Kara Fashions uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. Three years after its purchase, one of Kara’s buildings has a book value of $400,000 and a tax basis of $300,000. There were no other temporary differences and no permanent differences. Taxable income was $4 million and Kara’s tax rate is 40%. What is the deferred tax liability to be reported in the balance sheet? Assuming that the deferred tax liability balance was $32,000 the previous year, prepare the appropriate journal entry to record income taxes this year.
> Corning-Howell reported taxable income in 2018 of $120 million. At December 31, 2018, the reported amount of some assets and liabilities in the financial statements differed from their tax bases as indicated below: The total deferred tax asset and defe
> Arndt, Inc., reported the following for 2018 and 2019 ($ in millions): a. Expenses each year include $30 million from a two-year casualty insurance policy purchased in 2018 for $60 million. The cost is tax deductible in 2018. b. Expenses include $2 mil
> Sherrod, Inc., reported pretax accounting income of $76 million for 2018. The following information relates to differences between pretax accounting income and taxable income: a. Income from installment sales of properties included in pretax accounting i
> You are the new accounting manager at the Barry Transport Company. Your CFO has asked you to provide input on the company’s income tax position based on the following: 1. Pretax accounting income was $41 million and taxable income was $8 million for the
> For the year ended December 31, 2018, Fidelity Engineering reported pretax accounting income of $977,000. Selected information for 2018 from Fidelity’s records follows: Interest income on municipal bonds ……………………………………………………………………… $32,000 Depreciation c
> Southern Atlantic Distributors began operations in January 2018 and purchased a delivery truck for $40,000. Southern Atlantic plans to use straight-line depreciation over a four-year expected useful life for financial reporting purposes. For tax purposes
> On January 1, 2018, Medical Transport Company’s accumulated postretirement benefit obligation was $25 million. At the end of 2018, retiree benefits paid were $3 million. Service cost for 2018 is $7 million. Assumptions regarding the trend of future healt
> Identify three examples of differences with no deferred tax consequences.
> When a company records a deferred tax asset, it may need to also report a valuation allowance if it is “more likely than not” that some portion or all of the deferred tax asset will not be realized. The FASB Accounting Standards Codification represents t
> At the end of 2017, Payne Industries had a deferred tax asset account with a balance of $30 million attributable to a temporary book-tax difference of $75 million in a liability for estimated expenses. At the end of 2018, the temporary difference is $70
> At the end of 2017, Payne Industries had a deferred tax asset account with a balance of $30 million attributable to a temporary book–tax difference of $75 million in a liability for estimated expenses. At the end of 2018, the temporary difference is $70
> Eight independent situations are described below. Each involves future deductible amounts and/or future taxable amounts ($ in millions). Required: For each situation, determine taxable income, assuming pretax accounting income is $100 million. Temp
> Four independent situations are described below. Each involves future deductible amounts and/or future taxable amounts produced by temporary differences: The enacted tax rate is 40%. Required: For each situation, determine the: a. Income tax payable c
> Listed below are 10 causes of temporary differences. For each temporary difference indicate the balance sheet account for which the situation creates a temporary difference. Temporary Difference _____ 1. Accrual of loss contingency; tax-deductible when p
> Listed below are 10 causes of temporary differences. For each temporary difference, indicate (by letter) whether it will create future deductible amounts (D) or future taxable amounts (T). Temporary Difference _____ 1. Accrual of loss contingency; tax-de
> Lance Lawn Services reports warranty expense by estimating the amount that eventually will be paid to satisfy warranties on its product sales. For tax purposes, the expense is deducted when the cost is incurred. At December 31, 2018, Lance has a warranty
> In 2018, DFS Medical Supply collected rent revenue for 2019 tenant occupancy. For income tax reporting, the rent is taxed when collected. For financial statement reporting, the rent is recorded as deferred revenue and then recognized as income in the per
> Prince Distribution Inc. has an unfunded postretirement benefit plan. Medical care and life insurance benefits are provided to employees who render 10 years service and attain age 55 while in service. At the end of 2018, Jim Lukawitz is 31. He was hired
> Ayres Services acquired an asset for $80 million in 2018. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset’s cost is depreciated by MACRS.
