Questions and Answers of Financial Reporting and Analysis

On January 1, 20X1, Walker, Inc., signs a 5-year lease for two floors of a 20-floor building. The building has an expected remaining life of 20 years. The space is available immediately, and Walker
On October 1, 20X1, Brady Consulting leases unmodified equipment from Damon Corporation. The lease covers four years and requires lease payments of $73,046, beginning on September 30, 20X2. The
On January 1, 20X1, Dwyer Company leases space for a donut shop. The lease is for five years with payments to be made at the beginning of each year. The lease calls for Dwyer to pay $10,000 on
On January 1, 20X1, Bonduris Company leases warehouse space in Oakland, CA. The lease is for six years with payments to be made at the beginning of each year. The lease calls for Bonduris to pay
On January 2, 20X1, Allen Company purchased a machine for $70,000. This machine has a five-year useful life, has a residual value of $10,000, and is depreciated using the straight-line method for
Moss Inc. follows GAAP for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. It reported $250,000 of pre-tax income under GAAP, but it
In its 20X1 income statement, Tow Inc. reported proceeds from an officer’s life insurance policy of $90,000 and depreciation of $250,000. Tow was the owner and beneficiary of the life insurance on
The following information pertains to Ramesh Company for 20X1:Book income before income taxes .................... $106,000Income tax expense .................................................
Mill Company began operations on January 1, 20X1, and recognized income from construction- type contracts under different methods for tax purposes and financial reporting purposes. Information
For financial statement reporting, Lexington Corporation recognizes royalty income according to GAAP. However, royalties are taxed when collected. At December 31, 20X0, deferred royalty income of
lululemon athletica and Under Armour are both in the athletic apparel business. But the two companies’ depreciation methods differ. The following explanations were excerpted from the two
For the year ended December 31, 20X1, Tyre Company reported pre-tax financial statement income of $750,000. Its taxable income was $650,000. The difference was due to the use of accelerated
Nelson Inc. purchased machinery at the beginning of 20X1 for $90,000. Management used the straight-line method to depreciate the cost for financial reporting purposes and the sum-of-theyears’
Dunn Company’s 20X1 income statement reported $90,000 income before provision for income taxes. To aid in the computation of the provision for federal income taxes, the following 20X1 data are
Metge Corporation’s worksheet for calculating taxable income for 20X1 follows:($ in thousands)20X1Pre-tax income$1,000Permanent differences:Goodwill impairment400Interest on municipal
Kent Inc.’s reconciliation between financial statement and taxable income for 20X1 follows:Pre-tax financial income ........................................ $150,000Permanent difference
On January 1, 20X1, the Dolan Company purchased a new office building in Las Vegas for $6,100,000, which it holds for rentals and capital appreciation. Dolan estimated the building would have a
West Corporation leased a building and received the $36,000 annual rental payment on July 15, 20X1. The beginning of the lease period was August 1, 20X1. Rental income is taxable when received. West
Bryan Trucking Corporation began business on January 1, 20X1, and consists of the parent entity, domiciled and operating in Country X, and a subsidiary operating in Country Y. Bryan is required, as a
Black Company, organized on January 2, 20X1, had pre-tax accounting income of $500,000 and taxable income of $800,000 for the year ended December 31, 20X1. The only temporary difference is accrued
Mozart Inc.’s $98,000 taxable income for 20X1 will be taxed at the 21% corporate tax rate. For tax purposes, its depreciation expense exceeded the depreciation used for financial reporting purposes
Quinn Company reported a net deferred tax asset of $6,300 in its December 31, 20X0, balance sheet. For 20X1, Quinn reported pre-tax financial statement income of $300,000. Temporary differences of
In 20X1, Phillips Company reported $10,000,000 of pre-tax book income and also had $10,000,000 of taxable income. It incurred a $1,000,000 book expense that it deducted on its tax return. Assuming a
Following are the consolidated statement of operations, balance sheet, and portions of the income tax note from Acme United Corporation’s December 31, 2011, Form 10-K. (For the sake of brevity, the
Dix Company reported operating income (loss) before income tax in its first three years of operations as follows:20X1 .................... $ 100,00020X2 ..................... (200,000)20X3
