The estimated litigation

expense of $1,250,000 will

be deductible in 2012 when
it is expected to
be paid. The gross profit
from the installment sales
will be realized in the
amount of $500,000 in
each of the next two years.
The estimated liability for
litigation is classified as
noncurrent and the
installment accounts
receivable are classified as
$500,000 current and
$500,000 noncurrent. The
income tax rate is 30% for
all years.
55. The income tax
expense is
a. $150,000.
b. $225,000.
c. $250,000.
d. $500,000.
56. The deferred tax asset
to be recognized is
a. $0.
b. $75,000 current.
c. $375,000 current.
d. $375,000 noncurrent.
 57. The deferred tax
liability—current to be
recognized is
a. $75,000.
b. $225,000.
c. $150,000.
d. $300,000.
Use the following
information for questions
58 through 60.
Hopkins Co. at the end
of 2010, its first year of
operations, prepared a
reconciliation between
pretax financial income and
taxable income as follows:
 Pretax financial income $
750,000
Estimated litigation
expense 1,000,000
Extra depreciation for
taxes (1,500,000)
Taxable income $
250,000
The estimated litigation
expense of $1,000,000 will
be deductible in 2011 when
it is expected to
be paid. Use of the
depreciable assets will
result in taxable amounts of
$500,000 in each of the
next three years. The
income tax rate is 30% for
all years.
58. Income tax payable is
a. $0.
b. $75,000.
c. $150,000.
d. $225,000.
59. The deferred tax asset
to be recognized is
a. $75,000 current.
b. $150,000 current.
c. $225,000 current.
d. $300,000 current.
The estimated litigation expense of $1,250,000 will be deductible in 2012 when it is expected to be paid.
The gross profit from the installment sales will be realized in the amount of $500,000 in each of the next
two years. The estimated liability for litigation is classified as noncurrent and the installment accounts
receivable are classified as $500,000 current and $500,000 noncurrent. The income tax rate is 30% for all
years.
1. The income tax expense is
a. $150,000. b. $225,000. c. $250,000. d. $500,000.
2. The deferred tax asset to be recognized is
a. $0. b. $75,000 current. c. $375,000 current. d. $375,000 noncurrent.
3. The deferred tax liability—current to be recognized is
a. $75,000. b. $225,000. c. $150,000. d. $300,000.

Use the following information for questions 58 through 60. Hopkins Co. at the end of 2010, its first
year of operations, prepared a reconciliation between pretax financial income and taxable income as
follows: Pretax financial income $ 750,000 Estimated litigation expense 1,000,000 Extra
depreciation for taxes (1,500,000) Taxable income $ 250,000 The estimated litigation expense of
$1,000,000 will be deductible in 2011 when it is expected to be paid. Use of the depreciable assets will
result in taxable amounts of $500,000 in each of the next three years. The income tax rate is 30% for all
years.
4. Income tax payable is
a. $0. b. $75,000. c. $150,000. d. $225,000.
5. The deferred tax asset to be recognized is
a. $75,000 current. b. $150,000 current. c. $225,000 current. d. $300,000 current.

The deferred tax expense is the

a. increase in balance of deferred
tax asset minus the increase in
balance of deferred tax
liability.
b. increase in balance of deferred
tax liability minus the increase in
balance of deferred
tax asset.
c. increase in balance of deferred
tax asset plus the increase in
balance of deferred tax
liability.
d. decrease in balance of deferred
tax asset minus the increase in
balance of deferred
tax liability.
6. The deferred tax expense is the
a. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.
b. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset.
c. increase in balance of deferred tax asset plus the increase in balance of deferred tax liability.
d. decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability.

7. At the December 31, 2010 balance sheet date, Unruh Corporation reports an accrued
receivable for financial reporting purposes but not for tax purposes. When this asset is
recovered in 2011, a future taxable amount will occur and
a. pretax financial income will exceed taxable income in 2011.
b. Unruh will record a decrease in a deferred tax liability in 2011.
c. total income tax expense for 2011 will exceed current tax expense for 2011.
d. Unruh will record an increase in a deferred tax asset in 2011.

