Complete the multiple choice questions (#1-55) on green scantron and the remaining problems in your blue-book.

Transcription

1 April 20, 2009 Anderson Econ 136C- Spring 2009 MT #1 VERSION 1 Name Complete the multiple choice questions (#1-55) on green scantron and the remaining problems in your blue-book. 1. Which of the following would result in the use of a completed contract method? a. The buyer can not be expected to satisfy all obligations under the contract. b. All of these would result in the use of the completed contract method. c. The contract does not clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement. d. The contractor can not be expected to perform the contractual obligation. 2. Slowturn, Inc. has $100,000 remaining for a Net Operating Loss (NOL) carryforward. They estimate that future income within the remaining carryforward period will be $80,000. Their effective tax rate is 30%. Related to the above information, what should show on the balance sheet of Slowturn? a. Deferred tax asset and deferred tax valuation allowance, however there is not enough information above to determine the amount. b. Deferred tax asset 30,000, with a 24,000 valuation allowance. c. Deferred tax asset 30,000, with a 6,000 valuation allowance. d. Deferred tax asset 24, A project which has estimated contract value of $25,000,000 and estimated total costs at completion of $20,000,000 is currently 25% complete. How much gross profit should be reported on this contract from inception to date? a. There is not enough information b. $0 c. $1,250,000 d. $5,000, This period we estimate we will lose $200,000 on a contract for which we have previously reported $1,000,000 of revenue and $700,000 of costs. The current year costs incurred are $50,000 and estimated costs at completion are $2,000,000. What is the impact to revenue in the current period? a. $0 b. $500,000 debit c. $200,000 debit d. $5,000 debit

2 MT #1 v. 1--Page 2 5. When there exists a significant "unbilled" on a contract, the following is a possible cause: a. The contract value has been over-estimated. b. Total estimated costs at completion have been under-estimated. c. All of these. d. The project manager is behind on billings. 6. When a contractor has billed a customer an amount exceeding the actual percent complete of the project, this results in an: a. equity b. asset c. liability d. deferred revenue 7. A company depreciates fixed assets more quickly for tax purposes than it does for GAAP purposes. In the first year of depreciatio of an asset, this will create a: a. Deferred tax asset b. None of these c. Deferred tax liability d. Permanent difference 8. Revenue recognition criteria are provided in: a. SEC SAB No. 101 & 104 b. FASB Statement No. 157 c. FASB Interpretation No. 48 d. AICPA EITF Renner Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Renner would be a. a fine resulting from violations of OSHA regulations. b. a balance in the Unearned Rent account at year end. c. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes. d. making installment sales during the year. 10. Taxable income of a corporation differs from pretax financial income because of Permanent Temporary Differences Differences a. Yes Yes b. No No c. No Yes d. Yes No

3 MT #1 v. 1--Page Which of the following items will cause the effective rate of the tax provision to differ from a companies effective tax rate? a. Effective differences b. Temporary differences c. Permanent differences d. Both permanent and temporary differences 12. The percentage-of-completion method must be used when certain conditions exist. Which of the following is NOT one of those necessary conditions? a. The buyer can be expected to satisfy some of the obligations under the contract. b. Estimates of progress toward completion, revenues, and costs are reasonably dependable. c. The contractor can be expected to perform the contractual obligation. d. The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement. 13. The GAAP method of recording income taxes is best described as: a. Equity approach. b. Balance sheet approach because the tax provision is the net result of proper recordation of all the related balance sheet accounts. c. Cash flow approach because the tax provision reflects cash payments for taxes. d. Income statement approach because it reflects the tax provision which is consistent with GAAP income. 14. Costs incurred and estimated gross profit in excess of billings on uncompleted construction contracts is commonly referred to as: a. Contra-billed b. Unbilled c. Prebilled d. Billed 15. Which of the following are estimated by a contractor using the percentage of completion method until the contract is in fact completed? a. Total costs AND contract value b. Costs incurred to date c. Contract value d. Total costs

4 MT #1 v. 1--Page 4 April 20, 2009 ANSWER KEY Anderson Econ 136C- Spring Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page b MChoice c MChoice c MChoice b MChoice c MChoice c MChoice c MChoice a MChoice a MChoice C a MChoice C c MChoice a MChoice C b MChoice b MChoice a MChoice * Multiple Choice Foils are Jumbled * Test Questions are Scrambled

