Complete a four-part assessment in which you will compute values, prepare journal entries, and provide written explanations. Introduction Note: An accounting cycle requires specific
- Complete a four-part assessment in which you will compute values, prepare journal entries, and provide written explanations.
Introduction
Note: An accounting cycle requires specific steps that need to be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order.
Companies must present financial information to the investment community that provides a clear picture of present and potential tax obligations and tax benefits.
Companies spend a considerable amount of time and effort to minimize their income tax payments—and with good reason. Income taxes are major costs of doing business for most business organizations, regardless of the form of ownership.
Leasing of an asset has been around for many years, especially in the private sector. Individuals have utilized this form of asset acquisition for the purchase of realty, personal property, and even services. It has allowed them to acquire assets for little or no money down, use the asset for a determinable period of time, and then simply return the asset and terminate the lease agreement.
Today, leasing of capital assets is the fastest growing form of capital investment for corporations. It allows businesses to acquire large high-dollar assets with little or no responsibility for their maintenance and allows them to trade those assets in for newer models at the end of the lease. Consequently, accounting procedures for handling these transactions has undergone significant change over the last 25 years.
Preparation
- Assessment 5 Data Sheet [DOC].
- Assessment 5 Template [DOC].
- Overview
Note: Do not proceed with this assessment until you have reviewed faculty feedback on Assessment 4.
This assessment has four parts. The Assessment 5 Data Sheet contains the necessary information for all four parts. Record your answers in the Assessment 5 Template. Submit the completed template for this assessment. Both documents are linked in the Resources under the Required Resources heading.
Imagine your boss has handed you four client files to complete by end of day. However, several of the clients require written explanations of your reasoning.
Part 1: Temporary Differences
Use the information for Part 1 in the Assessment 5 Data Sheet to complete the following: - Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2016, 2017, and 2018.
- Indicate how deferred taxes will be reported on the 2018 balance sheet, assuming there were no temporary differences prior to 2016. Sharp's product warranty is for 12 months.
- Explain your reasoning. Use the blank area in the template following the journal entries to make your notes.
- Prepare the income tax expense section of the income statement for 2018, beginning with the line "Pretax financial income."
- Where appropriate, show all calculations leading to the final solution.
Part 2: Carryback and Carryforward
Use the information in Part 2 of the Assessment 5 Data Sheet to complete the following: - Prepare the journal entries for the years 2015-2019 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Bryan Clark Company uses the carryback provision.
- All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)
- Where appropriate, show all calculations leading to the final solution.
Part 3: Lessee Entries: Capital Lease
Use the information in Part 3 of the Assessment 5 Data Sheet to complete the following: - Identify and explain the type of lease. Use the blank area in the template following the journal entries to make your notes.
- Compute the present value of the minimum lease payments.
- Prepare all necessary journal entries for Southern for this lease through January 1, 2019.
- Where appropriate, show all calculations leading to the final solution.
Part 4: Lessee-Lessor Entries: Sales-Type Lease
Use the information in Part 4 of the Assessment 5 Data Sheet to complete the following: - Discuss the nature of this lease to Capital and Hinton. Use the blank area in the template following the journal entries to make your notes.
- Calculate the amount of the annual rental payment.
- Prepare all the necessary journal entries for Hinton for 2018.
- Prepare all the necessary journal entries for Capital for 2018.
- Where appropriate, show all calculations leading to the final solution.
Competencies Measured
By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria: - Competency 1: Define financial accounting conventions to support practice as a professional in the field.
- Apply tax rates to temporary differences.
- Analyze carryback and carryforward issues.
- Competency 3: Evaluate economic resources for an enterprise.
- Apply procedures for a capital lease.
- Apply procedures for a sales-type lease.
Assessment 5 Data Sheet
Part 1: Temporary Differences
Sharp Company has two temporary differences between its income tax expense and income taxes payable. The information is shown below.
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2018 |
2019 |
2020 |
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Pretax financial income |
$462,000 |
$500,500 |
$519,750 |
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Excess depreciation expense on tax return |
(16,500) |
(22,000) |
(5,500) |
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Excess warranty expense in financial income |
11,000 |
5,500 |
4,400 |
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Taxable income |
$456,000 |
$484,000 |
$518,650 |
The income tax rate for all years is 40%.
Part 2: Carryback and Carryforward
The pretax financial income (or loss) figures for Bryan Clark Company are as follows.
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2016 |
$ 88,000 |
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2017 |
137,500 |
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2018 |
44,000 |
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2019 |
(88,000) |
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2020 |
(191,900) |
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2021 |
66,000 |
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2022 |
55,000 |
Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 45% tax rate for 2016 and 2017 and a 25% tax rate for the remaining years.
Part 3: Lessee Entries: Capital Lease
On January 1, 2018, Southern, Inc. signed a 10-year non-cancelable lease for a machine. The terms of the lease called for Southern to make annual payments of $17,240 at the beginning of each year, starting January 1, 2018. The machine has an estimated useful life of 12 years.
The machine reverts back to the lessor at the end of the lease term. Southern uses the straight-line method of depreciation for all of its plant assets. Southern’s incremental borrowing rate is 4%, and the Lessor’s implicit rate is unknown.
Part 4: Lessee-Lessor Entries: Sales-Type Lease
On January 1, 2018, Capital Corp. leased equipment to Hinton Corporation. The following information pertains to this lease.
1. The term of the noncancelable lease is 12 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease.
2. Equal rental payments are due on January 1 of each year, beginning in 2018.
3. The fair value of the equipment on January 1, 2018, is $247,500, and its cost is $198,000.
4. The equipment has an economic life of 16 years. Hinton depreciates all of its equipment on a straight-line basis.
5. Capital set the annual rental to ensure a 6% rate of return. Hinton’s incremental borrowing rate is 4%, and the implicit rate of the lessor is unknown.
6. Collectability of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor.
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Assessment 5
Part 1: Temporary Differences
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Explanation:
Part 2: Carryback and Carryforward
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Part 3: Lessee Entries: Capital Lease
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Explanation:
Part 4: Lessee-Lessor Entries: Sales-Type Lease
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Account Title |
Debit |
Credit |
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Explanation:
1
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