8. Assuming a 40% statutory tax rate applies to all years involved, which of the following
situations will give rise to reporting a deferred tax liability on the balance sheet?
I. A revenue is deferred for financial reporting purposes but not for tax purposes.
II. A revenue is deferred for tax purposes but not for financial reporting purposes.
III. An expense is deferred for financial reporting purposes but not for tax purposes.
IV. An expense is deferred for tax purposes but not for financial reporting purposes.
a. item II only
b. items I and II only
c. items II and III only
d. items I and IV only

9. A major distinction between temporary and permanent differences is

a. permanent differences are not representative of acceptable accounting practice.
b. temporary differences occur frequently, whereas permanent differences occur only
once.
c. once an item is determined to be a temporary difference, it maintains that status;
however, a permanent difference can change in status with the passage of time.
d. temporary differences reverse themselves in subsequent accounting periods, whereas
permanent differences do not reverse.

10. Which of the following are temporary differences that are normally classified as expenses
or losses that are deductible after they are recognized in financial income?
a. Advance rental receipts.
b. Product warranty liabilities.
c. Depreciable property.
d. Fines and expenses resulting from a violation of law.

11. Which of the following is a temporary difference classified as a revenue or gain that is
taxable after it is recognized in financial income?
a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
c. An installment sale accounted for on the accrual basis for financial reporting purposes
and on the installment (cash) basis for tax purposes.
d. Interest received on a municipal obligation.

12. Which of the following differences would result in future taxable amounts?
a. Expenses or losses that are tax deductible after they are recognized in financial
income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in
taxable income.
d. Expenses or losses that are tax deductible before they are recognized in financial
income.

13. Stuart Corporation's taxable income differed from its accounting income computed for this
past year. An item that would create a permanent difference in accounting and taxable
incomes for Stuart would be
a. a balance in the Unearned Rent account at year end.
b. using accelerated depreciation for tax purposes and straight-line depreciation for book
purposes.
c. a fine resulting from violations of OSHA regulations.
d. making installment sales during the year.

14. An example of a permanent difference is

a. proceeds from life insurance on officers.
b. interest expense on money borrowed to invest in municipal bonds.
c. insurance expense for a life insurance policy on officers.
d. all of these.

15. Which of the following will not result in a temporary difference?

a. Product warranty liabilities
b. Advance rental receipts
c. Installment sales
d. All of these will result in a temporary difference.

16. A company uses the equity method to account for an investment. This would result in
what type of difference and in what type of deferred income tax?
Type of Difference Deferred Tax
a. Permanent Asset
b. Permanent Liability
c. Temporary Asset
d. Temporary Liability

17. Nickerson Corporation began operations in 2007. There have been no permanent or
temporary differences to account for since the inception of the business. The following
data are available:
Year Enacted Tax Rate Taxable Income Tax Paid
2009 45% $750,000 $337,500
2010 40% 900,000 360,000
2011 35%
2012 30%

18. In 2011, Nickerson had an operating loss of $930,000. What amount of income tax
benefits should be reported on the 2011 income statement due to this loss?
a. $409,500
b. $373,500
c. $372,000
d. $279,000

Use the following information for questions 19 and 20.

Operating income and tax rates for C.J. Company’s first three years of operations were as
follows:
Income Enacted tax rate
2010 $100,000 35%
2011 ($250,000) 30%
2012 $420,000 40%

19. Assuming that C.J. Company opts to carryback its 2011 NOL, what is the amount of
income tax payable at December 31, 2012?
a. $68,000
b. $168,000
c. $123,000
d. $108,000

20. Assuming that C.J. Company opts only to carry forward its 2011 NOL, what is the amount
of deferred tax asset or liability that C.J. Company would report on its December 31, 2011
balance sheet?
Amount _ Deferred tax asset or liability
a. $75,000 Deferred tax liability
b. $87,500 Deferred tax liability
c. $100,000 Deferred tax asset
d. $75,000 Deferred tax asset

1) The common stock account in a company's balance sheet is measured as:

A) The number of common shares outstanding multiplied by the stock's par per share.
B) The number of common shares outstanding multiplied by the stock's current market price per
share.
C) The number of common shares issued multiplied by the stock's par per share.
D) None of these answer choices are correct. Answer: C

2) When stock is issued in exchange for property, the best evidence of fair value might be any of
the following except:
A) The appraised value of the property received.
B) The selling price of the stock in a recent transaction.
C) The price of the stock quoted on the stock exchange.
D) The average book value of outstanding stock. Answer: D

