Question

Advanced Accounting - Chapter 12

Exercise 2 - Anticipating the impact on current-period tax rates due to forecasted events.

Waypine Enterprises reported a pretax operating loss of $84,000 in 2014, its first year of operations, and recognized a tax benefit of $6,000, based on the assumption that $40,000 of the loss could be offset against future pretax income. Management anticipates that there will be pretax operating income in the first six months of 2015 of $60,000 traceable to existing operations. However, additional income (loss) for the year is dependent on which of several strategies the company begins to pursue in the second quarter of 2015. Those strategies are as follows:

Strategy A—Existing operations would generate pretax income of $30,000 for the balance of the year and a new operating unit would begin operations in the second quarter of 2015, with projected pretax operating income (loss) of ($85,000), ($40,000), and ($20,000) for 2015 quarters 2 through 4, respectively. It is more likely than not that the operating units would generate pretax operating income of $30,000 in each of the next two years.

Strategy B—Existing operations would generate pretax loss of ($30,000) for the balance of the year and a 40% interest would be acquired in a limited liability company (LLC). The 40% interest would result in Waypine recognizing pretax income (loss) of ($40,000), $16,000, and $20,000 for 2015 quarters 2 through 4, respectively. It is likely that Waypine would recognize pretax operating income of $30,000 in 2016, traceable to this investment. Furthermore, it is anticipated that Waypine would dispose of its 40% interest in late 2016, resulting in a recognized gain of approximately $35,000.

Strategy C—Existing operations would generate pretax income of $30,000 for the balance of the year and construction would begin on a new research and development (R&D) center. The R&D center would become operational in the third quarter of 2015 and generate net licensing pretax income of $50,000 in 2015, along with income tax credits of $5,000.

Assume that the statutory tax rates in 2015 are 15% on the first $50,000 of income, 25% on the next $50,000 of income, and 30% on all remaining income. Calculate the estimated effective tax rate to be applied to income in the first six months of 2015, given each of the above strategies.

Note: Students should be reminded that if the tax benefit associated with prior-period operating losses is actually different from what was originally anticipated, such differences would be incorporated into the current-period effective tax rate.

Answer 1

Wage before pay evaluate $864,850*

Wage force 224,355**

Compensation from continuing with operations 640,495

Stopped operations

Incident from exchange of recreational division $119,500

Less: Applicable compensation evaluate diminish 35,850 (119,500 X 30%)

Pay before remarkable thing 556,845

Extraordinary thing:

Huge misfortune disaster 98,700

Less: Applicable pay charge diminishing 45,402 (98,700 x 46%)

Net Income $503,547

Wage per share

Pay from continuing with operations 5.30 (640,495/120,900)

Stopped operations, net of cost (0.69) [(119,500 - 35,850)/120,900]

Pay before exceptional things 4.61

Extraordinary thing, net of cost (0.44)

Net Income 4.17

*($803,900 - 57,600 + ($168,400 - 51,400) + ($55,800/6) - ({$55,800 - 9,300}/6) = $864,850

**[864,850 - ($168,400 - 51,400)] x 30%= $224,355

$ Million Cash flow from opcrating activitics Net income Adjustments Depreciation expenses Bad debt expense patent amortisation expense cash flow form operating activities before before changes in working capital decrease in Accounts receivable increase in Prepaid expenses increase in Inventory decrease in Accounts payable decrease in Accrued liabilities Net cash flow from operating activities 86.00 S 32.00 S 23.00 $ 142.00 20.00 $ (4.00) S (16.00) S (26.00 0.0 96.00 Cash flow from Investing activities purchase of long term investment purchase of Buildings and e Net cash flow used by Investing activities S (43.00 7.00 (50.00 Cash flow from Financing activities Payment of cash dividend Issuance of Notes payable Proceed from Common stock(50+205-72 267) Payment of Bonds payable Net Cash flow used by Financing activities 50.00 $ 84.00 S (52.00) (6.00) Decrease in cash Add cash in beginning,2017 cash at end,2018 43.00 actrities Non cash nvesting and Acquired Building with a seven-year lease agreement 131.00