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Financial reporting financial statement analysis and valuation 8th edition, Exercises of Business Accounting

University of Pittsburgh (Pitt) - BradfordBusiness Accounting

Solution Manual for financial reporting financial statement analysis and valuation 8th edition.

Typology: Exercises

2021/2022

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Chapter 2—Asset and Liability Valuation and Income Measurement
MULTIPLE CHOICE
1. Which of the following assets appears on the balance sheet at Historical cost?
a.
Equipment
b.
Notes Payable
c.
Investments in Marketable Securities
d.
Accounts Payable
ANS: A PTS: 1
2. Interest on Municipal Bonds represents what kind of tax difference?
a.
Permanent timing difference that results in that income item not being taxed.
b.
Temporary difference that will reversed in the future
c.
Tax rate on Municipal bonds are based on estimated tax rates.
d.
Not recognized in taxable income on the accrual basis of accounting.
ANS: A PTS: 1
3. Shareholders’ equity consists of what three components:
a.
Assets, liabilities, and contributed capital.
b.
Contributed capital, accumulated other comprehensive income, and retained earnings.
c.
Liabilities, contributed capital, and retained earnings.
d.
Liabilities, contributed capital, and accumulated other comprehensive income.
ANS: B PTS: 1
4. Which of the following valuation methods reflects current values?
a.
acquisition cost
b.
present value of cash flows using historical interest rates
c.
net realizable value
d.
adjusted acquisition cost
ANS: C PTS: 1
5. The use of acquisition cost as a valuation method is justified on the basis that acquisition cost is:
a.
timely
b.
relevant
c.
subjective
d.
objective
ANS: D PTS: 1
6. Firms use acquisition cost valuations and adjusted acquisition cost valuations for which of the following
types of assets?
a.
Assets that do not have fixed amounts of future cash flows.
b.
Assets that have fixed amounts of future cash flows.
c.
Assets with certain future economic benefits.
d.
monetary
ANS: A PTS: 1
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Download Financial reporting financial statement analysis and valuation 8th edition and more Exercises Business Accounting in PDF only on Docsity!

Chapter 2—Asset and Liability Valuation and Income Measurement

MULTIPLE CHOICE

  1. Which of the following assets appears on the balance sheet at Historical cost? a. Equipment b. Notes Payable c. Investments in Marketable Securities d. Accounts Payable ANS: A PTS: 1
  2. Interest on Municipal Bonds represents what kind of tax difference? a. Permanent timing difference that results in that income item not being taxed. b. Temporary difference that will reversed in the future c. Tax rate on Municipal bonds are based on estimated tax rates. d. Not recognized in taxable income on the accrual basis of accounting. ANS: A PTS: 1
  3. Shareholders’ equity consists of what three components: a. Assets, liabilities, and contributed capital. b. Contributed capital, accumulated other comprehensive income, and retained earnings. c. Liabilities, contributed capital, and retained earnings. d. Liabilities, contributed capital, and accumulated other comprehensive income. ANS: B PTS: 1
  4. Which of the following valuation methods reflects current values? a. acquisition cost b. present value of cash flows using historical interest rates c. net realizable value d. adjusted acquisition cost ANS: C PTS: 1
  5. The use of acquisition cost as a valuation method is justified on the basis that acquisition cost is: a. timely b. relevant c. subjective d. objective ANS: D PTS: 1
  6. Firms use acquisition cost valuations and adjusted acquisition cost valuations for which of the following types of assets? a. Assets that do not have fixed amounts of future cash flows. b. Assets that have fixed amounts of future cash flows. c. Assets with certain future economic benefits. d. monetary ANS: A PTS: 1
  1. The net amount a firm would receive if it sold an asset or the net amount it would pay to settle a liability is referred to as a. current replacement cost b. net realizable value c. current cost d. acquisition cost ANS: B PTS: 1
  2. Disregarding cash flows with owners, over sufficiently long periods of time, net income equals: a. revenues minus dividends and expenses b. assets minus liabilities c. stockholders’ equity d. cash inflows minus cash outflows ANS: D PTS: 1
  3. When income tax expense for a period is greater than income tax payable the difference will be reported how and on which financial statement? a. Deferred tax asset and Statement of Cash Flows b. Deferred tax asset and Balance Sheet c. Deferred tax liability and Statement of Cash Flows d. Deferred tax liability and Balance Sheet ANS: D PTS: 1
  4. Permanent tax differences are revenues and expenses a. that firms include in income tax returns, but do not appear in the income statement. b. that are included in both the tax return and income statement, but in different accounting periods. c. that firms include in the income statement, but do not appear in income tax returns. d. that are not included in either the tax return or the income statement. ANS: C PTS: 1
  5. The traditional accounting model delays the recognition of value changes of assets and liabilities until what event occurs? a. A change in value. b. A market transaction. c. A balance sheet date. d. Cash is received or cash is paid. ANS: B PTS: 1
  6. Fish Farm Corporation purchases a new tract of land on which it is going to build new growing and holding tanks in order to expand its business. Which of the following costs would not be part of the cost of the land? a. costs to run a title search b. costs of grading to level the land c. costs of tearing down an existing structure d. cost of the new holding tanks ANS: D PTS: 1
  7. Current replacement cost represents a. the amount a firm would have to pay currently to acquire an asset it now holds

