FAR (2nd Deck)

Question 1

Deferred Income Tax Liability

Answer 1

Calculation Steps:

Find undistributed earnings:

• Bart’s share of earnings: $270,000
• Less: Bart’s share of dividends: ($90,000)
• Undistributed earnings: $180,000

Calculate taxable portion:

• Only 35% is taxable (100% - 65% dividends received deduction)
• Taxable amount: $180,000 × 35% = $63,000

Calculate deferred tax liability:

• Future enacted tax rate of 21% applies (since distribution is in future)
• Deferred tax liability = $63,000 × 21% = $13,230

Question 2

Income Tax Liability

Answer 2

Question 3

Answer 3

Question 4

Answer 4

Question 5

Answer 5

Question 6

What would be the JE for the Issuance of Common Stock?

What would bethe JE for the Repurchase of Common Stock in the above problem?

What is the Ending APIC Balance?

Answer 6

Question 7

Answer 7

Question 8

Answer 8

Question 9

Answer 9

Deferred Tax Liability is when Book income exceeeds the taxable income amount.

Deferred Tax Assets is when Tax Reporting tax amount > Book amount, you would pay more taxes early but next year it would be a tax asset, think of it like prepaid on taxes

Question 10

Answer 10

Question 11

Answer 11

Since Front Market is the most advantageous, it would be the $52/shr that should be use.

Question 12

Answer 12

Question 13

Answer 13

To find deferred tax expense = enacted tax x applicable tax deduction(diff. Book vs Tax return)

Question 14

Answer 14

It would be the Side market for Selling Price of $50/shr, the cost is only use to determine the NET, You make the determination based on the greater NET amt after cost. But you always pick the Selling price!!!

Question 15

Answer 15

Question 16

Answer 16

7M Contract - 8M Total Cost = ($1M) Loss

Note that in this question, if there is a cost > contract agreement, the loss is immediately recognized!
No revenue is allocated based on cost.

Question 17

Answer 17

Question 18

“When is a contract modification treated as a SEPARATE contract?”

Answer 18

Must have BOTH:
Additional DISTINCT goods/services
Price reflects standalone selling price (Think: New & Different = New Contract)

Question 19

A company has an equity investment with a historical cost of $500,000 that is traded in an active market. At December 31, year 1, the quoted price for an identical investment was $400,000 and the quoted price for a similar investment was $430,000. Using the company’s internal present value of cash flows model, the company arrived at a value of $410,000. What amount is the value of the investment on December 31, year 1?

Answer 19

It should be the quoted price for the identical investment for $400,000. Since it is a equity investment.

Question 20

A company holds a financial asset that is actively traded in two different markets. The company transacts in both markets equally. The price of the asset in market A is $50. If the company sells the asset in market A, it incurs a transaction cost of $4. The price of the asset in market B is $48. If the company sells the asset in market B, it incurs a transaction cost of $1. What is the fair value of the financial asset?

Answer 20

Since Market B Net amt 47 > Market A $46, then the FV of the Financial Asset is Market B Selling Price for $48!

Question 21

A company that uses the accrual method of accounting started the fiscal year with assets of $600,000 and liabilities of $400,000. During the fiscal year, the company recorded credit sales of $250,000, of which $8,000 remained to be collected at year end, and incurred expenses of $90,000, of which $72,000 was paid in cash. A stock dividend valued at $10,000 was declared and issued to stockholders during the year. What is the year-end balance of total equity?

Answer 21

Question 22

A publicly traded corporation reported a $10,000 deduction in its current-year tax return for an item it expects to be disallowed. The tax rate is 40%. How should the corporation report this tax position in the financial statements?

Answer 22

As a $4,000 income tax expense and a $4,000 liability for an unrecognized tax benefit.

If it is not more than likely not chance (> 50%) that the position would be allowed then it needs to be accounted for as a non deductible item that is taxable and also a tax liability.

Question 23

Anchor Co. owns 40% of Main Co.’s common stock outstanding and 75% of Main’s noncumulative preferred stock outstanding. Anchor exercises significant influence over Main’s operations. During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its noncumulative preferred stock. What amount of dividend income should Anchor report on its income statement for the current period related to its investment in Main?

