Question

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1.    If plant assets of a manufacturing company are sold at a gain of $1,800,000 with related taxes of $540,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as

a.   a gain of $1,800,000 and an increase in income tax expense of $540,000.

b.   operating income net of applicable taxes, $1,260,000.

c.   a prior period adjustment net of applicable taxes, $1,260,000.

d.   a discontinued operations gain net of applicable taxes, $1,260,000.

2.    At Ruth Company, events and transactions during 2017 included the following. The tax rate for all items is 30%.

(1)   Depreciation for 2015 was found to be understated by $150,000.

(2)   A strike by the employees of a supplier resulted in a loss of $125,000.

(3)   The inventory at December 31, 2015 was overstated by $200,000.

            The effect of these events and transactions on 2017 income from continuing operations net of tax would be

a.   ($87,500).

b.   ($192,500).

c.   ($332,500).

d.   ($245,000).

3.    In 2017, Esther Corporation reported net income of $600,000. It declared and paid preferred stock dividends of $150,000 and common stock dividends of $60,000. During 2017, Esther had a weighted average of 300,000 common shares outstanding. Compute Esther's 2017 earnings per share.

a.   $1.30

b.   $1.50

c.   $2.00

d.   $2.50

4. On January 4, 2017, Kiley Co. leased a building to Dodd Corp. for a ten-year term at an annual rental of $200,000. At inception of the lease, Kiley received $800,000 covering the first two years' rent of $400,000 and a security deposit of $400,000. This deposit will not be returned to Dodd upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the $800,000 should be shown as a current and long-term liability in Kiley's December 31, 2017 balance sheet?

      Current Liability     Long-term Liability

a.         $0                             $800,000

b.         $200,000                  $400,000

c.         $400,000                  $400,000

d.         $400,000                  $200,000

5. On July 1, 2017, Ed Wynne signed an agreement to operate as a franchisee of Kwik Foods, Inc., for an initial franchise fee of $900,000. Of this amount, $300,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of $150,000 beginning July 1, 2018. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Wynne's credit rating indicates that he can borrow money at 14% for a loan of this type. Information on present and future value factors is as follows:

Present value of 1 at 14% for 4 periods                                                   0.59

Future value of 1 at 14% for 4 periods                                                     1.69

Present value of an ordinary annuity of 1 at 14% for 4 periods               2.91

What amount should Wynne record the acquisition cost of the franchise on July 1, 2017 (hint: think of what he should have in the bank today in order to make payments over the next 4 years).

a.   $654,000.

b.   $736,500.

c.   $900,000.

d.   $1,014,000.

Answer 1