In 20X1, MB Inc. is subject to a 21% tax rate. For book purposes, it expenses $1,500,000 of expenditures. MB intends to deduct these expenditures on its 20X1 tax return despite tax law precedent that
As of December 31, 20X1, Colt Corporation has a loss carryforward of $180,000 available to offset future taxable income. At December 31, 20X1, the company believes that realization of the tax benefit
Flower Company started doing business on January 1, 20X0. For the year ended December 31, 20X1, it reported $450,000 pre-tax book income on its income statement. Flower is subject to a 21% corporate
Boers Corporation and Bernstein, Inc. both project pre-tax income of $100 million in 20X1. Both also expect there to be no change in their cumulative temporary differences during the year. However,
Goff Corporation has only one temporary difference, which is related to the use of accelerated depreciation for income tax purposes and straight-line depreciation for financial reporting. Goff had
On December 31, 20X0, Toms River Rafting, Inc. (TRR), has a deferred tax asset related to a $250,000 net operating loss carryforward. The enacted tax rate (and substantively enacted tax rate) at the
Cishek Corporation sold $100 million of gift cards in 20X1. The gift cards may be used to purchase goods from Cishek in the future. The gift cards never expire, and Cishek expects that none of the
Millie Co. completed its first year of operations on December 31, 20X1, with pre-tax financial income of $400,000. Millie accrued a contingent liability of $900,000 for financial reporting purposes;
Devers Corporation began operations in 20X1 and had the following partial income statements, which are complete only down to pre-tax income. Devers had no book-tax differences except for the effects
Collins Company incurs a $1,000 book expense that it deducts on its tax return. The tax law is unclear whether this expense is deductible, so the deduction leads to an uncertain tax position.
Trevathan Corporation has only one source of temporary differences warranties. At December 31, 2016, 2017, and 2018, the amounts of cumulative temporary differences were as follows:Temporary
Current tax law limits the amount of interest expense that corporations may deduct to the sum of (a) taxable interest income and (b) 30% of taxable income (excluding taxable interest income) before
In early 2017, Quintana Corporation prepared the following forecast of its earnings for 2017 and 2018:Quintana’s pre-tax income forecasts include $40 million of nontaxable income in 2017 and $30
Early in 2017, Altuve Corporation forecasted that it would report a deferred tax liability of $70 million at December 31, 2017, representing the additional tax that would be due to U.S. authorities
The following information pertains to Seda Company’s pension plan for 20X1:Actuarial estimate of projected benefit obligation at 1/1 ........... $ 72,000Service cost
Turner Inc. provides a defined benefit pension plan to its employees. The company has 150 employees. The remaining amortization period at December 31, 20X0, for prior service cost is 5 years. The
AT&T reported pre-tax income of $24,873 million, $15,139 million, and $12,976 million for the years ended December 31, 2018, 2017, and 2016, respectively. At December 31, 2018, it had 7,281.6
At December 31, 20X1, Kerr Corporation’s pension plan administrator provided the following information:Fair value of plan assets ..................... $ 3,450,000Accumulated benefit obligation
Puhlman Inc. provides a defined benefit pension plan to its employees. It smooths recognition of its gains and losses when computing its market-related value to compute expected return. Additional
The Kroger Co. operates numerous grocery store chains. Excerpts from Kroger’s Note 15 are presented below. The 2017 amounts are for the fiscal year ended February 3, 2018. All amounts are in
On January 2, 20X1, Loch Company established a defined benefit plan covering all employees and contributed $1,000,000 to the plan. At December 31, 20X1, Loch determined that the 20X1 service and
Refer to The Kroger Co. information in Case 15-3.Required:Explain how net benefit cost and OCI would change if The Kroger Co. were using IAS 19.Case 15-3.The Kroger Co. operates numerous grocery
Mary Abbott is a long-time employee of Love Enterprises, a manufacturer and distributor of farm implements. Abbott plans to retire on her 65th birthday, five years from January 1, 20X1. Her salary at
On January 1, 20X1, Magee Corporation started doing business by hiring R. Walker as an employee at an annual salary of $50,000, with an annual salary increment of $10,000. Based on his current age
Use the facts given in E15-4. Repeat the requirements assuming that the discount and earnings rate is 11% instead of 8%.E15-4.Mary Abbott is a long-time employee of Love Enterprises, a manufacturer