and its reported amount in the [balance sheet] that will result in taxable or deductible amounts in some future year(s) when the reported amounts of assets are recovered and the reported amounts of liabilities are settled. d. is required by IAS 12. ANS: B PTS: 1

  1. Future tax deductions a. result in deferred tax assets. b. result in deferred tax liabilities. c. occur where the tax basis of liabilities is more than the financial reporting basis. d. occur where the tax basis of assets is less than financial reporting basis. ANS: A PTS: 1
  2. Future taxable income is characteristic of all of the following situations except : a. where deferred tax assets result. b. where deferred tax liabilities result. c. where the tax basis of liabilities exceed the financial reporting basis. d. where the tax basis of assets is less than financial reporting basis. ANS: A PTS: 1
  3. When recognizing deferred tax assets and liabilities, the income statement approach and the balance sheet approach yield identical results a. when enacted tax rates applicable to future periods do not change. b. when the firm recognizes no valuation allowance on deferred tax assets. c. Both (a) and (b) are correct. d. None of these answers is correct. ANS: C PTS: 1
  4. Firms may not include all income taxes for a period on the line for income tax expense in the income statement. Other places that income tax expenses may occur include all of the following except : a. Discontinued Operations b. Extraordinary Items c. Other Comprehensive Income d. Common Stock ANS: D PTS: 1
  5. U.S. GAAP, IFRS, and other major accounting standards are best characterized as a. historical accounting models. b. current value accounting models. c. acquisition cost accounting models. d. mixed attribute accounting models. ANS: D PTS: 1
  6. Which of the following would not represent an acquisition cost to be added to the purchase price of building: a. Sales Tax. b. Cost of grading the land. c. Capital repairs to get the building ready for occupancy. d. Renovations that would extend the life of the building.

ANS: B PTS: 1

  1. Valuation methods that reflect current values or a combination of historical and current values include all of the following except : a. fair value for assets and liabilities. b. current replacement cost for assets. c. net realizable value for assets. d. adjusted acquisition costs for assets. ANS: D PTS: 1
  2. Historical costs include all of the following except : a. acquisition costs for assets b. net realizable values for assets. c. adjusted acquisition costs for assets. d. initial present value for assets and liabilities ANS: B PTS: 1
  3. The existence of subjectivity in an asset valuation does not necessarily mean the valuation will not be reliable. All of the following are examples of this except : a. where historical cost is used for accounts receivable, fixed assets, and other assets with values that remain relatively stable. b. where market value is used for marketable equity securities, commodities, and financial assets are traded in liquid markets c. where historical cost is used for LIFO inventory layers where inventory has seen an inflationary increase in costs. d. where historical cost is used for internally generated intangible asset valuations. ANS: D PTS: 1
  4. What level are inputs for estimating fair values are based on inputs that are readily available via prices for identical assets or liabilities in actively traded markets such as securities exchanges? a. Level 1. b. Level 2. c. Level 3. d. None of these. ANS: A PTS: 1
  5. What level are inputs for estimating fair values are those inputs include quoted prices for similar assets or liabilities in active or inactive markets, other observable information such as yield curves and price indexes, and other observable data such as market-based correlation estimates? a. Level 1. b. Level 2. c. Level 3. d. None of these. ANS: B PTS: 1
  6. What level are inputs for estimating fair values based on a firm’s own assumptions about the fair value of an asset or a liability, such as using various data to estimate present values? a. Level 1. b. Level 2. c. Level 3.
  1. If a portfolio manager had to estimate the fair value of real estate, which of the following would he/she most likely identify as the level of inputs to determine this? a. Level 1. b. Level 2. c. Level 3. d. None of these. ANS: B PTS: 1
  2. If a portfolio manager had to estimate the fair value of privately placed bond issues, which of the following would he/she most likely identify as the level of inputs to determine this? a. Level 1. b. Level 2. c. Level 3. d. None of these. ANS: B PTS: 1
  3. All of the following can be used to describe reliability of accounting information except : a. biased. b. credible. c. verifiable. d. supported by source documents. ANS: A PTS: 1
  4. Relevant asset valuations refer to all of the following except : a. they are timely. b. they have the capacity to affect a user’s decisions, based on the information. c. they incorporate all available information. d. they are always subjective. ANS: D PTS: 1 COMPLETION
  5. The amount initially paid to acquire an asset is called ______________________________. ANS: acquisition cost PTS: 1
  6. Firms recognize the reduction in service potential of assets such as patents and trademarksusing the process of ____________________. ANS: amortization PTS: 1
  7. The amount that a company would have to pay today to acquire an asset it now holds is called ________________________________________. ANS: current replacement cost