3) On October 1, 2018, Chief Corporation declared and issued a 10% stock dividend. Before this
date, Chief had 80,000 shares of $5 par common stock outstanding. The market value of Chief
Corporation on the date of declaration was $10 per share. As a result of this dividend, Chief's
retained earnings will:
A) Decrease by $80,000.
B) Not change.
C) Decrease by $40,000.
D) Increase by $80,000. Answer: A Explanation: Retained earnings (8,000 shares × $10/share)
Common stock (8,000 shares × $5/share) Paid-in capital—excess of par 80,000 40,000 40,000

4) Beagle Corporation has 20,000 shares of $10 par common stock outstanding and 10,000
shares of $100 par, 6% cumulative, nonparticipating preferred stock outstanding. Dividends have
not been paid for the past two years. This year, a $300,000 dividend will be paid. What are the
dividends per share payable to preferred and common, respectively? 1 A) $6; $12. B) $18; $6. C)
$6; $6. D) None of these answer choices are correct. Answer: B Explanation: Preferred: $6 × 3 ×
10,000 = $180,000; $180,000/10,000 = $18 Common: ($300,000 - $180,000) ÷ 20,000 = $6

5) In 2018, Brock Lee Vegetables, issued $1 par value common stock for $30 per share. No other
common stock transactions occurred until March 31, 2020, when Brock Lee acquired some of
the issued shares for $25 per share and retired them. Which of the following statements is true
for this acquisition and retirement? A) 2020 net income is decreased. B) 2020 net income is
increased. C) Paid-in capital—share repurchase is increased. D) Retained earnings is increased.
Answer: C Explanation: The entries to record the stock issuance and subsequent acquisition and
retirement (per share) are as follows: Issuance (per share) Cash Common stock Paid-in capital—
excess of par 30 1 29 Retirement (per share) Common stock Paid-in capital—excess of par Paid-
in capital—share repurchase Cash 1 29 5 25

6) The corporate charter of Alpaca Co. authorized the issuance of 10 million, $1 par common
shares. During 2018, its first year of operations, Alpaca had the following transactions: January
June December 1 3 28 sold 8 million shares at $15 per share retired 2 million shares at $18 per
share sold 2 million shares at $20 per share What amount should Alpaca report as additional
paid-in capital‒ excess of par, in its 2 December 31, 2018, balance sheet? A) $122 million B)
$116 million C) $112 million D) $74 million Answer: A Explanation: On Jan. 1, additional paid-
in capital (PIC--excess of par) was credited for $112 [8 million shares × $14/share ($15 – $1
par)]. On June 3, additional Paid-in capital—excess of par was debited for the original issue of
$28 (2 million shares × $14/share), and retained earnings was debited for $6 (2 million shares ×
$18 ‒ $15). On Dec 28, additional paid-in capital (PIC--excess of par) was credited for $38 [2
million shares × $19/share ($20 – $1 par)]. Share-based Compensation:

7) The compensation associated with restricted stock units (RSUs) under a stock award plan is:
A) The book value of an unrestricted share of the same stock times the number of shares
represented by the RSUs. B) Allocated to expense over the service period which usually is the
vesting period. C) The estimated fair value of a share of similar stock times the number of shares
represented by the RSUs. D) The book value of a share of similar stock times the number of
shares represented by the RSUs. Answer: B

8) FX Services granted 15 million of its $1 par common shares to executives, subject to

forfeiture if employment is terminated within three years. The common shares have a market
price of $8 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year
after the shares are granted to executives? A) $0. B) $15 million. C) $40 million. D) $120
million. Answer: C Explanation: = $ 8 × 15 million fair value per share shares granted $ 120
million fair value of award 3 The $120 million total compensation is expensed equally over the
three-year vesting period, reducing earnings by $40 million each year.

9) On January 1, 2018, M Company granted 90,000 stock options to certain executives. The
options are exercisable no sooner than December 31, 2020, and expire on January 1, 2024. Each
option can be exercised to acquire one share of $1 par common stock for $12. An optionpricing
model estimates the fair value of the options to be $5 on the date of grant. What amount should
M recognize as compensation expense for 2018? A) $30,000. B) $60,000. C) $120,000. D)
$150,000. Answer: D Explanation: (90,000 × $5 = $450,000; $450,000 ÷ 3 yrs. = $150,000)

