Area III: Select Transactions

On January 1, Year 1, Corbin Co. enters a 5-year lease for equipment. Annual lease payments of $100,000 are due at the end of each year. The incremental borrowing rate is 6%. The present value factor for an ordinary annuity of $1, 5 periods at 6% = 4.2124. Corbin concludes this is a finance lease.<br/><br/>What is the initial lease liability that Corbin Co. should record on January 1, Year 1?

Summit Corp. has the following book-to-tax differences at December 31, Year 1 (enacted tax rate: 25%):<br/>- Equipment depreciation: Book $200,000, Tax (MACRS) $300,000<br/>- Warranty expense: Book accrual $80,000, Tax deduction $0 (cash basis)<br/>- Installment sale income: Book recognition $120,000, Tax recognition $0 (deferred)<br/><br/>What is Summit Corp.'s net deferred tax balance at December 31, Year 1?

On January 1, Year 1, Phoenix Corp. purchased a building for $800,000. The building has a useful life of 40 years with no salvage value. On January 1, Year 6, Phoenix determines that the building's total useful life should be 30 years instead of 40 years, with no change in salvage value.<br/><br/>What is the depreciation expense Phoenix should record for Year 6?

Riverside NFP received the following contributions during Year 1:<br/>- $100,000 cash contribution with no donor restrictions<br/>- $75,000 cash contribution restricted for program services in Year 2<br/>- $50,000 pledge receivable (unconditional promise) restricted for capital improvements, due in Year 3<br/>- Volunteer services valued at $25,000 for specialized accounting work that would otherwise be purchased<br/><br/>What total amount should Riverside NFP recognize as contribution revenue in Year 1?

Metro Corp. enters into a contract to sell equipment to a customer for $500,000. The contract includes a 2-year service agreement valued at $80,000 if sold separately. Metro delivers the equipment on January 1, Year 1, and will provide services over the next 2 years.<br/><br/>Under ASC 606, how much revenue should Metro recognize on January 1, Year 1?

Pinnacle Corp. discovered in Year 2 that it had failed to record depreciation expense of $45,000 in Year 1. The error was discovered before the Year 2 financial statements were issued. Pinnacle's tax rate is 25%.<br/><br/>How should Pinnacle correct this error in its Year 2 financial statements?

Westfield Corp. has a contingent liability related to a lawsuit. The company's legal counsel believes there is a 60% probability that Westfield will lose the case and pay damages of $800,000. There is a 30% probability of paying $400,000, and a 10% probability of paying nothing.<br/><br/>Under ASC 450, how should Westfield account for this contingency?

Meridian Corp. purchased equipment on January 1, Year 1, for $600,000. The equipment has a 10-year useful life and $60,000 salvage value. Meridian uses straight-line depreciation for books and MACRS for tax purposes. MACRS depreciation for Year 1 is $120,000. The tax rate is 30%.<br/><br/>What is the deferred tax impact of this equipment in Year 1?

Phoenix Corp. leases office space under a 4-year lease with annual payments of $80,000 due at the beginning of each year. Phoenix's incremental borrowing rate is 8%. The present value of an annuity due of $1 for 4 periods at 8% is 3.5771.<br/><br/>If Phoenix classifies this as an operating lease, what is the total lease cost Phoenix will recognize in Year 1?

Riverside Corp. enters into a contract to construct a building for $3,000,000. The contract is expected to take 3 years to complete. At the end of Year 1:<br/>- Costs incurred to date: $900,000<br/>- Estimated costs to complete: $1,800,000<br/>- Billings to customer: $800,000<br/>- Cash collected: $750,000<br/><br/>Using the percentage-of-completion method, how much revenue should Riverside recognize in Year 1?

Valley Corp. discovered the following subsequent events after year-end but before the financial statements were issued:<br/><br/>Event 1: A major customer filed for bankruptcy on February 15, Year 2. The customer owed Valley $150,000 at December 31, Year 1.<br/>Event 2: Valley issued $2,000,000 in bonds on January 30, Year 2, to finance expansion.<br/><br/>How should Valley account for these subsequent events in its Year 1 financial statements?

Granite Corp. leases equipment under a 6-year lease with the following terms:<br/>- Annual lease payments: $50,000 (paid at year-end)<br/>- Granite's incremental borrowing rate: 7%<br/>- Lease term: 6 years<br/>- Equipment's estimated useful life: 10 years<br/>- Equipment's fair value: $350,000<br/>- Present value of lease payments: $238,130<br/><br/>How should Granite classify this lease under ASC 842?

Northstar Corp. enters into a 3-year service contract with a customer for $450,000, payable as follows:<br/>- Year 1: $200,000 (received)<br/>- Year 2: $150,000<br/>- Year 3: $100,000<br/><br/>The services are performed evenly over the 3-year period. Northstar's incremental borrowing rate is 8%. The present value factors are: Year 2 = 0.926, Year 3 = 0.794.<br/><br/>Under ASC 606, what is the transaction price for this contract?

