F01.justanswer.com



|P17-1.   |(Debt Securities) |

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| |Presented below is an amortization schedule related to Spangler Company's 5-year, $100,000 bond with a 7% interest rate and a 5% |

| |yield, purchased on December 31, 2012, for $108,660. |

| |Date |

| |Cash Received |

| |Interest Revenue |

| |Bond Premium Amortization |

| |Carrying Amount of Bonds |

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| |12/31/12 |

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| |$108,660 |

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| |12/31/13 |

| |$7,000 |

| |$5,433 |

| |$1,567 |

| |  107,093 |

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| |12/31/14 |

| |  7,000 |

| |  5,354 |

| |  1,646 |

| |  105,447 |

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| |12/31/15 |

| |  7,000 |

| |  5,272 |

| |  1,728 |

| |  103,719 |

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| |12/31/16 |

| |  7,000 |

| |  5,186 |

| |  1,814 |

| |  101,905 |

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| |12/31/17 |

| |  7,000 |

| |  5,095 |

| |  1,905 |

| |  100,000 |

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| |The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end. |

| |  |

| |12/31/13 |

| |12/31/14 |

| |12/31/15 |

| |12/31/16 |

| |12/31/17 |

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| |Amortized cost |

| |$107,093 |

| |$105,447 |

| |$103,719 |

| |$101,905 |

| |$100,000 |

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| |Fair value |

| |$106,500 |

| |$107,500 |

| |$105,650 |

| |$103,000 |

| |$100,000 |

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| |Instructions |

| |(a)   |

| |Prepare the journal entry to record the purchase of these bonds on December 31, 2012, assuming the bonds are classified as |

| |held-to-maturity securities. |

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| |(b)   |

| |Prepare the journal entry(ies) related to the held-to-maturity bonds for 2013. |

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| |(c)   |

| |Prepare the journal entry(ies) related to the held-to-maturity bonds for 2015. |

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| |(d)   |

| |Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available-for-sale. |

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| |(e)   |

| |Prepare the journal entry(ies) related to the available-for-sale bonds for 2013. |

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| |(f)   |

| |Prepare the journal entry(ies) related to the available-for-sale bonds for 2015. |

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|Question 1 |[|

|The following information is available for Wenger Corporation for 2013. |p|

|1. |i|

| |c|

|Excess of tax depreciation over book depreciation, $40,000. This $40,000 difference will reverse equally over the years 2014–2017. |]|

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|2. | |

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|Deferral, for book purposes, of $20,000 of rent received in advance. The rent will be earned in 2014. | |

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|3. | |

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|Pretax financial income, $300,000. | |

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|4. | |

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|Tax rate for all years, 40%. | |

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|[|Compute taxable income for 2013. |[|

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|[|Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013. (Credit account |[|

|p|titles are automatically indented when amount is entered. Do not indent manually.) |p|

|i|Account Titles and Explanation |i|

|c|Debit |c|

|]|Credit |]|

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|[|Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming taxable income|

|p|of $325,000. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) |

|i|Account Titles and Explanation |

|c|Debit |

|]|Credit |

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Chart of Accounts for Questions 1 to 5

|Allowance to Reduce Deferred Tax Asset to Expected Realizable Value |

|Benefit Due to Loss Carryback |

|Benefit Due to Loss Carryforward |

|Deferred Tax Asset |

|Deferred Tax Liability |

|Income Tax Expense |

|Income Tax Payable |

|Income Tax Refund Receivable |

|Question 2 |[|

|Zurich Company reports pretax financial income of $70,000 for 2014. The following items cause taxable income to be different than pretax |p|

|financial income. |i|

|1. |c|

| |]|

|Depreciation on the tax return is greater than depreciation on the income statement by $16,000. | |

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|2. | |

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|Rent collected on the tax return is greater than rent earned on the income statement by $22,000. | |

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|3. | |

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|Fines for pollution appear as an expense of $11,000 on the income statement. | |

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|Zurich’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at | |

|the beginning of 2014. | |

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|[|Compute taxable income and income taxes payable for 2014. |[|

|p|Taxable income |p|

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|c|$[pic][pic] |c|

|]| |]|

| |Income taxes payable | |

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|[pic] |

|[|Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014. (Credit account |[|

|p|titles are automatically indented when amount is entered. Do not indent manually.) |p|

|i|Account Titles and Explanation |i|

|c|Debit |c|

|]|Credit |]|

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|[|Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.”. (Enter |[|

|p|negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) |p|

|i|Zurich Company |i|

|c|Income Statement (Partial) |c|

|]|Year ended December 31, 2014 |]|

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| |SHOW LIST OF ACCOUNTS | |

