Deck 2: Asset and Liability Valuation and Income Measurement

Question 1

The net amount a firm would receive if it sold an asset or the net amount it would pay to settle a liability is referred to as

A) current replacement cost
B) net realizable value
C) current cost
D) acquisition cost

Answer 1

B

Question 2

Which of the following valuation methods reflects current values?

A) acquisition cost
B) present value of cash flows using historical interest rates
C) net realizable value
D) adjusted acquisition cost

Answer 2

C

Question 3

Which of the following assets appears on the balance sheet at fair value?

A) Equipment
B) Land
C) Investments in Marketable Securities
D) Intangible Assets

Answer 3

C

Question 4

Fish Farm Corporation purchases a new tract of land on which it is going to build new growing and holding tanks in order to expand its business, which of the following costs would not be part of the cost of the land?

A) costs to run a title search
B) costs of grading to level the land
C) costs of tearing down an existing structure
D) cost of the new holding tanks

Question 5

Which of the following is not one of methods used by GAAP for treating value changes

A) Recognize value changes on the balance sheet and income statement when they are realized in a market transaction
B) Recognize value changes in the income statement when the value changes occur over time, but recognize them on the balance sheet when they are realized in a market transaction
C) Recognize value changes on the balance sheet when the value changes occur over time, but recognize them in the income statement when they are realized in a market transaction
D) Recognize value changes on the balance sheet and income statement when they occur over time, even though they are not realized in a market transaction

Question 6

Which of the following transactions is consistent with recognizing value changes on the balance sheet and income statement when they are realized in a market transaction

A) Selling land at a cost greater than its original purchase price.
B) Recording an increase in the fair value of investments at year end.
C) Translating foreign operations accounted for in Yen back to U.S. dollars in order to prepare consolidated financial statements.
D) Writing down the value of an asset due to obsolescent.

Question 7

When income tax expense for a period is greater than income tax payable the difference will be reported how and on which financial statement?

A) Deferred tax asset and Statement of Cash Flows
B) Deferred tax asset and Balance Sheet
C) Deferred tax liability and Statement of Cash Flows
D) Deferred tax liability and Balance Sheet

Question 8

Current replacement cost represents

A) the amount a firm would have to pay currently to acquire an asset it now holds
B) the amount a firm would have to pay currently to acquire an asset it does not now hold
C) the amount a firm would have to pay in the future to acquire an asset it now holds
D) the amount a firm would have to pay to purchase a comparably depreciated version of the asset it now holds

Question 9

Permanent tax differences are revenues and expenses

A) that firms include in income tax returns, but do not appear in the income statement.
B) that are included in both the tax return and income statement, but in different accounting periods.
C) that firms include in the income statement, but do not appear in income tax returns.
D) that are not included in either the tax return or the income statement.

Question 10

Plaxo Corporation has a tax rate of 35% and uses the straight-line method of depreciation for its equipment, which has a useful life of four years. Tax legislation requires the company to depreciate its equipment using the following schedule: year 1- 50%, year 2 - 30%, year 3 - 15% and year 4 - 5%. In 2006 Plaxo purchases a piece of equipment with a four year life and an original cost of $100,000. What amount will Plaxo record as a deferred tax asset or liability in 2006?

A) Deferred tax asset of $25,000.
B) Deferred tax liability of $25,000.
C) Deferred tax asset of $8,750.
D) Deferred tax liability of $8,750.

Question 11

At origination which of the following temporary differences would create a deferred tax asset

A) Tax basis of an asset exceeds its financial reporting basis.
B) Tax basis of a liability exceeds its financial reporting basis.
C) Financial reporting basis of an asset is equal to its tax basis.
D) Financial reporting basis of an asset exceeds its tax basis.

Question 12

The amount initially paid to acquire an asset is called ______________________________.

Question 13

Firms use acquisition cost valuations and adjusted acquisition cost valuations for which of the following types of assets?

A) Assets that do not have fixed amounts of future cash flows.
B) Assets that have fixed amounts of future cash flows.
C) Assets with certain future economic benefits.
D) monetary

Question 14

The amount that a company would have to pay today to acquire an asset it now holds is called ________________________________________.

Question 15

Firms recognize the reduction in service potential of assets such as building and equipment using the process of ____________________.

Question 16

Disregarding cash flows with owners, over sufficiently long periods of time, net income equals?

A) revenues minus dividends and expenses
B) assets minus liabilities
C) stockholders' equity
D) cash inflows minus cash outflows

Question 17

The use of acquisition cost as a valuation method is justified on the basis that acquisition cost

A) timely
B) relevant
C) subjective
D) objective

Question 18

Why might income tax expense on the income statement differ from actual income taxes paid to the government?

A) There are timing differences to when income is recognized and there are items that may or may not be subject to taxation.
B) The IRS uses the accrual method of calculating income.
C) Financial statement preparers can use an estimated tax rate.
D) The IRS requires deferral of most expenses.

Question 19

Shareholders' equity consists of what three components:

A) Assets, liabilities, and contributed capital.
B) Contributed capital, accumulated other comprehensive income, and retained earnings.
C) Liabilities, contributed capital, and retained earnings.
D) Liabilities, contributed capital, and accumulated other comprehensive income.

Question 20

The traditional accounting model delays the recognition of value changes of assets and liabilities until what event occurs?

A) A change in value.
B) A market transaction.
C) A balance sheet date.
D) Cash is received or cash is paid.

Question 21

What valuation methods reflect current values? Discuss the advantage(s) and disadvantage(s) of valuing assets and liabilities using current values.

