Analyzing Transactions. Using the analytical framework, indicate the effect of each of the three independent sets of transactions described next.

 
 (1) a. January 15, 2014: Purchased marketable equity securities for $100,000.

 
b. December 31, 2014: Revalued the marketable securities to their market value of $90,000. Unrealized changes in the market value of marketable equity securities appear in accumulated other comprehensive income.

 
c. December 31, 2014: Recognized income tax effects of the revaluation in Part b at an income tax rate of 40%. The income tax law includes changes in the market value of equity securities in taxable income only when the investor sells the securities.

 
d. January 5, 2015: Sold the marketable equity securities for $94,000.

 
 e. January 5, 2015: Recognized the tax effect of the sale of the securities in Part d. Assume that the tax is paid in cash immediately.

 
(2) a. During 2015: Sold inventory on account for $500,000.

 
b. During 2015: The cost of the goods sold in Part b is $400,000.

 
c. During 2015: Estimated that uncollectible accounts on the goods sold in Part a will equal 2% of the selling price.

 
d. During 2015: Estimated that warranty claims on the goods sold in Part a will equal 4% of the selling price.

 
 e. During 2015: Actual accounts written off as uncollectible totaled $3,000.

 
 f. During 2015: Actual cash expenditures on warranty claims totaled $8,000.

 
 g. December 31, 2015: Recognized income tax effects of the preceding six transactions. The income tax rate is 40%. The income tax law permits a deduction for uncollectible accounts when a firm writes off accounts as uncollectible and for warranty claims when a firm makes warranty expenditures. Assume that any tax is paid in cash immediately.

 
 (3) a. January 1, 2015: Purchased $100,000 face value of zero-coupon bonds for $68,058. These bonds mature on December 31, 2019, and are priced on the market at the time of issuance to yield 8% compounded annually. Zero-coupon bonds earn interest as time passes for financial and tax reporting, but the issuer does not pay interest until maturity. Assume that any tax owed on taxable income is paid in cash immediately.

 
b. December 31, 2015: Recognized interest revenue on the bonds for 2015.

 
 c. December 31, 2015: Recognized income tax effect of the interest revenue for 2015. The income tax law taxes interest on zero-coupon bonds as it accrues each year.

 
 d. December 31, 2016: Recognized interest revenue on the bonds for 2016.

 
 e. December 31, 2016: Recognized income tax effect of the interest revenue for 2016.

 
f. January 2, 2017: Sold the zero-coupon bonds for $83,683.

 
g. January 2, 2017: Recognized the income tax effect of the gain or loss on the sale. The applicable income tax rate is 40%, which affects cash immediately.

Answer rating: 100% (QA)

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