Multiple Choice: Select the best answer and place it on the line next to the question number.
Question:
Multiple Choice: Select the best answer and place it on the line next to the question number.
____ 1. Bond X and Bond Y are both issued by the same company. Each of the bonds has a maturity value of $100,000 and each pays a stated rate of interest of 8%. The current market rate of interest is 8% for each. Bond X matures in 7 years while Bond Y matures in 10 years. Which of the following is correct?
A) Both bonds will sell for the same amount.
B) Both bonds will sell for more than $100,000.
C) Bond X will sell for more than Bond Y.
D) Bond Y will sell for more than Bond X.
_____ 2. On July 1, 2017, Alabama Company issued 10% bonds dated July 1, 2017, with a face amount of $20 million. The bonds mature in 10 years. For bonds of similar risk and maturity, the market yield is 11%. Interest is paid semiannually, on June 30th and December 31st. The issue price of the bonds on July 1, 2017 is closest to:
A) $20,000,000
B) $18,822,060
C) $18,993,980
D) $18,804,980
_____ 3. On January 1, 2017, Idaho Company issued 11% bonds, dated January 1st with a face amount of $800,000. The bonds sold for $739,820 and mature in 20 years. For bonds of similar risk and maturity the market yield was 12%. Interest is paid semiannually on June 30 and December 31. Idaho decides to amortize the bond discount under the straight line approach and elects the option to report these bonds at their fair value. On December 31, 2017, the fair value of the bonds was $730,000, and the change in fair value was a result of a change in general interest rates. The gain or loss Idaho Company would report on its 2017 income statement relative to the bonds is closest to:
A) $12,829 gain
B) $9,820 gain
C) $70,000 gain
D) $3,009 loss
_____ 4. On August 1, 2017, Missouri Corporation issued $10 million of 8% nonconvertible bonds at 104. The bonds mature in 20 years. Each $1,000 bond was issued with 20 detachable stock warrants. Each warrant entitles the holder to purchase, for $50, one share of Missouri Corporation’s $1 par common stock. On August 1, 2017, the market value per share for Missouri’s stock was $46 and the market value of each warrant was $6. The market price of the bonds cannot be clearly determined. Total proceeds allocated to the stock warrants are:
A) $1,200,000
B) $200,000
C) $400,000
D) $460,000
Use the following to answer questions 5 and 6:
Nevada Corporation issued ten thousand $1,000 bonds on January 1, 2017 for $11,487,747. The bonds carry a stated rate of interest of 8%, mature in ten years, and pay interest semiannually on June 30th and December 31st. The market rate of interest at the time the bonds were issued was 6%. Nevada uses the effective interest method for amortizing bond discounts and premiums.
_____ 5. Total interest expense Nevada would report on its income statement for the year ended December 31, 2017 relative to these bonds is closest to:
A) $800,000
B) $600,000
C) $689,265
D) $687,603
_____ 6. Total interest paid by Nevada on these bonds for the year ended December 31, 2017 is closest to:
A) $800,000
B) $600,000
C) $689,265
D) $687,603
_____ 7. On January 1, 2017, Texas Inc. obtained a $50,000, four-year, 7% installment note from Arkansas Bank. The note requires four annual payments of $14,761, beginning on December 31, 2017. The portion of the Notes Payable that would be included in the current liability section of Texas’s balance sheet at December 31, 2017, after the first payment is made would be:
A) $35,239
B) $38,739
C) $12,049
D) $14,761
_____ 8. The lessee normally measures the capital lease liability to be recorded as the:
A) The future value of the minimum lease payments.
B) The sum of the cash payments over the term of the lease.
C) Present value of the minimum lease payments.
D) The fair market value of the leased asset.
_____ 9. New Mexico Corporation leased equipment under an agreement that qualifies as a capital lease. The present value of the minimum lease payments is $120,000. The lease term is five years. After the expiration of the original five year lease, the lease contains a bargain renewal option for three additional years. The expected economic life of the asset is ten years. Using the straight-line method, what would New Mexico record as annual depreciation expense on this leased equipment?
A) $24,000
B) $15,000
C) $12,000
D) $30,000
Collectability of the rental payments is reasonably assured, and there are no lessor costs yet to be incurred.
_____ 10. Montana would account for this lease as:
A) A capital lease.
B) A direct financing lease.
C) A sales type lease.