> Temporary differences result in future taxable or deductible amounts when the related asset or liability is recovered or settled. Some differences, though, are not temporary. What events create permanent differences? What effect do these have on the dete
> On January 1, 2013, Ameen Company purchased a building for $36 million. Ameen uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. At December 31, 2017, the book value of the building was $30 million and i
> Alvis Corporation reports pretax accounting income of $400,000, but due to a single temporary difference, taxable income is only $250,000. At the beginning of the year, no temporary differences existed. Required: 1. Assuming a tax rate of 35%, what will
> The following income statement does not reflect intraperiod tax allocation. Required: Recast the income statement to reflect intraperiod tax allocation. INCOME STATEMENT For the Fiscal Year Ended March 31, 2018 ($ in millions) Revenues ……………………………………………
> Delta Catfish Company has taken a position in its tax return to claim a tax credit of $10 million (direct reduction in taxes payable) and has determined that its sustainability is “more likely than not,” based on its t
> Listed below are several terms and phrases associated with accounting for income taxes. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it. List A List B 1. No tax consequences a. Deferred
> As of December 31, 2016, Lange Company has the following deferred tax assets and liabilities: Deferred tax assets Pension plans …………………………………………………………. $300,000 Inventory …………………………………………………………………. 200,000 Total deferred tax assets ………………………………………….. $50
> Case Development began operations in December 2018. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the instal
> Case Development began operations in December 2018. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the instal
> Andrews Medical reported a net loss–AOCI in last year’s balance sheet. This year, the company revised its estimate of future salary levels causing its PBO estimate to decline by $4 million. Also, the $8 million actual return on plan assets fell short of
> At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences: 1. Estimated warranty
> Listed below are ten independent situations. For each situation indicate (by letter) whether it will create a deferred tax asset (A), a deferred tax liability (L), or neither (N). Situation _____ 1. Advance payments on insurance, deductible when paid ___
> The benefit of future deductible amounts can be achieved only if future income is sufficient to take advantage of the deferred deductions. For that reason, not all deferred tax assets will ultimately be realized. How is this possibility reflected in the
> Wynn Sheet Metal reported a net operating loss of $160,000 for financial reporting and tax purposes in 2018. The enacted tax rate is 40%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as f
> Wynn Sheet Metal reported a net operating loss of $100,000 for financial reporting and tax purposes in 2018. The enacted tax rate is 40%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as f
> During 2018, its first year of operations, Baginski Steel Corporation reported a net operating loss of $375,000 for financial reporting and tax purposes. The enacted tax rate is 40%. Required: 1. Prepare the journal entry to recognize the income tax ben
> The information that follows pertains to Richards Refrigeration, Inc.: a. At December 31, 2018, temporary differences existed between the financial statement carrying amounts and the tax bases of the following ($ in millions): b. No temporary differenc
> The information that follows pertains to Esther Food Products: a. At December 31, 2018, temporary differences were associated with the following future taxable (deductible) amounts: Depreciation …………………………… $ 60,000 Prepaid expenses ……………………….. 17,000 Wa
> Bronson Industries reported a deferred tax liability of $8 million for the year ended December 31, 2017, related to a temporary difference of $20 million. The tax rate was 40%. The temporary difference is expected to reverse in 2019, at which time the de
> Arnold Industries has pretax accounting income of $33 million for the year ended December 31, 2018. The tax rate is 40%. The only difference between accounting income and taxable income relates to an operating lease in which Arnold is the lessee. The inc
> The Warren Group’s pension expense is $67 million. This amount includes a $70 million service cost, a $50 million interest cost, a $55 million reduction for the expected return on plan assets, and a $2 million amortization of a prior service cost. How is
> Allmond Corporation, organized on January 3, 2018, had pretax accounting income of $14 million and taxable income of $20 million for the year ended December 31, 2018. The 2018 tax rate is 35%. The only difference between accounting income and taxable inc
> Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). Determine the specific citation for accounting for each of the following items: 1. The specific items to which income tax expense is allocated for intraperiod tax alloc
> Differences between financial statement and taxable income were as follows: ________________________________($ in millions) Pretax accounting income ………………………………………………… $300 Permanent difference ………………………………………………………… (24) …………………………………………………………………………………
> Sometimes a temporary difference will produce future deductible amounts. Explain what is meant by future deductible amounts. Describe two general situations that have this effect. How are such situations recognized in the financial statements?
