Question & Answer

Will this type of behaviour tend to lead to profit maximisation?

What is an uncertain tax position, and what are the general guidelines for accounting for uncertain tax positions?

Indicate the section of a multiple-step income statement in which each of the following is shown. (a) Loss on inventory write-down. (b) Loss from strike. (c) Bad debt expense. (d) Loss on disposal of a component of the business. (e) Gain on sale of machinery. (f) Interest revenue. (g) Depreciation expense. (h) Material write-offs of notes receivable.

Maple Corp. owns several highly valued paintings that are on display in the corporation’s headquarters.  This year, it donated one of the paintings valued at $100,000 (tax basis of $25,000), to a local museum for the museum to display. What is the amount of Maple Corp.’s charitable contribution deduction for the painting (assuming income limitations do not apply)?  What would be Maple’s deduction if the museum sold the painting one month after it received it from Maple? (Assume Maple Corp. had prior knowledge of the museum’s intention to sell the painting after receiving it.)

Assume that on January 1, 2014, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of $72,000 beginning on January 1, 2014. 2. The fair value of the building on January 1, 2014 is $440,000. 3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,000. Kimberly-Clark depreciates similar buildings on the straight-line method. 4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. 5. Kimberly-Clark’s incremental borrowing rate is 12% per year. The lessor’s implicit rate is not known by Kimberly-Clark. 6. The yearly rental payment includes $2,471 of executory costs related to taxes on the property. Instructions Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2014 and 2015. Kimberly-Clark’s corporate year-end is December 31.

Instructions Complete the following statements by filling in the blanks. (a) In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be _______ (less than, greater than) pretax financial income. (b) If a $76,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying cumulative temporary difference amounts to $_______. (c) Deferred taxes ________ (are, are not) recorded to account for permanent differences. (d) If a taxable temporary difference originates in 2014, it will cause taxable income for 2014 to be ________ (less than, greater than) pretax financial income for 2014. (e) If total tax expense is $50,000 and deferred tax expense is $65,000, then the current portion of the expense computation is referred to as current tax _______ (expense, benefit) of $_______. (f) If a corporation’s tax return shows taxable income of $100,000 for Year 2 and a tax rate of 40%, how much will appear on the December 31, Year 2, balance sheet for “Income taxes payable” if the company has made estimated tax payments of $36,500 for Year 2? $________. (g) An increase in the Deferred Tax Liability account on the balance sheet is recorded by a _______ (debit, credit) to the Income Tax Expense account. (h) An income statement that reports current tax expense of $82,000 and deferred tax benefit of $23,000 will report total income tax expense of $________. (i) A valuation account is needed whenever it is judged to be _______ that a portion of a deferred tax asset _______ (will be, will not be) realized. (j) If the tax return shows total taxes due for the period of $75,000 but the income statement shows total income tax expense of $55,000, the difference of $20,000 is referred to as deferred tax _______ (expense, benefit).

Katherine Irving, controller of Lotan Corp., is aware of a pronouncement on accounting changes. After reading the pronouncement, she is confused about what action should be taken on the following items related to Lotan Corp. for the year 2014. 1. In 2014, Lotan decided to change its policy on accounting for certain marketing costs. Previously, the company had chosen to defer and amortize all marketing costs over at least 5 years because Lotan believed that a return on these expenditures did not occur immediately. Recently, however, the time differential has considerably shortened, and Lotan is now expensing the marketing costs as incurred. 2. In 2014, the company examined its entire policy relating to the depreciation of plant equipment. Plant equipment had normally been depreciated over a 15-year period, but recent experience has indicated that the company was incorrect in its estimates and that the assets should be depreciated over a 20-year period. 3. One division of Lotan Corp., Hawthorne Co., has consistently shown an increasing net income from period to period. On closer examination of its operating statement, it is noted that bad debt expense and inventory obsolescence charges are much lower than in other divisions. In discussing this with the controller of this division, it has been learned that the controller has increased his net income each period by knowingly making low estimates related to the write-off of receivables and inventory. 4. In 2014, the company purchased new machinery that should increase production dramatically. The company has decided to depreciate this machinery on an accelerated basis, even though other machinery is depreciated on a straight-line basis. 5. All equipment sold by Lotan is subject to a 3-year warranty. It has been estimated that the expense ultimately to be incurred on these machines is 1% of sales. In 2014, because of a production breakthrough, it is now estimated that 1/2 of 1% of sales is sufficient. In 2012 and 2013, warranty expense vwas computed as $64,000 and $70,000, respectively. The company now believes that these warranty costs should be reduced by 50%. 6. In 2014, the company decided to change its method of inventory pricing from average-cost to the FIFO method. The effect of this change on prior years is to increase 2012 income by $65,000 and increase 2013 income by $20,000. Instructions Katherine Irving has come to you, as her CPA, for advice about the situations above. Prepare a report, indicating the appropriate accounting treatment that should be given for each of these situations.

What is meant by par value, and what is its significance to stockholders

Explain how the financial sector could amplify the effects of shocks to the economy, such as those from the COVID-19 pandemic.

Assume the same data as in P21-10 with National Airlines Co. having an incremental borrowing rate of 10%. Instructions (a) Discuss the nature of this lease in relation to the lessee, and compute the amount of the initial lease liability. (b) Prepare a 10-year lease amortization schedule. (c) Prepare all of the lessee’s journal entries for the first year.