The following information pertains to Gali Company’s defined benefit pension plan for 20X1:Fair value of plan assets, beginning of year ............ $ 350,000Fair value of plan assets, end of year
The following information is based on an actual annual report. Different names and years are being used.Bond and some of its subsidiaries provide certain postretirement medical, dental, and vision
The following information pertains to Kane Company’s defined benefit pension plan:Balance sheet asset, 1/1/20X1$ 2,000AOCI—prior service cost, 1/1/20X124,000Service cost19,000Interest
The following information pertains P15-8 to the pension plan of Beatty Business Group:Note that the information in Columns (2) and (3) are as of the beginning of the year, whereas the information in
Dell Company adopted a defined benefit pension plan on January 1, 20X1. Dell amortizes the initial prior service cost of $1,334,400 over 16 years. It assumes a 7% discount rate and an 8% expected
George Corporation has a defined benefit pension plan for its employees. The following information is available for 20X1:PBO at 1/1$ 930,000Payments made to retirees at 12/31204,000Service
On January 1, 20X1, East Corporation adopted a defined benefit pension plan. At plan inception, the prior service cost was $60,000. In 20X1, East incurred service cost of $150,000 and amortized
On January 1, 20X1, Cello Co. established a defined benefit pension plan for its employees. At January 1, 20X1, Cello estimated the service cost for 20X1 to be $45,000. At January 1, 20X2, it
Nome Company sponsors a defined benefit plan covering all employees. Benefits are based on years of service and compensation levels at the time of retirement. Nome has a September 30 fiscal year-end.
Selected pension information extracted from the retirement benefits note that appeared in Green’s 20X1 annual report follows. (These numbers have been modified but are based on the activities of a
Hukle Company has provided the following information pertaining to its postretirement plan for 20X1:Service cost
Berle Corp. has a defined benefit pension plan that features the following data: January 1, 20X1 (beginning of fiscal year):Fair value of plan assets
The following information pertains to Sparta Company’s defined benefit pension plan for 20X1:Discount rate8%Expected rate of return on plan assets10%Remaining amortization period at 1/1 for prior
The following information pertains to Lee Corporation’s defined benefit pension plan for 20X1:Service cost ................................................................. $ 160,000Actual and
Bostonian Company provided the following information related to its defined benefit pension plan for 20X1:PBO on 1/1$ 2,500,000Fair value of plan assets on 1/12,000,000Service cost120,000Actual
Cummings Inc. had the following reconciliation at December 31, 20X0:Fair value of plan assets$ 5,000PBO4,200Funded status$ 800AOCI—prior service cost$ 300AOCI—net actuarial loss700Total pension
Jones Company has a postretirement benefit (health care) plan for its employees. On January 1, 20X1, the balance in the Accumulated postretirement benefit obligation account was $300 million. The
Zeff Manufacturing provides the following information about its postretirement health care plan for 20X1:Accumulated postretirement benefit obligation on 1/1$ 300,000Fair value of plan assets on
Bonny Corp. has a defined benefit pension plan for its employees who have an average remaining service life of 10 years. The following information is available for 20X1 and 20X2 related to the
At January 1, 20X1, Milo Co.’s projected benefit obligation is $300,000, and the fair value of its pension plan assets is $340,000. The average remaining service period of Milo’s employees is 10
At January 1, 20X1, Archer Co.’s PBO is $500,000 and the fair value of its pension plan assets is $630,000. The average remaining service period of Archer’s employees is 12 years. The AOCI—net
You have the following information related to Chalmers Corporation’s pension plan:a. Defined benefit, noncontributory pension plan.b. Plan initiation, January 1, 20X3 (no credit given for prior
Target adopted the new leasing standard for the year ended February 2, 2019, using the modified retrospective approach outlined in ASC Topic 842. All questions relate to the year ended February 2,
Bunker Company negotiated a lease with Gilbreth Company that begins on January 1, 20X1. The lease term is three years, and the asset’s economic life is five years. The equipment was customized, and
Monk Company, a dealer in machinery and equipment, leased equipment with a 10-year life to Leland Inc. on July 1, 20X1. The fair value of the leased equipment at July 1, 20X1, is $1,849,591. The
