Question

1)      During the first quarter of its fiscal year, Tangerine Enterprises experiences a temporary liquidation of 1000 units in its LIFO base owing to seasonal fluctuations. The LIFO unit cost is $12, and the estimated replacement cost of the inventory is $20 per unit. Identify the entry in the first interim period to account for the temporary liquidation.

Dr. Cost of Goods Sold for $20,000; Cr Inventory for $12,000; Cr excess of replacement cost over LIFO cost of inventory liquidated for $8,000.

 

2)      If the liquidated inventory is replaced by the end of the fiscal year, the

Difference in the actual and estimated replacement price of inventory is adjusted to cost of goods sold in the replacement period.

3)      At the beginning of the year 20x1, Cubic Enterprises had 1,000 units of inventory on had with a FIFO cost of $20 each. No additional purchases were made during the year. During the year, the market value of inventory reduced. The chief Financial officer of cubic. Decided to recognize the reductions in the market value in the interim period in which they occurred. Identify an argument that favors the CFO’s decision.

The reductions in the market price of inventory are permanent.

4)      At the beginning of its fiscal year, Lilac retalls has 1200 units of inventory on hand with a FIFO cost of $25 each. No additional purchases were made during the year. 300 units were sold during the first quarter, the market value of inventory reduced to $20. However, the market value increased to $22 at the end of the second quarter. Which of the following statements is true about the inventory valuation in the interim financial statements if the declines were not identified as temporary?

The ending inventory of the first-quarter is written down by 4500 ; the second-quarter interim report shows a loss recovery of $ 1400

Value of ending inventory written down in the first quarter= (1200 units – 300 units) units x (25 – 20)= 4500; value of ending inventory recovery in the second quarte = (900 units – 200 units) units x (22-20)= 1400

5)      Revenue recognizes for tax purposes either before or after the period in which it is recognized for book purposes results in Temporary difference.

 

6)      Sigma enterprises incurred no advertising expense in the first quarter ending March 31 on April 1 50,000 was paid for advertising. The quarterly sales were selected as the allocation base for allocating advertising costs to the benefit period. In each of the second and third quarters, 15000 was allocated as advertising expense. Calculate the amount of advertisement expense allocated in the quarter.

 

Allocation to two quarters =15000 x 2 =30000

Allocation to fourth quarters =50000-30000=20,000

 

7)      The first step in computing the interim income tax provision is determine the effective annual tax rate

 

8)      The first-quarter earnings of fractal financials were 120000. Which of the following journal entries records the tax provision if the estimated effective tax rate was 20 percent?

Debit income tax expense for $24000; Credit income tax payable for $24000

Tax provision for the quarter = 120000 x 20% = 24000

 

9)      Yaveo fashions has actual earnings of 12000 and 20000 in the first and second quarters of the year, respectively. The estimated effective annual tax rate has been revised from 20% in the first quarter to 30% in the second quarter. What is the amount of income tax provision required in second quarter? $7200

 

10)   Mugen resources has actual earnings of 15000 and 18000 in the first and second quarters of the year, respectively. The estimated effective annual tax rate has been revised from 25% in the first quarter to 35% in the second quarter. What is the amount of cumulative income tax provision (form the first six months of the year) at the end of second quarter?

Actual cumulative income for first two quarters = 15000+18000=33000x 35%=11550

 

11)   In the third quarter of the year 20x1, skyosis pharma requires an income tax provision of 18300. The updated estimated effective annual tax rate is 24% $6000 of the third-quarter income of $96000 is due to a temporary difference in which accounting income is higher than tax income. What is the entry made to recognize the provision and deferral?

 

Debit income tax expense by $18300; Credit tax liability by $1440; credit income taxes payable by $16,860

Tax liability 6,000 x 24%=1440; income taxes payable 18300-1440=16860

 

12)   The indirect effects of a change in an accounting principle are reported in the period the change is made.

 

13)  The CFO of Diyo solutions finds that the current usage patterns of the machinery used for production differ from expectations. The CFO decides to change the depreciation method. As a result, he should decide.

 

To report this change by the current and prospective application; not to restate the prior financial statements.

 

14)   Which of the following is true of the treatment of interim expenses incurred by a company?

They may be charged to the interim period in which they are incurred; they may be allocated to several interim periods; they may be accrued as an estimated liability.

Answer 1

1)      Which of the following statements is true of the income tax expense shown on the income statement ?

 The income tax expense is the sum of the income tax actually payable in the period and the amount of the tax deferral for the period.