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Financial data of Fancy Footwork Company for 2013 and 2012 are presented below

FANCY FOOTWORK COMPANY
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2013 AND 2012
2013 2012
Cash $ 260,000 $ 230,000
Receivables $ 156,000 $ 120,000
Inventory $ 180,000 $ 220,000
Plant assets $ 160,000 $ 135,000
Accumulated depreciation $ (80,000) $ (76,000)
Long-term investments (held-to-maturity) $ 80,000 $ 93,000
$ 756,000 $ 722,000

Accounts payable $ 135,000 $ 122,000
Accrued liabilities $ 30,000 $ 33,100
Bonds payable $ 135,000 $ 166,000
Common stock $ 180,000 $ 165,000
Retained earnings $ 276,000 $ 235,900
$ 756,000 $ 722,000

FANCY FOOTWORK COMPANY
INCOME STATEMENT
For the year ended Dec 31, 2013
Sales 750000
Cost of Goods Sold 530000
Gross Margin 220000
Selling and administrative expenses 106000
Income from Operations 114000
Other revenues and gains
Gain on sale of investments 7000
Income before tax 121000
Income tax expense 48400
Net Income 72600

Additional information:
During the year, $9000 of common stock was issued in exchange for plant assets. No plant assets were sold in 2012. Cash dividends were $32500.

Required:
A) Prepare a statement of cash flows using the indirect method
B) Prepare a statement of cash flows using the direct method. (Do not prepare a reconciliation schedule.

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Problem 1

The Diamond Glitter Company is in the process of preparing its financial statements for 2012. Assume that no entries for depreciation have been recorded in 2012. The following information related to depreciation of fixed assets is provided to you.

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(TCO B) As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of Noor Co.’s sole depreciable asset, acquired in Year 1, exceeded its tax basis by $250,000 at December 31, Year 1. This difference will reverse in future years. The enacted tax rate is 30% for Year 1, and 40% for future years. Noor has no other temporary differences. In its December 31, Year 1, balance sheet, how should Noor report the deferred tax effect of this difference?

(TCO B) Thorn Co. applies Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. At the end of Year 1, the tax effects of temporary differences were as follows:

Deferred
tax assets Related asset
(liabilities) classification
Accelerated tax depreciation ($75,000) Noncurrent asset
Additional costs in inventory for tax purposes 25,000 Current asset
($50,000)

A valuation allowance was not considered necessary. Thorn anticipates that $10,000 of the deferred tax liability will reverse in Year 2. In Thorn’s December 31, Year 1, balance sheet, what amount should Thorn report as noncurrent deferred tax liability under U.S. GAAP?

(TCO B) Justification for the method of determining periodic deferred tax expense is based on the concept of:

(TCO B) In Year 2, Ajax, Inc. reported taxable income of $400,000 and pretax financial statement income of $300,000. The difference resulted from $60,000 of nondeductible premiums on Ajax’s officers’ life insurance and $40,000 of rental income received in advance. Rental income is taxable when received. Ajax’s effective tax rate is 30%. In its Year 2 income statement, what amount should Ajax report as income tax expense-current portion?

(TCO B) Stone Co. began operations in Year 1 and reported $225,000 in income before income taxes for the year. Stone’s Year 1 tax depreciation exceeded its book depreciation by $25,000. Stone also had nondeductible book expenses of $10,000 related to permanent differences. Stone’s tax rate for Year 1 was 40%, and the enacted rate for years after Year 1 is 35%. In its December 31, Year 1, balance sheet, what amount of deferred income tax liability should Stone report?

 
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(TCO A) Platypus Building Inc. won a bid for a new office building contract. Below is info from the project accountant:

(TCO A) Kerry Corp purchased a used bottling machine from Bob’s Bottling Inc. on Jan 1, 2012 for $900000.  Bob accounted for the sale correctly under the installment sales method.  It had a book value of $675000.  Kerry paid with $300000 cash and a note for $600000 with an annual interest of 10%.  Kerry agreed to make equal annual payments of $200000.  Kerry Corp made their first payment on Jan 1, 2013 of $260000 which included interest of $60000 to date of payment.

As of Dec 31, 2013 Bob has deferred gross profit of ?