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|[|Compute the effective income tax rate for 2014. (Round answer to 1 decimal places, e.g. 25.5.) |

|p|Effective income tax rate |

|i| |

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|]| % |

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|Question 3 |[|

|Button Company has the following two temporary differences between its income tax expense and income taxes payable. |p|

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| |c|

|2014 |]|

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|2015 | |

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|2016 | |

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|Pretax financial income | |

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|$840,000 | |

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|$910,000 | |

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|$945,000 | |

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|Excess depreciation expense on tax return | |

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|(30,000 | |

|) | |

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|(40,000 | |

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|(10,000 | |

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|Excess warranty expense in financial income | |

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|20,000 | |

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|10,000 | |

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|8,000 | |

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|Taxable income | |

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|$830,000 | |

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|$880,000 | |

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|$943,000 | |

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|The income tax rate for all years is 40%. | |

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|[|Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2014, 2015, and 2016. (Credit|[|

|p|account titles are automatically indented when amount is entered. Do not indent manually.) |p|

|i|Account Titles and Explanation |i|

|c|Debit |c|

|]|Credit |]|

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| |2014 | |

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| |2015 | |

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| |2016 | |

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| |SHOW LIST OF ACCOUNTS | |

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| |LINK TO TEXT | |

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|[|Assuming there were no temporary differences prior to 2014, indicate how deferred taxes will be reported on the 2016 balance sheet. |[|

|p|Button’s product warranty is for 12 months. |p|

|i|Button Company |i|

|c|Balance Sheet |c|

|]|2016 |]|

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| |SHOW LIST OF ACCOUNTS | |

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| |LINK TO TEXT | |

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|[|Prepare the income tax expense section of the income statement for 2016, beginning with the line “Pretax financial income.” (Enter |

|p|negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) |

|i|Button Company |

|c|Income Statement (Partial) |

|]|Year ended December 31, 2016 |

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|Question 4 |[|

|The following facts relate to Duncan Corporation. |p|

|1. |i|

| |c|

|Deferred tax liability, January 1, 2014, $60,000. |]|

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|2. | |

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|Deferred tax asset, January 1, 2014, $20,000. | |

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|3. | |

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|Taxable income for 2014, $105,000. | |

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|4. | |

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|Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $230,000. | |

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|5. | |

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|Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $95,000. | |

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|6. | |

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|Tax rate for all years, 40%. No permanent differences exist. | |

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|7. | |

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|The company is expected to operate profitably in the future. | |

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|[|Compute the amount of pretax financial income for 2014. |[|

|p|Pretax financial income |p|

|i| |i|

|c|$[pic][pic] |c|

|]| |]|

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| |SHOW LIST OF ACCOUNTS | |

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|[|Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014. (Credit account |[|

|p|titles are automatically indented when amount is entered. Do not indent manually.) |p|

|i|Account Titles and Explanation |i|

|c|Debit |c|

|]|Credit |]|

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| |SHOW LIST OF ACCOUNTS | |

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|[|Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.” (Enter |[|

|p|negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) |p|

|i|Duncan Corporation |i|

|c|Income Statement (Partial) |c|

|]|Year ended December 31, 2014 |]|

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| |SHOW LIST OF ACCOUNTS | |

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|[|Compute the effective tax rate for 2014. (Round answer to 0 decimal places, e.g. 25%) |

|p|The effective tax rate |

|i| |

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|]| % |

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|Question 5 |[|

|Nadal Inc. has two temporary differences at the end of 2013. The first difference stems from installment sales, and the second one |p|

|results from the accrual of a loss contingency. Nadal’s accounting department has developed a schedule of future taxable and deductible |i|

|amounts related to these temporary differences as follows. |c|

| |]|

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|2014 | |

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|2015 | |

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|2016 | |

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|2017 | |

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|Taxable amounts | |

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|$40,000 | |

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|$50,000 | |

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|$60,000 | |

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|$80,000 | |

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|Deductible amounts | |

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|(15,000 | |

|) | |

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|(19,000 | |

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|$40,000 | |

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|$35,000 | |

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|$41,000 | |

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|$80,000 | |

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| | |

|As of the beginning of 2013, the enacted tax rate is 34% for 2013 and 2014, and 38% for 2015–2018. At the beginning of 2013, the company | |

|had no deferred income taxes on its balance sheet. Taxable income for 2013 is $500,000. Taxable income is expected in all future years. | |

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|[pic] |

|[|Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013. (Credit account |[|

|p|titles are automatically indented when amount is entered. Do not indent manually.) |p|

|i|Account Titles and Explanation |i|

|c|Debit |c|

|]|Credit |]|

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|[|Indicate how deferred income taxes would be classified on the balance sheet at the end of 2013. |

|p|Nadal Inc. |

|i|Balance Sheet |

|c|December 31, 2013 |

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