and a long-term liability
IV. As neither an asset nor a liability.

A) I and III
B) I, II and III
C) IV only
D) II and IV
Answer: B
Rationale: Operating leases are reported on a company’s balance sheet and described in the
footnotes to the financial statements, which provide key details regarding the company’s
current and future lease payment obligations.

23. GAAP identifies two different approaches in reporting leases by the lessee: operating
lease method and the finance lease method. Which option best describes the financial
 statement effects of leasing on the financial statements of the lessee?
A)
Lease Type Assets Liabilities Expenses
Operating Increased Increased Lease expense
B)
Lease Type Assets Liabilities Expenses
Finance Increased Increased Lease expense
C)
Lease Type Assets Liabilities Expenses
Finance None None Amortization and interest
D)
Lease Type Assets Liabilities Expenses
Operating None None Lease expense

Answer: A
Rationale: Assets and liabilities are recorded for operating leases. The payment is recognized
as lease expense. Under finance leases, an asset is capitalized and amortized, and a liability
is recorded which creates interest expense.

24. FunTime Corp. disclosed the following finance lease information in its 2022 annual
report (in millions).

Aggregate expected maturities of long-term debt and scheduled finance lease

payments for the years shown are as follows:

Long-Term Debt
Scheduled Finance Lease Payments Maturities
2023 $ 2,000 $ 16,286
2024 2,000 16,286
2025 2,000 16,286
2026 2,000 446,286
2027 2,000 136,286
Thereafter 37,000 16,284
47,000 647,714
Finance lease amount representing
interest (21,644)
Present value of net scheduled lease
payments $ 25,356 25,356
Total long-term debt and finance
leases $ 673,070

What finance lease liability does FunTime’s report on its balance sheet at December 31, 2022
 (in millions)?
A) $ 21,644
B) $ 25,356
C) $ 47,000
D) $673,070

Answer: B
Rationale: The present value of finance lease payments is reported on the balance sheet as a
liability.

25. Which of the following is not a condition requiring the use of the finance lease reporting
method instead of the operating lease reporting method?
A) The lease automatically transfers ownership of the leased asset from the lessor to the
lessee at the termination of the lease
B) The lease term covers the majority of the remaining economic life of the leased asset
C) The lease allows the lessee to use the leased asset during the lease term
D) The lease provides that the lessee can purchase the leased asset for a nominal amount
(bargain purchase price) at the termination of the lease
Answer: C
Rationale: For both finance and operating leases, lease agreements allow the lessee to use the
leased asset.

26. Morgan is considering entering into a contract to sell a building on January 1 in exchange for
a note. The note pays a lump sum payment of $300,000 in ten years and ten annual payments
of $2,500 beginning on the date of sale (January 1). If the annual interest rate is 10 percent,
what is the total present value of the contract?
A) $159,489.92
B) $132,559.55
C) $131,023.42
D) $155,505.55
Answer: B
(1) Present value of annual receipts:
Value = $2,500  Present value factor for an annuity due for i = 10% and n = 10
= $2,500  6.75902 (from Table 6)= $16,897.55
(2) Present value of lump-sum receipt:
Value = $300,000  Present value factor for i =10% and n = 10
= $300,000  0.38554 (from Table 4) = $115,662.00
(3) Total present value:
Value = $16,897.55 + $115,662.00 = $132,559.55

27. How is interest expense calculated according to GAAP?

A) Stated rate of interest x maturity value.
B) Effective interest rate x maturity value of the obligation.
C) Effective interest rate x balance sheet value.
D) Stated rate of interest x balance sheet value.
 Answer: C

28. Interest expense calculated under GAAP is equal to the stated rate of interest times the
maturity value if the interest-bearing obligation is issued at
A) a discount.
B) either a discount or a premium.
C) a premium.
D) par.
Answer : D

29. If a company issues a note payable when the market rate of interest is greater than the
stated rate, then
A) the cash received will exceed the maturity value of the note.
B) the note will be issued at a discount.
C) the note will be issued at a premium.
D) the cash received will be equal to the maturity value of the note.
Answer: B

