Depreciation Methods

On January 2, 2018, Skyler, Inc. purchased a laser cutting machine to be used in the fabrication of a part for one of its key products. The machine cost $120,000, and its estimated useful life was four years or 920,000 cuttings, after which it could be sold for $5,000.

Required

a. Calculate each year’s depreciation expense for the machine's useful life under each of the following depreciation methods (round all answers to the nearest dollar):

1. Straight-line.
2. Double-declining balance.
3. Units-of-production. (Assume annual production in cuttings of 200,000; 350,000; 260,000; and 110,000.)

1. Straight-Line

2. Double-declining balance

3. Units of Production

b. Assume that the machine was purchased on July 1, 2018. Calculate each year’s depreciation expense for the machine's useful life under each of the following depreciation methods:

1. Straight-line.
2. Double-declining balance.

1. Straight-Line

2. Double-declining balance (Round answers to the nearest whole number, when appropriate.)

On July 1, 2018, Gupta Corporation bought 30% of the outstanding common stock of VB Company for $170 million cash. At the date of acquisition of the stock, VB’s net assets had a total fair value of $490 million and a book value of $220 million. Of the $270 million difference, $50 million was attributable to the appreciated value of inventory that was sold during the last half of 2018, $160 million was attributable to buildings that had a remaining depreciable life of 10 years, and $60 million related to equipment that had a remaining depreciable life of 5 years. Between July 1, 2018, and December 31, 2018, VB earned net income of $60 million and declared and paid cash dividends of $50 million.

Required:
1. Prepare all appropriate journal entries related to the investment during 2018, assuming Gupta accounts for this investment by the equity method.
2. Determine the amounts to be reported by Gupta. (amounts in millions)

The information that follows pertains to Richards Refrigeration, Inc.:

At December 31, 2018, temporary differences existed between the financial statement carrying amounts and the tax bases of the following:

No temporary differences existed at the beginning of 2018.

Pretax accounting income was $210 million and taxable income was $145 million for the year ended December 31, 2018. The tax rate is 30%.

Required:
1. Complete the following table given below and prepare the appropriate journal entry to record income taxes for 2018

Complete the following table given below to record income taxes for 2018. (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5). Negative amounts should be entered with a minus sign.)

Record 2018 Income Taxes

2. What is the 2018 net income?

Corning-Howell reported taxable income in 2018 of $140 million. At December 31, 2018, the reported amount of some assets and liabilities in the financial statements differed from their tax bases as indicated below:

*Gains and losses taxable when investments are sold.

The total deferred tax asset and deferred tax liability amounts at January 1, 2018, were $230 million and $45 million, respectively. The enacted tax rate is 40% each year.

Required:
1. Determine the total deferred tax asset and deferred tax liability amounts at December 31, 2018.
2. Determine the increase (decrease) in the deferred tax asset and deferred tax liability accounts at December 31, 2018.
3. Determine the income tax payable currently for the year ended December 31, 2018.
4. Prepare the journal entry to record income taxes for 2018.

Disco-vary has two current projects it believes will be wildly popular. The first, tentatively titled BEAT, is a docudrama about musicians. Disco-vary is purchasing rights to stream seven segments for a flat cost of $15,000,000. Streaming will take place from June 2018 through May 2019. In addition to rights to these segments, the $15,000,000 payment also gives Disco-vary first rights to a second season. DDisco-vary employees value this right of first refusal at $1,000,000.

The second project is an original series about inner city basketball, HOOPS, and is developed and produced by Disco-vary. Filming began in February 2018 and costs in the first month are $6,000,000. Costs include location costs, salaries, equipment, and costs of scripts. Disco-vary anticipates that ultimate costs will be $18,000,000, and that streaming revenues will be $50,000,000. Filming is expected to wrap up in December 2018, with editing complete in 2019. RedFlix plans to stream the series in spring 2019.

Because it is a new start-up trying to attract viewers, Disco-vary is projecting a loss of $110,000,000 in 2018.   The CEO of Disco-vaty would like to treat all costs of BEAT and HOOPS as expenses in 2018 so that 2019 will be profitable.

Is it possible to account for the expenses in that 2018 year? I am under the impression that they will have a lot of expenses in 2018 but you cant say for certain the project and costs pertaining to the project will allow for no expenses in 2019.

On January 1, 2018, Winn Heat Transfer leased office space under a three year operating lease agreement. The arrangement specified three annual rent payments of $90,000 each, beginning December 31, 2018, and at each December 31 through 2020. The lessor, HVAC Leasing calculates lease payments based on an annual interest rate of 8%. Winn also paid a $300,000 advance payment at the beginning of the lease in addition to the first $90,000 rent payment. With permission of the owner, Winn made structural modifications to the building before occupying the space at a cost of $390,000. The useful life of the building and the structural modifications were estimated to be 30 years with no residual value.

