Lofthouse Machinery Co. includes a 2-year warranty on its machinery sales. At the end of 2013, an analysis of the warranty records reveals an accumulated temporary difference of $120,000 for warranty expenses; book expenses related to warranties have exceeded tax deductions allowed. The enacted income tax rate for 2013 and future years is 40%. Management concludes that it is more likely than not that Lofthouse will have future income to realize the future tax benefit from this temporary difference. They also conclude that 20% of the warranty liability is current and 80% is noncurrent. 1. How would the deferred tax information be reported on the Lofthouse balance sheet at December 31, 2013? 2. If management assumed that only 70% of the tax benefit from the temporary difference could be realized, how would the deferred tax information be reported on the balance sheet at December 31, 2013? (Recall that the valuation allowance is allocated proportionately between the current and noncurrent portions of the deferred tax asset.)
> Distinguish between (a) Secured and unsecured bonds, (b) Collateral trust and debenture bonds, (c) Convertible and callable bonds, (d) Coupon and registered bonds, (e) Municipal and corporate bonds, and (f) Term and serial bonds.
> On January 1, 2013, Picard Inc. purchased a new piece of equipment from LaForge Engineering to expand its production facilities. The equipment was purchased at a cost of $800,000. Picard financed the purchase with an $800,000 mortgage to be repaid in ann
> The following information comes from the financial statements of Randall Stewart Company. Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,000 Accounts payable
> Moriarty Co. is experiencing financial difficulties. Income has exhibited a downward trend, and the company reported its first loss in company history this past year. The firm has been unable to service its debt and, as a result, has missed two semiannua
> McKeon Machine Company has outstanding a $210,000 note payable to Tejon Investment Corporation. Because of financial difficulties, McKeon negotiates with Tejon to exchange inventory of machine parts to satisfy the debt. The cost of the inventory transfer
> Ryan Marie Company has one asset, a bond issued by Miles Company that Ryan Marie purchased (on the day it was issued) as an investment. Ryan Marie also has only one liability, one of its own bonds that was to finance the purchase of the Miles bond invest
> Clarkston Inc. issued $1,000,000 of convertible 10-year, 11% bonds on July 1, 2012. The interest is payable semiannually on January 1 and July 1. The discount in connection with the issue was $9,500, which is amortized monthly using the straight-line bas
> Joy Insurance decides to finance expansion of its physical facilities by issuing convertible debenture bonds. The terms of the bonds follow: maturity date 10 years after May 1, 2012, the date of issuance; conversion at option of holder after two years; 2
> Chiam Corporation has $300,000 of 12% bonds, callable at 102, with a remaining 10-year term, and interest payable semiannually. The bonds are currently valued on the books at $290,000, and the company has just made the interest payment and adjustments fo
> The December 31, 2012, balance sheet of Spring Company includes the following items: 8% bonds payable due December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 Premium on bonds payable . . . . . . . . . . .
> The Long-Term Debt section of Rodman Company’s balance sheet as of December 31, 2012, included 8% bonds payable of $600,000 less unamortized discount of $44,000. Further examination revealed that these bonds were issued to yield 11%. The amortization of
> What are the two steps that are required in determining the amount of tax benefit to be recognized in association with an uncertain tax position?
> What factors must be considered in determining the periodic depreciation charges that should be made for a company’s depreciable assets?
> Jennifer Stack acquired $50,000 of Old town Corp. 9% bonds on July 1, 2010. The bonds were acquired at 92; interest is paid semiannually on March 1 and September 1. The bonds mature September 1, 2017. Stack’s books are kept on a calendar-year basis. On F
> In 1996, the IASB revised IAS 12. Did that revision make the international standard for deferred tax accounting more or less similar to the U.S. standard?
> Tanzanite Corporation issued $500,000 of 7% debentures to yield 11%, receiving $424,624. Interest is payable semiannually, and the bonds mature in five years. 1. What entries would be made by Tanzanite for the first two interest payments, assuming premiu
> What rules govern the netting of deferred tax assets and deferred tax liabilities?
> Assume that $280,000 of Denham Springs School District 8% bonds are sold on the bond issue date for $257,196. Interest is payable semiannually, and the bonds mature in 15 years. The purchase price provides a return of 9% on the investment. 1. What entrie
> In practice, the provisions for accounting for uncertain tax positions are relatively easy to apply.” Do you agree or disagree? Explain.
> On January 1, 2012, Terrel Company sold $100,000 of 10-year, 8% bonds at 93.5, an effective rate of 9%. Interest is to be paid on July 1 and December 31. Compute the amount of premium or discount amortization in 2012 and 2013 using (1) The straight-line
> Is prior service cost recognized as an expense in the period in which it initially arises?