30. Which of the following is not a condition requiring the use of the finance lease reporting
method instead of the operating lease reporting method?
A) The lease automatically transfers ownership of the leased asset from the lessor to the
lessee at the termination of the lease
B) The lease term covers the majority of the remaining economic life of the leased asset
C) The lease allows the lessee to use the leased asset during the lease term
D) The lease provides that the lessee can purchase the leased asset for a nominal amount
(bargain purchase price) at the termination of the lease
Answer: C
Rationale: For both finance and operating leases, lease agreements allow the lessee to use the
leased asset

31. Corning Company issued $8,000 of 10% bonds on January 1, 2009. The bonds were
issued at a premium. The cash payment for annual interest on the bonds
A) is equal to annual interest expense.
B) is greater than annual interest expense.
C) is less than annual interest expense.
D) equals the balance in Premium on Bonds Payable on the day the bonds were issued.
Answer: B

32. Flutie Company issued $8,000 of 8% bonds on January 1, 2009, at a discount of $940.
The market rate of interest on the issue date was 10%. The carrying value of the bonds on
December 31, 2009 is
A) $6,994.
B) $7,060.
C) $8,940.
D) $7,126.
Answer: D
 $7,060 + [($7,060 x .10)  ($8,000 x .08)] = $7,126

33. The amount of amortized bond premium

A) reduces interest expense on the income statement.
B) is reported as a deduction from bonds payable on the balance sheet.
C) is reported as an addition to bonds payable on the balance sheet.
D) is added to the present value of bonds.
Answer: A

34. On April 30, 2024, one year before maturity, Hill Corporation retired $500,000 of 6%
bonds payable at 102. The book value of the bonds on April 30 was $492,500. Bond interest
was last paid on April 30, 2024.
What is the gain or loss on the retirement of the bonds?
A) $17,500 gain
B) $ 7,500 gain
C) $ 7,500 loss
D) $17,500 loss
Answer: D
Rationale: The loss is the difference between the retirement value and the book value of the
bond: (102% x $500,000) – $492,500 = $17,500.
Problems:

1. Halloween Inc. has 50,000 outstanding shares of common stock with par value of $0.50
per share and market price on January 1 of $80.

A. Show the journal entries of the two independent equity transactions in the template
below.
1. 10% stock dividend paid to common shareholders with current market price at $80
2. 30% stock dividend paid to common shareholders with current market price at $100
B. How have these two transactions changed the overall valuation of the firm?

Answer:
A. 1. Retained Earnings 400,000
Common Stock 2,500
APIC 397,500
Common stock = 50,000 shares × 10% × $0.50 par value = $2,500
Additional paid-in capital = 50,000 shares × 10% × ($80.00 - $0.50) = $397,500
Retained earnings = 50,000 shares × 10% × $80.00 = $400,000

2. Retained Earnings 7,500

Common Stock 7,500

Common stock = 50,000 shares × 30% × $0.50 par value = $7,500

Retained earnings = $7,500

(Note: Since a 30% stock dividend is considered to be a large stock dividend, retained earnings
are reduced by the par value of the shares distributed and common stock is increased
by the same amount. There is no change to additional paid-in capital.)

B. Since these two stock dividends merely increased the number of shares available in an
equal way to all shareholders, the overall value of the firm should remain unchanged.
Any market price changes may be caused by naïve investors or in the market reading
signals into the transaction (either good or bad).
2. Following is the stockholder’s equity section of Silver, Inc. at December 31, 2024:

December 31,
Stockholders' Equity 2024
Common stock - $0.50 par value, authorized 1,000,000
shares $ 100,000
Additional paid-in capital 980,000
Treasury stock—5,000 shares (30,000)
Retained earnings 250,000
Total stockholders' equity $1,300,000

A. Compute the number of shares that have been issued.

B. At what average issue price were the shares issued?
C. At what average cost were the treasury stock purchased?

Answer:

