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89. GKC Corporation
GKC Corporation entered into noncancelable, long-term material contracts with suppliers for the purchase of
raw materials beginning in the calendar Year 4. These contracts amounted to $500,000 at December 31, Year 4,
relating to raw materials with a market price of $575,000. This amount was considered material for GKC.
(CMA adapted, Dec 95 #17) Refer to the GKC Corporation example. Assume the goods were received and the
market price of the raw materials amounts to $450,000. GKC Corporation's financial statements at December
31. Year 4, for this transaction should
90. In any given accounting period, the amount a firm reports as income before income taxes for financial
reporting in comparison to the amount of taxable income that appears on its income tax return may differ due to
temporary differences. The temporary differences may create a deferred tax asset due to
91. In its first year of operations, EMB Company reported financial statement income (prior to income tax
expense) of $100,000. In the same year, EMB Company reported $80,000 of taxable income, the difference
being due to temporary differences. Assuming the enacted tax rate for the current year and all future years is
30%, what is EMB's current year adjustment for deferred income taxes?
92. In any given accounting period, the amount a firm reports as income before income taxes for financial
reporting in comparison to the amount of taxable income that appears on its income tax return may differ due to
temporary differences. Temporary differences include
93. In any given accounting period, the amount a firm reports as income before income taxes for financial
reporting in comparison to the amount of taxable income that appears on its income tax return may differ due to
permanent differences. Permanent differences include
94. Lally Corporation
Information relating to Lally Corporation for Year 1 and Year 2 is as follows:
Year 1
Year 2
Income before taxes
$5,000,000
$4,000,000
Interest income included above that was not subject to income
taxes
100,000
100,000
·
Income before income taxes in Year 1 included rent revenue of $80,000 that was not subject to income
tax until its receipt in Year 2
·
Lally was subject to an effective income tax rate of 40% in Year 1 and 2.
(CMA adapted, Jun 86 #7) Refer to the Lally Corporation example. The amount of current income tax expense
that would have been reported on Lally Corporation's Income Statement for the year ended December 31, Year
1 is
95. Lally Corporation
Information relating to Lally Corporation for Year 1 and Year 2 is as follows:
Year 1
Year 2
Income before taxes
$5,000,000
$4,000,000
Interest income included above that was not subject to income
taxes
100,000
100,000
·
Income before income taxes in Year 1 included rent revenue of $80,000 that was not subject to income
tax until its receipt in Year 2
·
Lally was subject to an effective income tax rate of 40% in Year 1 and 2.
(CMA adapted, Jun 86, #9) Refer to the Lally Corporation example. Lally Corporation's current income tax
expense for Year 2 was
96. Lally Corporation
Information relating to Lally Corporation for Year 1 and Year 2 is as follows:
Year 1
Year 2
Income before taxes
$5,000,000
$4,000,000
Interest income included above that was not subject to income
taxes
100,000
100,000
·
Income before income taxes in Year 1 included rent revenue of $80,000 that was not subject to income
tax until its receipt in Year 2
·
Lally was subject to an effective income tax rate of 40% in Year 1 and 2.
(CMA adapted, Jun 86 #10) Refer to the Lally Corporation example. The amount of deferred income taxes that
would have been reported on Lally Corporation's Statement of Financial Position on December 31, Year 2, is
97. Some employers specify the benefit that employees will receive during retirement. The employer must
contribute sufficient amounts to the pension plan so that those contributions plus earnings from investments
made with those contributions will be sufficient to pay the specified benefit. Such plans are referred to as
98. Some employers promise to contribute a certain amount to the pension plan each period for each employee,
usually based on an employee's salary, without specifying the benefits the employee will receive during
retirement. The amounts employees eventually receive depend on the investment performance of the pension
plan. Such plans are referred to as
99. In any given accounting period, the amount a firm reports as income before income taxes for financial
reporting in comparison to the amount of taxable income that appears on its income tax return may differ due to
100. When faced with uncertainty, firms may want to keep liabilities off their balance sheets. Such firms may
attempt to engage in off-balance-sheet financing.
Required:
a.
Why might firms want to keep liabilities off their balance sheets?
b.
