Assignment
Part A
Colorado Company has provided you the following information.
Year Taxable income Income tax rate
2014 $390,000 35%
2015 $320,000 37%
2016 $400,000 40%
2017 ($1,200,000) 40%
Colorado Company has decided to use the loss carryback and carryforward provision as a result of the year 2017 loss. The enacted tax rate remains at 40% after year 2017. Colorado Company has determined that a valuation allowance is not necessary.
Prepare the journal entry on December 31, 2017 to record the carryback and carryforward decision.
The Matrix Company began operations as of the beginning of 2015. During 2015, Matrix reported GAAP (book) income before taxes of $789,500. For income tax purposes, depreciation expense was $150,000; for GAAP (book) purposes, depreciation expense was $74,000. Matrix accrued $900,000 of revenue for GAAP (book) purposes during 2015; $600,000 of the accrued revenue was taxable during 2015. Matrix earned interest of $79,800 from a municipal bond investment during 2015. Matrix's marginal income tax rate is 40%. Matrix did not make any income tax payments during 2015.
• For each of the items below, determine whether the items are temporary differences or permanent differences. Also, for each temporary difference, you are required to determine whether a deferred tax asset or deferred tax liability is created by the temporary difference described. Assume that each of the temporary differences described is an originating difference.
• Municipal bond interest
• Accrued warranty expense
• Sales revenues received in advance
• Prepaid insurance where the tax deduction in future years will be less than the book expense
• Tax depreciation expense exceeds GAAP (book) depreciation expense
• Accrued bad debt expense
• The dividends received deduction
• Installment sales revenue (recognized currently for GAAP, recognized for tax purposes when cash is collected in future years)
• Life insurance payments for executives for which the company is the beneficiary
• Fines paid for law violations
• Explain why temporary differences result in deferred tax assets or deferred tax liabilities while permanent differences do not, and describe the difference in the formation of deferred tax assets and deferred tax liabilities.
And this one
Cannon Company has the following information for the year ending December 31, 2015.
Long-term debt of $18,000 was issued for cash.
Cash paid for labor during 2015 amounted to $489,500.
During the year, Cannon experienced a pension outflow of $14,000.
Dividends of $34,000 were received.
Cannon's cash balance at the beginning of 2015 was $975,000; at the end of 2015 the cash balance was $839,500.
The company made an investment of $310,000 in an affiliate company.
A lease payment of $110,000 was made on November 1, 2015. There is no asset recorded in connection with the lease.
During the year, Cannon collected $780,000 cash from customers.
Cash paid for income taxes amounted to $56,000 for all of 2015.
During 2015, Cannon discontinued its consumer electronics division. The business was sold resulting in a $12,000 net cash inflow.
Prepare Cannon Company's statement of cash flows for the year ending December 31, 2015 using the indirect method. Explain how the indirect statement of cash flows that you prepared would differ under IFRS rules. Assume this is a nonfinancial entity.
Part B
The following Income Statement and Operating Cash Flow information pertain to Receivership Inc.'s operations for the year ended December 31, 2014. Prepare the net cash flow from operating activities section of the cash flow statement using the direct method.
Income statement for the year ended December 31, 2014
Revenues 1,328
COGS 587
Rent expenses 152
Wages expenses 136
Insurance expenses 53
Other SG&A (includes depreciation expenses) 198
Interest expenses 30
Gain on sale of asset (5)
1,151
Income before tax 177
Tax 62
Net income 115
Cash flow provided by operating activities (indirect method), for the year ended December 31, 2014
Net income 115
Depreciation 32
Gain on sale of asset (5)
142
Increases/decreases in A/R 26
Inventories (35)
Prepaid rent 13
A/P 28
Wages payable (20)
Tax payable 5
Interest payable (2)
Advances from customers (3)
Other accrued SG&A 5
17
Net cash provided by operating activities 159
Part C
The following information and financial statements excerpts pertain to Liquidity Inc.
a. All short term investments (securities available for sale) were purchased on 12/31/14 and sold during 2015.
b. The company entered a lease agreement on 12/31/15.
c. Fixed assets with a net book value of $15 were sold during the year.
d. The company repaid the current portion of long-term debt during the year.
e. Dividend was declared and partially paid.
2014 2015
Assets
Cash 54 45
Short term investments 95 0
Accounts receivable 45 85
Inventory 52 75
Prepaid general expenses 11 15
Fixed assets under capital lease, net 0 50
Fixed assets, net 165 228
422 498
Liabilities and stockowners' equity
Accounts payable 38 48
Wages payable 12 6
Tax payable 3 5
Dividend payable 0 4
Current portion of long term debt 10 12
Obligations under capital leases 0 50
Long term debt 183 180
Common stock 150 163
Retained earnings 26 30
422 498
2014 2015
Revenues, net 426
Cost of goods sold 310
Gross margin 116
General expenses 30
Wages expenses 42
Depreciation expense 24
Interest expense 11
Loss on sale of fixed assets 3
Gain on sale of securities available for sale -12
Tax expenses 8
106
Net income 10
1. Prepare the statement of cash flows for the year 2015 using the direct method.
2. Reconcile net income and net cash flows from operating activities for the year 2015.