Case A: Revenue Recognition for Products

Smooth Blend, Inc., a calendar year company, produces several blends of whiskey. Maturing whiskey is stored for 3 years in a large, dark aromatic warehouse owned by Smooth Blend. Smooth Blend sells the whiskey to Distributor Company at the beginning of the aging process (January 1, 2011). Distributor Company will pick up the whiskey at the end of the aging process (December 31, 2013) and take it to its facilities for bottling. Distributor Company pays the full purchase price to Smooth Blend on January 1, 2011 to protect itself against price increases.

1. When should Smooth Blend recognize revenue? Why?
2. Would your answer change
   1. If the quality control manager of Distributor Company had the right to taste the whiskey on December 31, 2013 and receive a full refund if not satisfied with the quality of the liquor?
   2. If there was no right of return but Smooth Blend promised to help Distributor Company attract customers?
   3. If Smooth Blend acquired a fixed price option from Distributor Company to repurchase the whiskey in 6 months?
3. How would your answer change if Smooth Blend sold the whiskey to Friendly Bank, agrees to oversee the aging process on the bank’s behalf, and acquires a fixed price forward from Friendly Bank to repurchase the whiskey in 6 months?

Purple Co. began business on January 1, 2020. The following items caused the only differences between pretax financial income and taxable income.

1. On January 2, 2020, heavy equipment costing $800,000 was purchased. The equipment had a life of 4 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below:

                                                      Tax Depreciation                                        

              2020              2021                 2022                   2023                Total    

            $360,000         $180,000          $140,000          $120,000          $800,000

2. On January 2, 2020, $360,000 was collected in advance for rental of a building for a two-year period. The entire $360,000 was reported as taxable income in 2020, but $180,000 of the $360,000 was reported as unearned revenue at December 31, 2020 for book purposes.

3. In 2020, the company had an accounts receivable of $420,000 for goods that had been delivered to the customer in 2020. It will be collected in 2021.

4. Purple Co. deducts insurance expense of $210,000 for tax purposes in 2020, but the expense is not yet recognized for accounting purposes. In 2021, 2022, and 2023, no insurance expense will be deducted for tax purposes, but $70,000 of insurance expense will be reported for accounting purposes in each of these years.

The enacted tax rates existing at December 31, 2021 are:

2020                 20%                             2022                 30%

            2021                20%                              2023                30%

                                                                        2024                30%

Instructions:

1. For items 1)-4), indicate whether it involves a deferred tax asset, deferred tax liability, or permanent difference.

1):                    2):                    3):                    4):                    

Purple’s taxable income for 2020 was $900,000. Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2020. Show your work.

How would you calculate the below for the biomedical company Resmed within the year of 2019-2020?

- Liquidity

- Leverage

- Profitability

- Market Value

On January 1, 2020, Ivanhoe Company has the following defined benefit pension plan balances.

The interest (settlement) rate applicable to the plan is 10%. On January 1, 2021, the company amends its pension agreement so that prior service costs of $506,000 are created. Other data related to the pension plan are as follows.

1.Prepare a pension worksheet for the pension plan for 2020 and 2021. (Enter all amounts as positive.)

2. For 2021, prepare the journal entry to record pension-related amounts

On January 1, 2020, Sage Company has the following defined benefit pension plan balances.

Projected benefit obligation$4,571,000

Fair value of plan assets4,210,000

The interest (settlement) rate applicable to the plan is 10%. On January 1, 2021, the company amends its pension agreement so that prior service costs of $492,000 are created. Other data related to the pension plan are as follows.

2020

2021

Service cost

$152,000 $179,000

Prior service cost amortization

0 89,000

Contributions (funding) to the plan

236,000 285,000

Benefits paid

198,000 275,000

Actual return on plan assets

252,600 261,000

Expected rate of return on assets

6% 8%

Q. Prepare a pension worksheet for the pension plan for 2020 and 2021

Q. For 2021, prepare the journal entry to record pension-related amounts.

Mac Leasing Company (lessor) and Ash Corporation (lessee) signed a four-year lease on January 1, 2020. The underlying asset has an estimated life of six years, and the property reverts to Mac at the end of the lease term. Lease payments of $34,577 are payable on January 1 of each year and were set to yield Mac a return of 8%, which was known to Ash. The estimated residual value at the end of the lease term is $29,000 and is guaranteed by Ash Corporation. Ash expects the estimated residual value at the end of the lease term to be $29,000. The lease contains no purchase option.

a) Prepare an amortization schedule of the lease liability.

b)Prepare the entries for Ash Company for 2020.

c)Let’s now assume that Ash Corporation expects the estimated residual value at the end of the lease term to be $10,150 instead. Prepare the entries for Ash Corporation for 2020.

On October 1st American Company purchased this 1,000,000 peso CD when the peso was worth 10 cents

This 2 year CD pays interest at 12% with interest paid each April 1st and October 1st

American Company purchased this 1,000,000 peso CD when the peso was worth 10 cents

On December 31st The peso was worth 8 cents

On April 1st 2020 the peso was worth 9 cents

On October 1st 2020 the peso was worth 11 cents

On December 1st 2020 the peso was worth 10 cents

On April 1st 2021 the peso was worth 8 cents

On October 1st 2021 the peso was worth 9 cents

REQUIRED: MAKE ALL THE JOURNAL ENTRIES AMERICAN MAKES IN CONNECTION WITH THIS CD

DON'T FORGET THE INITIAL PURCHASE OF THE CD AND THE NECESSARY ADJUSTING ENTRIES AT YEAR END

Sheffield Corporation, a clothing retailer, had income from operations (before tax) of $427,500, and recorded the following before-tax gains/(losses) for the year ended December 31, 2020:

Sheffield also had the following account balances as at January 1, 2020:

As at January 1, 2020, Sheffield had one piece of land that had an original cost of $142,000 that it accounted for using the revaluation model. It was most recently revalued to fair value on December 31, 2019, when its carrying amount was adjusted to fair value of $246,240. In January 2020, the piece of land was sold for proceeds of $246,240. In applying the revaluation model, Sheffield maintains the balance in the Revaluation Surplus (OCI) account until the asset is retired or disposed of.