5 April 20, 2009 Anderson Econ 136C- Spring 2009 MT #1 VERSION 2 Name Complete the multiple choice questions (#1-15) on green scantron and the remaining problems in your blue-book. 1. When a contractor has billed a customer an amount exceeding the actual percent complete of the project, this results in an: a. liability b. asset c. deferred revenue d. equity 2. Which of the following would result in the use of a completed contract method? a. All of these would result in the use of the completed contract method. b. The contractor can not be expected to perform the contractual obligation. c. The buyer can not be expected to satisfy all obligations under the contract. d. The contract does not clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement. 3. When there exists a significant "unbilled" on a contract, the following is a possible cause: a. All of these. b. Total estimated costs at completion have been under-estimated. c. The project manager is behind on billings. d. The contract value has been over-estimated. 4. Costs incurred and estimated gross profit in excess of billings on uncompleted construction contracts is commonly referred to as: a. Prebilled b. Billed c. Contra-billed d. Unbilled

6 MT #1 v. 2--Page 2 5. A project which has estimated contract value of $25,000,000 and estimated total costs at completion of $20,000,000 is currently 25% complete. How much gross profit should be reported on this contract from inception to date? a. $1,250,000 b. There is not enough information c. $0 d. $5,000, This period we estimate we will lose $200,000 on a contract for which we have previously reported $1,000,000 of revenue and $700,000 of costs. The current year costs incurred are $50,000 and estimated costs at completion are $2,000,000. What is the impact to revenue in the current period? a. $200,000 debit b. $0 c. $500,000 debit d. $5,000 debit 7. Revenue recognition criteria are provided in: a. FASB Interpretation No. 48 b. FASB Statement No. 157 c. AICPA EITF 94-2 d. SEC SAB No. 101 & Renner Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Renner would be a. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes. b. a balance in the Unearned Rent account at year end. c. making installment sales during the year. d. a fine resulting from violations of OSHA regulations. 9. Which of the following items will cause the effective rate of the tax provision to differ from a companies effective tax rate? a. Permanent differences b. Temporary differences c. Both permanent and temporary differences d. Effective differences

7 MT #1 v. 2--Page Slowturn, Inc. has $100,000 remaining for a Net Operating Loss (NOL) carryforward. They estimate that future income within the remaining carryforward period will be $80,000. Their effective tax rate is 30%. Related to the above information, what should show on the balance sheet of Slowturn? a. Deferred tax asset and deferred tax valuation allowance, however there is not enough information above to determine the amount. b. Deferred tax asset 30,000, with a 24,000 valuation allowance. c. Deferred tax asset 30,000, with a 6,000 valuation allowance. d. Deferred tax asset 24, Taxable income of a corporation differs from pretax financial income because of Permanent Temporary Differences Differences a. No No b. Yes No c. No Yes d. Yes Yes 12. The GAAP method of recording income taxes is best described as: a. Income statement approach because it reflects the tax provision which is consistent with GAAP income. b. Equity approach. c. Cash flow approach because the tax provision reflects cash payments for taxes. d. Balance sheet approach because the tax provision is the net result of proper recordation of all the related balance sheet accounts. 13. Which of the following are estimated by a contractor using the percentage of completion method until the contract is in fact completed? a. Total costs b. Total costs AND contract value c. Contract value d. Costs incurred to date

8 MT #1 v. 2--Page The percentage-of-completion method must be used when certain conditions exist. Which of the following is NOT one of those necessary conditions? a. Estimates of progress toward completion, revenues, and costs are reasonably dependable. b. The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement. c. The contractor can be expected to perform the contractual obligation. d. The buyer can be expected to satisfy some of the obligations under the contract. 15. A company depreciates fixed assets more quickly for tax purposes than it does for GAAP purposes. In the first year of depreciatio of an asset, this will create a: a. Permanent difference b. Deferred tax liability c. Deferred tax asset d. None of these

9 MT #1 v. 2--Page 5 April 20, 2009 ANSWER KEY Anderson Econ 136C- Spring Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page a MChoice a MChoice a MChoice d MChoice a MChoice c MChoice d MChoice d MChoice C a MChoice c MChoice d MChoice C d MChoice b MChoice d MChoice C b MChoice * Multiple Choice Foils are Jumbled * Test Questions are Scrambled

