Chapter 2Asset and Liability Valuation and Income Measurement

Chapter 2—Asset and Liability Valuation and Income Measurement

MULTIPLE CHOICE

• Which of the following assets appears on the balance sheet at Historical cost?
• Equipment
• Notes Payable
• Investments in Marketable Securities
• Accounts Payable

ANS: A PTS: 1

• Interest on Municipal Bonds represents what kind of tax difference?
• Permanent timing difference that results in that income item not being taxed.
• Temporary difference that will reversed in the future
• Tax rate on Municipal bonds are based on estimated tax rates.
• Not recognized in taxable income on the accrual basis of accounting.

ANS: A PTS: 1

3. Shareholders’ equity consists of what three components:

• Assets, liabilities, and contributed capital.
• Contributed capital, accumulated other comprehensive income, and retained earnings.
• Liabilities, contributed capital, and retained earnings.
• Liabilities, contributed capital, and accumulated other comprehensive income.

ANS: B PTS: 1

• Which of the following valuation methods reflects current values?
• acquisition cost
• present value of cash flows using historical interest rates
• net realizable value
• adjusted acquisition cost

ANS: C PTS: 1

• The use of acquisition cost as a valuation method is justified on the basis that acquisition cost is:
• timely
• relevant
• subjective
• objective

ANS: D PTS: 1

• Firms use acquisition cost valuations and adjusted acquisition cost valuations for which of the following

types of assets?

• Assets that do not have fixed amounts of future cash flows.
• Assets that have fixed amounts of future cash flows.
• Assets with certain future economic benefits.
• monetary

ANS: A PTS: 1

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• 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

• current replacement cost
• net realizable value
• current cost
• acquisition cost

ANS: B PTS: 1

• Disregarding cash flows with owners, over sufficiently long periods of time, net income equals:
• revenues minus dividends and expenses
• assets minus liabilities
• stockholders’ equity
• cash inflows minus cash outflows

ANS: D PTS: 1

• When income tax expense for a period is greater than income tax payable the difference will be reported

how and on which financial statement?

• Deferred tax asset and Statement of Cash Flows
• Deferred tax asset and Balance Sheet
• Deferred tax liability and Statement of Cash Flows
• Deferred tax liability and Balance Sheet

ANS: D PTS: 1

• Permanent tax differences are revenues and expenses
• that firms include in income tax returns, but do not appear in the income statement.
• that are included in both the tax return and income statement, but in different accounting

periods.

• that firms include in the income statement, but do not appear in income tax returns.
• that are not included in either the tax return or the income statement.

ANS: C PTS: 1

• The traditional accounting model delays the recognition of value changes of assets and liabilities until

what event occurs?

• A change in value.
• A market transaction.
• A balance sheet date.
• Cash is received or cash is paid.

ANS: B PTS: 1

• 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?

• costs to run a title search
• costs of grading to level the land
• costs of tearing down an existing structure
• cost of the new holding tanks

ANS: D PTS: 1

• Current replacement cost represents
• the amount a firm would have to pay currently to acquire an asset it now holds

• the amount a firm would have to pay currently to acquire an asset it does not now hold
• the amount a firm would have to pay in the future to acquire an asset it now holds
• the amount a firm would have to pay to purchase a comparably depreciated version of the

asset it now holds

ANS: A PTS: 1

• Which of the following is not one of methods used by GAAP for treating value changes?
• Recognize value changes on the balance sheet and income statement when they are realized

in a market transaction

• Recognize value changes in the income statement when the value changes occur over time,

but recognize them on the balance sheet when they are realized in a market transaction

• Recognize value changes on the balance sheet when the value changes occur over time, but

recognize them in the income statement when they are realized in a market transaction

• Recognize value changes on the balance sheet and income statement when they occur over

time, even though they are not realized in a market transaction

ANS: B PTS: 1

• Which of the following transactions is consistent with recognizing value changes on the balance sheet

and income statement when they are realized in a market transaction?

• Selling land at a cost greater than its original purchase price.
• Recording an increase in the fair value of investments at year end.
• Translating foreign operations accounted for in Yen back to U.S. dollars in order to prepare

consolidated financial statements.

• Writing down the value of an asset due to obsolescent.

ANS: A PTS: 1

• At origination which of the following temporary differences would create a deferred tax asset?
• Tax basis of an asset exceeds its financial reporting basis.
• Tax basis of a liability exceeds its financial reporting basis.
• Financial reporting basis of an asset is equal to its tax basis.
• Financial reporting basis of an asset exceeds its tax basis.

ANS: A PTS: 1

• Plaxo Corporation has a tax rate of 35% and uses the straight-line method of depreciation for its

equipment, which has a useful life of four years. Tax legislation requires the company to depreciate its equipment using the following schedule: year 1- 50%, year 2 - 30%, year 3 - 15% and year 4 - 5%. In 2014 Plaxo purchases a piece of equipment with a four year life and an original cost of $100,000. What amount will Plaxo record as a deferred tax asset or liability in 2010?

• Deferred tax asset of $25,000.
• Deferred tax liability of $25,000.
• Deferred tax asset of $8,750.
• Deferred tax liability of $8,750.

ANS: D PTS: 1

• The income statement approach to measuring income tax expense
• is required by FASB Statement No. 109.
• compares revenues and expenses recognized for book and tax purposes, eliminates

permanent differences, and computes income tax expense based on book income before taxes excluding permanent differences.

• computes income tax expense as a difference between the tax basis of an asset or a liability

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.

• is required by IAS 12.

ANS: B PTS: 1

• Future tax deductions
• result in deferred tax assets.
• result in deferred tax liabilities.
• occur where the tax basis of liabilities is more than the financial reporting basis.
• occur where the tax basis of assets is less than financial reporting basis.

ANS: A PTS: 1

• Future taxable income is characteristic of all of the following situations except:
• where deferred tax assets result.
• where deferred tax liabilities result.
• where the tax basis of liabilities exceed the financial reporting basis.
• where the tax basis of assets is less than financial reporting basis.

ANS: A PTS: 1

• When recognizing deferred tax assets and liabilities, the income statement approach and the balance

sheet approach yield identical results

• when enacted tax rates applicable to future periods do not change.
• when the firm recognizes no valuation allowance on deferred tax assets.
• Both (a) and (b) are correct.
• None of these answers is correct.

ANS: C PTS: 1

• 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:

• Discontinued Operations
• Extraordinary Items
• Other Comprehensive Income
• Common Stock

ANS: D PTS: 1

• U.S. GAAP, IFRS, and other major accounting standards are best characterized as
• historical accounting models.
• current value accounting models.
• acquisition cost accounting models.
• mixed attribute accounting models.

ANS: D PTS: 1

• Which of the following would not represent an acquisition cost to be added to the purchase price of

building:

• Sales Tax.
• Cost of grading the land.
• Capital repairs to get the building ready for occupancy.
• Renovations that would extend the life of the building.