D) An operating lease.
_____ 11. Utah Company would account for this lease as:
A) A capital lease.
B) A direct financing lease.
C) A sales type lease.
D) An operating lease.
_____ 12. The net carrying value of the lease liability on Utah's books after the December 31, 2017 payment is closest to:
A) $15,943,154
B) $17,533,246
C) $21,000,000
D) $15,066,492
_____ 13. Total interest revenue Montana would report on its year end December 31, 2017 income statement relative to this lease is closest to:
A) $4,933,508
B) $1,673,820
C) $876,662
D) $2,466,754
_____ 14. If the lessor records unearned rent at the beginning of a lease term, the lease must:
A) Be a direct financing lease.
B) be a sales-type lease.
C) contain a bargain renewal option.
D) be an operating lease.
_____ 15. North Dakota Corporation purchased a machine for $20,000 in January 2017. North Dakota records a full year depreciation on assets in the year of purchase, and their year ends December 31st.. For financial reporting purposes, North Dakota depreciates the machine on a straight-line basis over a four-year period. There is no residual value. For tax purposes, depreciation expense on the machinery is 50% of cost in 2017, 30% in 2018, and 20% in 2019. Pretax accounting income for 2017 was $150,000, which includes interest revenue of $20,000 from municipal bonds. The enacted tax rate is 30% for all years. There are no other differences between accounting and taxable income. Current income taxes payable at December 31, 2017 are:
A) $42,000
B) $37,500
C) $43,500
D) $45,000
_____ 16. A result of intraperiod tax allocation is that:
A) Large fluctuations in a company's tax liability are eliminated.
B) Current year income tax expense is allocated among the income statement items that caused the expense.
C) Higher taxes occur in the future.
D) Income tax expense in the income statement equals taxes actually paid.
_____ 17. If a company's deferred tax asset is not reduced by a valuation allowance, the company believes it is more likely than not that:
A) Sufficient financial income will be generated in future years to realize the full tax benefit.
B) Tax rates will change in the future.
C) Sufficient taxable income will be generated in future years to realize the full tax benefit.
D) Tax rates will not change in future years.
_____ 18. Ohio Corp. reported a deferred tax liability of $6,000,000 for the year ended December 31, 2016, when the tax rate was 40%. The deferred tax liability was related to a temporary difference of $15,000,000 caused by an installment sale in 2016. The temporary difference is expected to reverse in years 2017 through 2019 as $5,000,000 of installment income is expected to be recognized as taxable income in each of those years. There are no other temporary differences. A new tax law was passed in 2017 with the tax rate remaining 40% through December 31, 2017, then increase to 45% for tax years beginning after December 31, 2017. Taxable income for the year 2017 is $30,000,000. Income tax expense reported by Ohio on its year end December 31, 2017 income statement is:
A) $12,000,000
B) $10,500,000
C) $10,000,000
D) $11,250,000
_____ 19. Maine Company reported a pretax operating loss of $150,000 for financial reporting and tax purposes in 2017. The enacted tax rate is 40% for 2017 and subsequent years. In 2015, Maine reported taxable income of $42,000 and paid $14,700 in income taxes; and in 2016 Maine reported taxable income of $40,000 and paid $16,000 in taxes. Assume Maine requests a refund of taxes already paid by electing a loss carryback. In addition, Maine expects to generate positive operating profits and taxable income in the future. The after tax net loss reported by Maine on its year end December 31, 2017 income statement is:
A) $119,300
B) $150,000
C) $90,000
D) $92,100
_____ 20. At December 31, 2017, Vermont Industries reported three temporary differences between accounting and taxable income. Vermont had $25,000 of future deductible amounts resulting from accrued warranty liabilities. Vermont offers customers a one year warranty on its products. Vermont had $55,000 in future taxable amounts associated with depreciation on property and equipment, and $15,000 in future taxable amounts associated with prepaid expenses that expire in 2018. No temporary differences existed at December 31, 2016. The income tax rate is 40%. Vermont would report the following amounts related to deferred taxes on its year end December 31, 2017 balance sheet:
A) $18,000 net non current deferred tax liability.
B) $4,000 current deferred tax asset and $22,000 non current deferred tax liability.
C) $10,000 current deferred tax asset and $28,000 non current deferred tax liability.
D) $4,000 non current deferred tax asset and $22,000 non current deferred tax liability.