Exam 3 Multiple Choice Flashcards
Hunt Corporation began operations in 2025. An analysis of Hunt’s debt securities portfolio acquired in 2025 shows the following totals at December 31, 2025 for trading and available for sale debt securities.
What amount should Hunt report in its 202t income statement for unrealized holding gain/loss?
260,000 - 240,000 = 20,000
$20,000
Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the…?
Earnings are reported by the invested in its financial statements.
An investor has a long-term investment in stocks. How are the regular cash dividends received by the investor recorded for both the Fair Value Method and the Equity Method?
Fair Value Method: A reduction of the investment
Equity Method: Income
Wild Corporation purchased a 5% interest in the stock of Granger Company as part of its avaliable-for-sale securities portfolio. Concerning this investment, what will Wild report on its balance sheet and income statement?
A current asset on its balance sheet, and dividend revenue and unrealized holding gains and losses on its income statement.
Church Company purchased $1,500,000 of 10% bonds of Gia Company on January 1, 2025, paying $1,410,375. The bonds mature on January 1, 2031; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Church uses the effective-interest method and plans to hold these bonds to maturity. On July 1, 2025, Church should increase its Debt Investments account for the Gia Company bonds by…?
1,500,000 x 10% x 1/2 = 75,000 (cash interest)
1,410,375 x 11% x 1/2 = 77,571 (interest revenue)
75,000 - 77,571 = -2,571
$2,571
During 2025 Fairfield Company purchased 10,000 shares (less than 20%) of Piper, Inc. for $30 per share. During the year Fairfield Company sold 2,500 shares of Piper for $35 per share. At December 31, 2025 the market price of Piper’s stock was $28 per share. What is the total amount of gain/(loss) that Fairfield will report in its income statement of for the year ended December 31, 2025 related to its investment in Piper Stock?
Gain on sale: 2,500 x (35 - 30) = 12,500
Unrealized loss: 7,500 x (30 - 28) = 15,000
12,500 - 15,000 = -2,500
($2,500)
Bryant Pharmaceuticals entered into a licensing agreement with Zenith Lab for a new drug under development. Bryant will receive $8,100,000 if the new drug receives FDA approval. Based on prior approval, Bryant determines that it is 85% likely that the drug will gain approval. The transaction price of this arrangement is…?
$8,100,000 (Most likely)
Taylor & Wine is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Botsch Corporation purchased computer equipment, installation, and training for a total cost of $210,000 on March 15, 2025. Estimated standalone fair values of the equipment, installation and training are $140,000, $70,000, and $30,000 respectively. The transaction price allocated to equipment, installation and training is…?
Equipment: (140,000 / 240,000) x 210,000 = 122,500
Installation: (70,000 / 240,000) x 210,000 = 61,250
Training: (30,000 / 240,000) x 210,000 = 26,250
Madison Construction enters into a contract with a customer to build a warehouse for $950,000 on March 30, 2025 with a performance bonus of $50,000 if the building is completed by July 31, 2025. The bonus is reduced by $10,000 each week that completion is delayed. Madison commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes in the image.
The transaction price for this transaction is…?
7/31: 65% x 1,000,000 = 650,000
8/7: 25% x 990,000 = 247,500
8/14: 5% x 980,000 = 49,000
8/21: 5% x 970,000 = 48,500
650,000 + 247,500 + 49,000 + 48,500 = 995,000
$995,000
On January 15, 2024, Morse Company enters into a contract to build custom equipment for XYZZ Company. The contract specified a delivery date of March 1. The equipment was not delivered until March 31. The contract required full payment of $75,000, 30 days after delivery. The revenue for this contract should be recorded on…?
March 31, 2024.
Machinery was acquired at the beginning of the year. Would depreciation recorded during the life of the machinery result in future taxable amounts? Would it result in future deductible amounts?
Future Taxable Amounts: Yes
Future Deductible Amounts: Yes
Assuming a 20% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet?
I. A revenue is deferred for financial reporting purposes but not for tax purposes.
II. A revenue is deferred for tax purposes but not for financial reporting purposes.
III. An expense is deferred for financial reporting purposes but not for tax purposes.
IV. An expense is deferred for tax purposes but not for financial reporting purposes.
Items II and III only.
Simpson Company deducts insurance expense of $210,000 for tax purposes in 2025, but the expense is not yet recognized for accounting purposes. In 2026, 2027, and 2028, no insurance expense will be deducted for tax purposes, but $70,000 of insurance expense will be reported for accounting purposes in each of these years. Simpson Company has a tax rate of 20% and income taxes payable of $180,000 at the end of 2025. There were no deferred taxes at the beginning of 2025. What is the deferred tax liability at the end of 2025?
Fin: 0
Tax: 210,000 x 20% = 42,000
Easton Company made the following journal entry in late 2025 for rent received on property it leases to Danford Corporation:
D - Cash: 150,000
C - Unearned Rent Revenue: 150,000
The payment represents rent for the years 2026 and 2027, the period covered by the lease. Easton is a cash basis taxpayer. Easton has income tax payable of $230,000 at the end of 2025, and its tax rate is 25%. What amount of income tax expense should Easton Company report at the end of 2025?
Income Tax Expense: 192,500
+
Deferred Tax Liability (Rent): 37,500
=
Income Tax Payable: 230,000
$230,000
Stuart Corporation’s taxable income differed from its accounting income computed for this past year. Which item would create a permanent difference in accounting and taxable incomes for Stuart?
- A balance in the Unearned Rent account at year-end.
- Using accelerated depreciation for tax purposes and straight-line depreciation for book purposes.
- A fine resulting from violations of OSHA regulations.
- Making installment sales during the year.
A fine resulting from violations of OSHA regulations.