Coastal Corp. enters into a contract to deliver 1,000 widgets over 12 months. The contract price is $50,000. At the end of Month 3, Coastal has delivered 300 widgets and incurred costs of $12,000. The estimated total costs to fulfill the contract are $40,000.<br/><br/>Using the output method, how much revenue should Coastal recognize through Month 3?

Community Helpers, a nongovernmental NFP, received a pledge of $50,000 in Year 1 to be paid in Year 3. The pledge is unconditional. The appropriate discount rate is 5%. How should this pledge be recognized in Year 1?

On January 1, Year 1, a company purchased a machine for $100,000. It is depreciated using the straight-line method over 10 years with no salvage value. On January 1, Year 3, the company changed the estimated useful life to a total of 8 years (from acquisition date) and established a salvage value of $4,000. What is the depreciation expense for Year 3?

In Year 2, a company discovered that it failed to accrue $10,000 of warranty expense in Year 1. The tax rate is 30%. How should this error be reported in the Year 2 financial statements?

A company changes its inventory method from LIFO to FIFO. How should this change be reported?

Legal counsel informs a company that a loss from a lawsuit is 'reasonably possible' and estimates the loss to be between $100,000 and $200,000. How should this be reported?

A company is being sued. It is 'probable' that the company will lose. The estimated loss is a range between $500,000 and $1,000,000, with no amount within the range being more likely than any other. What amount should be accrued?

On January 1, Year 1, Contractor Co. enters a contract to build a bridge for $10,000,000. The estimated cost is $8,000,000. <br/>Year 1 Actual Costs: $2,000,000. <br/>Year 1 Billings: $1,800,000. <br/>Year 1 Cash Collected: $1,500,000. <br/>Using the percentage-of-completion (input) method, what is the Current Asset (Contract Asset) or Current Liability (Contract Liability) reported at year-end?

Under ASC 606, which of the following is an indicator that revenue should be recognized at a point in time rather than over time?

A retailer sells a product for $100 and offers a $10 mail-in rebate. Based on history, 40% of customers mail in the rebate. What is the transaction price for this sale?

At the end of Year 1, a company has a Deferred Tax Asset (DTA) of $100,000. Management determines that it is 'more likely than not' that only $60,000 of the DTA will be realized. What journal entry is required?

A company reports Pretax Financial Income of $500,000. <br/>- Municipal bond interest income: $20,000<br/>- Depreciation (Tax > Book): $50,000<br/>- Warranty Expense (Book > Tax Paid): $10,000<br/><br/>The enacted tax rate is 25%. What is the Current Income Tax Payable?

Which of the following creates a Deferred Tax Liability?

Under ASC 820, which of the following inputs is considered Level 1 in the fair value hierarchy?

On January 1, Year 1, Lessee Co. enters a 5-year lease for equipment. <br/>- Annual payments: $20,000 (due Dec 31)<br/>- Rate: 5%<br/>- PV of payments: $86,590<br/>- Useful life of asset: 6 years<br/>- No purchase option or transfer of ownership.<br/>- The lease is classified as an Operating Lease.<br/><br/>What is the Lease Expense for Year 1?

A lessee enters a lease with the following terms:<br/>- Present Value of Lease Payments: $100,000<br/>- Lease Incentive Received: $5,000<br/>- Initial Direct Costs incurred by Lessee: $2,000<br/>- Prepaid Lease Payments made at commencement: $10,000<br/><br/>What is the initial Right-of-Use (ROU) Asset balance?

Which of the following criteria would cause a lessee to classify a lease as a Finance Lease?

A company has a December 31 year-end. On January 15, Year 2, before the financial statements were issued, a major customer declared bankruptcy due to a fire that destroyed their plant on January 10, Year 2. The customer owed $50,000 at December 31. How should this be reported in the Year 1 financial statements?

A company has a December 31 year-end. On February 1, Year 2, the company settled a lawsuit for $100,000. The lawsuit had been filed in November, Year 1, and the company had previously accrued $70,000 based on the best estimate at year-end. The financial statements are issued on March 1, Year 2. What amount should be reported as the liability in the December 31, Year 1 Balance Sheet?

In Year 2, a company changes its inventory method from LIFO to FIFO. This is considered a change in accounting principle. How should this change be reported?

In Year 2, a company discovered it failed to accrue $50,000 of warranty expense in Year 1. The tax rate is 30%. What is the adjustment to beginning Retained Earnings in the Year 2 Statement of Changes in Equity?

A company is being sued. Legal counsel believes it is 'probable' the company will lose and estimates the loss will be between $100,000 and $500,000, with no amount within the range more likely than any other. What amount should be accrued?

Under ASC 606, which of the following scenarios results in revenue recognition over time?

A company incurs the following costs to obtain a contract with a customer: <br/>- Sales commission (paid only if contract signed): $5,000<br/>- Legal fees for contract drafting: $2,000<br/>- Travel costs to client meeting: $1,000<br/><br/>What amount should be recognized as an asset (Contract Costs)?

