Deferred Taxes To practice recognizing and reporting deferred taxes. (See Topic Guides NI&EPS 6, 7, 21). Terry’s management opened a new life insurance policy this year on the CEO. The premium for this new policy is $1,000/month. The policy cannot be prepaid. Acct 331 - Page 10 4. Critical Thinking 5. 6. Hints: 1. 2. 3. 4. The easiest way to create the correcting entry for this Terry is work through the steps we did in class through Step 6 (Making the Correct Journal Entry) for 2020. Each of the steps can be done exactly the same way we did in class. The final result will be the entry Terry should have made. Once you have the entry Terry should have made, you can then compare the numbers in that entry to the numbers Terry is currently using and make an adjusting entry. I would start by adjusting Income Tax Expense as reported in our last Terry (what Terry has recognized) to what it should be (as you just determined from Step 6 entry). Then adjust Deferred Tax (which currently has a balance of '0,'. since Terry hasn’t recognized it at all). Finally, use Income Tax Payable as the plug figure. If you want to know why Income Tax Payable is the plug figure, please come and ask! The sale of the machines was recorded in an earlier Terry assignment. You’ll find all of the numbers you need for the tax adjustment in that earlier problem. Make sure that you have corrected any necessary mistakes to your work on that problem before you start doing these calculations. Your ending cash balance will not change, since you haven't paid the government anything yet. However, you will need to add one (1) new line item to your Statement of Cash Flows to adjust from Net Income to Cash Flows from Operating Activities. Who might be affected by Terry’s decision not to recognize deferred taxes appropriately in past years? How could this decision affect each individual or group? You should set up your tables for Step 5 just like we did in class. Calculate the three (3) ratios after you make any adjustments. What do you think investors’ reaction will be to the adjustment for deferred taxes (if any)? In other words, based on your changes to the financial statements and the change in the ratios, do you think investors will be happy with these changes? Why or why not?

addition:

Here are the numbers for depreciation:

Under GAAP, Terry’s straight line depreciation & amortization was calculated to be $2,181,000 for 2020 - 2023 and $0 in 2024. For tax purposes, Terry’s depreciation expense is $3,315,120 for 2020, $2,983,608 for 2021, and $2,425,272 in 2022.

For the record, they were publicly posted in the Announcements from the Professor and Terry 3 Discussion Boards earlier this week.

  
 
 
 
 