On July 1, 20X1, Heflin Corporation (a fictional company) issued $20 million of 12%, 20-year bonds. Interest on the bonds is paid semiannually on December 31 and June 30 of each year, and the bonds
On January 1, 20X0, Korman, Inc., issued $1.0 billion of 3% zero coupon subordinated debentures, which were issued at a price of $553.68 per $1,000 principal amount at maturity. The bonds were priced
On January 1, 20X1, Chain Corporation issued $5 million of 7% coupon bonds at par. The bonds mature in 20 years and pay interest semiannually on June 30 and December 31 of each year. On December 31,
On January 1, 20X1, Nicks Corporation issued $250 million of floating-rate debt. The debt carries a contractual interest rate of “LIBOR plus 5.5%,” which is reset annually on January 1 of each
On January 1, 20X1, Tusk Company issued $300 million of bonds with a 6% coupon interest rate. The bonds mature in 10 years and pay interest annually on December 31 of each year. The market rate of
The following information pertains to the financial statements of Buffalo Supply Company, a provider of plumbing fixtures to contractors in central Pennsylvania.Required:Reconstruct all journal
On January 1, 20X1, Wade Crimbring, Inc., a dealer in used manufacturing equipment, sold a CNC milling machine to Fletcher Bros., a new business that plans to fabricate utility trailers. To conserve
Clay Company started construction on a new office building on January 1, 20X1, and it moved into the finished building on July 1, 20X2. Of the building’s $2,500,000 total cost, $2,000,000 was
Yachting in Paradise, Inc., was founded late in 20X0 by retired Admiral Andy Willits to provide executive retreats aboard a luxury yacht with ports of call scattered around the South Pacific.
Kobe Company began constructing a building for its own use in February 20X1. During 20X1, Kobe incurred interest of $70,000 on specific construction debt and $15,000 on other borrowings. Interest
The following graph depicts three depreciation expense patterns over time.Required:Pattern I, of course, is straight-line depreciation. Which depreciation expense pattern corresponds to the
National Sweetener Company owns the patent to the artificial sweetener known as Supersweet. Assume that National Sweetener acquired the patent on January 1, 20X1, at a cost of $300 million; expected
On January 1, 20X0, Vick Company purchased a trademark for $400,000, which had an estimated useful life of 16 years. On January 1, 20X4, Vick paid $60,000 for legal fees in a successful defense of
To meet the increasing demand for its microprocessors, Intelligent Micro Devices began construction of a new manufacturing facility on January 1, 20X1. Construction costs were incurred uniformly
On January 2, 20X1, Lava, Inc., purchased a patent for a new consumer product for $90,000. At the time of purchase, the patent was valid for 15 years; however, its useful life was estimated to be
Consider the following two scenarios:Scenario I: Over the 20X1–20X5 period, Micro Systems, Inc., spends $10 million a year to develop patents on new computer hardware manufacturing technology.
During 20X1, Orr Company incurred the following costs:Research and development services performed by Key Corporation for Orr ............. $150,000Design, construction, and testing of preproduction
In 20X1, Ball Labs incurred the following costs:Direct costs of doing contract research and development .............. $400,000work for the government to be reimbursed by a governmental unitResearch
The 20X0 income statement and other information for Mallard Corporation, which is about to purchase a new machine at a cost of $500 and a new computer system at a cost of $300, follow.Sales$1,000Cost
Pearl, Inc., develops and markets computer software. During 20X0, one of Pearl’s engineers began developing a new and very innovative software product. On July 1, 20X1, a team of Pearl engineers
Gardenia Co. and Lantana Co. both operate in the same industry. Gardenia began its operations in 20X1 with a $20 million initial investment in plant and equipment with an expected life of 10 years.
In January 20X1, Vorst Company purchased a mineral mine for $2,640,000. Removable ore was estimated at 1,200,000 tons. After it has extracted all the ore, Vorst will be required by law to restore the
On July 1, 20X1, Ritz Company signs a contract with Venticello, Inc., to install Ritz’s inventory management software throughout Venticello, Inc. Ritz will begin the installation immediately and
Prescott Co. management has committed to a plan to dispose of a group of assets associated with the manufacture of railroad cars. This group of assets qualifies as a component of an entity for
Zeff Company purchases a delivery van on January 1, 20X1, at a cost of $15,849. It has a useful life of four years and no estimated salvage value. When making the purchase decision, the company

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