PTS: 1

  1. The difference between income tax payable and income tax expense is reported on the balance sheet as either ___________________________________ or a ___________________________________. ANS: deferred tax asset, deferred tax liability deferred tax liability, deferred tax asset PTS: 1
  2. Items, such as interest revenue on municipal bond holdings, that do not affect taxable income or income taxes paid in any year are referred to as _____________________________________________. ANS: permanent differences PTS: 1
  3. Revenues and expenses that firms include in both net income to shareholders and in taxable income, but in different periods are referred to as _____________________________________________. ANS: temporary differences PTS: 1
  4. Stockholders’ equity can be expanded into the following three accounts: Accumulated other comprehensive income, retained earnings and _________________________________________________________________. ANS: contributed capital PTS: 1 Balance Sheet Equation Cash + Non-Cash Assets = Liabilities + Contributed Capital
  • Accumulated Other Comprehensive Income
  • Retained Earnings
  1. Refer to the Balance Sheet Equation. If ORP Corporation sells $25,000 of its product on account, it will see an increase in non-cash assets and ___________________________________. ANS: retained earnings PTS: 1
  2. Refer to the Balance Sheet Equation. To recognize the cost of goods sold ORP Corporation will reduce retained earnings and reduce ______________________________. ANS: non-cash assets non cash assets

