a) Explain the difference between pretax financial income and taxable income.

b) What are the two objectives of accounting for income taxes?

c) Interest on governmental bonds is often referred to as a permanent difference when determining the proper amount to report for deferred taxes. Explain the meaning of permanent differences, and give two other examples.

d) Explain the meaning of a temporary difference as it relates to deferred tax computations, and give four examples.

e) Bridgeton Company started its operations at the beginning of 2018. The following information relates to its operations for the year. The differences between the 2018 income statement and tax return are listed below:

Fines incurred for pollution violations of $7,320 were deducted in computing pretax financial income.

Warranty expense accrued for financial reporting purposes amounts to $15,910. Warranty deductions per the tax return amount to $8,730.

Interest revenue earned on an investment in tax-exempt bonds amounts to $2,570.

Depreciation of property, plant and equipment for financial reporting purposes amounts to $80,500. Depreciation of these assets amounts to $102,000 for the tax return.

Income on construction contracts using the percentage of completion method per books amounts to $99,000. Income on contracts for tax purposes amounts to $64,300.

Sales on an accrual basis were $76,890. For tax purposes $60,450 was recorded on the installment sales method.

Interest received on governmental bonds was $41,500.

Rent collected in advance in January 1, 2018 totaled $72,000 for a 4 year period. Of this amount, $54,000 was reported unearned at December 31, for book purposes. Pretax financial income for 2018 is $477,600 and the tax rate is 30%.

Taxable income is expected for the next few years.

Instructions

Compute taxable income for 2018. (5 marks)

Compute the deferred taxes at December 31, 2018, that relate to the temporary differences described above. Clearly label them as deferred tax asset or liability. (5 marks)

iii. Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2018. (4 marks)

Draft the income tax expense section of the income statement, beginning with “Income before income taxes. ” (3 marks)

Question

a) Jazz Corporation issued a 8% $240,0000 bond on January 1, 2016. The bond became due on January 1, 2019. The interest on the bond is payable semiannually, each July 1 and January 1. The required effective interest rate on the bond was 10%.

(Round your calculations to the nearest $1)

Instructions

Calculate the proceeds from the sale of the bond and the discount on the bond. (4 marks)

Prepare a bond amortization schedule for the 3 years. Be sure to clearly show the semiannual interest payments. (6 marks)

iii. Prepare the necessary journal entries to show:

The issuance of the bond on January 1, 2016

Interest payments on July 1, 2016

Interest payments on December 31, 2016

What is the difference between a bond sold at a discount and a bond sold at a premium?

b) Mandell Company manufactures tennis equipment and has been in operations for five years. Over the years, the company used its cash flows from operations and investments from its main owner – Robert Mandell, to finance its operations. However, the company is now contemplating expanding its production line into the manufacturing of products for other sporting activities. Mandell realizes that he will need additional funds to finance the company’s expansion plan and is considering to borrow a note payable or to issue bonds. In the past, the company has had little need for external borrowing so the management team has a number of questions concerning the accounting for these new non-current liabilities. They have asked you to conduct some research on this topic.

Instructions

Access the IFRS authoritative literature at the IASB website (http://www.ifrs.org) and provide paragraph citations to answer the following issues.

With respect to a decision of issuing notes or bonds, management is aware of certain costs (e.g., printing, marketing, and selling) associated with a bond issue. How will these costs affect the company’s reported earnings in the year of issue and while the bonds are outstanding?

If the company’s expansion is successful, the financial performance of Mandell Company could dramatically improve. As a result, the company’s market rate of interest (which is currently around 10%) could decline. This raises the possibility of retiring or exchanging the debt, in order to get a lower borrowing rate. How would such a debt extinguishment be accounted for?

Question

a) Explain the difference between pretax financial income and taxable income.
b) What are the two objectives of accounting for income taxes?
c) Interest on governmental bonds is often referred to as a permanent difference when determining the proper amount to report for deferred taxes. Explain the meaning of permanent differences, and give two other examples.
d) Explain the meaning of a temporary difference as it relates to deferred tax computations, and give four examples.
e) Bridgeton Company started its operations at the beginning of 2018. The following information relates to its operations for the year. The differences between the 2018 income statement and tax return are listed below:

Fines incurred for pollution violations of $7,320 were deducted in computing pretax financial income.
Warranty expense accrued for financial reporting purposes amounts to $15,910. Warranty deductions per the tax return amount to $8,730.
Interest revenue earned on an investment in tax-exempt bonds amounts to $2,570.
Depreciation of property, plant and equipment for financial reporting purposes amounts to $80,500. Depreciation of these assets amounts to $102,000 for the tax return.
Income on construction contracts using the percentage of completion method per books amounts to $99,000. Income on contracts for tax purposes amounts to $64,300.
Sales on an accrual basis were $76,890. For tax purposes $60,450 was recorded on the installment sales method.
Interest received on governmental bonds was $41,500.
Rent collected in advance in January 1, 2018 totaled $72,000 for a 4 year period. Of this amount, $54,000 was reported unearned at December 31, for book purposes. Pretax financial income for 2018 is $477,600 and the tax rate is 30%.
Taxable income is expected for the next few years.

Instructions

Compute taxable income for 2018. (5 marks)
Compute the deferred taxes at December 31, 2018, that relate to the temporary differences described above. Clearly label them as deferred tax asset or liability. (5 marks)

iii. Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2018. (4 marks)

Draft the income tax expense section of the income statement, beginning with “Income before income taxes. ” (3 marks)

Question

a) Jazz Corporation issued a 8% $240,0000 bond on January 1, 2016. The bond became due on January 1, 2019. The interest on the bond is payable semiannually, each July 1 and January 1. The required effective interest rate on the bond was 10%.

(Round your calculations to the nearest $1)

Instructions

Calculate the proceeds from the sale of the bond and the discount on the bond. (4 marks)
Prepare a bond amortization schedule for the 3 years. Be sure to clearly show the semiannual interest payments. (6 marks)

iii. Prepare the necessary journal entries to show:

The issuance of the bond on January 1, 2016
Interest payments on July 1, 2016
Interest payments on December 31, 2016

What is the difference between a bond sold at a discount and a bond sold at a premium?

b) Mandell Company manufactures tennis equipment and has been in operations for five years. Over the years, the company used its cash flows from operations and investments from its main owner – Robert Mandell, to finance its operations. However, the company is now contemplating expanding its production line into the manufacturing of products for other sporting activities. Mandell realizes that he will need additional funds to finance the company’s expansion plan and is considering to borrow a note payable or to issue bonds. In the past, the company has had little need for external borrowing so the management team has a number of questions concerning the accounting for these new non-current liabilities. They have asked you to conduct some research on this topic.

Instructions

Access the IFRS authoritative literature at the IASB website (http://www.ifrs.org) and provide paragraph citations to answer the following issues.

With respect to a decision of issuing notes or bonds, management is aware of certain costs (e.g., printing, marketing, and selling) associated with a bond issue. How will these costs affect the company’s reported earnings in the year of issue and while the bonds are outstanding?
If the company’s expansion is successful, the financial performance of Mandell Company could dramatically improve. As a result, the company’s market rate of interest (which is currently around 10%) could decline. This raises the possibility of retiring or exchanging the debt, in order to get a lower borrowing rate. How would such a debt extinguishment be accounted for?

Accepted Answer

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