10 26. I. There is an SEC Staff accounting bulletin governing revenue recognition lists four criteria for recognizing revenue, please list them. II. For each situation below (A) state and support whether revenue is recognizable for this transaction and (B) show any required jounal entries. II 1 Leasit, Inc. entered into a transaction to lease vacant office space for their client NoVacancy!, Inc. Leasit will receive half of the total $200,000 commission when a tenant signs the lease (and that commission is non refunable) and then the other half once the tenant occupies the space. On December 15, 2008 Leasit received $100,000 when a tenant signed the lease. The tenant should occupy the space sometime in the third quarter of II 2 Seller completes a sale which provides that they must buy back the inventory in the future at a price equal to the original sales price plus any costs incurred by the buyer for holding the inventory. Sales price $100,000 (collected in cash) and cost is $75,000. III. Scooby Doo Music sold CDs to retailers for $800,000 and granted the right to return. The retailers are of high credit standing, they have received the risk of loss upon receipt of the goods (which was FOB receiving) and there is no further obligation by Scooby Doo Music. During the remaining period of the year,, retailers returned CDs to Scooby Doo and were granted credit of $78,000. Past experience indicated that the normal return rate is 15%. Prepare Scooby Doo s entries to record (a) the initial sale and (b) the $78,000 of returns. Scooby Doo s cost of the sold CD s is $500, I. II. XYZ, Inc. sold goods but the customer is high credit risk and consequently the installment sales method is used. The details of the transaction are as follows: $200,000 sales price, $125,000 cost of the inventory sold. (a) record the journal entry upon sale and (b) record the journal entry upon collection of $150,000 of cash from the customer. RAFS, Inc. lent $30,000 in the form of a note receivable to a venture in Colombia. RAFS finds the investment to be of excessively high risk and the likelihood of repayment (or amount of repayment) to be highly uncertain. The note requires interest to be paid once a quarter based upon an annual rate of 24%. (a) record the journal entry when RAFS advances the $30,000 (b) record the journal entry when RAFS receives the first $1,800 interest payment in cash and (c) after $35,000 has been collected in interest, what would be the journal entry for yet another $1,800 interest payment? 28. The following represents data for each year from inception of a long term construction project in 2006 until its completion in In your blue book: List the appropriate journal entry to be recorded assuming that the costs incurred in each year have already been recorded by the accounting sytem. Be sure in each year to show your computation of % complete for partial credit points AGGREGATE TO DATE Estimated contract Value 2,000,000 2,000,000 2,000,000 2,200,000 Estimated costs at completion 1,500,000 1,800,000 2,100,000 2,100,000 Projected profit 500, ,000 (100,000) 100,000 Aggregate costs incurred to date 375, ,000 1,680,000 2,100,000 JUST THIS YEAR Billings made this year 525, , , ,000 Collections this year 500, , , , You, Inc. begain operations on January 1, 2008 and at the end of the year reconciled their pretax financial income to taxable income as follows: Pretax financial income 3,000,000 Permanent difference due to meals & entertainment 100,000 Tax depreciation in excess of book (60,000) Bad debt expense not deductible until written off 30,000 Taxable income 3,070,000 Assuming an effective tax rate for all years of 30%: Prepare the journal entry to record the 2008 tax provision. Be sure to show your computations of deferred tax assets, deferred tax liabilities and income tax payable for partial credit.

11 26. I. There is an SEC Staff accounting bulletin governing revenue recognition lists four criteria for recognizing revenue, please list them. Persuasive evidence of an arrangement exists Delivery has occurred or services have been rendered The seller's price to the buyer is fixed or determinable and Collectibility is reasonably assured II. For each situation below (A) state and support whether revenue is recognizable for this transaction and (B) show any required jounal II 1 Leasit, Inc. entered into a transaction to lease vacant office space for their client NoVacancy!, Inc. Leasit will receive half of the total $200,000 commission when a tenant signs the lease (and that commission is non refunable) and then the other half once the tenant occupies the space. On December 15, 2008 Leasit received $100,000 when a tenant signed the lease. The tenant should occupy the space sometime in the third quarter of State, and support whether revenue is recognizable for this transaction and show the journal entry required for each scenario below. Revenue is NOT recognizable, because: the sellers price to the buyer is not determinable. JE: Cash 100,000 Unearned revenue 100,000 II 2 Seller completes a sale which provides that they must buy back the inventory in the future at a price equal to the original sales price plus any costs incurred by the buyer for holding the inventory. Sales price $200,000 (collected in cash) and cost is $100,000. Revenue is NOT recognizable, because: the delivery has not taken place and the price is not determinable. JE: Cash 100,000 Deposits/ Unearned revenue (any liability but NOT revenue) 100,000 III. Scooby Doo Music sold CDs to retailers for $800,000 and granted the right to return. The retailers are of high credit standing, they have received the risk of loss upon receipt of the goods (which was FOB receiving) and there is no further obligation by Scooby Doo Music. During the remaining period of the year,, retailers returned CDs to Scooby Doo and were granted credit of $78,000. Past experience indicated that the normal return rate is 15%. Prepare Scooby Doo s entries to record (a) the initial sale and (b) the $78,000 of returns. Scooby Doo s cost of the sold CD s is $500,000 Accounts receivable $800,000 Sales $800,000 Sales returns allow. $120,000 A/R allowance $120,000 COS $425,000 Inventory $425,000 (b) Returns received A/R allowance $78,000 Accounts receivable $78,000