(TCO A) Blue Suede Construction Corp used the percentage-of-completion method of revenue recognition. They were contracted to build the new amphitheater for $4500000.  Additional information was provided:

(TCO A) Revenue is NOT recognized at the time of sale when

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Problem 1

You are the Senior Accountant for the Patty Corporation which has several divisions.  They each keep their own accounting books and have chosen the appropriate method of revenue recognition based on their operations.

Problem 2

Curiosity Company provided the following financial information for its installment-sales for the current year

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(TCO D) Lease methods of accounting are

(TCO D) Advantage(s) of leasing versus buying equipment is (are)

(TCO D) Pirate, Inc. leased equipment from Shoreline Enterprises under a four-year lease requiring equal annual payments of $320,000, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pirate, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pirate, Inc. in the first year of the asset’s life?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods 3.5771 3.31213
10%, 4 periods 3.48685 3.16986

(TCO D) On January 2, 2013, Bentley Co. leases equipment from Harry’s Leasing Company with five equal annual payments of $30,000 each, payable beginning December 31, 2013. Bentley Co. agrees to guarantee the $60,000 residual value of the asset at the end of the lease term. Bentley’s incremental borrowing rate is 10%; however, it knows that Harry’s implicit interest rate is 8%. What journal entry would Harry’s Leasing Company make at January 2, 2013 assuming this is a direct–financing lease?
PV Annuity Due PV Ordinary Annuity PV Single Sum
8%, 5 periods 4.31213 3.99271 0.68508
10%, 5 periods 4.16986 3.79079 0.62092

(TCO D) Lease A does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the leased property. How should the lessee classify these leases

(TCO D) Carl Leasing, Inc. agrees to lease medical equipment to Sally, Inc. on January 1, 2012. They agree on the following terms

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Problem 1

Kingdom Leasing Inc. agrees to lease jousting equipment to Knight Inc. on Jan 1, 2012.  They agree on the following terms

1) The normal selling price of the jousting equipment is $325000 and the cost of the asset to Kingdom Leasing Inc. was $250000

2) Knight will pay all maintenance, insurance and taxes costs directly and annual payments of $60000 on Jan 1 each year

3) The lease begins on Jan 1, 2012 and payments will be in equal annual installments

4) The lease is noncancelable with no renewal option.  The lease term is 10 years (the same as the estimated economic life).

5) At the end of the lease, the jousting ring will revert to Kingdom Leasing Inc. and have an unguaranteed residual value of $30000.  Their implicit interest rate is 10%

6) Kingdom Leasing, Inc.  Incurred costs of $6500 in negotiating and closing the lease.  There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable

Problem 2

Kingdom Leasing Inc. agrees to lease jousting equipment to Knight Inc. on Jan 1, 2012.  They agree on the following terms

1) The normal selling price of the jousting equipment is $325000 and the cost of the asset to Kingdom Leasing Inc. was $250000

2) Knight will pay all maintenance, insurance and taxes costs directly and annual payments of $60000 on Jan 1 each year

3) The lease begins on Jan 1, 2012 and payments will be in equal annual installments

4) The lease is noncancelable with no renewal option.  The lease term is 10 years (the same as the estimated economic life).

5) At the end of the lease, the jousting ring will revert to Kingdom Leasing Inc. and have an unguaranteed residual value of $30000.  Their implicit interest rate is 10%.

6) Kingdom Leasing, Inc.  Incurred costs of $6500 in negotiating and closing the lease.  There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable

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Problem 1

On January 1, 2012, Harrington Company has the following defined benefit pension plan balances.

Projected benefits obligation $5,600,000
Fair value of plan assets 6,400,000

The interest (settlement) rate applicable to the plan is 9%. On January 1, 2013, the company amends its pension
agreement so that service costs of $620,000 are created. Other data related to the pension plan are as follows:

Problem 2

Allison Co. has the following postretirement benefit plan balances on January 1, 2012

 
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Problem 1

California Surplus Inc. qualifies to use the installment-sales method for tax purposes and sold an investment on an installment basis. The total gain of $75000 was reported for financial reporting purposes in the period of sale. The installment period is 3 years; one-third of the sale price is collected in 2012 and the rest in 2013. The tax rate was 35% in 2012, and 30% in 2013 and 30% in 2014. The accounting and tax data is shown below.