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1 Terry Co. Terry Co. Terry Co. Adjusted Financials from Part 2 2 Multi-Step Income Statement Balance Sheet Statement of Cash Flows 3 For the Year Ended December 31, Year 3 As of 12/31/Year 3 For Year Ended 12/31/Year 3 4 Sales Revenue Year 3 Year 2 Cash Flow from Operations 5 Sales Revenue $73,225,460 Assets Net Income $7,455,552 6 Less: Sales Discounts 7 Sales Returns $799,700 Current Assets Adjustments: $6,361,250 $7,160,950 Cash $7,226,500 $3,635,000 Change in A/R ($1,817,500) 8 Net Sales Revenue $6,064,510 A/R $6,543,000 $6,179,500 Change in Inventor $708,000 Allowance for Bad ($363,500) ($1,817,500) Change in Prepaid $545,250 10 Cost of Goods Sold Inventory $9,470,000 $10,178,000 Change in Prepaid ($181,750) 11 Cost of Goods Sold $40,626,221 Prepaid Insurance $545,250 $1,090,500 Depreciation & Am $2,181,000 12 Gross Profit $25,438,289 Prepaid Utilities $908,750 $727,000 Change in A/P ($638,866) 13 Total Current Asse $24,330,000 $19,992,500 Change in Bond Int $10,131 14 Operating Activities 15 Selling Expenses 16 Advertising Expens 17 Bad Debt Expense Long-term Investments Change in Est. Cou $60,000 Loans to other bus $2,908,000 $2,908,000 Change in Income $1,847,504 $1,423,125 Total Long-term In $2,908,000 $2,908,000 Change in Unearne $230,940 $617,950 PPE Change in Wages ($109,050) $2,835,659 18 Miscellaneous Selli 19 Sales Force Salarie 20 Selling Commissio 21 Shipping Expense 22 Total Selling Expenses 23 Administrative Expenses 24 Executive Salaries 25 Depreciation & Am 26 Insurance Expense $354,413 Land $7,997,000 $5,089,000 Net Cash Flow from Operations $10,291,211 $999,625 Building $5,816,000 $5,816,000 $3,635,000 $20,356,000 Cash Flow from Investments Equipment Accumulated Depi $9,451,000 $595,231 ($9,451,000) $24,718,000 ($7,270,000) $13,086,000 Purchase of Land ($2,908,000) $7,625,344 Total PPE Purchase of Equipr ($10,905,000) Intangible Assets Net Cash Flow from Investments ($13,813,000) $3,180,625 Patents, net $1,090,500 $1,090,500 $2,181,000 Total Assets $53,046,500 $37,077,000 Cash Flow from Financing $263,538 Repayment of Loar ($363,500) 27 Miscellaneous Adm $35,896 Liabilities and Stockholders' Equity Issuance of Bonds $1,942,453 28 Office Supplies Exp $281,713 Current Liabilities Issuance of Notes | $4,362,000 29 R&D Evnense $1.090 500 Accounts Pavable 83723 13A SA. 362 00o Pavments of Divide 18200 000 1 Terry Co. Terry Co. Terry Co. Adjusted Financials from Part 2 2 Multi-Step Income Statement Balance Sheet Statement of Cash Flows 3 For the Year Ended December 31, Year 3 As of 12/31/Year 3 For Year Ended 12/31/Year 3 4 Sales Revenue Year 3 Year 2 Cash Flow from Operations 5 Sales Revenue $73,225,460 Assets Net Income $7,455,552 6 Less: Sales Discounts 7 Sales Returns $799,700 Current Assets Adjustments: $6,361,250 $7,160,950 Cash $7,226,500 $3,635,000 Change in A/R ($1,817,500) 8 Net Sales Revenue $6,064,510 A/R $6,543,000 $6,179,500 Change in Inventor $708,000 Allowance for Bad ($363,500) ($1,817,500) Change in Prepaid $545,250 10 Cost of Goods Sold Inventory $9,470,000 $10,178,000 Change in Prepaid ($181,750) 11 Cost of Goods Sold $40,626,221 Prepaid Insurance $545,250 $1,090,500 Depreciation & Am $2,181,000 12 Gross Profit $25,438,289 Prepaid Utilities $908,750 $727,000 Change in A/P ($638,866) 13 Total Current Asse $24,330,000 $19,992,500 Change in Bond Int $10,131 14 Operating Activities 15 Selling Expenses 16 Advertising Expens 17 Bad Debt Expense Long-term Investments Change in Est. Cou $60,000 Loans to other bus $2,908,000 $2,908,000 Change in Income $1,847,504 $1,423,125 Total Long-term In $2,908,000 $2,908,000 Change in Unearne $230,940 $617,950 PPE Change in Wages ($109,050) $2,835,659 18 Miscellaneous Selli 19 Sales Force Salarie 20 Selling Commissio 21 Shipping Expense 22 Total Selling Expenses 23 Administrative Expenses 24 Executive Salaries 25 Depreciation & Am 26 Insurance Expense $354,413 Land $7,997,000 $5,089,000 Net Cash Flow from Operations $10,291,211 $999,625 Building $5,816,000 $5,816,000 $3,635,000 $20,356,000 Cash Flow from Investments Equipment Accumulated Depi $9,451,000 $595,231 ($9,451,000) $24,718,000 ($7,270,000) $13,086,000 Purchase of Land ($2,908,000) $7,625,344 Total PPE Purchase of Equipr ($10,905,000) Intangible Assets Net Cash Flow from Investments ($13,813,000) $3,180,625 Patents, net $1,090,500 $1,090,500 $2,181,000 Total Assets $53,046,500 $37,077,000 Cash Flow from Financing $263,538 Repayment of Loar ($363,500) 27 Miscellaneous Adm $35,896 Liabilities and Stockholders' Equity Issuance of Bonds $1,942,453 28 Office Supplies Exp $281,713 Current Liabilities Issuance of Notes | $4,362,000 29 R&D Evnense $1.090 500 Accounts Pavable 83723 13A SA. 362 00o Pavments of Divide 18200 000