> VeriFone Systems is a provider of electronic card payment terminals, peripherals, network products, and software. In its 2015 annual report, the company reported deferred tax assets totaling about $398 million. The company also reported valuation allowan
> At the end of the year, the deferred tax asset account had a balance of $12 million attributable to a cumulative temporary difference of $30 million in a liability for estimated expenses. Taxable income is $35 million. No temporary differences existed at
> Refer to the situation described in BE 16–4. Suppose the deferred portion of the rent collected was $40 million at the end of 2019. Taxable income is $200 million. Prepare the appropriate journal entry to record income taxes. In BE 16–4 In 2018, Ryan Ma
> In 2018, Ryan Management collected rent revenue for 2019 tenant occupancy. For financial reporting, the rent is recorded as deferred revenue and then recognized as income in the period tenants occupy rental property, but for income tax reporting it is ta
> A company reports pretax accounting income of $10 million, but because of a single temporary difference, taxable income is $12 million. No temporary differences existed at the beginning of the year, and the tax rate is 40%. Prepare the appropriate journa
> The projected benefit obligation and plan assets were $80 million and $100 million, respectively, at the beginning of the year. Due primarily to favorable stock market performance in recent years, there also was a net gain of $30 million. On average, emp
> A company reports pretax accounting income of $10 million, but because of a single temporary difference, taxable income is only $7 million. No temporary differences existed at the beginning of the year, and the tax rate is 40%. Prepare the appropriate jo
> Southeast Airlines had pretax earnings of $65 million, including a gain on disposal of a discontinued operation of $10 million. The company’s tax rate is 40%. What is the amount of income tax expense that Southeast should report in its income statement?
> Refer to the situation described in BE 18–8. By what amount will Cox’s paid-in capital—share repurchase increase if it determines the cost of treasury shares by the FIFO method? In BE 18–8 In previous years, Cox Transport reacquired 2 million treasury s
> In previous years, Cox Transport reacquired 2 million treasury shares at $20 per share and, later, 1 million treasury shares at $26 per share. By what amount will Cox’s paid-in capital—share repurchase increase if it now sells 1 million treasury shares a
> The Jennings Group reacquired 2 million of its shares at $70 per share as treasury stock. Last year, for the first time, Jennings sold 1 million treasury shares at $71 per share. By what amount will Jennings’ retained earnings decline if it now sells the
> Agee Storage issued 35 million shares of its $1 par common stock at $16 per share several years ago. Last year, for the first time, Agee reacquired 1 million shares at $14 per share. Assuming that Agee retires shares it reacquires (restores their status
> First Bank has some question as to the tax-free nature of $5 million of its municipal bond portfolio. This amount is excluded from First Bank’s taxable income of $55 million. Management has determined that there is a 65% chance that the tax-free status o
> Horton Industries’ shareholders’ equity included 100 million shares of $1 par common stock and a balance in paid-in capital—excess of par of $900 million. Assuming that Horton retires shares it reacquires (restores their status to that of authorized but
> Lewelling Company issued 100,000 shares of its $1 par common stock to the Michael Morgan law firm as compensation for 4,000 hours of legal services performed. Morgan’s usual rate is $240 per hour. By what amount should Lewelling’s paid-in capital—excess
> Penne Pharmaceuticals sold 8 million shares of its $1 par common stock to provide funds for research and development. If the issue price is $12 per share, what is the journal entry to record the sale of the shares?
> Additional disclosures are required pertaining to deferred tax amounts reported on the balance sheet. What are the needed disclosures?
> Schaeffer Corporation reports $50 million accumulated other comprehensive income in its balance sheet as a component of shareholders’ equity. In a related statement reporting comprehensive income for the year, the company reveals net income of $400 milli
> Refer to the situation described in BE 18–13, but assume a 2-for-1 stock split instead of the 5% stock dividend. Prepare the journal entry to record the stock split if it is to be effected in the form of a 100% stock dividend. What is the par per share a
> On June 13, the board of directors of Siewert Inc. declared a 5% stock dividend on its 60 million, $1 par, common shares, to be distributed on July 1. The market price of Siewert common stock was $25 on June 13. Prepare the journal entry to record the st
> Adams Moving and Storage, a family-owned corporation, declared a property dividend of 1,000 shares of GE common stock that Adams had purchased in February for $37,000 as an investment. GE’s shares had a market value of $35 per share on the declaration da
> The shareholders’ equity of MLS Enterprises includes $200 million of no par common stock and $400 million of 6% cumulative preferred stock. The board of directors of MLS declared cash dividends of $50 million in 2018 after paying $20 million cash dividen
> Following is a recent Microsoft press release: REDMOND, Wash.—March 16, 2016 —Microsoft today announced that its board of directors have declared a quarterly dividend of $0.36 per share. The dividend will be payable on June 9, 2016, to shareholders of re
> What is comprehensive income? How does comprehensive income differ from net income? Where do companies report it in a balance sheet?
> AirParts Corporation reported a net operating loss of $25 million for financial reporting and tax purposes. Taxable income last year and the previous year, respectively, was $20 million and $15 million. The enacted tax rate each year is 40%. Prepare the
> A deferred tax liability (or asset) is described as the tax effect of the temporary difference between the financial statement carrying amount (book value) of an asset or liability and its tax basis. Explain this tax effect of the temporary difference. H
> The par value of shares historically indicated the real value of shares and all shares were issued at that price. The concept has changed with time. Describe the meaning of par value as it has evolved to today.
