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intermediate accounting volume 2
Questions and Answers of
Intermediate Accounting Volume 2
A car dealer advertises a new car lease with the following terms:- \(\$ 3,500\) cash paid by the customer at the beginning of the lease;- Monthly payments of \(\$ 229\) for 48 months; and- The
Under what circumstances would a deferred rent liability appear on the balance sheet of a company that is a lessee in an operating lease?
Define the following terms, as used in lease accounting standards:- Bargain purchase option (BPO).- Lease term.- Minimum net lease payments.- Contingent lease payments.- Bargain renewal term.-
Assume that a lessee signs a lease for a three-year term for \(\$ 1,000\) per year that has a renewal option at the lessee's option for a further three years for \(\$ 1,000\) per year. How long is
How would your answer to Question 17-7 change if the renewal was at the lessor's option? If rental during the second term was \(\$ 1\) per year instead of \(\$ 1,000\) ?Data From Question 17-7:Assume
A lessee signs a lease for a two-year term that requires a yearly payment of \(\$ 14,000\), which includes \(\$ 2,500\) for insurance and maintenance cost. At the end of the twoyear term, there is a
Assume an asset has a fair market value of \(\$ 48,500\) and is leased for \(\$ 10,000\) per year for six years. Payments are made at the end of each year. Insurance costs included in this amount are
Assume a non-profit organization wishes to acquire a particular asset. Why might it be cheaper to lease rather than buy the asset?
Assume a lease involves payments of \(\$ 20,000\) per year, net of insurance costs, and is properly capitalized on the lessee's books at a \(10 \%\) interest rate for \(\$ 135,180\). How much
A lessee enters into a five-year finance lease with a five-year bargain renewal option, and then the asset is returned to the lessor. How long would the depreciation period be for the asset? Assume
How is the current portion of the lease liability determined if the lease payments are due and payable at the end of the fiscal year? How would your answer change if the payments were due at the
What is a sale and leaseback? How are such transactions accounted for?
Suppose that a company owns a building. The company enters into a sale and leaseback arrangement to sell the building and then lease it back. The company makes a substantial profit on the sale. How
Suppose that a lessor is a private Canadian corporation. How does its status as a private corporation affect classification of a lease, as compared to a public corporation?
What interest rate does the lessor use for discounting calculations associated with a lease?
Describe the nature of a sales-type lease. What kinds of entities offer such leases?
In a sales-type lease, how does separation of the sale component from the lease component affect revenue recognition in the current and future years?
What is the benefit that arises as a result of a tax loss?
Over what period can a tax loss be used as an offset against taxable income?
Why do companies usually use tax losses as carrybacks before using them as carryforwards?
When do recognition and realization coincide for tax losses?
Why is it desirable to recognize the benefit of a tax loss carryforward in the period of the accounting loss? Under what circumstances would such a benefit be realized?
What criteria must be met to recognize the benefit of a tax loss carryforward in the period of the accounting loss?
ABC Company has a taxable loss of \(\$ 100,000\). The tax rate is \(40 \%\). What is the potential benefit of the tax loss?
A company reports an accounting loss of \(\$ 75,000\). Depreciation for the year was \(\$ 216,000\), and CCA was \(\$ 321,000\). The company wishes to maximize its tax loss. How much is the tax loss?
Refer again to the data in Question 16-8. Assume instead that the company wishes to minimize its taxable loss/maximize taxable income. How much is the taxable income (loss)? Explain.
Explain why a company might choose not to claim CCA when it reports (a) accounting income and (b) an accounting loss.
Define the term "more likely than not."
What strategies can be used to increase the likelihood that a tax loss carryforward will be used?
Provide three examples of favourable evidence in assessing the likelihood that a tax loss carryforward will be used in the carryforward period.
A company has a tax loss of \(\$ 497,000\) in \(20 X 4\), when the tax rate was \(40 \%\). The tax loss is expected to be used in 20X6. At present, there is an enacted tax rate of \(42 \%\) for 20X5.
A company recorded the benefit of a tax loss carryforward in the year of the loss. Two years later, the balance of probability shifts, and it appears that the loss will likely not be used in the
A company did not recognize the benefit of a tax loss carryforward in the year of the loss. Two years later, the balance of probability shifts, and it appears that the loss will likely be used in the
How will income change if a tax loss carryforward, previously recognized, is now considered to be unlikely?
A company has recorded a \(\$ 40,000\) benefit in relation to a \(\$ 100,000\) tax loss carryforward. The tax rate changes to \(35 \%\). What entry is appropriate?
Give three objections to the practice of recording a tax loss carryforward prior to realization.
What disclosure is required in relation to tax loss carryforwards?