1. Record the beginning of the lease Jan 2018

2. Record the lease payment Jan 2018

3. Record the lease and interest payment Dec 2018

4.Record the amortization of the right to use asset Dec 2018

5.Record the depreciation expense for Winn 2018

6.Record the lease and interest payment 2019

7. Record the amortization of the right to use asset Dec 2019

8. Record the depreciation expense for Winn 2019

9.Record the lease and interest payment 2020

10. Record the amortization of the right to use asset Dec 2020

11. Record the depreciation expense for Winn 2020

Corning-Howell reported taxable income in 2018 of $190 million. At December 31, 2018, the reported amount of some assets and liabilities in the financial statements differed from their tax bases as indicated below:

*Gains and losses taxable when investments are sold.

The total deferred tax asset and deferred tax liability amounts at January 1, 2018, were $260 million and $60 million, respectively. The enacted tax rate is 40% each year.

Required:
1. Determine the total deferred tax asset and deferred tax liability amounts at December 31, 2018.
2. Determine the increase (decrease) in the deferred tax asset and deferred tax liability accounts at December 31, 2018.
3. Determine the income tax payable currently for the year ended December 31, 2018.
4. Prepare the journal entry to record income taxes for 2018.

On January 1, 2018, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $150,000. The Cortland bonds have a stated interest rate of 6%. Interest is paid semiannually on June 30 and December 31, and the bonds mature in 10 years. For bonds of similar risk and maturity, the market yield on particular dates is as follows (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

Required:
1. Calculate the price Ithaca would have paid for the Cortland bonds on January 1, 2018 (ignoring brokerage fees).
2. Prepare all appropriate journal entries related to the bond investment during 2018, assuming Ithaca accounts for the bonds as a held-to-maturity investment. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.
3. Prepare all appropriate journal entries related to the bond investment during 2018, assuming that Ithaca chose the fair value option when the bonds were purchased, and that Ithaca determines fair value of the bonds semiannually. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.

1. On November 30, 2017, Rocky Co. decided to dispose of a component A. The sale was not complete

at the end of 2017. During 2017, this component generated operating income of $200,000. The

historical cost of component A is $1,200,000 and the Accumulated Depreciation for component A on

December 31, 2017 was $500,000. At December 31, 2017, the fair value of component A was

estimated at $710,000 and the cost to sell component A was estimated to be $50,000. Rocky has a

30% tax rate in all years.

a) Provide the journal entry to record any impairment of Component A in 2017.

b) Provide the Discontinued Operations Section of the 2017 Multistep Income Statement.

Rocky Co. sold component A on May 17, 2018 for a sales price of $735,000 with sales commissions

of $45,000. During 2018, component A generated operating income of $100,000. Rocky’s common

shares outstanding at the end of 2017 and 2018 were 500,000 and 700,000 shares, respectively. In

2018, Rocky declared a preferred stock dividend of $30,000, but only paid $24,000 of the dividend in

2018. In 2018, Rocky declared a common stock dividend of $60,000 and only paid $40,000.

c) Provide the 2018 Partial Income Statement, starting with Income from Continuing Operations

Before Taxes of $900,000. Include the first four lines and EPS information. Good format is

required.

d) Provide the journal entry to record the disposal of Component A. GJEF is required.

2. On November 30, 2017, MoBull Co. decided to dispose of a segment B. The sale was not complete at

the end of 2017. During 2017, segment B generated operating income of $300,000. The historical

cost of segment B is $1,000,000 and the Accumulated Depreciation on segment B at 12/31/17 is

$400,000. At December 31, 2017, the fair value of segment B was estimated at $630,000 and the

cost to sell segment B was estimated to be $10,000. MoBull Co. sold segment B on May 17, 2018 for

$615,000. During 2018, segment B generated operating loss of $40,000. MoBull has a 30% tax rate

in all years.

a) Provide the journal entry to record any impairment of Segment B in 2017. If no journal entry,

justify why.

b) Provide the Discontinued Operations Section of the 2017 Multistep Income Statement.

MoBull’s common shares outstanding at the end of 2017 and 2018 were 525,000 and 475,000,

respectively. In 2018, MoBull declared a preferred stock dividend of $100,000, but only paid

$70,000 of the dividend in 2018. In 2018, MoBull declared a common stock dividend of $200,000

and paid $240,000.

c) Provide the 2018 Partial Income Statement, starting with Income from Continuing Operations of

$1,000,000. Include the first four lines and EPS information. Good format is required.

d) Provide the journal entry to record the disposal of Segment B. GJEF is required.