12 27. I. II. XYZ, Inc. sold goods but the customer is high credit risk and consequently the installment sales method is used. The details of the transaction are as follows: $200,000 sales price, $125,000 cost of the inventory sold. (a) record the journal entry upon sale and (b) record the journal entry upon collection of $150,000 of cash from the customer. (a) JE Upon sale: A/R installment 200,000 Inventory 125,000 Deferred gross profit 75,000 (b) JE Upon collection of $150,000 Cash 150,000 A/R 150,000 Deferred gross profit 56,250 Realized gross profit 56,250 RAFS, Inc. lent $30,000 in the form of a note receivable to a venture in Colombia. RAFS finds the investment to be of excessively high risk and the likelihood of repayment (or amount of repayment) to be highly uncertain. The note requires interest to be paid once a quarter based upon an annual rate of 24%. (a) record the journal entry when RAFS advances the $30,000 (b) record the journal entry when RAFS receives the first $1,800 interest payment in cash and (c) after $35,000 has been collected in interest, what would be the journal entry for yet another $1,800 interest payment? (a) JE Upon advance Note receivable 30,000 Cash 30,000 (b) JE Upon receipt of $1,800 Cash 1,800 Note receivable 1,800 (C ) JE Upon collection of $1,800 after $35,000 has already been collected. Cash 1,800 Income/ Revenue (as long as income ok) 1,800

13 28. The following represents data for each year from inception of a long term construction project in 2006 until its completion in In your blue book: List the appropriate journal entry to be recorded assuming that the costs incurred in each year have already been recorded by the accounting sytem. Be sure in each year to show your computation of % complete for partial credit points AGGREGATE TO DATE Estimated contract Value 2,000,000 2,000,000 2,000,000 2,200,000 Estimated costs at completion 1,500,000 1,800,000 2,100,000 2,100,000 Projected profit 500, ,000 (100,000) 100,000 Aggregate costs incurred to date 375, ,000 1,680,000 2,100,000 JUST THIS YEAR Billings made this year 525, , , ,000 Collections this year 500, , , , % Complete 375,000 1,500,000 = 25.00% JOURNAL ENTRY: Revenue 500,000 (25%*2,000,000) WIP/ Unbilled 500,000 Accounts receivable 525,000 WIP/ Unbilled 525,000 Cash 500,000 Accounts receivable 500, % Complete 900,000 1,800,000 = 50.00% JOURNAL ENTRY: Revenue 500,000 (50%*2,000, ,000) WIP/ Unbilled 500,000 Accounts receivable 490,000 WIP/ Unbilled 490,000 Cash 475,000 Accounts receivable 475, % Complete WHO CARES LOSS PROJECTED RECORD ALL LOSS!!! JOURNAL ENTRY: Revenue 200,000 (reverse all prior profit PLUS 100,000 loss) WIP/ Unbilled 200,000 Accounts receivable 585,000 WIP/ Unbilled 585,000 Cash 600,000 Accounts receivable 600, % Complete 2,100,000 2,100,000 = % JOURNAL ENTRY: Revenue 1,400,000 (100%*2,200, , , ,000) WIP/ Unbilled 1,400,000 Accounts receivable 600,000 WIP/ Unbilled 600,000 Cash 625,000 Accounts receivable 625,000 Prior profit, two ways: OR EASIER: 2005 revenue 500,000 Projected profit at , revenue 500,000 % complete at % costs (375,000) 100, costs (525,000) 100,000

14 29. SOLUTION Deferred tax asset: bad debt expense is a future deduction= asset 30,000 Tax rate 30% Deferred tax asset 9,000 Deferred tax liability excess tax depreciation is less future deductions= liab. 60,000 Tax rate 30% Deferred tax liability 18,000 Income tax payable Taxable income 3,070,000 Tax rate 30% Income tax payable 921,000 Journal Entry Deferred tax asset 9,000 Deferred tax liability 18,000 Income tax payable 921,000 Income tax provision 930,000