Question

Please prepare accounting entries or answer the questions asked for the following independent situations (SHOW ALL WORK):

1. Diamond Company owns 40% of the stock of Silver Company. On January 1, 2019, Silver reports total income of $4,000,000. On June 1, 2019, Silver pays total dividends to its shareholders of $1,000,000. Prepare the necessary accounting entries for Diamond.

2. May Company purchased a bond issued by August Company on September 1, 2019 for $1,000,000. The bond is properly classified as Trading. On December 31, 2019, the market price of the bond is $1,100,000. Prepare the appropriate adjusting entry for May Company.

3. Strong Company has a temporary difference of $5,000,000 that properly gives rise to a deferred tax liability. The tax rate is 30%. Accordingly, Strong records a DTL of $1,500,000 on its books. What would the result be if Congress were to lower the tax rate to 20% assuming the temporary difference still exists.

4. Briefly distinguish a contract asset from a contract liability.

Answer 1

	Diamond Company
	Date	A/C title	Debit	Credit
	1-Jan-19	Associate	1,600,000
		Retained Earnings		1,600,000
		(Share of Profit of associate)		(40%*4000000)
	1-Jun-19	Divdend Receivable	1,000,000
		Associate		1,000,000
		(Dividend Declared fro associates)
		Note:An associate is where an entity has significant influence over the associated company.
		Significant influence is the power to participate in the financial and operating policy decisions. It is
		presumed that an investment of between 20% and 50% indicates the ability to significantly influence the
		investee.
	May Company
	Date	A/C title	Debit	Credit
	1-Jan-19	Investment	100,000
		Unreaslzed Gain on investment		100,000	(1100000-1000000)
		(Fair Value adjustment)
	Strong Company
	Date	A/C title	Debit	Credit
		Deferred Tax Liability	500,000
		Tax Expense- Deferred		500,000	(1500000- (5000000 X 20%)
		Reversal for Tax Difference)
		Deferred tax liability journal entry
		Account	Debit	Credit
		Tax expense – current
		Tax expense – deferred	1,500,000		(5000000 X 30%)
		Income tax payable
		Deferred tax liability		1,500,000
		Total