How might firms attempt to keep liabilities off their balance sheets?
a.
Firms may want to engage in off-balance-sheet financing to lower the cost of borrowing (as liabilities
would not be on the balance sheet to require higher interest payments) or avoid violating debt
covenants.
b.
Firms may attempt off-balance-sheet financing through the use of executory contracts or contingent
obligations. Both types of activities may keep liabilities off the balance sheet.
101. Do firms confront ethical issues when engaging in off-balance-sheet financing?
102. Using accounts receivable to achieve off-balance-sheet financing. Ares Appliance Store has $100,000 of
accounts receivable on its books on January 2, 2009. These receivables are due on December 31, 2009. The firm
wants to use these accounts receivables to obtain financing.
a. Prepare journal entries during 2009 for the transactions in parts (i) and (ii) below:
(1) The firm borrows $100,000 from its bank, using the accounts receivable as collateral. The loan is
repayable on December 31, 2009, with interest at 8%.
(2) The firm sells the accounts receivable to the bank for $92,593. It collects amounts due from customers
on these accounts and remits the cash to the bank.
b. Compare and contrast the income statement and balance sheet effects of these two transactions.
c. How should Ares Appliance Store structure this transaction to ensure that it qualifies as a sale instead of a
collateralized loan?
(Ares Appliance Store; using accounts receivable to achieve off-balance-sheet financing.)
a. (1) January 2, 2009
Cash ....................................................... 92,593
Cash.................................................................100,000
To record interest expense on loan for 2009 and repayment of the loan.
(2) Cash.......................................................... 92,593
Loss from Sale of
103. Artemis Company grows and ages tobacco. On January 2, 2009, the firm has aging tobacco with a cost of
$200,000 and a current market value of $300,000. Artemis Company wants to use this tobacco to obtain
financing. The firm uses a December 31 year-end.
a. Prepare journal entries during 2009 and 2010 for the transactions in parts (i) and (ii) below:
(1) The firm borrows $300,000 from its bank, using the tobacco inventory as collateral. The loan is
repayable on December 31, 2010, with interest at 10% per year compounded annually. Assume zero storage
costs. The firm expects to sell the tobacco on December 31, 2010, for $363,000.
(2) The firm sells the tobacco inventory to the bank for $300,000. It promises to sell the inventory on behalf
of the bank at the end of two years and remit the proceeds to the bank.
b. Compare and contrast the income statement and balance sheet effects of these two transactions.
c. How should Artemis Company structure this transaction to ensure that it qualifies as a sale instead of a
collateralized loan?
(Artemis Company; using inventory to achieve off-balance-sheet financing.)
a. (1) January 2, 2009
Cost of Goods Sold................................................ 200,000
Inventory.................................................................... 200,000
Cost of Goods Sold................................................ 200,000
Inventory..................................................................... 200,000
To record cost of tobacco “sold”.
b. Both transactions result in a total of $100,000 income for the two years combined. The
collateralized loan shows $163,000 gross profit from the sale in 2010 and interest expense of $30,000 in 2009
104. The Aphrodite Manufacturing Company reports the following information related to its only pension plan
for 2009 (amounts in millions).
Pension Plan Assets, Beginning of 2009.. . . . . . . . . . . . . . . . . . . . . . . . . . .
$43,484
Plus Actual Return on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,239
Plus Employer Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
526
Less Benefits Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,046)
Pension Plan Assets, End of 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$46,203
======
Pension Plan Liability, Beginning of 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . .
$45,183
Plus Service Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
908
Plus Interest Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,497
Less Actuarial Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(960)
Less Benefits Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,046)
Pension Plan Liability, End of 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$45,582
======
Service Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$908
Interest Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,497
Expected Return on Pension Plan Investments . . . . . . . . . . . . . . . . . . . . . . .
(3,456)
Amortization of Actuarial Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,101
Net Pension Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,050
======
Give a single journal entry on the books of the Aphrodite Manufacturing Company to recognize pension
expense, the pension plan contribution, and the change in the net pension asset or net pension liability for 2009.
Be sure to consider needed entries in Other Comprehensive Income, supporting the entry in this account with
amounts from the disclosures above. Ignore income taxes.