Answer 23

Note: This question is trying to test your understanding of how you should treat ownership of stock.

The reasson why we ignore CS oustanding for Income statement is because there is significant influence. *Refer to chart below.

The Non Cumulative PS, is a non voting stock, therefore the 75% is not considered significant. So you take the 75% x $100,000 = $75,000

Question 24

At the end of Year 1, Cody Co. reported a profit on a partially completed construction contract by recognizing construction revenue as the performance obligation was satisfied. By the end of Year 2, the total estimated profit on the contract in Year 3 had been drastically reduced from the amount estimated at the end of Year 1. In Year 2, a loss equal to one-half of the Year 1 profit was recognized. Cody is allowed to use the completed contract method for income tax purposes and reports the recognized profit at the end of the contract. The Year 2 balance sheet should include a

Answer 24

Question 25

Based on the Fair Value Framework, what are some examples that would apply?

Answer 25

* Land in business combinations * Bond liabilities (fair value option) * Production facility impairment * Asset/liability fair value measurements **Not apply:** * Share-based payments * Legal services for stock * Inventory valuation * Other items with specific guidance

Question 26

Dunn and Grey are partners with capital account balances of $60,000 and $90,000, respectively. They agree to admit Zorn as a partner with a one-third interest in capital and profits, for an investment of $100,000, after revaluing the assets of Dunn and Grey. Goodwill to the original partners should be

Answer 26

Question 27

Giaconda Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. What example is this?

Answer 27

The Income Approach A common application of this approach is to determine the present value of expected future cash flows that a market participant expects to receive from holding an asset (ie, discounted cash flows analysis).

Question 28

How do you calculate for Book Value per Common Share?

Answer 28

Question 29

How do you calculate for Deferred Income Tax Expense?

Answer 29

Take the Temporary Differences x Future (Enacted) Income Tax Rate

Question 30

How do you find Current Income Tax Expense/Benefit?

Answer 30

Taxable Income x Current Income Tax Rate

Question 31

How do you find current tax liability/expense? (aka, Steps to get from Book Income to Taxable Income)

Answer 31

Question 32

On January 2, Year 1, Ross Co. purchased a machine for $70,000. This machine has a 5-year useful life and a salvage value of $10,000, and it is depreciated using the straight-line method for financial statement purposes. For tax purposes, depreciation expense was $25,000 for Year 1 and $20,000 for Year 2. Ross' Year 2 income, before income taxes and depreciation expense, was $100,000 and its effective tax rate was 30%. If Ross had made no estimated tax payments during Year 2, what amount of current income tax liability would Ross report in its December 31, Year 2, balance sheet?

Answer 32

Question 33

How do you find TOTAL income Tax expense/benefit?

Answer 33

Current Income Tax Exp/Benefit + Deferred Inc. Tax Exp/Benefit

Question 34

Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year. Murphy reacquired 30,000 of those shares at a cost of $15 per share and recorded the transaction using the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share and recognized a $50,000 gain on its income statement on May 20. Which of the following statements is correct?

Answer 34

Murphy's net income for the current year is overstated. Why?

Question 35

On July 1, Year 1, Cove Corp., a closely held corporation, issued 6% bonds with a maturity value of $60,000, together with 1,000 shares of its $5 par value common stock, for a combined cash amount of $110,000. The market value of Cove's stock cannot be ascertained. If the bonds were issued separately, they would have sold for $40,000 on an 8% yield to maturity basis. What amount should Cove report for additional paid-in capital on the issuance of the stock?

Answer 35

We need to determine what is the APIC for CS, since the total proceeds received is for two types of securities we need to determine what portion is for CS.

Question 36

On March 1, Year 1, Rya Corp. issued 1,000 shares of its $20 par value common stock and 2,000 shares of its $20 par value convertible preferred stock for a total of $80,000. At this date, Rya's common stock was selling for $36 per share, and the convertible preferred stock was selling for $27 per share. What amount of the proceeds should be allocated to Rya's convertible preferred stock?

Answer 36

Understand, when two shares are sold together as one price, you allocate % based on the investment Fair Value.