A. Total Par value / Unit par value = $100,000 / $0.50 = 200,000 shares

B. (Common stock + Additional paid-in capital) / Shares issued = Issue price

($100,000 + $980,000) / 200,000 = $5.40

C. Treasury stock / Treasury shares = Treasury cost per share

$30,000 / 5,000 = $6 per treasury share

3. Jaguar Company purchases an investment in South America Preserve Company at the

purchase price of $6 million cash. This represents 25% of the book value of South America
Preserve. During the year, South America Preserve reports net income of $1,200,000 and
pays cash dividends of $100,000. At the end of the year, the fair value of Jaguar’s investment
is $6.4 million.

Required
A. At what amount is the investment reported on Jaguar’s balance sheet at year-end?
B. What amount of income from investments does Jaguar report? Explain.
C. Prepare journal entries to record the transactions for Jaguar Company.

Answer:

A. Given the 25% ownership, “significant influence” is presumed and the investment must
be accounted for using the equity method.

Beginning balance $6,000,000

% South America Preserve income
300,000 ($1,200,000  0.25)
earned
% Dividends received (25,000) ($100,000  0.25)
 Ending balance $6,275,000

B. $1,200,000  0.25 = $300,000

Equity earnings are computed as the reported net income of the investee (South America
Preserve Company) multiplied by the percentage of the outstanding common stock
owned.

C.
1. Investment in South America Preserve 6,000,000
Cash 6,000,000

2. Investment in South America Preserve 300,000

Investment income 300,000

3. Cash 25,000
Investment in South America Preserve 25,000

4. Eduardo Corp. owns 100% of Arkansas Group, Inc.’s stock. Eduardo Corp. prepares
consolidated financial statements. Data from the annual reports of the two companies are:

Sales Net Income Dividends

Eduardo Corp. (consolidated) $3,000,000 $800,000 $100,000
Arkansas Group, Inc. $ 600,000 $ 140,000 $ 20,000

Required
A. How much of the $3,000,000 consolidated sales reported by Eduardo Corp. is from
operations of Arkansas Group?
B. How much of the $800,000 consolidated net income reported by Eduardo Corp. is from
operations of Arkansas Group?

Answer:

A. Eduardo Corp. reports 100% of Arkansas Group, Inc.’s sales, $600,000.

A. Net income from Arkansas Group, Inc. = 100% × $140,000 = $140,000.

The consolidated income statement includes the gross sales and expenses of the investee.

5. Computer Castle Corporation reported the following in its 2022 annual report regarding
acquisition of Mary’s Motherboards:

Acquisition of Mary’s Motherboards, Inc.

On January 31, 2022 we completed our acquisition of Mary’s Motherboards, Inc., a
provider of hardware systems, software and services, by means of a merger of one of
our wholly owned subsidiaries with and into Motherboards such that Motherboards
became a wholly owned subsidiary of See the Future. We acquired Motherboards to,
 among other things, expand our product offerings by adding Motherboards’s existing
hardware systems business and broadening our software and services offerings. We
have included the financial results of Motherboards in our consolidated financial
statements from the date of acquisition.

(in millions)
Cash, cash equivalents and marketable securities $ 5,142
Trade receivables 4,860
Inventories 662
Goodwill 2,582
Intangible assets 7,694
In-process research and development 830
Other assets 4,070
Deferred tax assets, net 2,500
Accounts payable and other liabilities (7,900)
Deferred revenues (2,230)
Total preliminary purchase price $18,210

Required
A. Of the total assets acquired, what portion is allocated to tangible assets and what portion
to intangible assets?
B. Are Motherboards’s assets (both tangible and intangible) reported on the consolidated
balance sheet at the book value or at the fair market value on the date of the acquisition?
Explain.
C. Explain how the intangible assets are valued at the time of the acquisition.
D. How are the tangible and intangible assets accounted for subsequent to the acquisition?
 Answer:

A.
$
million %
Cash and securities $ 5,142
Trade receivables 4,860
Other assets 4,070
Inventories 662
Deferred taxes assets, net 2,500
Total tangible assets $17,234 60.8%

Goodwill $ 2,582
Intangible assets 7,694
In process R&D 830
Total intangible assets $11,106 39.2%

B. All assets of the acquired company are reported on the consolidated balance sheet at their
fair market values on the date of the acquisition, not at their net book values. Fair values
are the most objective value at acquisition. They are the “historic cost” of the new assets.

