Question

Using the analytical framework illustrated in the chapter, indicate the effect of each of the three independent sets of transactions described next.
(1) a. January 15, 2009: Purchased marketable equity securities for $100,000.
b. December 31, 2009: 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, 2009: Recognized income tax effects of the revaluation in Part b at an income tax rate of 40 percent. 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, 2010: Sold the marketable equity securities for $94,000.
e. January 5, 2010: 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 2010: Sells inventory on account for $500,000.
b. During 2010: The cost of the goods sold in Part (b) is $400,000.
c. During 2010: Estimated that uncollectible accounts on the goods sold in Part (a) will equal 2 percent of the selling price.
d. During 2010: Estimated that warranty claims on the goods sold in Part (a) will equal 4 percent of the selling price.
e. During 2010: Actual accounts written off as uncollectible totaled $3,000.
f. During 2010: Actual cash expenditures on warranty claims totaled $8,000.
g. December 31, 2010: Recognized income tax effects of the preceding six transactions. The income tax rate is 40 percent. 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, 2010: Purchased $100,000 face value of zero-coupon bonds for $68,058. These bonds mature on December 31, 2014, and are priced on the market at the time of issuance to yield 8 percent 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, 2010: Recognized interest revenue on the bonds for 2010.
c. December 31, 2010: Recognized income tax effect of the interest revenue for 2010. The income tax law taxes interest on zero-coupon bonds as it accrues each year.
d. December 31, 2011: Recognized interest revenue on the bonds for 2011.
e. December 31, 2011: Recognized income tax effect of the interest revenue for 2011.
f. January 2, 2012: Sold the zero-coupon bonds for $83,683.
g. January 2, 2012: Recognized the income tax effect of the gain or loss on the sale.
The applicable income tax rate is 40 percent, which affects cash immediately.



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  • CreatedJune 23, 2012
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