Evidence concerning future profitability

OUTHWEST AIRLINES CO (ticker symbol LUV) filed their annual 10-k with the SEC on 2/7/2022 for 2021. Find this 10-K and determine who the company’s auditor is.





5.Grant Thornton

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Question 2

1.5 Points

Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.According to Southwest in their 10-k, the majority of the Companys short-term investments consist of instruments classified at which Level?

1.Level 1

2.Level 2

3.Level 3

4.Southwest, specifically mentioned that they are not required to follow this hierarchy because they are in the airline industry and they follow alternate guidance that only federal transportation companies may elect.

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Question 3

1.5 Points

Which of the following temporary differences results in Southwest’s largest component of their deferred tax liabilities?

1.Rapid rewards loyalty liability

2.Prepaid insurance

3.Accelerated depreciation

4.Accrued employee benefits

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Question 4

1.5 Points

Southwest mentioned how they report their short-term investments. Which of the following is true?

1.The majority of these investments are reported at amortized cost since they are mainly U.S. bonds that are held to maturity.

2.The majority of these investments are reported at Fair value with unrealized gains and losses going to OCI.

3.All of these investments are classified as and are stated at fair value

4.All of these investments are classified as trading securities and are stated at fair value

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Question 5

1.5 Points

Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Recently Russia has invaded Ukraine. This could have global implications to the price of jet fuel. What does Southwest do to help their bottom line.

1.They increase prices and pass everything off to the consumer.

2.They use financial derivative instruments in other commodities, such as West Texas Intermediate (“WTI”) crude oil, Brent crude oil, and refined products, such as heating oil and unleaded gasoline, to decrease its exposure to jet fuel price volatility.

3.They buy Bitcoin

4.They speculate in options and reduce their dividends.

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Question 6

1.5 Points

What was Southwest’s total current income tax expense in 2021?






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Question 7

1.5 Points

Read through Southwest’s Risks factors. Which of the following s false.

1.The Company is currently prohibited from repurchasing its common stock.

2.The Company is currently prohibited from paying dividends or making capital contributions with respect to its common stock.

3.Southwest did not enter into any agreements with the Treasury department as a result of the Covid-19

4.The airline industry is subject to relatively high fixed costs and highly variable and unpredictable demand, and is particularly sensitive to changes in economic conditions

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Question 8

1.5 Points

During 2021, what was Southwest’s total income tax expense?

1.368 million

2.1,325 million

3.20 million

4.348 million

5.Total income tax expense is not publicly available – it is filed on Form 1120 with the IRS

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Question 9

1.5 Points

At December 31, 20Y3, Sleepy Hollow Corp. has a loss carryforward of $100,000. All available evidence concerning future profitability is positive and the company asserts that it will use this carryforward to offset future taxable income. Assume enacted income tax rates of 21% in 20Y3 but 28% for future periods. What amount deferred tax asset (DTA) or deferred tax liability (DTL) should be reported in Sleepy Hollow’s 20Y3 balance sheet?

1.$100,000 DTA

2.$100,000 DTL

3.$21,000 DTA

4.$21,000 DTL

5.$28,000 DTA

6.$28,000 DTL

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Question 10

1.5 Points

In 20Y1, a company recorded a temporary difference of $40,000 related to rent collected in advance. This difference will reverse evenly over 4 years and the tax rate is 25% in all years. In 20Y2, the company’s journal entry to record deferred income taxes would include:

1.a credit to deferred tax asset of $2,500

2.a credit to deferred tax liability of $2,500

3.a debit to deferred tax asset of $10,000

4.a credit to deferred tax asset of $10,000

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Question 11

1.5 Points

Price Corp., had book income of $100,000 at December 31, 20Y1. Included in this amount on the income statement are:

. Interest revenue on a bond for the state of Florida of $20,000

. Entertainment Expenses deducted for book purposes of $15,000

The enacted tax rate for 20Y1 is 21% and thereafter. What is the amount of the deferred tax liability the company should report on its balance sheet at December 31, 20Y1?

11.$0, these differences are permanent

11.$2,100 deferred tax liability

11.$7,350 deferred tax liability

11.$0, the combined items result in a DTA not a DTL, silly

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Question 12

1.5 Points

Lulu’s Inc. has a deferred tax liability account valued at $62,500 at January 1, 20Y1, which is due to a temporary difference in prepaid expenses of $250,000. During 20Y1, this temporary difference increased to a cumulative amount of $325,000. Lulu’s tax rate is 25% for all years, and the company has taxable income of $700,000. The journal entry to account for the income tax expense, deferred taxes and income tax payable for 2020 should include:

12.Dr. Deferred tax liability $18,750

12.Cr. Deferred tax liability for $18,750

12.Dr. Deferred tax asset for $75,000

12.Cr. Deferred tax liability for $75,000

12.Dr. Current income tax expense $18,750

12.Cr. Deferred income tax expense $18,750

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Question 13

1.5 Points

Daffodil Corp was a new startup company in 20Y1 and had the following financial information for the year:

. An unrealized holding loss on a trading security of $5,000 that was recorded in book income for 20Y1 but for tax purposes is deferred until the loss is realized.

. $16,000 of bad debt expense recognized for financial accounting purposes. For tax purposes, this expense is not deductible until actually written off.

. $3,000 incurred for a fine paid to the City of DeKalb.

. Book depreciation was 10,000 but under MACRS tax depreciation was $70,800. This difference will reverse equally over years 20Y22075.

. Pretax financial income, $500,000.

. The tax rate is 21% for 20Y1, and for all subsequent years since Congress can’t seem to pass any legislation.

. There were no other


What is taxable income in 20Y1?







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Question 14

1.5 Points

On January 1, 2020, Timmermann Corp. purchased $120,000 of the 6%, 5-year bonds of Harrington, Inc. for $136,487. Timmermann has the ability and intent to hold these bonds until maturity. The bonds provide a 3% return and pay interest annually on January 1. At December 31, 2020, the bonds have a fair value of $130,000. The journal entry on December 31, 2020 would include:

14.a debit to the fair value adjustment account of $3,382

14.a debit to debt investment of $3,105

14.a credit to debt investment of $3,105

14.a credit to debt investment of $1,576

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Question 15

1.5 Points

At December 31, 2021, Bhuller Company has an trading debt investment with an amortized cost of $106,000 and a fair value of $121,000. Assume the Company’s Fair Value Adjustment account has a credit balance of $6,700. What is the journal entry required at December 31, 2021?

15.Debit Unrealized Holding Gain/Loss – Income $15,000

Credit Fair value adjustment $15,000

15.Debit Fair value adjustment $15,000

Credit Unrealized Holding Gain/Loss – Income $15,000

15.Debit Fair value adjustment $8,300

Credit Unrealized Holding Gain/Loss – Income $8,300

15.Debit Fair value adjustment $21,700

Credit Unrealized Holding Gain/Loss – Income $21,700

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Question 16

1.5 Points

Orange, Inc. purchased 35% of Bananas 32,300 outstanding shares of common stock for $8 per share on January 1, 20Y1. On May 15, Banana declared and paid cash dividends of $35,200 to all stockholders of record. At the end of the year, Banana reported $82,000 of net income and its common stock was trading at $35 per share. The carrying value of this investment on Orange’s December 31, 20Y1 balance sheet is:





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Question 17

1 Point

Brighton Corp. purchased 10,000 shares of common stock in Tesla. In the financial statement disclosures, Brighton’s investment in Tesla would be classified as:

17.Level 1

17.Level 2

17.Level 3

17.Level 4

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