> The pension plan was amended last year, creating a prior service cost of $20 million. Service cost and interest cost for the year were $10 million and $4 million, respectively. At the end of the year, there was a negligible balance in the net gain–pensio
> Most preferred shares are cumulative. Explain what this means.
> Terminology varies in the way companies differentiate among share types. But many corporations designate shares as common or preferred. What are the two special rights usually given to preferred shareholders?
> What is meant by a shareholder’s preemptive right?
> The owners of a corporation are its shareholders. If a corporation has only one class of shares, they typically are labeled common shares. Indicate the ownership rights held by common shareholders, unless specifically withheld by agreement.
> Distinguish between publicly held and privately (or closely) held corporations.
> Corporations offer the advantage of limited liability. Explain what is meant by that statement.
> Identify the three common forms of business organization and the primary difference between the way they are accounted for.
> A quasi reorganization is sometimes employed by a firm undergoing financial difficulties but with favorable future prospects. What are two objectives of this procedure? Briefly describe the procedural steps.
> Suppose you own 80 shares of Facebook common stock when the company declares a 4% stock dividend. What will you receive as a result?
> During its first year of operations, Nile.com reported a net operating loss of $15 million for financial reporting and tax purposes. The enacted tax rate is 40%. Prepare the journal entry to recognize the income tax benefit of the net operating loss.
> The projected benefit obligation was $80 million at the beginning of the year. Service cost for the year was $10 million. At the end of the year, pension benefits paid by the trustee were $6 million and there were no pension-related other comprehensive i
> How are deferred tax assets and deferred tax liabilities reported in a classified balance sheet?
> A member of the board of directors is concerned that the company’s income statement reports income tax expense of $12.3 million, but the income tax obligation to the government for the year is only $7.9 million. How might the corporate controller explain
> On January 1, 2018, NRC Credit Corporation leased equipment to Brand Services under a finance/sales-type lease designed to earn NRC a 12% rate of return for providing long-term financing. The lease agreement specified: a. Ten annual payments of $55,000 b
> Universal Leasing leases electronic equipment to a variety of businesses. The company’s primary service is providing alternate financing by acquiring equipment and leasing it to customers under long-term sales-type leases. Universal earns interest under
> Federated Fabrications leased a tooling machine on January 1, 2018, for a three-year period ending December 31, 2020. The lease agreement specified annual payments of $36,000 beginning with the first payment at the beginning of the lease, and each Decemb
> For each of the three independent situations below determine the amount of the annual lease payments. Each describes a finance lease in which annual lease payments are payable at the beginning of each year. Each lease agreement contains an option that pe
> On January 1, 2018, Maywood Hydraulics leased drilling equipment from Aqua Leasing for a four-year period ending December 31, 2021, at which time possession of the leased asset will revert back to Aqua. The equipment cost Aqua $412,184 and has an expecte
> Bidwell Leasing purchased a single-engine plane for $400,000 and leased it to Red Baron Flying Club for its fair value of $645,526 on January 1, 2018. Terms of the lease agreement and related facts were: a. Eight annual payments of $110,000 beginning Jan
> Each of the four independent situations below describes a sales-type lease in which annual lease payments of $100,000 are payable at the beginning of each year. Each is a finance lease for the lessee. Determine the following amounts at the beginning of t
> Each of the three independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor’s implicit rate of return. Required: For each situati
> Terms of a lease agreement and related facts were: a. Incremental costs of commissions for brokering the lease and consummating the completed lease transaction incurred by the lessor were $4,242. b. The retail cash selling price of the leased asset was $
> The 2018 annual report of MLS Corporation included the following disclosure note: Note 10: Borrowings (in part) Convertible Debt On June 15, 2018, we issued $125 million of zero coupon convertible unsecured debt due on June 15, 2020 in a private placemen
> Both convertible bonds and bonds issued with detachable warrants have features of both debt and equity. How does the accounting treatment differ for the two hybrid securities? Why is the accounting treatment different?
> At January 1, 2018, Café Med leased restaurant equipment from Crescent Corporation under a nine-year lease agreement. The lease agreement specifies annual payments of $25,000 beginning January 1, 2018, the beginning of the lease, and at each December 31
> In a financing lease, “front loading” of lease expense and lease revenue occurs. What does this mean, and how is it avoided in an operating lease?
> Each of the four independent situations below describes a finance lease in which annual lease payments are payable at the beginning of each year. The lessee is aware of the lessor’s implicit rate of return. Required: For each situatio
> Bradley-Link’s December 31, 2018, balance sheet included the following items: Long-Term Liabilities _________________________________ ($ in millions) 9.6% convertible bonds, callable at 101 beginning in 2019, due 2022 (net of unamortized discount of $2)