> On January 1, 2012, Housen Company issued 10-year bonds of $500,000 at 102. Interest is payable on January 1 and July 1 at 10%. On April 1, 2013, Housen Company reacquires and retires 50 of its own $1,000 bonds at 98 plus accrued interest. The fiscal per
> How is the classification of assets (current or noncurrent) arising from NOL carryforwards determined under FASB ASC Topic 740?
> Briefly describe the four procedures followed in testing goodwill for impairment.
> George’s Inc. is considering issuing bonds to finance the acquisition of a nationwide chain of distributors of George’s products. George’s is contemplating two different types of bonds to raise the required $180 million purchase price. The first is a tra
> What are the sources of income through which the tax benefit of a deferred tax asset can be realized?
> In each of the following independent cases, state whether the bonds were issued at par, a premium, or a discount. Explain your answers. (a) Pop-up Manufacturing sold 1,500 of its $1,000, 8% stated-rate bonds when the market rate was 7%. (b) Splendor, Inc
> What factors must actuaries consider in determining the amount of future benefits under a defined benefit pension plan?
> What is the market value of each of the following bond issues? (Round to the nearest dollar.) (a) 10% bonds of $1,000,000 sold on bond issue date; 10-year life; interest payable semiannually; effective rate, 12%. (b) 9% bonds of $200,000 sold on bond iss
> When is a valuation allowance necessary?
> On July 1, 2013, Ketchikan Inc. borrowed $90,000 to finance the purchase of machinery. The terms of the mortgage require payments to be made at the end of every month with the first payment of $1,589 being due on July 31, 2013. The length of the mortgage
> What is meant by the word vesting?
> On January 1, 2013, Lily Company purchased a building for $2,000,000. The company made a 25% down payment and took out a mortgage payable over 30 years with monthly payments of $11,006.47. The first payment is due February 1, 2013. The mortgage interest
> What is a drawback of the asset and liability method?
> How would you define “uncertain” tax position?
> Refer to Practice 12-22. Assume all of the same facts except that the principal repayment amount will be dropped to $8,000 (from $10,000) instead of to $5,000. (1) Make the journal entry necessary on the company’s books to record this debt restructuring
> What are the major advantages of the asset and liability method?
> On January 1, the company obtained a $10,000, 8% loan. The $800 interest is payable at the end of each year, with the principal amount to be repaid in five years. As of the end of the year, the first year’s interest of $800 is not yet paid because the co
> One possibility for reporting income tax expense in the income statement for a given year is to merely report the amount of income tax payable in that year. What is wrong with this approach?
> Consider the following information: Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,300 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
> Hinton Exploration Company reported pretax financial income of $637,000 for the calendar year 2013. Included in the Other Income section of the income statement was $98,000 of interest revenue from municipal bonds held by the company. The income statemen
> The company has one asset, a bond (called Bond B) that it purchased (on the day it was issued) as an investment, and one liability, one of its own bonds (called Bond X) that the company issued to finance the purchase of the Bond B investment. The company
> Goshute Company computed pretax financial income of $50,000 for the year ended December 31, 2013. Taxable income for the year was $15,000. Accumulated temporary differences as of December 31, 2012, were $120,000. A deferred tax liability of $48,000 was i
> The company has convertible bonds with a total face amount of $100,000 and a carrying value of $98,500. The bonds are converted into 2,000 shares of $1 par common stock. Each share of stock had a market value of $55 on the date of conversion. Make the jo
> Relevan Company computed a pretax financial loss of $15,000 for the first year of its operations ended December 31, 2013. Included in the loss was $42,000 in uncollectible accounts expense that was accrued on the books in 2013 using an allowance system b
> Briefly describe the three types of intangible assets in terms of amortization and impairment.
> The company issued convertible bonds with a total face value of $100,000 for $111,000. If the bonds had been issued without the conversion feature, their issuance price would have been $101,000. Make the journal entry necessary to record the issuance of
> Fulton Company computed a pretax financial loss of $18,000 for the first year of its operations ended December 31, 2013. This loss did not include $25,000 in unearned rent revenue that was recognized as taxable income in 2013 when the cash was received.
