Question

1. When the purchase of a material sevenminus year depreciable asset is recorded by debiting an expense​ account, which one of the following statements is​ correct?

A. It is a selfminus correcting error and no adjustment is necessary.

B. Since it affects only the income​ statement, no adjustment is required.

C. The error will eventually selfminus ​correct, but the financial statements will be in error for seven years.

D. If the company uses a rapid depreciation​ method, the error will selfminus correct quickly so no adjustment is necessary.

2. On January​ 1, Year​ 1, Davenport Corporation granted an employee

40 comma 000

options to purchase

40 comma 000

shares of​ Davenport's $10 par common stock at​ $30 per share. The options became exercisable on December​ 31, Year​ 3, after the employee completed three years of service. The option was exercised on February​ 1, Year 4. The market prices of​ Davenport's stock were as​ follows: January​ 1, Year​ 1, $40; December​ 31, Year​ 3, $60; and February​ 1, Year​ 4, $55. An options pricing model estimated the value of the options at

$ 12

each on the grant date. For Year​ 1, Davenport should recognize compensation expense of​ ________. (Do not round intermediate calculations. Only round your final answer to the nearest​ dollar.)

A.

​$0

B.

$ 160 comma 000

C.

$ 480 comma 000

D.

$ 400 comma 000

3.

Which of the following measures of benefit obligations does the FASB require for pension​ computations?

A.

accumulated benefit obligation

B.

future benefit obligation

C.

vested benefit obligation

D.

projected benefit obligation

4.

When using the indirect method to prepare the operating section of a statement of cash​ flows, which of the following is added to net income to compute cash flows from operating​ activities?

A.

bond discount amortization

B.

gain on sale of

longminus

term

asset

C.

decrease in deferred tax liability

D.

All of the above.

5. Tomminus

Kat

​Inc.'s income before taxes is

$ 390 comma 000

and its tax rate is

40

​%.

Tomminus

Kat

included

$ 40 comma 000

of interest from municipal bonds in the

$ 390 comma 000

.

There are no other

bookminus

tax

differences. What is the journal entry to record income tax​ expense?

A.

Income Tax Expense

16 comma 000

Income Tax Payable		16 comma 000

B.

Income Tax Expense

172 comma 000

Income Tax Payable		172 comma 000

C.

Income Tax Expense

156 comma 000

Income Tax Payable		156 comma 000

D.

Income Tax Expense

140 comma 000

Income Tax Payable		140 comma 000

Answer 1

1.)

Rectification Entry should be like this

Depriciable Asset A/c Dr.

To Material

But we have to choose from the given option,

Option C.

The error will eventually selfminus ​correct, but the financial statements will be in error for seven years.

2.)

Davenport's should recognise compensation expense of $ 160 comma 000

3.)

The Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 87 states that companies must measure and disclose their pension obligations, together with the performance of their plans, at the end of each accounting period.  

A projected benefit obligation (PBO) is one of three ways to calculate expenses or liabilities of traditional defined benefit pensions — plans that take into account employee years of service and salary to calculate retirement benefits.

Hence, Option D is Correct.

4.)

Cash from operating activities is the aggregate amount of cash flow reported in the operating activities section of the statement of cash flows of a business. This statement is part of the organization’s financial statements. Operating activities refer to the primary revenue-generating activities of an entity, such as cash received from the sale of goods or services, royalties on the use of company-owned intellectual property, commissions for sales on behalf of other entities, and cash paid to suppliers. The amount of cash flows from operating activities can be approximately derived with the following formula:

EBIT + Depreciation = Cash from operating activities

Option D - All of the above.

5.)

The interest income earned from most municipal bonds is exempt from all federal income taxes regardless of your tax bracket. This is the most significant benefit of municipal bonds and it is a characteristic unique to municipal bonds.

As Interest earned from municipal bonds is included in the income of Tomminus Kat,

Taxable Income = $ 390,000 - $ 40,000

= $ 350,000

Tax Rate = 40%

= $ 140,000

Option D is correct.