Where can authoritative IFRS be found related to the various disclosure issues discussed in the chapter?

The following facts relate to Krung Thep Corporation. 1. Deferred tax liability, January 1, 2014, $40,000. 2. Deferred tax asset, January 1, 2014, $0. 3. Taxable income for 2014, $95,000. 4. Pretax financial income for 2014, $200,000. 5. Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $240,000. 6. Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $35,000. 7. Tax rate for all years, 40%. 8. The company is expected to operate profitably in the future. Instructions (a) Compute income taxes payable for 2014. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014. (c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.”

Kraft Enterprises owns the following assets at December 31, 2014. Cash in bank—savings account 68,000 Checking account balance 17,000 Cash on hand 9,300 Postdated checks 750 Cash refund due from IRS 31,400 Certifi cates of deposit (180-day) 90,000 What amount should be reported as cash?

Andy McDowell Co. establishes a $100 million liability at the end of 2014 for the estimated site-cleanup costs at two of its manufacturing facilities. All related closing costs will be paid and deducted on the tax return in 2015. Also, at the end of 2014, the company has $50 million of temporary differences due to excess depreciation for tax purposes, $7 million of which will reverse in 2015. The enacted tax rate for all years is 40%, and the company pays taxes of $64 million on $160 million of taxable income in 2014. McDowell expects to have taxable income in 2015. Instructions (a) Determine the deferred taxes to be reported at the end of 2015. (b) Indicate how the deferred taxes computed in (a) are to be reported on the balance sheet. (c) Assuming that the only deferred tax account at the beginning of 2014 was a deferred tax liability of $10,000,000, draft the income tax expense portion of the income statement for 2014, beginning with the line “Income before income taxes.” (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $10,000,000 deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, and then (3) the amount of pretax financial income.)

Consider the following letter and answer Shady’s question.

Teri Hatcher Inc., in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 2013. Book Basis Tax Basis Equipment (net) $400,000 $340,000 Estimated warranty liability $200,000 $ –0– It is estimated that the warranty liability will be settled in 2014. The difference in equipment (net) will result in taxable amounts of $20,000 in 2014, $30,000 in 2015, and $10,000 in 2016. The company has taxable income of $520,000 in 2013. As of the beginning of 2013, the enacted tax rate is 34% for 2013–2015, and 30% for 2016. Hatcher expects to report taxable income through 2016. Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013. (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2013.

Identify the factors affecting the premium paid on a call option. Describe how each factor affects the size of the premium. (LO2)

Explain how the current account of the balance of payments is likely to vary with the course of the business cycle.

Distinguish the tax treatment of an NOL incurred in 2017 and an NOL incurred in 2024.

Explain the following terms. (a) LIFO layer. (b) LIFO reserve. (c) LIFO effect.

The differences between the book basis and tax basis of the assets and liabilities of Castle Corporation at the end of 2013 are presented below. Book Basis Tax Basis Accounts receivable $50,000 $–0– Litigation liability 30,000 –0– It is estimated that the litigation liability will be settled in 2014. The difference in accounts receivable will result in taxable amounts of $30,000 in 2014 and $20,000 in 2015. The company has taxable income of $350,000 in 2013 and is expected to have taxable income in each of the following 2 years. Its enacted tax rate is 34% for all years. This is the company’s first year of operations. The operating cycle of the business is 2 years. Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013. (b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2013.

What requirements do an abandoned spouse and qualifying surviving spouse have in common?

On April 1, 2014, Seminole Company sold 15,000 of its 11%, 15-year, $1,000 face value bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2015, Seminole took advantage of favorable prices of its stock to extinguish 6,000 of the bonds by issuing 200,000 shares of its $10 par value common stock. At this time, the accrued interest was paid in cash. The company’s stock was selling for $31 per share on March 1, 2015. Instructions Prepare the journal entries needed on the books of Seminole Company to record the following. (a) April 1, 2014: issuance of the bonds. (b) October 1, 2014: payment of semiannual interest. (c) December 31, 2014: accrual of interest expense. (d) March 1, 2015: extinguishment of 6,000 bonds. (No reversing entries made.)

The following information has been obtained for the Gocker Corporation. 1. Prior to 2014, taxable income and pretax financial income were identical. 2. Pretax financial income is $1,700,000 in 2014 and $1,400,000 in 2015. 3. On January 1, 2014, equipment costing $1,200,000 is purchased. It is to be depreciated on a straightline basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.) 4. Interest of $60,000 was earned on tax-exempt municipal obligations in 2015. 5. Included in 2015 pretax financial income is an extraordinary gain of $200,000, which is fully taxable. 6. The tax rate is 35% for all periods. 7. Taxable income is expected in all future years. Instructions (a) Compute taxable income and income taxes payable for 2015. (b) Prepare the journal entry to record 2015 income tax expense, income taxes payable, and deferred taxes. (c) Prepare the bottom portion of Gocker’s 2015 income statement, beginning with “Income before income taxes and extraordinary item.” (d) Indicate how deferred income taxes should be presented on the December 31, 2015, balance sheet.

From looking at Figure 15.16, how has the pound ‘fared’ compared with the US dollar and the yen from 1980? What conclusions can be drawn about the relative movements of these currencies?