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CPA FAR Payables, Contingencies, and Income Taxes
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Key areas of CPA FAR (Financial Accounting and Reporting) regarding liabilities, contingencies, and income taxes focus on US GAAP requirements for recognition, measurement, and disclosure.  1. Payables (Current Liabilities) Accounts payable represent obligations to suppliers for goods/services purchased on credit.  Recording: Recorded when the company legally owns the goods or receives the service. Measurement: Generally recorded at the invoiced amount. Types: Include accounts payable (short-term) and accrued liabilities (e.g., accrued expenses, interest payable, payroll).  2.... Show more
CPA FAR Payables, Contingencies, and Income Taxes
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25 Questions

1. How much would Aragona Corp. report as deferred income tax expense on the December 31, Year 13, income statement?
2. Among the items reported on Fisk Corp.’s income statement for Year 13 were the following:
What is the total amount of temporary differences for Fisk Corp. in Year 13?,$543
3. Which of the following is correct regarding the discount resulting from the determination of a note payable’s present value?
I. The discount is NOT a separate account from the note payable account.
II. The note payable is reported on the balance sheet at the net of the note payable face value less the unamortized discount.
4. What amount of current income tax expense should be reported in Pecorino’s December 31, Year 13, income statement?
5. On February 19, Year 3, a Dunn Corp. truck was in an accident with an auto driven by Aaron. On January 16, Year 4, Dunn received notice of a lawsuit seeking $500,000 in damages for personal injuries suffered by Aaron. Dunn Corp.’s counsel believes it is reasonably possible that Aaron will be awarded an estimated amount in the range between $150,000 and $300,000, and that $220,000 is a better estimate of potential liability than any other amount. Dunn’s accounting year ends on December 31, and the Year 3 financial statements were issued on March 8, Year 4. What amount of loss should Dunn accrue at December 31, Year 3?
6. For the month of January, Year 1, Catalina Corp. reported gross wages paid to employees in the amount of 20,000 and federal income tax withheld from those wages of $3,500. These wages were also subject to social security (FICA) tax withholding at 7% of gross wages, which Catalina Corp. must match. Payroll taxes are remitted to the appropriate taxing authority on the 15th of the month following withholding. What amount should Catalina Corp. report as both a liability and expense for payroll taxes as of, and for the month ended, January, Year 1?
7. The Shea Corp. has a temporary difference in Year 1 that is from a noncurrent liability and expected to reverse in Years 2, 3, and 4. In Year 1 the tax rate is 30%. In Years 2, 3, and 4, the enacted rate is 40%. Under US GAAP, the deferred tax liability is based on which of the following tax rates?
8. The reporting of which of the following would typically result in a deferred tax liability?
I. Warranty expense
II. Bad debt expense
9. Trevellyan Corp. received cash in the amount of $20,000 that was included in its Year 1 financial statements, of which $12,000 will not be taxed until Year 2. Trevellyan’s enacted tax rate is 30% for Year 1, and 25% for Year 2. What amount should Trevellyan report in its Year 1 balance sheet for deferred income tax liability?
10. During Year 4, Denny Corp. became involved in a tax dispute with the Internal Revenue Service (IRS). At December 31, Year 4, Denny’s tax advisor believed that an unfavorable outcome was probable. A reasonable estimate of additional taxes was $400,000, but could be as much as $500,000. After the Year 4 financial statements were issued, Denny Corp. received and accepted an IRS settlement offer of $415,000. Under US GAAP, what amount of accrued liability should Denny Corp. have reported in its December 31, Year 4, balance sheet?
11. Stabler Corp. is discounting a note receivable at the First Alameda Bank. The contingent liability for this note receivable being discounted must be disclosed in the notes to the financial statements at its face amount if sold to the bank:
I. with recourse
II. without recourse
12. Station Toy Train Co., a cash basis taxpayer, prepares accrual basis financial statements. In its Year 13 balance sheet, Station’s deferred income tax liabilities increased compared to Year 12. Which of the following changes during Year 13 would cause this increase in deferred income tax liabilities?
I. An increase in prepaid insurance
II. An increase in rent receivable
III. An increase in liability for warranty obligations
13. Minte Corp. is determining whether to record a contingent loss from claims and assessments. Minte will record a contingent liability if the loss is probable and the amount can be reasonably estimated under:
I. US GAAP
II. IFRS
14. What amount of taxable income should be reported for Pecorino in Year 13?,$131
15. The Ginger Corp. operates its business in two international jurisdictions, Greece and Italy, and prepares its taxes based on taxing authority. Ginger also has the legal right to offset taxes in these jurisdictions. Ginger’s accounting records at December 31, Year 2, report the following deferred tax assets and liabilities, their amounts, and taxing jurisdictions: Deferred tax liability; $10,000; Italy Deferred tax asset; $25,000; Greece Deferred tax liability; $15,000; Greece Assuming Ginger prepares its financial statements in accordance with IFRS, how should Ginger present its deferred taxes in its December 31, Year 2, financial statements?
16. How much would Aragona Corp. report as current year tax income tax expense on the December 31, Year 13, income statement?
17. On September 30, Graphnet Corp. borrowed $1,000,000 on a 9% note payable quarterly. Graphnet Corp. paid the first of four quarterly payments of $264,200 when due on December 30. How much of the first payment serves to reduce the principal?
18. Normally, interest is imputed when no, or an unreasonably low, rate is stated. An exception exists for receivables and payables arising from transactions with customers or suppliers in the normal course of business when the trade terms do NOT exceed:
19. When purchases are made, the purchase is recorded as a credit to accounts payable:
20. Bruford Corp., a newly organized company, reported pretax financial income of $100,000 for the current year. Among the items reported in Bruford’s income statement are the following: The enacted tax rate for the current year is 25% and 30% thereafter. In its December 31 balance sheet, Bruford should report a deferred income tax liability of:
21. During Year 1, Blacker, Inc., a golf supplies manufacturer, introduced a new golf club carrying a two-year warranty against defects. Blacker estimated the warranty costs to be 3% within 12 months following sale, and 6% in the second 12 months following sale. Blacker’s accounting records reported sales in Years 1 and 2, of $750,000 and $1,000,000, respectively, and actual warranty expenditures of $10,000, and $30,000 for Years 1 and 2, respectively. Based on this information, what should Blacker report as an estimated warranty liability at December 31, Year 2?
22. How much will Aragona Corp. report as taxable income on its income statement for December 31, Year 13?
23. When recording accounts payable, a purchase discount is recorded:
24. Hall Corp. is obligated to pay a bonus to its CEO equal to 10% of the company’s income after deduction of the bonus but before income tax. Hall’s income before the bonus and income tax was $75,000. Hall’s income tax rate is 40%. What amount should Hall accrue for the CEO’s bonus?
25. How much would Aragona Corp. report as total income tax expense on the December 31, Year 13, income statement?

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