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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Hunter Company purchased a light truck on January 2, 2019 for $18,000. The truck, which will be used for deliveries, has the following characteristics:

Estimated life: 5 years

Estimated residual value: $3,000

Depreciation method for financial statements: straight-line method

Depreciation for income tax purposes: MACRS (3-year life)

From 2019 through 2023, each year, Hunter had sales of $100,000, cost of goods sold of $60,000, and operating expenses (excluding depreciation) of $15,000. The truck was disposed of on December 31, 2023, for $2,000.

Required:

  1. 1. Prepare an income statement for financial reporting through pretax accounting income for each of the 5 years, 2019 through 2023.
  2. 2. Prepare, instead, an income statement for income tax purposes through taxable income for each of the 5 years, 2019 through 2023.
  3. 3. Compare the total income for all 5 years under Requirements 1 and 2.

1.

To determine

Prepare an income statement of Company H for financial reporting through pretax accounting income for each year.

Explanation

Depreciation: Depreciation is a method of reducing the capitalized cost of long-lived operating assets or plant assets for the period the asset is used.

Prepare an income statement of Company H for financial reporting through pretax accounting income for each year as follows:

Income statement
Particulars20192020202120222023
Sales 100,000100,000100,000100,000100,000
Less: Cost of goods sold60,00060,00060,00060,00060,000
Gross profit40,00040,00040,00040,00040,000
Less: Operating expenses15,00015,00015,00015,00015,000
Depreciation expenses (1)3,0003,0003,0003,0003,000
Loss on disposal (2)00001,000
Pretax accounting income22,00022,00022,00022,00021,000

Table (1)

Working note (1):

Calculate the depreciation expense:

Depreciation expenses=[Acquisition cost – Residual val

2.

To determine

Prepare an income statement of Company H for income tax purpose through taxable income for each year.

3.

To determine

Compare the total income of Company H with Requirement (1) and (2).

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