discount rate, interest rate PTS: 1

  1. Net income equals revenues plus ____________________ minus expenses and ____________________. ANS: gains, losses PTS: 1
  2. The application of GAAP requires firms to write down assets whose fair values decrease below their book values, but does not allow firms to revalue upward the values of assets whose fair values have increased. This asymmetric treatment rests on the ________________________________________. ANS: conservatism convention. PTS: 1 SHORT ANSWER
  3. What valuation methods reflect historical cost? Discuss the advantages and disadvantages of valuing assets and liabilities using historical valuations. ANS: Valuation methods reflecting historical cost include:
  4. acquisition cost
  5. adjusted acquisition cost
  6. present value of cash flows using historical interest rates The main advantages of using historical valuations are simplicity, less subjectivity and reliability. The disadvantages include lack of relevance. PTS: 1
  7. What valuation methods reflect current values? Discuss the advantage(s) and disadvantage(s) of valuing assets and liabilities using current values. ANS: Valuation methods reflecting current values include:
  8. current replacement cost
  9. net realizable value
  10. present value of cash flows using current interest rates The main advantage of using current values is increased relevance for financial statement users. The disadvantages include greater subjectivity. PTS: 1
  11. Discuss the three ways in which GAAP allows value changes to be treated in the financial statements. Provide an example of each value change treatment. ANS:
  1. Value changes recognized on the balance sheet and the income statement when realized in a market transaction. Examples include selling inventory or land.
  2. Value changes recognized on the balance sheet when they occur, but recognized on the income statement when realized. Examples include marketable securities.
  3. Value changes recognized on the balance sheet and the income statement when they occur. Examples include impairment losses. PTS: 1
  4. When income tax expense differs from income taxes currently payable on taxable income companies recognize deferred tax assets and deferred tax liabilities. What type of event would create a deferred tax asset and deferred tax liability? ANS: Deferred tax assets arise when taxable income exceeds book income. An example would be warranty expense. Deferred tax liabilities arise when book income exceeds taxable income. An example would be recognized more depreciation expense for tax purposes than for book purposes. PTS: 1
  5. Discuss the two principal reasons income before taxes for financial reporting differs from taxable income. ANS:
  6. Permanent Differences--Revenues and expenses that firms include in net income to shareholders, but which never appear in the income tax return.
  7. Temporary Differences--Revenues and expenses that firms include in both net income to shareholders and in taxable income but in different periods. PTS: 1
  8. The analytical framework used to evaluate transactions is reproduced below: Cash + Non-Cash Assets = Liabilities + Contributed Capital
  • Accumulated Other Comprehensive Income
  • Retained Earnings Using this analytical framework indicate the effect of each of the following transactions for TX Corporation:
  1. TX Corporation sold additional shares of common stockmarketable securities for for $250,000 cash
  2. At the end of the period TX Corporation revalued the securities to $125,000.
  3. During the next period TX Corporation sells equipment with a book value of $100,000 for $$90, ANS: Cash + Non-Cash Assets = Liabilities + Contributed Capital
  • Accumulated Other Comprehensive Income
  • Retained Earnings
  1. +250,000 +250,
    • 25,000 - 25,
  1. For some transactions GAAP requires that value changes are recognized on the balance sheet and the income statement when they occur, even if not realized. Discuss what types of transactions get this type of treatment and the logic behind this accounting. ANS: The application of GAAP requires firms to write down assets whose fair values decrease below their book values. For example, GAAP requires that firms recognize a loss on equipment in which its fair value has decreased below its book value due to obsolescence or other permanent valuation effect. GAAP does not allow firms to revalue upward the values of assets whose fair values have increased. Firms must await the validation of the value increase through a market transaction to justify this type of gain. PTS: 1
  2. Deferred tax assets and liabilities are created due to temporary differences between the tax and financial reporting basis of certain assets and liabilities. Discuss which scenarios result in a deferred tax asset and which result in deferred tax liabilities. ANS: Deferred tax assets result from the following two scenarios:
  3. The tax basis of assets exceeds the financial reporting basis
  4. The tax basis of liabilities is less than the financial reporting basis Deferred tax liabilities result from the following two scenarios:
  5. The tax basis of assets is less than the financial reporting basis
  6. The tax basis of liabilities exceeds the financial reporting basis PTS: 1
  7. H. Solo Company purchased a new piece of equipment with a list price of $175,000 and subject to a 5 percent discount if paid within 45 days. H. Solo paid within the discount period. The company also paid $1,500 to obtain title to the equipment and $600 as the license fee for the first year of operation. It paid $2,500 to level the area in which the equipment would be located and $12,500 to relocate other equipment that would have interfered with the proper operation of the new equipment. H. Solo paid $ for property and liability insurance for the first year of operation. What is the acquisition cost of this equipment that H. Solo should record in its accounting records? Indicate the treatment of any amount not included in acquisition cost. ANS: H. Solo should record the equipment at the following cost: Purchase price = $175,000 less 5% discount = $166, title = $1, leveling = $2, relocation = $12, TOTAL COST = $182, The $600 license for the first year of operations is a period expense, $400 should be treated as insurance expense for the period. PTS: 1
  1. Accord Inc. income tax return shows taxes currently payable for 2011 of $85,000. The company reported deferred tax assets of $35,000 at the end of 2010 and $24,000 at the end of 2011. Accord reported deferred tax liabilities of $48,000 at the end of 2011 and $54,000 at the end of 2011. Determine the amount of income tax expense reported by Accord for 2011. ANS: Accord’s income tax expense for 2011 can be determined by this journal entry: Income tax expense $102, Deferred Tax Asset $11, Deferred Tax Liability $6, Income taxes payable $85, PTS: 1 PROBLEM
  2. There are three valuation methods that reflect historical values: acquisition cost, adjusted acquisition cost, and present value of cash flows using historical interest rates. For each of three methods discuss what the valuation represents and provide an example of a balance sheet item that is valued using the method. In addition, for each of the three methods valuation methods explain its advantages and disadvantages. ANS:
  3. Acquisition cost is the amount paid initially to acquire the asset, examples include prepayments, land, and intangibles with indefinite lives. The advantage is simplicity and reliability, the disadvantage is lack of relevance.
  4. Adjusted acquisition cost is the amount paid initially to acquire an asset less accumulated depreciation and amortization, examples include equipment and intangible assets with limited lives. The advantage is simplicity and reliability, the disadvantage is lack of relevance and subjectivity due to not being able to observe the actual consumption of the asset.
  5. Present value of cash flows using historical interest rates is an item in which cash receipts or cash payments will occur over time, these future cash flows are then discounted at the interest rate in effect at the time of the initial transaction. Balance sheet examples include notes receivable and notes payable. The advantage is simplicity and reliability, the disadvantage is subjectivity due to not updating the interest rate as time elapses. PTS: 1
  6. The analytical framework used to evaluate transactions is reproduced below: Cash + Non-Cash Assets = Liabilities + Contributed Capital
  • Accumulated Other Comprehensive Income
  • Retained Earnings Using this analytical framework indicate the effect of each of the following transactions for Wisco Corporation:
  1. Wisco sold merchandise for $225,000 on account which cost $170,000 to manufacture.
  2. Wisco purchased for cash $110,000 of raw material inventory.
  3. The company paid $25,000 in advance for an advertising campaign that would be aired next year.