Question 37

Beck Corp. issued 200,000 shares of common stock when it began operations in Year 1 and issued an additional 100,000 shares in Year 2. Beck also issued preferred stock convertible to 100,000 shares of common stock. In Year 3, Beck purchased 75,000 shares of its common stock and held it in Treasury. At December 31, Year 3, how many shares of Beck's common stock were outstanding? ## Footnote Equity

Answer 37

Question 38

In Dec 31 Y1 Company BoD Cancels 50000 Shares of $2.50 par value CS held in Treas. Before cancellation: Common stock is 540,000 ## Footnote Equity

Answer 38

Question 39

## Footnote Equity

Answer 39

Question 40

When a company issues preferred stock WITH detachable warrants, and you only know ONE fair value, what's the rule for recording the value? ## Footnote Equity

Answer 40

The **KNOWN** fair value gets recorded FIRST * If only warrant's fair value is known → Record warrants at fair value * Remaining proceeds go to preferred stock * Think: "Known First, Rest to Other"

Question 41

## Footnote Equity

Answer 41

Question 42

When a treasury stock is sold, what should be the adjustment to Income Statement?

Answer 42

**TRICK QUESTION!** * There is NO effect on Income Statement, only SE * All transactions involving treasury stock generally affect only stockholders' equity accounts, never income statement accounts. No gain or loss is recognized in the income statement from the purchase, reissue, or retirement of treasury stock.

Question 43

On July 1, Year 1, Cove Corp., a closely held corporation, issued 6% bonds with a maturity value of $60,000, together with 1,000 shares of its $5 par value common stock, for a combined cash amount of $110,000. The market value of Cove's stock cannot be ascertained. If the bonds were issued separately, they would have sold for $40,000 on an 8% yield to maturity basis. What amount should Cove report for additional paid-in capital on the issuance of the stock? ## Footnote Equity

Answer 43

Question 44

On March 1, Year 1, Rya Corp. issued 1,000 shares of its $20 par value common stock and 2,000 shares of its $20 par value convertible preferred stock for a total of $80,000. At this date, Rya's common stock was selling for $36 per share, and the convertible preferred stock was selling for $27 per share. What amount of the proceeds should be allocated to Rya's convertible preferred stock? ## Footnote Equity

Answer 44

Question 45

## Footnote Equity

Answer 45

Question 46

## Footnote Equity

Answer 46

Question 47

On March 21, Year 2, a company with a calendar year end issued its Year 1 financial statements. On February 28, Year 2, the company's only manufacturing plant was severely damaged by a storm and had to be shut down. Total property losses were $10 million and determined to be material. The amount of business disruption losses is unknown. How should the impact of the storm be reflected in the company's Year 1 financial statements?

Answer 47

Type 2 events are not related to any condition that existed as of the F/S date and are not recognized but may require note disclosure if material.

Question 48

Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?

Answer 48

Question 49

On March 15, Year 2, a calendar-year company issued its Year 1 financial statements. On March 1, Year 2, a fire destroyed the company's only manufacturing plant. Which of the following statements is correct regarding the treatment of the loss in the December 31, Year 1, financial statements? ## Footnote subsequent events

Answer 49

No accrual or balance sheet adjustment is recorded for a Type 2 event. However, the fire is still important information that should be disclosed on the company's F/S notes.

Question 50

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year end. The loan was refinanced through issuance of long-term bonds after year end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?

Answer 50

Current liabilities of $30,000 Long-term liabilities of $100,000 ## Footnote *If an entity can demonstrate the intent and ability to refinance a short-term obligation to a longer period, the obligation is reclassified from current to long-term.*

Question 51

Swift Corp. prepares its financial statements for its fiscal year ending December 31, year 1. Swift estimates that its product warranty liability is $28,000 at December 31, year 1. On February 12, year 2, before the financial statements were issued, Swift received information about a product defect that will require a recall of all units sold in year 1. It is expected the product recall will cost an additional $40,000 in warranty repairs. What should Swift present in its December 31, year 1 financial statements? ## Footnote Subsequent Event

Answer 51

* NO issue existed at year-end (Dec 31) * Fire happened AFTER year-end (Feb 1) * Completely NEW event * Therefore: UNRECOGNIZED subsequent event = FOOTNOTE only