C. Intangible assets are valued as an estimate of the value of future economic benefits. This
is very imprecise and involves significant estimates, both of the timing and amount of
expected cash flows and of the discount rate.

D. Subsequent to the acquisition, the tangible assets are accounted for like any other
acquired asset: the receivables are removed when collected, inventories become future
cost of goods sold, and depreciable assets are depreciated over their estimated useful
lives. Intangible assets with a determinable life are amortized over their useful lives.
Finally, because indefinite life intangibles and goodwill have indeterminate useful lives,
they are not amortized, but are tested annually for impairment, or more often if
circumstances require.

6. Paris Company issues $5,000,000 of 5% bonds that pay interest semiannually and mature in
10 years. Compute the bonds’ issue price assuming that the bonds’ effective interest rate is:

A. 4% per year compounded semiannually

B. 6% per year compounded semiannually

Answer:

Using the present value tables:

Interest Payment = $5,000,000 × 5% × 6/12 = $125,000

 A. Selling price of the bond discounted at 4%:
Present value of principal repayment ($5,000,000 x 0.67297*) = $3,364,850
Present value of interest payments ($125,000 x 16.3513**) = 2,043,929
$5,408,779

*Present value of a sum, 20 periods at 2%

**Present value of an annuity, 20 periods at 2%

B. Selling price of the bond discounted at 6%:

Present value of principal repayment ($5,000,000 × 0.55368*) = $2,768,400
Present value of interest payments ($125,000 × 14.87747**) = 1,859,684
$4,629,084
*Present value of a sum, 20 periods at 3%
**Present value of an annuity, 20 periods at 3%

Answer using Excel or a financial calculator:

A. Rate = 2%, nper = 20, pmt = 125,000, fv = 5,000,000 $5,408,786

B. Rate = 3%, nper = 20, pmt = 125,000, fv = 5,000,000 $4,628,063

7. Company A borrowed cash, signing a two-year, interest bearing note payable with a face
value of $10,000 and an effective interest rate of 8%. Interest payments on the note are made
annually. Provide journal entries that would be recorded over the life of the note assuming the
following stated interest rates: A. 0%, B. 8%, C. 6% and D. 10%
A. Issues at stated rate 0%
Proceeds = PVsingle sum n=2, i=8% .85734*10,000=8,573.4
Interest Expense Yr 1 = 8573*.08 = 686
8573 + 686 – 0 = 9259 (beg bv + int exp – int pmt = end bv
Interest Expense Yr 2 = 9259*.08 = 741

Cash Note Payable Discount on NP Interest Expense

Issue Issue Yr 1
8573 Issue 1427 686

Repay Yr 2 Yr 1
10,000 10,000 741 686

Repay Yr2
10,000 741
 B. Issues at stated rate 8%

Cash Note Payable Interest Expense

Issue 800 Issue Yr 1
10,000 Yr1 10,000 800
800
Yr2 Yr2 800
Repay Repay
10,000 10,000

C. Issues at stated rate 6%

Proceeds = (PV face (single sum n=2, i=8%) .85734*10,000) + (PV pmt (annuity n=2,
i=8%) 1.78326*600) = 9643

Cash Note Payable Discount on NP Interest Exp

9643 10000 357
600 171 771
600 185 785
10000 10000

D. Issues at stated rate 10%

Proceeds = (PV face (single sum n=2, i=8%) .85734*10,000) + (PV pmt (annuity n=2, i=8%)
1.78326*1000) = 10,356

Cash Note Payable Premium on NP Interest Exp

10356 10000 356
1000 172 828
1000 185 815
10000 10000
8. In January, Company A issued 10,000 shares of Common Stock with a par value of $1 for $5
per share. In February they bought back 1,000 shares at $4 each. In March they reissued 500 of
those shares for $6 per share. In June they reissued the remaining shares for $2 per share.
Prepare the journal entries associated with these transactions.