Financial Accounting Tax Return
2012 (40% tax rate)
Income before temporary difference $ 175,000 $ 175,000
Temporary difference $ 75,000 $ 25,000
Income $ 250,000 $ 200,000

2013 (35% tax rate)
Income before temporary difference $ 200,000 $ 200,000
Temporary difference $ – $ 25,000
Income $ 200,000 $ 225,000

2014 (35% tax rate)
Income before temporary difference $ 180,000 $ 180,000
Temporary difference $ – $ 25,000
Income $ 180,000 $ 205,000

Required:

1) Prepare the journal entries to record the income tax expense, deferred income taxes, and the income taxes payable for 2012, 2013, and 2014. No deferred income taxes existed at the beginning of 2012.
2) Explain how the deferred taxes will appear on the balance sheet at the end of each year. (Assume Installment Accounts Receivable is classified as a current asset.)
3) Show the income tax expense section of the income statement for each year, beginning with “Income before income taxes.”

Problem 2

The Ambrosia Corporation’s lead accountant shows the following information.
On Jan. 1, 2012, Ambrosia purchased a bottling machine for $3,000,000.
A) Straight-line basis depreciation for 3 years for tax purposes.
B) Half-year convention for 5 years for financial reporting (See Appendix 11A).
C) Tax-exempt municipal bonds yielded interest of $50,000 in 2013.
D) Pretax financial income is $3,000,000 in 2012 and $4,400,000 in 2013.
E) The company recognized an extraordinary gain of $250,000 in 2013 (which is fully taxable).
F) Taxable income is expected in future years with an expected tax rate of 40%.

Required:
1) Compute taxable income and income taxes payable for 2013.
2) Prepare the journal entries for income tax expense, income taxes payable, and deferred taxes for 2013.
3) Prepare the deferred income taxes presentation for Dec 31, 2013 balance sheet.

Required:
a) Prepare journal entries for the end of the year based on the information above.
b) Prepare the entry to record the gross profit realized in the current year.

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(TCO A) Benny Building, Inc. won a bid for a new warehouse building contract.
Below is information from the project accountant.

TCO B) At the beginning of 2012, Barbara, Inc. has a deferred tax asset of $8,000 and deferred tax liability of $6,500. In 2012, pretax financial income was $600,000 and the tax rate was 35%.

(TCO C) Presented below is pension information related to Baked Goods, Inc. for the year 2013

(TCO C) Bunny Hopping, Inc. sponsors a defined-benefit pension plan. The following data relate to the operation of the plan for the year 2013

(TCO D) Bucky, Inc. leased equipment from Green Enterprises under a 4-year lease requiring equal annual payments of $65,000, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Bucky, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Bucky, Inc. in the first year of the asset’s life?

(TCO E) On December 31, 2013, Antique Salvage, Inc. appropriately changed its inventory valuation method  from weighted-average cost to FIFO method for financial statement and income tax purposes. The change will result in a $1,000,000 increase in the beginning inventory at January 1, 2013. Assume a 40% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is

(TCO E) Which of the following is not a change in accounting estimate

(TCO F) Balancing Act, Inc recognized net income of $489,000 including $7,500 in depreciation expense

(TCO G) The disclosure of accounting policies is important to the financial statements when determining

(TCO G) Adventure, Inc is a company that operates in four different divisions. The following information relating to each segment is available for 2013

(TCO A) Bentley Corporation has several divisions. All operations keep their own accounting books and have chosen the appropriate method of revenue recognition

(TCO B) Buffy, Inc. qualifies to use the installment-sales method for tax purposes and sold an investment on an installment basis. The total gain of $750,000 was reported for financial reporting purposes in the period of sale. The installment period is 3 years; one third of the sale price is collected in 2012 and the rest in 2013. The tax rate was 40% in 2012, 35% in 2013, and 35% in 2014. The accounting and tax data is shown below

(TCO D) Bing Leasing, Inc. agrees to lease equipment to Boyd, Inc. on January 1, 2012. They agree on the following terms:

(TCO F) Financial data of Beautiful Beadwork Company for 2013 and 2012 are presented below

(TCO G) Selected financial ratios.
The following information pertains to Allbright, Inc

(TCO E) Changes in accounting principle include direct and indirect effects. Please discuss how the indirect effects of a change in accounting principle should be treated and disclosed

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