12) On January 1, 2018, Blue Inc. issued stock options for 200,000 shares to a division manager.
The options have an estimated fair value of $6 each. To provide additional incentive for
managerial achievement, the options are not exercisable unless divisional revenue increases by
6% in three years. Blue initially estimates that it is not probable the goal will be achieved, but in
2019, after one year, Blue estimates that it is probable that divisional revenue will increase by
6% by the end of 2020. Ignoring taxes, what is the effect on earnings in 2019? A) $200,000. B)
$400,000. C) $600,000. D) $800,000. Answer: D Explanation: In 2019, the revised estimate of
the total compensation would change from zero to 200,000 × $6 = $1,200,000. Blue would
reflect the cumulative effect on compensation in 2019 earnings and record compensation
thereafter: 2019 Compensation expense ([$1,200,000 × 2/3] – $0) 800,000 Paid-in capital-stock
options 800,000 2020 Compensation expense ([$1,200,000 × 3/3] – $800,000) Paid-in capital–
stock options 400,000 400,000

13) To encourage employee ownership of the company's common shares, KL Corp. permits any
of its employees to buy shares directly from the company through payroll deduction. There are
no brokerage fees and shares can be purchased at a 15% discount. During May, employees
purchased 10,000 shares at a time when the market price of the shares on the New York Stock
Exchange was $15 per share. KL will record compensation expense associated with the May
purchases of: 5 A) $0. B) $15,000. C) $22,500. D) $150,000. Answer: C Explanation: Cash ($15
× 10,000 × 85%) Compensation expense ($15 × 10,000 × 15%) Common stock ($15 × 10,000)
127,500 22,500 150,000 EPS:

14) How many types of potential common shares must a corporation have in order to be said to
have a complex capital structure? A) Three. B) Two. C) One. D) Zero. Answer: C 15) Which of
the following does not represent potential shares for an EPS calculation? A) Convertible
preferred stock. B) Convertible bonds. C) Stock rights. D) Participating preferred stock. Answer:
D

On January 1, 20x1, JP CO. agreed to issue 5000 shares to Rock Company in exchange for
construction of a building. Ownership of the building was trasferred on November 30, 2021.
However, the contract price was settled on January 01, 20x2. At which date should JP Co
recognize the acquisition of building?

A. January 01, 20x1

B. November 30, 20x1
C. January 01, 20x2
D. November 30, 20x2

1. Which of the following do not come within the definition of a share-based payment under
IFRS 2?

A employee share purchase plans

B employee share option plans
C share appreciation rights
D a rights issue that includes some shareholder employees

2. A company issues fully paid shares to 500 employees on 31 July 20X8. Shares issued to
employees normally have vesting conditions attached to them and vest over a three-year period,
at the end of which the employees have to be in the company’s employment. These shares have
been given to the employees because of the performance of the company during the year. The
shares have a market value of $2m on 31 July 20X8 and an average fair value for the year of
$3m. It is anticipated that in three-years’ time there will be 400 employees at the company.
What amount would be expensed to profit or loss for the above share issue?
A $3m
B $2m
C $1m
D $666,667
3. A company grants 750 share options to each of its six directors on 1 May 20X7. The options
vest on 30 April 20X9. The fair value of each option on 1 May 20X7 is $15 and their intrinsic
value is $10 per share. It is anticipated that all of the share options will vest on 30 April 20X9.
What will be the accounting entry in the financial statements for the year ended 30 April 20X8?
A Increase equity $33,750; increase in expense in profit or loss $33,750
B Increase equity $22,500; increase in expense in profit or loss $22,500
C Increase liability $67,500; increase in expense profit or loss $67,500
D Increase liability $45,000; increase in current assets $45,000

4. A public limited company has granted 700 share appreciation rights (SARs) to each of its 400
employees on 1 January 20X6. The rights are due to vest on 31 December 20X8 with payment
being made on 31 December 20X9. During 20X6, 50 employees leave, and it is anticipated that a
further 50 employees will leave during the vesting period. Fair values of the SARs are as
follows:

1 January 20X6 15

31 December 20X6 18

31 December 20X7 20

What liability will be recorded on 31 December 20X6 for the share appreciation rights?
A $1,260,000
B $1,680,000
C $2,520,000
D $3,780,000

ANSWERS
1 (d).
2 (b). $2m. The issue of fully paid shares is deemed to relate to past service and should be
expensed to profit or loss at 31 July 20X8.
3 (a). 750 x 6 (directors) x $15 / 2 years = $33,750
4 (a). 700 x (400 – 100) x $18 x 1/3 = $1,260,000