A CPA volunteers to audit the financial statements of a local NFP. The CPA's normal billing rate for this service is $5,000. The NFP would have had to purchase this service if not donated. How should the NFP record this transaction?

At year-end, Company Y has the following temporary differences:<br/>- Tax depreciation exceeds book depreciation by $40,000.<br/>- Warranty expense (book) exceeds warranty deductions (tax) by $10,000.<br/>Tax rate is 25%. What is the net Deferred Tax Liability (DTL) or Asset (DTA)?

A company has a Deferred Tax Asset of $100,000. Management determines it is 'more likely than not' that $40,000 of the DTA will not be realized. What is the journal entry to record the valuation allowance?

Under ASC 820, which of the following inputs is considered Level 1 in the fair value hierarchy?

Lessee Co. enters a 5-year lease. Payments are $10,000 annually at the BEGINNING of each year. The incremental borrowing rate is 5%. The PV of an annuity due of $1 for 5 periods at 5% is 4.55. The PV of an ordinary annuity is 4.33. What is the initial Lease Liability?

A lessee has an operating lease with the following terms: <br/>- 5 year term<br/>- Payments: Year 1: Free; Years 2-5: $15,000 per year.<br/>- Total payments: $60,000.<br/>What is the lease expense for Year 1?

Under ASC 842, a lessee may elect not to recognize a Right-of-Use (ROU) asset and Lease Liability for which type of lease?

A company has a December 31 year-end. On January 15, Year 2, before the financial statements were issued, a major customer declared bankruptcy due to a fire that occurred on January 10, Year 2. The customer owed $50,000 at Dec 31. How should this be treated in the Year 1 financial statements?

A company is the plaintiff in a lawsuit. Legal counsel states it is probable the company will win $1,000,000. How should this be reported?

At the beginning of Year 1, Delta Co. discovered it had erroneously expensed a $100,000 equipment purchase in Year 0. The equipment should have been depreciated over 5 years (straight-line, no salvage). The tax rate is 30%. <br/><br/>What is the adjustment to the beginning Retained Earnings of Year 1 (net of tax)?

On July 1, Year 1, Alpha Co. pays $12,000 for a 2-year insurance policy. Alpha uses the cash basis for tax purposes and accrual basis for financial reporting. Tax rate is 25%. <br/><br/>What is the Deferred Tax Asset or Liability reported on the December 31, Year 1 Balance Sheet regarding this transaction?

On January 1, Year 1, Lessee Corp enters into a 5-year lease for equipment. Payments are $20,000 annually at the END of each year. The rate is 5%. PV of annuity factor is 4.329. The equipment has a 6-year life. The lease grants an option to purchase the equipment for $1,000 (expected to be exercised). <br/><br/>What is the amortization expense for the Right-of-Use (ROU) Asset for Year 1?

Under ASC 606, which of the following scenarios represents revenue recognized 'over time'?

A company has a deferred tax asset of $40,000 at year-end. Management determines that it is more likely than not that only $30,000 of the asset will be realized. <br/><br/>What is the journal entry to record the valuation allowance?

Which of the following events occurring after the reporting date but before the financial statements are issued requires ADJUSTMENT to the financial statements?

A company uses the percentage-of-completion method (cost-to-cost) for a long-term construction contract. <br/>Contract Price: $1,000,000.<br/>Year 1 Data:<br/>- Costs incurred: $200,000<br/>- Estimated costs to complete: $600,000<br/>- Billings: $150,000<br/>- Collections: $100,000<br/><br/>What is the Gross Profit recognized in Year 1?

Which of the following is considered a Level 1 input in the Fair Value Hierarchy (ASC 820)?

On January 1, Year 1, Retailer sells a product for $100. The product includes a warranty that covers defects for 1 year (Assurance Type). Retailer also sells an extended warranty for years 2-3 for $20 (Service Type). The customer buys both. <br/><br/>How much revenue is recognized on January 1, Year 1?

A company has a probable loss contingency estimated to be between $100,000 and $200,000. No amount within the range is more likely than any other. What amount should be accrued?

In a sale-leaseback transaction, the seller-lessee transfers an asset to a buyer-lessor and leases it back. If the transfer does NOT meet the requirements for a sale under ASC 606 (e.g., repurchase option exists), how should the seller-lessee account for the transaction?

A company changes its inventory method from FIFO to Weighted Average. How should this change be reported?

On January 1, Year 1, Lessee signs a 3-year operating lease. Payments are: Year 1: $0 (Free rent); Year 2: $15,000; Year 3: $21,000. <br/><br/>What is the Lease Expense for Year 1?

A company has a $100,000 temporary difference that will result in taxable amounts in future years (DTL). The enacted tax rate for the current year is 30%. The enacted rate for future years is 25%. <br/><br/>What is the Deferred Tax Liability?

Which of the following is a characteristic of a 'Finance Lease' for a lessee?