Chapter 1: Investments
Held-to-maturity securities are reported at what basis on the balance sheet?
Amortized cost
Describe the difference between permanent and temporary tax differences. Give one example of each.
Permanent differences are items reported for book purposes that will never be taxed, such as municipal bond interest. Temporary differences are reported as income or expense in one period for book purposes and another period for income tax payment purposes. An example is accelerated depreciation.
Which discount rate will produce the smallest present value?
a. 2%
b. 6%
c. 8%
d. Not possible to determine without cash flows
c. 8%
What event rocked the stock exchanges in April?
Tarriffs
Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. What is the journal entry Koehn should make to record a cash dividend received from Sells?
DR Cash
CR Investment in Sells
Lehman Corporation purchased a machine on January 2, 2024, for $4,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes:
2024 $800,000 2025: $1,280,000
What is the balance in the deferred tax liability account as of 12/31/25 as a result of this transaction? Assume a 20% tax rate.
$96,000
Book depreciation: $4,000,000 / 5 years * 2 years = $1,600,000
Tax depreciation: $2,080,000
Difference (tax over book) $480,000
* tax rate 20%
= Deferred tax liability $96,000
Collum is considering trading in an old machine and purchasing a new one for $248,600. Data related to the investment is:
Cash flows:
Year 1 $139,000, Year 2 $143,000, Year 3 $131,000 Year 4: $136,000
Salvage values: Old equipment: $24,500, New equipment $27,500
Initial investment in working capital: $15,000
What is the payback for the new machine?
1.7 years
Investment: Machine $248,600 + working capital $15,000 = $(263,600 total) cash out
Year 0: Salvage old machine $24,500
Year 1: Cash flow $139,000
Balance end of year 1: (100,100)
/ proceeds year 2 $143,000
= Portion of year 2 .7
1.7 years
Who won the NCAA basketball tournament this year?
FLORIDA GATORS
On January 3, 2024, Moss Company acquires $500,000 of Adam Company’s 10-year, 10% bonds for $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. If Moss uses the effective-interest method, what amount of interest revenue would be recognized in 2025 for these bonds?
$47,698; see excel computation
Khan, Inc. reported a taxable and financial loss of $2,250,000 for 2026. Its pretax financial income for the last two years was as follows:
The amount that Khan reports as a net loss for financial reporting purposes in 2026, assuming that it uses the NOL carryforward provisions, and that the tax rate is 20% for all periods affected, is
$1,800,000
Loss $(2,250,000)
Tax benefit 450,000
After tax loss $(1,800,000)
A project has a profitabiltiy index of 1.38. The project's present value of future cash flows is $23,250. The company has a discount rate of 12%. What was the initial investment?
$16,248
Index = PV of future cash flows/initial investment
$23,250/X = 1.38
X = $16,248
Who is the newly elected Pope?
Pope Leo XIV
from America
Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2025 for $1,000,000. In 2025, Doane earned $400,000 and paid dividends of $250,000. In 2026, Doane earned $500,000 and paid cash dividends of $150,000 on April 1 and $150,000 on October 1. On July 1, 2026, Rich sold half of its stock in Doane for $660,000 cash. The carrying amount of this investment reported in Rich's December 31, 2025 balance sheet is
$1,045,000
See excel
XYZ Corporation reported pretax accounting income of $500,000 for the year ended December 31, 2024. The company had the following temporary differences:
The enacted tax rate is 25%.
Required:
Dr. Income Tax Expense 132,500
Dr. Deferred Tax Asset 6,250
Cr. Income Tax Payable 128,750
Cr. Deferred Tax Liability 10,000
Super Industries is considering investing in a machine with a 5 year life with the following characteristics:
Initial investment: $500,000
Additional investment in working capital $10,000
Cash flows before taxes years 1 to 5: $140,000
Yearly depreciation: $90,000
Tax rate: 30%
What is the after tax cash flow in year 2?
$125,000
See excel
Name the Big 4
PWC, KPMG, EY, Deloitte
As of December 31, 2024, the Fair Value Adjustment account had a debit balance of $2,500. On January 1, 2025, Alpha Corp. sold all its security investments and purchased other available-for-sale (AFS) debt securities for $100,000. By December 31, 2025, the fair value of these securities had declined to $92,000. What journal entry should Alpha make at December 31, 2025, if any?
DR Other comprehensive income $10,500
CR Fair value adjustment $10,500
See excel
Duncan Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. Profits of $1,200,000 recognized for books in 2024 will be collected in the following years:
Collection of Profits
2025:$200,000 2026:$400,000 2027:$600,000
The enacted tax rates are: 30% for 2024, 25% for 2025, and 20% for 2026 and 2027. What is the deferred tax liability as of 12/31/24 related to the above transaction?
$250,000
$200,000 * 25% = $50,000
$400,000 * 20% = $80,000
$600,000 * 20% = $120,000
Total $250,000
WhiteCare Dry Cleaning has decided they need to open an additional facility. The information for the additional facility is as follows:
Cost $550,000
Additional operating costs per year (Excluding depreciation) 21,000
Additional revenues per year 45,000
Salvage value $400,000
Useful life 15 years
Tax rate 21%
What is the accrual accounting rate of return?
2.01%
see excel
Who is the chair of the Federal Reserve? What does he/she do?
Jerome Powell, sets federal borrowing rate among other responsibilities