Graham Corporation provided the following data related to accounting and taxable income:There are no existing temporary differences other than those reflected in this data. There are no permanent
Maynes Limited reported the following information (in thousands) for 20X6 and 20X7:Mayne's income tax rate is \(35 \%\). The 20X6 unusual gain is not taxable until 20X7. The 20X7 gain on discontinued
Rundle Corporation acquired new equipment for \(\$ 400,000\) in \(20 \mathrm{X} 4\). For accounting purposes, the equipment will be depreciated over four years, straight-line, with a full-year's
Agnew Corporation started operations in \(20 X 1\). The company acquired equipment in the first year for a price of \(\$ 90,000\). The equipment will be depreciated for accounting purposes over three
The records of Retter Corporation, at the end of 20X4, provided the following data related to income taxes:a. Golf club dues expense in \(20 \mathrm{X} 4, \$ 16,000\), properly recorded for
Scarlett Corporation reported accounting income before taxes as follows: \(20 \mathrm{X} 4, \$ 150,000 ; 20 \mathrm{X} 5, \$ 92,000\). Taxable income for each year would have been the same as pre-tax
The pre-tax income statements for VCR Corporation for two years (summarized) were as follows:For tax purposes, the following income tax differences existed:a. Revenues on the 20X6 statement of profit
Hogarth Incorporated recorded instalment sales revenue of \(\$ 60,000\) in \(20 \mathrm{X} 1\) and \(\$ 200,000\) in \(20 \mathrm{X} 2\). The revenue is not taxable until collected. Of the year \(20
Thomas Incorporated started operations on 1 January 20X5 and purchased \(\$ 400,000\) of capital assets. Information on the first two years of operations is as follows:Required:Prepare all income tax
Solway Company has a deferred income tax liability in the amount of \(\$ 200,000\) at 31 December \(20 X 4\), relating to a \(\$ 500,000\) receivable. This sale was recorded for accounting purposes
Change in Tax Rates: On 1 January 20X3, Highmark Corporation reported the following amounts on the statement of financial position:On this date, the net book value of capital assets was \(\$
Change in Tax Rates: On December 31, 20X6, Silk Corporation reported the following amounts on the statement of financial position:On this date, the net book value of capital assets was \(\$
The statements of profit and loss for Gardner Corporation for two years (summarized) were as follows:The income tax rate is \(38 \%\) in \(20 \mathrm{X} 4\) and \(40 \%\) in \(20 \mathrm{X} 5\). The
The records of Morgan Corporation provided the following data at the end of years 1 through 4 relating to income tax allocation:The above amounts include only one temporary difference; no other
At the end of 20X4, Varna Ltd. had accumulated temporary differences of \(\$ 500,000\) arising from CCA/depreciation on capital assets. The balance of the deferred income tax liability account was
Timmis Limited, in the first year of its operations, reported the following information regarding its operations:a. Income before tax for the year was \(\$ 1,500,000\) and the tax rate was \(38
In its first year of operations, Lee Corporation reported the following information:a. Income before income taxes was \(\$ 2,000,000\).b. The company acquired capital assets costing \(\$ 1,800,000\);
A. Grossery Limited is a wholesale grocery distributor formed in 20X4, with warehouses in several locations in southern Ontario. The company uses the liability method of tax allocation. In fiscal
At the end of 20X8, Lambert Corporation reported the following items in the financial statements:In \(20 \mathrm{X} 8\), the company reported \(\$ 214,500\) of taxable income. It also reported a \(\$
Liquid Limited reported income before income tax of \(\$ 175,900\) in \(20 \mathrm{X} 9\). The tax rate for \(20 \mathrm{X} 9\) was \(38 \%\) and was enacted during the year. The enacted tax rate at
At the beginning of 20X1, Farcus Corporation had the following future tax accounts:Deferred tax asset \(\$ 19,600\)Warranty expense to date has been \(\$ 126,000\); claims paid have been \(\$
Components of Shareholders' Equity: The following accounts are taken from the general ledger of GRL Trading Limited on 31 December 20X1:\begin{array}{lr}\text { Preferred shares, no-par value, } \$ 2
Effect of Transactions: The following transactions will change the SFP in some way:a. Declare a cash dividend, to be paid in three weeks' time.b. Declare and issue a stock dividend, recorded at fair
Effect of Transactions: The following statement of changes in shareholders' equity summarizes various equity transactions that occurred during \(20 \mathrm{X} 2\) :Required:Journalize the
Share Issuance: Lake Simcoe Limited (LSL) has unlimited no-par common shares authorized. The following transactions took place in the first year:a. To record authorization (memorandum).b. Issued
Share Retirement-Entries and Account Balances: The accounting records of Farhad Corporation showed that the company acquired and retired shares as following during the year:\begin{array}{ll}5 \text {
Share Retirement-Analysis: During 20X5, Veech Corporation had several changes in shareholders' equity. The comparative equity accounts for \(20 \mathrm{X} 4\) and 20X5:In 20X5, the only transactions
The following is the share capital note to the financial statements of Capital Corporation for the year ended 31 December 20X4:Note 17 Share capital Authorized share capital consists of an unlimited
Retired Shares-Entries and Reporting: On 1 January 20X5, BC Ventures Corporation reported the following in shareholders' equity:\begin{array}{lr}\text { Preferred shares, 3,000 shares outstanding,