105. Apollo, an automobile manufacturer reports the following information related to its health care plan for
2009 (amounts in millions).
Health Care Plan Assets, Beginning of 2009..........................................
$ 6,497
Plus Actual Return on Investments.............................................................
510
Plus Employer Contribution .....................................................................
0
Less Benefits Paid..................................................................................
(1,547)
Health Care Plan Assets, End of 2009....................................................
$ 5,460
=====
Health Care Plan Liability, Beginning of 2009.........................................
$39,274
Plus Service Cost.......................................................................................
617
Plus Interest Cost .....................................................................................
2,004
Less Actuarial Gain..................................................................................
(9,485)
Less Benefits Paid....................................................................................
(1,547)
Health Care Plan Liability, End of 2009 ...................................................
$30,863
======
Service Cost................................................................................................
$ 617
Interest Cost................................................................................................
2,004
Expected Return on Health Care Plan Investments. .................................
(479)
Amortization of Actuarial Losses...............................................................
41
Net Health Care Benefits Expense..........................................................
$ 2,183
======
Give a single journal entry for the Apollo, to recognize health care benefits expense, the health care plan
contribution, and the change in the net health care benefits asset or net health care benefits liability for 2009. Be
sure to consider needed entries in Other Comprehensive Income, supporting the entry in this account with
amounts from the preceding disclosures. Ignore income taxes.
(Preparing journal entry for health care plan.) (Amounts in Millions)
106. Heracles, an athletic shoe company, reports the following information about its income taxes for three
recent years (amounts in millions):
Components of Income Tax Expense 2011 2010 2009
Currently Payable $775.6 $622.8 $495.4
Deferred (26.0) 25.4 9.0
Total Income Tax Expense $749.6 $648.2 $504.4
===== ====== =====
a. Give the journal entries to record income tax expense for 2009, 2010, and 2011.
b. Describe the likely reasons for the pattern of taxes currently payable and deferred for each year. Assume
that the deferred taxes relate primarily to retirement benefits. The effective tax rate was relatively stable for the
three years.
(Preparing journal entries for income tax expense.) (Amounts in Millions)
a. 2009
Income Tax Expense....................................................... 504.4
Income Tax Payable............................................................ 495.4
Deferred Tax Liability........................................................... 9.0
107. Zeus, an electric utility, reports the following information about its income taxes for three recent years
(amounts in millions):
Components of Income Tax Expense 2011 2010 2009
Currently Payable . . . . . . . . . . . . . . . . . . . . . $ 46 $415 $ (96)
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . 344 (74) 368
Total Income Tax Expense . . . . . . . . . . . . . . . $390 $341 $ 272
a. Give the journal entries to record income tax expense for 2009, 20010, and 2011.
b. Describe the likely reasons for the pattern of taxes currently payable and deferred for each year. Assume
that deferred taxes relate primarily to depreciation temporary differences. The effective tax rate was relatively
stable for the three years.
(Preparing journal entries for income tax expense.) (Amounts in Millions)
a. 2009
Income Tax Expense........................................................ 272
Income Tax Receivable.......................................................96
Deferred Tax Liability............................................................. 368
108. Demeter, a consumer foods company reports the following information related to its only pension plan for
2009 (amounts in millions).
Pension Plan Assets, Beginning of 2009..........................................................
$5,086
Plus Actual Return on Investments.................................................................
513
Plus Employer Contribution............................................................................
19
Less Benefits Paid........................................................................................
(233)
Pension Plan Assets, End of 2009..................................................................
$5,385
======
Pension Plan Liability, Beginning of 2009.......................................................
$5,771
Plus Service Cost.........................................................................................
245
Plus Interest Cost........................................................................................
319
Less Actuarial Gain.....................................................................................
(155)
Less Benefits Paid.......................................................................................
(233)
Pension Plan Liability, End of 2009...............................................................
$5,947
=====
Service Cost................................................................................................
$ 245
Interest Cost................................................................................................
319
Expected Return on Pension Plan Investments ..............................................
(391)
Amortization of Actuarial Losses..................................................................