> The company has bonds outstanding with a face value of $50,000 and an unamortized premium of $2,350 at the beginning of the year and $2,000 as of the end of the year. Sales (all for cash) were $42,000 for the year. Total interest expense of $4,650 was re
> On January 1, the company issued 10-year bonds with a face value of $400,000. The bonds carry a coupon rate of 10%, and interest is paid semiannually. On the issue date, the market interest rate for bonds issued by companies with similar risk was 12% com
> Faro Inc. began operating on January 1, 2013. At the end of the first year of operations, Faro reported $400,000 income before income taxes on its income statement but only $320,000 taxable income on its tax return. Analysis of the $80,000 difference rev
> On January 1, the company issued 10-year bonds with a face value of $400,000. The bonds carry a coupon rate of 10%, and interest is paid semiannually. On the issue date, the market interest rate for bonds issued by companies with similar risk was 12% com
> Using the information given in Exercise 16-26 and assuming pretax financial income of $2,900,000, calculate taxable income. In Exercise 16-26 Indicate which of the following items are temporary differences and which are nontaxable or nondeductible. For
> On January 1, Lewis Company purchased land it will use as a landfill for the next 12 years. The cost of the land was $525,000. At the end of 12 years, Lewis Company will be required to spend $250,000 to landscape and reforest the landfill site. The appro
> Queensland Company has five employees belonging to its pension plan. One employee is expected to retire each year over the next five years. On January 1, 2013, Queensland initiated an amendment to its pension plan that increased the PBO for the plan by $
> Under what conditions would scheduling the temporary difference reversals be required under Topic 740?
> You and your partner own a small data-entry company. You contract with businesses to manually enter data, such as library card catalogs and medical records, into a computer database. Your most significant physical assets are a large office building you o
> The company reported the following balance sheet information: Total income tax expense for 2013 was $60,000. Compute the amount of cash paid for income taxes in 2013. 2013 2012 Income taxes payable $ 17,000 $22,000 Deferred income tax liability. 13
> Refer to Practice 11-7. In Practice 11-7 The company has decided to use group depreciation based on the straight-line depreciation method. The initial pool of assets on which the group depreciation rate is based is as follows: (1) Make the journal ent
> The company assembled the following information with respect to operating cash flow for the year: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000 Deprecia
> The FASB frequently receives recommendations about areas it should consider for study. Depreciation accounting has not been addressed as a separate topic by the FASB, and several alternative methods are used for recording this expense on the books. Assum
> The company reported sales of $60,000. Other income statement items for the year were as follows: Interest revenue from municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,000 Depreciation expense (tax d
> The following information is from the June 30, 1998, balance sheet for Delta Air Lines (all dollar amounts are in millions): Delta also included this note to its financial statements: Depreciation and Amortization—Effective July 1, 19
> Refer to Practice 17-8. Make two summary journal entries necessary with respect to the pension plan for the year. In Practice 17-8 On January 1 of Year 1, the company had a projected benefit obligation (PBO) of $10,000 and a pension fund with a fair val
> Locate the 2009 financial statements for The Walt Disney Company on the Internet and consider the following questions: 1. What depreciation method does Disney use for its parks, resorts, and other property? For its film and television costs? 2. Where do
> Refer to Practice 16-11. In Practice 16-11 On January 1, the company purchased investment securities for $1,000. The securities are classified as trading. By December 31, the securities had a fair value of $700 but had not yet been sold. On January 1, t
> If a non-U.S. company chooses to revalue a long-term operating asset upward in accordance with IAS 16, how is the unrealized “gain” on the revaluation recognized in the financial statements?
> Different airlines depreciate the same airplanes but using different useful-life and residual value assumptions. For example, airlines have depreciated the same Boeing aircraft over lives ranging from 14 years to 28 years. What might cause a firm to deci
> Refer to Practice 16-5. Assume that the enacted tax rates are as follows: 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 2014 . . . . . . . . .
> Professor Linda DeAngelo found evidence suggesting that when the management of a company is ousted under fire, the new management tends to take an earnings “bath” after gaining control. A “bath” is a large reduction in earnings due to asset write downs,
> Taxable income and income tax rates for 2011–2016 for the company shown below. Make the journal entry necessary to record any net operating loss (NOL) carryforward created in 2016. The enacted tax rate for future years is 40%. Тах
> In today’s high-tech, high-cost entertainment industry, motion pictures often have costs in the tens of millions of dollars. Of course, it is hoped that these movies will be box office winners and that the revenues will exceed the cost outlay. With first
> Refer to Practice 16-17. Assume that the net operating loss in 2013 was $150,000 instead of $93,000. Make the journal entry necessary to record (1) Any net operating loss (NOL) carryback in 2013 and (2) Any net operating loss (NOL) carryforward created i
> Atwater Manufacturing Company purchased a new machine especially built to perform one particular function on the assembly line. A difference of opinion has arisen as to the method of depreciation to be used in connection with this machine. Three methods
> Taxable income and income tax rates for 2011–2013 for the company have been as follows: Make the journal entry necessary to record any net operating loss (NOL) carryback in 2013. Тахаble Income Tax Total Year Income Rate Tax Paid
> Ferris Bueller, Inc., owns a building in Des Moines, Iowa, that was built at a cost of $5,000,000 in 2000. The building was used as a manufacturing facility from 2003 to 2012. However, economic conditions have made it necessary to consolidate Ferris Buel
> The company is evaluating its tax position on a certain issue and has determined that although it is more likely than not that its position will be sustained, it is less certain about the amount that will be sustained. It has provided the following proba
> Does pension expense include the actual return on plan assets or the expected return? Explain.
