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Intermediate Accounting Final Exam Part 1

Intermediate Accounting Final Exam Part 1
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Solution Guide / Answer Key:

J. David Spiceland, James Sepe, and Mark Nelson (2010)
Intermediate Accounting with British Airways Annual Report, 6th Edition McGraw-Hill
10 Multiple Choice Questions (Pick A, B, C or D & show calculations)

1) Barbara Muller Services (BMS) pays its employees monthly. The payroll information listed below is for January 2011, the first month of BMS’s fiscal year.

Salaries $80,000
Federal income taxes to be withheld 16,000
Federal unemployment tax rate 0.80%
State unemployment tax rate (after FUTA deduction) 5.40%
Social security tax rate 6.20%
Medicare tax rate 1.45%

The journal entry to record payroll for the January 2011 period will include a debit to payroll tax expense of:

2) During 2011, Deluxe Leather Goods sold 800,000 reversible belts under a new sales promotional program. Each belt carried one coupon which entitles the customer to a $5.00 cash rebate. Deluxe estimates that 70% of the coupons will be redeemed, even though only 350,000 coupons had been processed during 2011. At December 31, 2011, Deluxe should report a liability for unredeemed coupons of:

3) On February 1, 2011, Pearson Corporation became the lessee of equipment under a 5 year, non-cancelable lease. The estimate economic life of the equipment is 8 years. The fair value of the equipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least:

4) A non-cancelable lease contains a bargain purchase option. The fair value of the asset exceeds the lessor’s cost of the asset. Collectability of the lease payments is assured and there are no material cost uncertainties surrounding the lease. Therefore, the lease will be accounted for by the lessor as a:

5) For its first year of operations Tringali Corporation’s reconciliation of pretax accounting income to taxable income is as follows:

Pretax accounting income $300,000
Permanent difference (15,000)
Temporary difference-depreciation (20,000)
Taxable income $265,000

Tringali’s tax rate is 40%

What should Trigali report as its deferred income tax liability as of the end of its first year of operations?

6) The financial reporting carrying value of Boze Music’s only depreciable asset exceeded its tax basis by $150,000 at December 31,2011. This was a result of differences between straight line depreciation for financial reporting purposes and MACRS for tax purposes. The asset was acquired earlier in the year. Boze has no other temporary differences. The enacted tax rate is 30% for 2011 and 40% thereafter. Boze should report the deferred tax effect of this difference on its December 31, 2011 balance sheet as:

7) Colombo Enterprises has a defined benefit pension plan. At the end of the reporting year, the following data were available: Beginning PBO-$75,000; service cost-$14,000; interest cost-$6,000; benefits paid for the year-$9,000; ending PBO-$89,000 and the expected return on plan assets-$10,000. There were no other pension related costs. The journal entry to record the annual pension costs will include a debit to pension expense for:

8) Under its executive stock option plan, W corporation granted options on January 1, 2011 that permit executives to purchase 15 million of the company’s $1 par common shares within the next 8 years but not before December 31, 2013 (vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options estimated by an appropriate option pricing model is $4 per option. No forfeitures are anticipated. The options are exercised on April 2, 2014 when the market price is $21 per share. By what amount will W’s shareholder’s equity be increased when the options are exercised?

9) Lucia Ltd. reported net income of $135,000 for the year ended December 31, 2011. January 1 balances in accounts receivables and accounts payables were $29,000 & $26,000 respectively. Year-end balances in these accounts were $30,000 and $24,000 respectively. Assuming that all relevant information has been presented, Lucia’s cash flows form operating activities would be:

10) At December 31, 2011, Amy Jo’s Appliances had unadjusted account balances in accounts receivable of $311,000 and $970 (credit balance) in the allowance for uncollectible accounts, following 2011 write offs of $6,450 in bad debts. An analysis of Amy Jo’s December 31, 2011 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for 2011 should be:



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