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

E16-24 (Balance Sheet Classification)

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 expense, $15 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).
2. Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax return.
3. Income from installment sales of properties, $50 million: income recorded in the year of the sale; taxable when received equally over the next five years.
4. Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax purposes.

Required:
Show how any deferred tax amounts should be classified and reported in the December 31 balance sheet. The tax rate is 40%.

Click here for the solution: 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

Livetree Ltd. Is developing a detailed financial plan for next year and expects to have the following fixed asset accounts by the end of this year ($000)

Livetree Ltd. Is developing a detailed financial plan for next year and expects to have the following fixed asset accounts by the end of this year ($000).

Gross $45,789
Accumulated Depreciation (26,328)
Net Fixed Assets $19,461

The capital plan already completed calls for expenditures of $7,042,000 on new equipment next year, which will be depreciated straight line over a 10-year period without a half-year convention. Assets currently on the books will depreciate by $4,258,000 next year. Develop Livetree’s ending fixed asset balances for the planned year.


Click here for the solution: Livetree Ltd. Is developing a detailed financial plan for next year and expects to have the following fixed asset accounts by the end of this year ($000)

At December 31, 2010, Cord Company's plant asset and accumulated depreciation and amortization accounts had balances as follows

P11-2 Comprehensive problem; Chapters 10 and 11

At December 31, 2010, Cord Company's plant asset and accumulated depreciation and amortization accounts had balances as follows:

Depreciation is computed to the nearest month and residual values are immaterial. Transactions during 2011 and other information:

AND SO ON

a. On January 6, 2011, a plant facility consisting of land and building was acquired from King Corp. in exchange for 25,000 shares of Cord's common stock. On this date, Cord's stock had a fair value of $50 a share. Current assessed values of land and building for property tax purposes are $187,500 and $562,500, respectively.
b. On March 25, 2011, new parking lots, streets, and sidewalks at the acquired plant facility were completed at a total cost of $192,000. These expenditures had an estimated useful life of 12 years.
c. The leasehold improvements were completed on December 31, 2007, and had an estimated useful life of eight years. The related lease, which would terminate on December 31, 2013, was renewable for an additional four-year term. On April 29, 2011, Cord exercised the renewal option.
d. On July 1, 2011, machinery and equipment were purchased at a total invoice cost of $325,000. Additional costs of $10,000 for delivery and $50,000 for installation were incurred.
e. On August 30, 2011, Cord purchased a new automobile for $12,500.
f. On September 30, 2011, a truck with a cost of $24,000 and a carrying amount of $9,100 on date of sale was sold for $11,500. Depreciation for the nine months ended September 30, 2011, was $2,650.
g. On December 20, 2011, a machine with a cost of $17,000 and a book value of $2,975 at date of disposition was scrapped without cash recovery.

Required:
1. Prepare a schedule analyzing the changes in each of the plant asset accounts during 2011. This schedule should include columns for beginning balance, increase, decrease, and ending balance for each of the plant asset accounts. Do not analyze changes in accumulated depreciation and amortization.
2. For each asset category, prepare a schedule showing depreciation or amortization expense for the year ended December 31, 2011. Round computations to the nearest whole dollar.


Click here for the solution: At December 31, 2010, Cord Company's plant asset and accumulated depreciation and amortization accounts had balances as follows

Ayres Services acquired an asset for $80 million in 2011

E 16-3 Taxable income given; calculate deferred tax liability

Ayres Services acquired an asset for $80 million in 2011. 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. The enacted tax rate is 40%. Amounts for pretax accounting income, depreciation, and taxable income in 2011, 2012, 2013, and 2014 are as follows:

2011 2012 2013 2014
Pretax accounting Income 330 350 365 400
Depreciation on the income statement 20 20 20 20
Depreciation on the tax return (25) (33) (15) (7)
Taxable income 325 337 370 413

Required:
For December 31 of each year, determine (a) the temporary book–tax difference for the depreciable asset and (b) the balance to be reported in the deferred tax liability account.

Click here for the solution: Ayres Services acquired an asset for $80 million in 2011

At the end of 2010, Payne Industries had a deferred tax asset account with a balance of $30 million attributable

E 16-10 Deferred tax asset; taxable income given; valuation allowance

At the end of 2010, 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 2011, the temporary difference is $70 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2011 is $180 million and the tax rate is 40%.

Required:
1. Prepare the journal entry(s) to record Payne's income taxes for 2011, assuming it is more likely than not that the deferred tax asset will be realized.
2. Prepare the journal entry(s) to record Payne's income taxes for 2011, assuming it is more likely than not that one-half of the deferred tax asset will ultimately be realized.

Click here for the solution: At the end of 2010, Payne Industries had a deferred tax asset account with a balance of $30 million attributable

Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement

Lease versus purchase decision (LO4) Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be $10,000. It can borrow funds for four years at 12 percent interest. The firm will use the three-year MACRS depreciation category (with the associated four-year write-off). Assume a tax rate of 35 percent.

The other alternative is to sign two operating leases, one with payments of $2,600 for the first two years, and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar.

a. Compute the aftertax cost of the leases for the four years.
b. Compute the annual payment for the loan (round to the nearest dollar).
c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan due to rounding.)
d. Determine the depreciation schedule (see Table 12–9).
e. Compute the aftertax cost of the borrow–purchase alternative.
f. Compute the present value of the aftertax cost of the two alternatives. Use a discount rate of 8 percent.
g. Which alternative should be selected, based on minimizing the present value of aftertax costs?

Click here for the solution: Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement

Your portfolio has three asset classes

Your portfolio has three asset classes. U.S. government T-bills account for 45% of the portfolio, large-company stocks constitute another 40%, and small-company stocks make up the remaining 15%. If the expected returns are 3.8% for the T-bills, 12.3% for the large-company stocks, and 17.4% for the small-company stocks, what is the expected return of the portfolio?

Click here for the solution: Your portfolio has three asset classes

From the information listed in the text, compute the average annual return, the variance, standard deviation, and coefficient of variation for each asset

P12-1 From the information listed in the text, compute the average annual return, the variance, standard deviation, and coefficient of variation for each asset.

P12-2 Based upon your answers to problem 1, which asset appears riskiest based on standard deviation? Based on coefficient of variation?

Click here for the solution: From the information listed in the text, compute the average annual return, the variance, standard deviation, and coefficient of variation for each asset