Question 22

Balance Sheet Equation
Refer to Balance Sheet Equation. ORP Corporation sells land with a book value of $12,000 for $9,000. This transaction results in ORP recording an increase in cash of $9,000, a decrease in non-cash assets of $12,000 and a decrease in ______________________________ of $3,000.

Question 23

Balance Sheet Equation
Refer to Balance Sheet Equation. JCP Company purchased marketable securities for $5,000 during the year, at the end of the year the company revalues the securities to $5,700. This revaluation would result in an increase to non-cash assets and ____________________________________________________________.

Question 24

What valuation methods reflect historical cost? Discuss the advantages and disadvantages of valuing assets and liabilities using historical valuations.

Question 25

Stockholders' equity can be expanded into the following three accounts: contributed capital, retained earnings and _________________________________________________________________.

Question 26

Items, such as interest revenue on municipal bond holdings, that do not affect taxable income or income taxes paid in any year are referred to as _____________________________________________.

Question 27

____________________ assets and liabilities represent amounts of cash a firm can expect to receive or pay in the future.

Question 28

The difference between income tax payable and income tax expense is reported on the balance sheet as either ___________________________________ or a ___________________________________.

Question 29

Revenues and expenses that firms include in both net income to shareholders and in taxable income, but in different periods are referred to as _____________________________________________.

Question 30

Net income equals revenues plus ____________________ minus expenses and ____________________.

Question 31

The application of GAAP requires firms to write down assets whose fair values decrease below their book values, but does not allow firms to revalue upward the values of assets whose fair values have increased. This asymmetric treatment rests on the ________________________________________.

Question 32

Acquisition costs includes all costs necessary to get an asset ready for its _________________________.

Question 33

________________________________________ is the net amount that a firm would receive if it sold an asset or the net amount it would have to pay to settle a liability.

Question 34

Discuss the three ways in which GAAP allows value changes to be treated in the financial statements. Provide an example of each value change treatment.

Question 35

When income tax expense differs from income taxes currently payable on taxable income companies recognize deferred tax assets and deferred tax liabilities. What type of event would create a deferred tax asset and deferred tax liability?

Question 36

A change in the _________________________ or _________________________ will not change a preset series of cash flows, however it will change the present value of those cash flows.

Question 37

Balance Sheet Equation
Refer to Balance Sheet Equation. If ORP Corporation sells $25,000 of its product on account, it will see an increase in non-cash assets and ___________________________________.

Question 38

Balance Sheet Equation
Refer to Balance Sheet Equation. The payment of dividends by a firm reduces cash and ______________________________.

Question 39

Balance Sheet Equation
Refer to Balance Sheet Equation. To recognize the cost of goods sold ORP Corporation will reduce retained earnings and reduce ______________________________.

Question 40

Discuss the two principal reasons income before taxes for financial reporting differs from taxable income.

Question 41

Deferred tax assets and liabilities are created due to temporary differences between the tax and financial reporting basis of certain assets and liabilities. Discuss which scenarios result in a deferred tax asset and which result in deferred tax liabilities.

Question 42

Plaxo Corporation has a tax rate of 35% and uses the straight-line method of depreciation for its equipment, which has a useful life of four years. Tax legislation requires the company to depreciate this type of equipment using the following schedule: year 1- 50%, year 2 - 30%, year 3 - 15% and year 4 - 5%. In 2006 Plaxo purchases a piece of equipment with a four year life and an original cost of $100,000. Discuss how this transaction will effect Plaxo's income taxes in 2006.

Question 43

Accord Inc. income tax return shows taxes currently payable for 2006 of $85,000. The company reported deferred tax assets of $35,000 at the end of 2005 and $24,000 at the end of 2006. Accord reported deferred tax liabilities of $48,000 at the end of 2006 and $54,000 at the end of 2006.
Determine the amount of income tax expense reported by Accord for 2006.

Question 44

The following problem requires present value information:
Biotech sold a patent on a new blood analyzer to Pharma. The sales agreement which was signed on January 1, 2006 requires Pharma to pay Biotech $1 million immediately. In addition, Pharma is required to pay $600,000 each December 31 for 20 years starting with December 31, 2006. Pharma and Biotech judge that a 10 percent is an appropriate interest rate for this arrangement.

Question 45

There are three valuation methods that reflect historical values: acquisition cost, adjusted acquisition cost, and present value of cash flows using historical interest rates. For each of three methods discuss what the valuation represents and provide an example of a balance sheet item that is valued using the method. In addition, for each of the three methods valuation methods explain its advantages and disadvantages.

Question 46

The analytical framework used to evaluate transactions is reproduced below:
Using this analytical framework indicate the effect of each of the following transactions for CX Corporation:

Question 47

The analytical framework used to evaluate transactions is reproduced below:
Using this analytical framework indicate the effect of each of the following transactions for TX Corporation:

Question 48

H. Solo Company purchased a new piece of equipment with a list price of $175,000 and subject to a 5 percent discount if paid within 45 days. H. Solo paid within the discount period. The company also paid $1,500 to obtain title to the equipment and $600 as the license fee for the first year of operation. It paid $2,500 to level the area in which the equipment would be located and $12,500 to relocate other equipment that would have interfered with the proper operation of the new equipment. H. Solo paid $400 for property and liability insurance for the first year of operation. What is the acquisition cost of this equipment that H. Solo should record in its accounting records? Indicate the treatment of any amount not included in acquisition cost.

Question 49

For some transactions GAAP requires that value changes are recognized on the balance sheet and the income statement when they occur, even if not realized. Discuss what types of transactions get this type of treatment and the logic behind this accounting.