Question: 1. K Corporation's partial income statement after its first year of operations is as follows:
Income before Income Taxes $3,750,000
Income Tax expense
Current $1,035,000
Deferred 67,500
__________ 1,102,500
Net Income $2,647,500
K uses the straight-line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The amount charged to depreciation expense on its books this year was $1,200,000. No other differences existed between book income and taxable income except for the amount of depreciation.
Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation's tax return for the current year?
$1,200,000
$1,425,000
$1,500,000
$1,800,000
2. A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be the net deferred tax consequences of temporary differences that will result in net taxable amounts during the next year.
totally eliminated from the financial statements if the amount is related to a noncurrent asset.
based on the classification of the related asset or liability for financial reporting purposes.
the total of all deferred tax consequences that are not expected to reverse in the operating period or one year, whichever is greater.
3. On January 1, 2010, Nen Co. has the following balances:
Projected benefit obligation $4,200,000
Fair value of plan assets $3,750,000
The settlement rate is 10%. Other data related to the pension plan for 2016 are:
Service cost $240,000
Amortization of unrecognized prior service costs $54,000
Contributions$270,000Benefits paid $225,000
Actual return on plan assets $264,000
Amortization of unrecognized net gain $18,000
The balance of the projected benefit obligation at December 31, 2016 is
$4,572,000 $4,590,000 $4,629,000 $4,635,000
4. Pirate, Inc. leased equipment from Shoreline Enterprises under a four-year lease requiring equal annual payments of $425,000, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pirate, Inc.'s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pirate, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pirate, Inc. in the first year of the asset's life?
PV Annuity Due PV Ordinary Annuity8%, 4 periods 3.5771 3.31213 10%, 4 periods 3.48685 3.16986 $121,621 $0 $112,612 $87,621
5. Lease A does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the leased property. How should the lessee classify these leases?
(Lease A) Capital lease (Lease B) Capital lease
(Lease A) Operating lease (Lease B) Operating lease
(Lease A) Operating lease (Lease B) Capital lease
(Lease A) Capital lease (Lease B) Operating lease