Cash Common Stock APIC-Common Treasury Stock

Jan Feb Jan Jan Feb
50,000 4,000 10,000 40,000 4,000
Mar Mar
3,000 2,000

Jun Jun
1,000 2,000
APIC
Treasury
Jun Mar
1,000 1,000

9. FunTime Corp. disclosed the following lease information in its 2022 annual report related to
its leasing activities.

(In millions) 2022 2021

Operating Leases
Operating lease right-of-use assets $3,155 $2,855

Other current liabilities $750 $685

Operating lease liabilities 3,550 3,125

Finance Leases
Property and equipment, at cost $2,580 $1,450
Accumulated depreciation (250) (185)

Other current liabilities $180

Other long-term liabilities 2,235 1,410
 Required
a. What amounts did FunTime’s report on its balance sheet, in total for 2022, related to
leased assets?
b. Where would the principal payments on the finance leases appear in the statement of cash
flows?

Answer:
a. FunTime would report $5,485 million in assets ($3,155 + $2,580 - $250) and $6,715
million in liabilities ($750 + $3,550 + $180 + $2,235).

b. Principal payments would be reported in the cash flows from (used in) financing activities
section of the statement of cash flows.

10. On January 1 of the current year, Samuels, Inc., purchased a building for $2.5 million to be
leased. The building is expected to have a 45 year life with no salvage value. The building was
leased immediately by Verdi Corp. (a calendar year-end company) for $162,500 a year payable
December 31 each year. The lease term is 5 years. The rate of interest implicit in the lease is
7%. The lease is classified as an operating lease.
a. Prepare an amortization schedule of the lease liability.
b. Prepare an amortization schedule for the right o fuse asset.
c. Prepare the journal entries for the current year and the following year.

Answer:
January 1, Year 1
Right-of-use asset – operating lease (A) ........................... 666,282
Operating lease liability (L) ..................................... 666,282
December 31, Year 1
Operating lease liability ..................................................... 162,500
Cash ....................................................................... 162,500
December 31, Year 1
Operating lease expense................................................... 162,500
Operating lease liability........................................... 46,640
Right-of-use asset – operating lease ...................... 115,860
December 31, Year 2
Operating lease liability ..................................................... 162,500
Cash ....................................................................... 162,500
December 31, Year 2
Operating lease expense................................................... 162,500
Operating lease liability........................................... 38,530
Right-of-use asset – operating lease ...................... 123,970

11. Carter, Inc. began operations in 2022. The company reported $104,000 of deprecation expense on its
2022 income statement and $102,400 in 2023. Carter deducted $112,000 for depreciation on its tax return
in 2022 and $97,600 in 2023. The company reports a tax obligation of $36,120 for 2023 based on a tax
rate of 25%.
a. Determine the temporary difference between the book value of depreciable assets and the tax basis of
these assets at the end of 2022 and 2023.
b. Calculate the deferred tax liability at the end of each year.
c. Calculate the income tax expense for 2023.
d. Prepare the journal entry to record income tax expense for 2023.

Answer:
a. Temporary differences 2022: $112,000 - $104,000 = $8,000; 2023: ($112,000 + $97,600) –
($104,000 + $102,400) = $3,200.
b. Deferred tax liability 2022: $8,000 x 25% = $2,000; 2023: $3,200 x 25% = $800
c. $36,120 + ($800 – $2,000) = $34,920
Income tax expense (+E, -SE)................................................... 34,920
Deferred tax liability (-L)............................................................. 1,200
Income taxes payable (+L)................................................... 36,120

(Note that if you assume the taxes due are paid in cash in the reporting period, the account
Income taxes payable used above would be replaced with Cash (Cash would be reduced). Either
is correct.)