On 1 January 20X1, Winnipeg Corporation issued 10,000 no-par common shares at \(\$ 50\) per share. On 15 January 20X5, Winnipeg purchased 100 of its own common shares at \(\$ 55\) per share to be
Compute Dividends, Preferred Shares-Four Cases: Western Horizons Limited has the following shares outstanding:Common, no-par Preferred, no-par, \(\$ 0.75\)The matching dividend, if applicable, is
Mountain Construction Corporation is authorized to issue unlimited \(5(0.4)\) no-par preferred shares and unlimited no-par common shares. There are \(15,(060\) preferred and 45,000 common shares
Compute Dividends, Retire Shares: Australia Ltd. reported the following items in shareholders' equity at 31 December 20X3:Required:1. No dividends were declared in \(20 \mathrm{X} 1\) or \(20
NovaCor Limited had the following shareholders' equity on 31 December 20X8:Earnings for \(20 \mathrm{X} 8\) had been \(\$ 307,000\) and comprehensive income, which also included a \(\$ 12,000\)
UMG Corporation reported balances in shareholder's equity:Each of the following cases is independent:Case A The Board of Directors declared and distributed a \(14 \%\) stock dividend, to be recorded
Equity; Retirement and Stock Dividend: Davison Enterprises reported the following description of shareholders' equity on 31 December 20X6:There were no dividends in arrears. The following
Retained Earnings Calculation and Equity: Below are selected accounts from Serious Sound Corp. at 31 December 20X1. The accounts have not been closed for the year but transactions have been correctly
Statement of Changes in Equity: Below is a partially completed statement of changes in equity for Torino Capital Limited (in thousands of \(\$\) ).Required:Complete the statement of changes in equity
Statement of Changes in Equity: Green Energy Limited began 20X2 with shareholders' equity as follows:\begin{array}{lr}\text { Preferred shares; } \$ 1,240,000 \text { shares issued and outstanding }
Entries and Shareholders' Equity: On 31 December 20X1, Kingdom Corporation had the following shareholders' equity:Dividends are two years in arrears on the Series B preferred shares.The following
Historically, what factors have dictated classification of a financial instrument as debt or equity? How is the classification made when based on the financial instruments rules?
What is the distinguishing feature of debt?
Assume a company issues a financial instrument for \(\$ 50,000\) in \(20 \mathrm{X} 2\) and retires it through an open market purchase for \(\$ 56,000\) in \(20 X 5\). In each of the intervening
Explain appropriate financial statement classification of retractable preferred shares, which have a required maturity date or are to be repaid at the option of the investor.
How is convertible debt classified if it is mandatorily convertible into a fixed number of shares? If it is convertible at the investor's option into a fixed number of shares?
Explain how to classify convertible debt if the conversion option specifies that the number of shares to be issued depends on the fair value of shares at the conversion date.
What happens to the common share conversion rights account, created when convertible debt is issued, when the bond is actually converted? What if the bond is repaid in cash instead?
If a \(\$ 400,000,8 \%\) mandatorily convertible bond is issued at par and \(\$ 76,400\) of the issuance price is attributable to the interest obligation, how much interest expense will be recorded
What is the distinction between stock options and stock warrants?
How is a share-based payment to a supplier measured in the financial statements?
If share rights are recognized on issuance, what happens to the share rights account if the share rights are exercised? Allowed to lapse? Compare this to the treatment of the common share conversion
When would a share-based compensation contract, payable after three years, result in an equity account being recognized in the first year? A liability? Both equity and a liability?
Assume that a cash-settled share-based payment scheme is established for an employee group. It will vest over five years, and be paid at the end of the fifth year. The total fair value of the plan is
Repeat question 14 assuming that retention rates are estimated to be \(80 \%\) at the end of year \(1,75 \%\) at the end of year 2 , and \(60 \%\) at the end of year 3 . How much compensation expense
Share-based payments to employees are trued up by the end of the vesting period. If the plan is cash-settled, for what factors is it trued up? If it is equity-settled?
Explain the terms of a SARs program for employees.
Define a derivative, and a hedge.
Assume that a Canadian company sells a product to a U.S. customer, and that the sale is denominated in U.S. dollars. What kind of a derivative instrument will eliminate the exchange risk? How will
What areas of disclosure are required for financial instruments?
Omni Services Ltd., a Canadian public company, is a conglomerate involved in publication of newspapers, media services, and information technology consulting. It recently entered into an agreement to
On-the-Crest Ltd. (OCL) is a company operating in the used-vehicle industry. OCL derives its revenue from selling, licensing, and servicing software products for car dealers, from the sale of
Creative Traders Ltd. (CTL) is a Canadian company that conducts business in several countries, using a variety of currencies. The notes to the financial statements pertaining to fair values of
Classification: Elkridge Corporation issued the following financial instruments in \(20 X 4\) :1. Convertible debentures issued at 103 . The debentures require interest to be paid semiannually at a
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