> The managements of two different companies argue that because of specific conditions in their companies, recording depreciation expense should be suspended for 2013. Evaluate carefully their arguments. (a) The president of Guzman Co. recommends that no d
> The company has determined that there is an 80% likelihood that its position on a tax issue will be upheld upon review by taxing authorities and that the entire amount of the position, $100,000, will be allowed. Is this a “highly certain” tax position? W
> The following two depreciation methods are acceptable for tax purposes: (a) Straight line with a half-year convention. The half-year convention is the assumption that all assets are acquired in the middle of the year. Therefore, a half-year’s depreciatio
> The company has taken a tax position that is subject to review by the Internal Revenue Service. The company determines that there is a 40% probability that the position will not be sustained upon review. Is this a “highly certain” tax position? Why or wh
> The company has decided to use group depreciation based on the straight-line depreciation method. The initial pool of assets on which the group depreciation rate is based is as follows: Compute the group depreciation rate. Acquisition Salvage Usefu
> Refer to Practice 16-9. The company had no taxable income in past years. Analysis of prospects for the future indicates that it is more likely than not that total taxable income in the foreseeable future will be no more than $20,000. Assume that the inco
> In January 2013, Vorst Co. purchased a mineral mine for $2,820,000 with removable ore estimated at 1,200,000 tons. After it has extracted all the ore, Vorst believes it will be able to sell the property for $300,000. During 2013, Vorst incurred $360,000
> Refer to Practice 16-8. The company had no taxable income in past years. Analysis of prospects for the future indicates that it is more likely than not that total taxable income in the foreseeable future will be no more than $400. Assume that the income
> At December 31, 2012, Oteron Company’s noncurrent operating asset and accumulated depreciation and amortization accounts had balances as follows: Depreciation is computed to the nearest month. The salvage values of the depreciable ass
> On January 1, the company purchased investment securities for $1,000. The securities are classified as trading. By December 31, the securities had a fair value of $700 but had not yet been sold. On January 1, the company also purchased a piece of equipme
> What amortization method for premiums and discounts on bonds is recommended in FASB ASC Section 835-30-35 (Interest—Imputation of Interest—Subsequent Measurement)? Why? When can the alternative method be used?
> Allwood, Inc., a small furniture manufacturer, purchased the following assets at the end of 2012. Compute the following amounts for 2013 using group depreciation on a straight-line basis: 1. Depreciation expense 2. Group depreciation rate 3. Average li
> On January 1, the company purchased investment securities for $2,000. The securities are classified as trading. By December 31, the securities had a fair value of $4,200 but had not yet been sold. The company also recognized a $7,000 restructuring charge
> Equipment was purchased at the beginning of 2011 for $100,000 with an estimated product life of 300,000 units. The estimated salvage value was $4,000. During 2011, 2012, and 2013, the equipment produced 80,000 units, 120,000 units, and 40,000 units, resp
> The company started business on January 1 and had revenues of $60,000 for the year. In addition to income tax expense, the company’s only other expenses are as follows: • Bad debt expense of $10,000. Tax rules do not allow any deduction until the bad deb
> Limestone Construction purchased a concrete mixer on July 15, 2013. Company officials revealed the following information regarding this asset and its acquisition: Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> On January 1 of Year 1, the company had a projected benefit obligation (PBO) of $10,000 and a pension fund with a fair value of $9,200. There was no prior service cost, nor were there deferred pension gains or losses. The following information relates to
> The information that follows is from the balance sheet of Hampton Company for December 31, 2013, and December 31, 2012. Hampton did not acquire or dispose of any buildings or equipment during 2013. Hampton uses the straight-line method of depreciation.
> Refer to Practice 16-5. Assume that on January 1, 2015, Congress changes the enacted tax rate. Make the journal entry necessary to record this tax rate change on January 1, 2015, assuming that (1) The new tax rate is 30% and (2) The new tax rate is 43%.
> The company purchased a ship for $850,000. The ship has an estimated residual value of $100,000. Compute the amount of MACRS depreciation deduction for the first two years of the life of the ship.
> Wu Company has established a defined benefit pension plan for its lone employee, Ronald Dalton. Annual payments under the pension plan are equal to Ronald’s highest lifetime salary multiplied by (2% × number of years with the company). As of the beginnin
> In applying the net operating loss carryback and carryforward provisions, what order of application is followed for federal tax purposes?
