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.

2018

2019

2020

Pretax financial income

$462,000

$500,500

$519,750

Excess depreciation expense on tax return

(16,500)

(22,000)

(5,500)

Excess warranty expense in financial income

11,000

5,500

4,400

Taxable income

$456,000

$484,000

$518,650

The income tax rate for all years is 40%.

Explain your reasoning on why deferred taxes will be reported the way they are. Use the blank area in the template following the journal entries to make your notes.

Part 2: Carryback and Carryforward

The pretax financial income (or loss) figures for Bryan Clark Company are as follows.

2016

$ 88,000

2017

137,500

2018

44,000

2019

(88,000)

2020

(191,900)

2021

66,000

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.