Midterm 2 Preview Questions

Income tax expense is based on:

A. pretax income

B. operating income

C. income from continuing operations

D. taxable income

A. pretax income

Deferred tax expense is the:

A. increase in a deferred tax liabiltiy

B. decrease in deferred tax asset

C. decrease in a deferred tax liabiltiy

D. none above

A. increase in a deferred tax liabiltiy

All of the following are examples of temporary differences that result in tax deductions (benefits) in future years, execpt:

A. depreciable property

B. estimated liabilities realted to discontinued operations

C. product warranty liabilities

D. litigation accruals

A. depreciable property

Deferred income taxes are based on the:

A. current tax rate in all cases

B. future tax rates if they have been enacted into law

C. current tax rate or future tax rates, depending on when the temporary differencce will reverse

D. future tax rates in all cases

B. future tax rates if they have been enacted into law

The FASB believes that the most consistent method for accounting for income taxes is the

A. carryback-carryforward method

B. benefit-oblifation method

C. asset-liability method

D. temporary-permanent method

C. asset-liability method

Future deductible amounts will cause:

A. taxable income to be more than pretax financial income in the future

B. the recording of a deferred tax liability

C. a decrease in pretax financial income in future years

D. the recording of a deferred tax asset

D. the recording of a deferred tax asset

Income tax expense is computed as income tax payable:

A. plus or minus the change in provision for income taxes

B. less an increase in a degerred tax liability

C. less a decrease in a deferred tax asset

D. plus or minus the change in deferred income taxes

D. plus or minus the change in deferred income taxes

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if

A. it is probable that a future tax rate change will occur

B. the future tax rates have been enacted into law

C. it appears likely that a future tax rate will be less than the current tax rate

D. it appears llikely that a future tax rate will be greater than the current tax rate

B. the future tax rates have been enacted into law

A deferred tax liability represents the:

A. increase in taxes payable in future years as a result of taxable temporary differences

B. increase in taxes saved in future years as a result of deductible temporary differences

C. decrease in taxes payable in future years as a result of taxavle temporary differences

D. decrease in taxes saved in future years as result of deductible temporary differences

A. increase in taxes payable in future years as a result of taxable temporary differences

Which of the following are temporary differences that are normally classified as expenses or losses and are deductible after they are recognized in financial income?

A. Advanced rental receipts

B. Depreciable property

C. Fines and expenses resulting from a violation of law

D. Product warranty liabilities

D. Product warranty liabilities

Trading securities are reported on the balance sheet at fair value

A. True

B. False

A. True

A requirement for a security to be classified as held-to-maturity is

A. ability to hold the security to maturity

B. positive intent

C. the security must be a debt security

D. all of these answer choices are correct

D. all of these answer choices are correct

When an available-for-sale debt security is sold, the gain (loss) on sale is the difference between the net proceeds from the sale and the security’s:

A. par value

B. face value

C. fair value

D. amortized cost

D. amortized cost

Under the equity method, dividends received by the investor are reported as dividend revenue on the income statement

A. True

B. False

B. False

Accounting and reporting for equity securities where the company has 20-50% ownership uses which of the following methods?

A. Consolidation

B. Amortized cost

C. Equity

D. Fair Value

C. Equity

Held-to-maturity securities are reported at their:

A. historical cost

B. fair value

C. net realizable value

D. amortized cost

D. amortized cost

Unrealized gains and losses on held-to-maturity securities are:

A. reported on the balance sheet

B. reported on the income statement

C. not recognized because these securities are reported at their amortized cost

D. none of these answer choices are correct

C. not recognized because these securities are reported at their amortized cost

Unrealized gains and losses on available-for-sale debt securities are

A. reported as part of other comprehensive income on the statement of comprehensive income.

B. not reported because these securities are reported at their amortized cost.

C. reported in other comprehensive income on the income statement.

D. reported at amortized cost on the balance sheet with the adjustment to fair value reported as part of other comprehensive income.

A. reported as part of other comprehensive income on the statement of comprehensive income.

An ownership interest of 15% in another company’s voting stock should be accounted for using the:

A. fair value method

B. equity method

C. consolidation method

D. cost method

A. fair value method

Under the equity method, if an investee company generates net income, the investor company:

A. does not recognize any share of the net income.

B. records its proportionate share as an increase in its investment account.

C. records its proportionate share of the net income as dividend income.

D. records its proportionate share as an unrealized gain.

B. records its proportionate share as an increase in its investment account.

When convertible preferred stock is exercised, a gain or loss is recognized on the conversion of preferred stock to common. The book value method is used to account for the transaction

A. True

B. False

B. False

The treasury-stock method would apply to which of the following securities?

A. Stock warrants

B. Treasury stock

C.Preferred stock

D. Convertible preferred stock

A. Stock warrants

For which of the following securities is an allocation of the sales proceeds necessary?

A. Bonds issued with detachable warrants

B. Bond issued with nondetachable warrants

C. Convertible bonds

D. Bonds issued with either detachable or nondetachable warrants

A. Bonds issued with detachable warrants

Companies issue convertible debt in order to obtain financing at a lower interest rate

A. True

B. False

A. True

Under the fair value method, compensation expense is recorded:

A. evenly over the service period

B. on the date of grant

C. evenly over the period from the grant date to the measurement date

D. on the date of exercise

A. evenly over the service period

With stock-appreciation rights, the holder receives an amount equal to the difference between:

A. the market value and fair value

B. the market value and a pre-established price

C. a pre-established price and the average price over a pre-determine appreciation period

D. none of the options are correct

B. the market value and a pre-established price

In accounting for stock-based compensation, which of the following methods reflects the current FASB position?

A. Fair value method

B. Intrinsic value method

C. Book value method

D. Par value method

A. Fair value method

Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is

A. that many corporations can obtain debt financing at lower rates

B. that convertible bonds will always sell at a premium

C. that equity capital has issue costs that convertible debt does not

D. the ease with which convertible debt is sold even if the company has poor credit rating

A. that many corporation can obtain debt financing at lower rates

Dona Company issues Bonds Payable with detachable stock warrants. The fair value of the warrants is known, but Dona cannot determine the fair value of the bonds without the warrants. If the proceeds of the issuance are more than the pair value of the bonds plus the far value of the warrants, the excess should be credited to

A. Paid-in-Capital - Stock Warrants

B. Premium on Bonds Payable

C. Retained Earnings

D. Paid-in-Capital - Common Stock

B. Premium on Bonds Payable

The proceeds from the sale of debt with detachable stock warrants should be allocated between the two securities based on the:

A. face value of the bonds and market value of the warrants

B. face value of the bonds

C. aggregate fair market value of the bonds and the warrants

D. fair market of the bonds

C. aggregate fair market value of the bonds and the warrants