Cash + Non-Cash Assets = Liabilities + Contributed Capital

  • Accumulated Other Comprehensive Income
  • Retained Earnings
  • 25,000 + 25,
  1. The company used $10,000 of excess cash to purchase marketable securities. Cash + Non-Cash Assets = Liabilities + Contributed Capital + Accumulated Other Comprehensive Income + Retained Earnings
  • 10,000 + 10,
  1. Wisco purchased a machine for $22,000 in cash. Cash + Non-Cash Assets = Liabilities + Contributed Capital + Accumulated Other Comprehensive Income + Retained Earnings
  • 22,000 + 22,
  1. At the end of the year Wisco paid dividends of $5,000. Cash + Non-Cash Assets = Liabilities + Contributed Capital
  • Accumulated Other Comprehensive Income
  • Retained Earnings
  • 5,000 - 5,
  1. At the end of the year the marketable securities that Wisco purchased in transaction 7 were now worth $11,500. Cash + Non-Cash Assets = Liabilities + Contributed Capital + Accumulated Other Comprehensive Income + Retained Earnings
  • 1,500 + 1,
  1. Depreciation for the period was $1,500. Cash + Non-Cash Assets = Liabilities + Contributed Capital + Accumulated Other Comprehensive Income + Retained Earnings
  • 1,500 - 1, PTS: 1
  1. The analytical framework used to evaluate transactions is reproduced below: Cash + Non-Cash Assets = Liabilities + Contributed Capital
  • Accumulated Other Comprehensive Income
  • Retained Earnings Using this analytical framework indicate the effect of each of the following transactions for Staples Corporation:
  1. Staples recorded cash sales of $25,000. The merchandise had cost $19,000 to manufacture.
  2. Staples purchased $8,500 of raw material inventory on account.
  3. The company paid $2,500 for property insurance for the next 12 months.
  4. Staples paid its employees $5,000 for the month.
  5. The company purchased $1,000 of supplies on account.
  6. Staples issued $25,000 of long-term debt.
  7. The company used $10,000 of excess cash to purchase marketable securities.
  8. Staples purchased a machine for $16,000 using $8,000 cash with the balance on account.
  9. Staples paid $2,500 for interest expense on the long-term debt.
  10. At the end of the year the marketable securities that Staples purchased in transaction 7 were now worth $14,500.
  11. Depreciation for the period was $1,500.
  12. Staples examined the equipment and determined that its fair value was $10,000. ANS: Cash + Non-Cash Assets = Liabilities + Contributed Capital + Accumulated Other Comprehensive Income + Retained Earnings
  13. Staples recorded cash sales of $25,000. The merchandise had cost $19,000 to manufacture. Cash + Non-Cash Assets = Liabilities + Contributed Capital + Accumulated Other Comprehensive Income + Retained Earnings
  • 25,000 + 25,
    • 19,000 - 19,
  1. Staples purchased $8,500 of raw material inventory on account. Cash + Non-Cash Assets = Liabilities + Contributed Capital + Accumulated Other Comprehensive Income + Retained Earnings
  • 8,500 + 8,
  1. The company paid $2,500 for property insurance for the next 12 months. Cash + Non-Cash Assets = Liabilities + Contributed Capital + Accumulated Other Comprehensive Income + Retained Earnings
  • 2,500 + 2,
  1. Staples paid its employees $5,000 for the month. Cash + Non-Cash Assets = Liabilities + Contributed Capital + Accumulated Other Comprehensive Income + Retained Earnings
  • 5,000 - 5,
  1. The company purchased $1,000 of supplies on account. Cash + Non-Cash Assets = Liabilities + Contributed Capital + Accumulated Other Comprehensive Income + Retained Earnings
  1. The following problem requires present value information: Biotech sold a patent on a new blood analyzer to Pharma. The sales agreement which was signed on January 1, 2009 requires Pharma to pay Biotech $1 million immediately. In addition, Pharma is required to pay $700,000 each December 31 for 20 years starting with December 31, 2009. Pharma and Biotech judge that a 10 percent is an appropriate interest rate for this arrangement. a. Compute the present value of the receivable on Biotech’s books on January 1, 2009 immediately after receiving the $1 million down payment. b. Compute the present value of the receivable on Biotech’s books on December 31, 2009. c. Compute the present value of the receivable on Biotech’s books on December 31, 2010. ANS: Jan. 1 2009: The present value of an ordinary annuity of $700,000 for 20 periods, at 10% equals ($ 7 00,000 * 8.5136) $5,959,520. Dec. 31, 2009: After receiving the first payment the present value of $600,000 for 19 periods, at 10% equals ($ 7 00,
    • 8.3649) $ 5. Dec. 31, 2010: After receiving the second payment the present value of 7 00,000 for 18 periods, at 10% equals ($ 7 00,000 * 8.2014) $5,740, PTS: 1
  2. Jurgen Company's income tax return shows income taxes for 2010 of $75,000 (that is, $75,000 is owed for 2010). For financial reporting, the firm reports deferred tax assets of $67,900 at the beginning of 2010 and $63,600 at the end of 2010. It reports deferred tax liabilities of $53,600 at the beginning of 2010 and $59,400 at the end of 2010. Required: a. Compute the amount of income tax expense for 2010. b. Assume for this part that the firm’s deferred tax assets are as stated above for 2010 but that its deferred tax liabilities were $83,500 at the beginning of 2010 and $72, at the end of 2010. Compute the amount of income tax expense for 2010. c. Explain contextually why income tax expense is higher than taxes owed in Part a and lower than taxes owed in Part b. ANS: a. Taxes Currently Payable ....................................................................... $ 75, Plus Decrease in Deferred Tax Assets: $67,900 – $63,600 .................. 4, Plus Increase in Deferred Tax Liabilities: $59,400 – $53,600 .............. 5, Income Tax Expense ............................................................................. $ 85, b. Taxes Currently Payable........................................................................$75, Plus Decrease in Deferred Tax Assets: $67,900 – $63,600.................. 4, Less Decrease in Deferred Tax Liability: $83,500 – $72,100............. (11,400) Income Tax Expense................................................................. $ 67,