In 2015, Sheffield purchased a portfolio of debt investments that the company intended to hold for longer term and classified the portfolio of investments as fair value through other comprehensive income (FV-OCI) with gains/losses recycled through net income. The investments in the portfolio are traded in an active market. Sheffield records unrealized gains and losses on these investments as OCI, and then books these gains and losses to net income when they are impaired or sold. The portfolio’s carrying amount on December 31, 2019, was $125,400. The entire portfolio was sold in November 2020 for proceeds of $143,640.

Sheffield’s income tax expense for 2020 was $112,860. Sheffield prepares financial statements in accordance with IFRS.

Calculate net income for the year ended December 31, 2020.

Calculate retained earnings as at December 31, 2020.

Calculate net income for the year ended December 31, 2020, if Sheffield prepares financial statements in accordance with ASPE. Sheffield’s income tax expense would not change.

Calculate retained earnings as at December 31, 2020, if Sheffield prepares financial statements in accordance with ASPE. Assume that under ASPE, Sheffield’s retained earnings at January 1, 2020, would be $530,100.

Will the sum of the Accumulated Other Comprehensive Income and Retained Earnings under IFRS equal the balance of Retained Earnings under ASPE at December 31, 2020? Prepare a continuity schedule of the related accounts to demonstrate your answer.

The sum of the AOCI and Retained Earnings under IFRS equal the balance of Retained Earnings under ASPE as follows:

Dave Solomon is 59 years of age and is planning for his retirement. Dave is a barrister at a leading law firm. His gross salary for the 2019–2020 income year totals $345,000. He has decided to sell the majority of his assets as detailed below:

•  A two-storey residence at St Lucia, described in PoTL end of chapter question 11.6 (a)

•  A painting, described in PoTL end of chapter question 11.6 (b)

•  A parcel of shares, described in PoTL end of chapter question 11.6 (d).

•  A unit in a unit complex that he holds as a residential rental property investment. Davepurchased the unit ‘off plan’ on 1 January 2012 for $350,000. The unit was tenanted from that day. On 1 August 2019, Dave replaced the stove in the unit with a new one that cost him $1,800. He uses the diminishing value method for income tax purposes, and the effective life of the stove is 12 years. Dave sold the unit on 29 February 2020 for $450,000, and applies an apportionment of 0.2% on the sale of depreciating assets as set out in the ATO Rental properties Guide for rental property owners. During the 2019–2020 income year, Dave received rent totalling $16,800. By 30 June 2019, Dave had claimed Div 43 capital works deductions totalling $52,500.

  You are required to:

  Calculate Dave’s taxable income for the 2019–2020 income year. Show all your calculations and provide reasons for your answer, referencing relevant sections of the Income Tax Assessment Acts.

  Question 2

  Your client is a wealthy investor and property owner. Your client provides you with information (as detailed below) about various transactions that took place between 1 July 2019 and 30 June 2020.

1. 1) Warehouse: On 30 April 1985 your client acquired a large parcel of vacant land at Rocklea, a suburb in Brisbane with a significant number of commercial buildings. The purchase price was $180,000 and your client incurred $2,000 in legal fees and $18,000 in transfer duty when purchasing the land. In April 2000 your client signed a contract for the construction of a large warehouse on the land. The final construction cost was $1,000,000. The warehouse is used tohouse your client’s extensive motor vehicle collection. Your client signs the contract to sell the warehouse for $2,200,000 on 1 June 2020. Your client receives the proceeds on 1 July 2020. At the time of sale, an independent valuation revealed the land component of the sale price was $1,200,000. Your client paid $80,000 to insure the warehouse building against flood and fire damage.

2. 2) Boat: Your client owned a luxury motor cruiser that was moored at the Manly Yacht Club. Your client used the boat to go fishing over weekends and to cruise the waters of Moreton Bay. Your client purchased the vessel in late 2006 for $140,000 and sells the vessel on 1 June 2020 to a local boat broker for $90,000. During the period of ownership, your client paid a total of $25,000 in weekly mooring fees to the Manly Yacht club and also incurred $20,000 in repairs on the vessel.

3. 3) Dining Table: Your client acquires a large, hand crafted, English oak dining table for $8,000 in April 2001. The table is very old, having been constructed sometime during 1910 and was used by your client and his family in their formal dining room. Your client auctions the table on 2 April 2020 and it sells for a record price of $50,000. Your client pays $2,000 in auction fees. Duringyour client’s period of ownership they paid $3,000 to insure the table against loss or damage.

4. 4) Your client also has a capital loss carried forward from the 2017–2018 income year of $10,000.

You are required to:

Calculate which amount(s), if any, must be returned as assessable income for the 2019–2020 income year. Show all your calculations and provide reasons for your answer, referencing relevant sections of the Income Tax Assessment Acts.