167
Net Pension Expense
$340
====
Give a single journal entry for the Demeter to recognize pension expense, the pension plan contribution, and the
change in the net pension asset or net pension liability for 2009. Be sure to consider needed entries in Other
Comprehensive Income, supporting the entry in this account with amounts from the disclosures above. Ignore
income taxes.
(Preparing journal entry for pension plan.) (Amounts in Millions)
2009
109. Amun Company reports the following information for a year:
Book Income Before Income Taxes..........................................$318,000
Income Tax Expense............................................................... 156,000
Income Taxes Payable for the Year........................................ 48,000
Income Tax Rate on Taxable Income .................................... 40%
Amun has both permanent and temporary differences between book income and taxable income.
a. What is the amount of temporary differences for the year? Give the amount, and indicate whether the
effect is to make book income larger or smaller than taxable income.
b. What is the amount of permanent differences for the year? Give the amount, and indicate whether the
effect is to make book income larger or smaller than taxable income.
Amun Company; deriving permanent and temporary differences from financial statement disclosures.)
Change in
Income Tax = Income Taxes + Deferred Tax
Expense Currently Payable Liability
110. Horus Company reports the following information about its financial statements and tax return for a year:
Depreciation Expense from Financial Statements $322,800
Financial Statement Pretax Book Income 190,800
Income Tax Expense from Financial Statements 42,000
Income Taxes Payable from Tax Returns 27,600
Together the federal and state governments tax taxable income at a rate of 40%. Permanent differences result
from municipal bond interest that appears as revenue in the financial statements but is exempt from income
taxes. Temporary differences result from the use of accelerated depreciation for tax returns and straight-line
depreciation for financial reporting. Reconstruct the income statement for financial reporting and for tax
reporting for the year, identifying temporary differences and permanent differences.
(Horus Company; reconstructing information about income taxes.)
HORUS COMPANY
Illustrations of Timing Differences and Permanent Differences
Financial Type of Income Tax
Statements Difference Return
Operating Income Except
Depreciation $ 427,800 (6) -- $ 427,800 (4)
Depreciation (322,800) (g) Temporary (358,800) (3)
Municipal Bond Interest 85,800 (5) Permanent --
Taxable Income -- $ 69,000 (2)
Pretax Book Income $ 190,800 (g)
Income Taxes Payable at
40% $ 27,600 (g)
Income Tax Expense at 40%
of $105,000 = $427,800 –
$322,800, Which Is
Income Excluding Perma-
nent Differences (42,000) (g)
Net Income $ 148,800 (1)
Order and derivation of computations:
(g) Given.
111. Washington Corporation purchases a new machine for $50,000 on January 1, 2008. The machine has a
four-year estimated service life and an estimated salvage value of zero. After paying the cost of running and
maintaining the machine, the firm enjoys a $25,000-per-year excess of revenues over expenses (except
depreciation and taxes). In addition to the $25,000 from the machine, other pretax income each year is $35,000.
Washington uses straight-line depreciation for financial reporting and depreciates the machine for tax reporting
using the following percentages: 33% in the first year, 44% in the second, 15% in the third, and 8% in the
fourth. Depreciation is Woodward’s only temporary difference. Washington pays combined federal and local
income taxes at a rate of 40% of taxable income.
a. Compute the amount of income taxes currently payable for each of the four years.
b. Compute the carrying value of the machine for financial reporting and the tax basis of the machine for tax
reporting at the end of each of the four years. The tax basis is the amortized cost for income tax purposes.
c. Compute the amount of income tax expense for each of the four years.
d. Give the journal entries to record income tax expense and income tax payable for 2008 through 2011.
(Washington Corporation; effect of temporary differences on income taxes.)
a. 2008 2009 2010 2011
Other Pre-Tax Income $ 35,000 $ 35,000 $ 35,000 $ 35,000
Income before Depreciation
Tax Basis, December 31 $ 33,500 $ 11,500 $ 4,000 $ --
c. Financial Reporting 2008 2009 2010 2011
Income before Depreciation $ 60,000 $ 60,000 $ 60,000 $ 60,000
Depreciation Expense