c. In both Part a. and Part b., the value of the deferred tax asset decreased, which means that the company utilized deferred tax assets to decrease taxes owed relative to the amount expensed. However, the difference lies in the change in the deferred tax liability. In Part a., the deferred tax liability increased, which occurs when the firm has larger deductions (lower income) on its tax return relative to amounts expensed (amounts recognized in income). The advantageous treatment of these amounts leads to lower current cash outflows for taxes than amounts recognized as income tax expense. For Part b., the situation is reversed. In Part b., the decrease in the deferred tax liability means that previous timing differences likely reversed, leading to higher cash payments required for current income tax payments relative to amounts recognized as income tax expense. PTS: 1

  1. Fellsmere Company’s income tax return shows income taxes for 2010 of $35,000. The firm reports deferred tax assets before any valuation allowance of $32,600 at the beginning of 2010 and $35,200 at the end of 2010. It reports deferred tax liabilities of $26,900 at the beginning of 2010 and $24,300 at the end of 2010. Required: a. Assume for this part that the valuation allowance on the deferred tax assets totaled $14,400 at the beginning of 2010 and $15,100 at the end of 2010. Compute the amount of income tax expense for 2010. b. Assume for this part that the valuation allowance on the deferred tax assets totaled $14,400 at the beginning of 2010 and $12,700 at the end of 2010. Compute the amount of income tax expense for 2010. ANS: (a) Taxes Currently Payable $35, Less Increase in Deferred Tax Assets: Beginning of Year: $32,600 – $14,400 = $18, End of Year: $35,200 – $15,100 = 20,100 (1,900) Less Decrease in Deferred Tax Liabilities: $26, - $24,300 (2,600) Income Tax Expense $30, (b) Taxes Currently Payable $35, Less Increase in Deferred Tax Assets: Beginning of Year: $32,600 – $14,400 = $18, End of Year: $35,200 – $12,700 = 22,500 (4,300) Less Decrease in Deferred Tax Liabilities: $26, - $24,300 (2,600) Income Tax Expense $28, PTS: 1
  2. The financial statement disclosures for Able Company, a retail chain, revealed the following information regarding the firm’s income taxes: For the Year Ended January 31: 2011 2010