Misty Mark, an infamous archer, decided to open an archery and fitness business called Bows and Biceps. The following is a list of transactions for Bows and Biceps for the first month. Put the transactions in a T account ledger and then create a trial balance, Income Statement, Statement of Owner’s Equity, and Balance Sheet on 5/31/20.

1. 5/1/2020 - Deposited $10,000 into a bank account in the name of the business.
2. 5/1/2020 - Signed a one-year lease for a building and paid the first six month’s rent of $4,200.
3. 5/2/2020 - Bought equipment from Archery Supply, Inc for $2,000.
4. 5/10/2020 - Enrolled 10 students in a Bow Hunting for Beginners class to be held on 5/29. Each student paid $50 for the class
5. 5/15/2020 - Misty gives her personal exercise equipment with a fair market value of $3,000 to the business.
6. 5/25/2020 - Enrolled 10 students in a Fit to Shoot class to be held next month. Each student paid $25 for the class.
7. 5/28/2020 - Purchased $500 in office supplies from Andy’s Office Supply on credit. Half of the supplies were used immediately, the other half was stored in the supply closet for future use.
8. 5/31/2020 - Misty withdraws $1,000 to take a vacation after working so hard to set up the business.

Misty Mark, an infamous archer, decided to open an archery and fitness business called Bows and Biceps. The following is a list of transactions for Bows and Biceps for the first month. Put the transactions in a T account ledger and then create a trial balance, Income Statement, Statement of Owner’s Equity, and Balance Sheet on 5/31/20.

1. 5/1/2020 - Deposited $10,000 into a bank account in the name of the business.
2. 5/1/2020 - Signed a one-year lease for a building and paid the first six month’s rent of $4,200.
3. 5/2/2020 - Bought equipment from Archery Supply, Inc for $2,000.
4. 5/10/2020 - Enrolled 10 students in a Bow Hunting for Beginners class to be held on 5/29. Each student paid $50 for the class
5. 5/15/2020 - Misty gives her personal exercise equipment with a fair market value of $3,000 to the business.
6. 5/25/2020 - Enrolled 10 students in a Fit to Shoot class to be held next month. Each student paid $25 for the class.
7. 5/28/2020 - Purchased $500 in office supplies from Andy’s Office Supply on credit. Half of the supplies were used immediately, the other half was stored in the supply closet for future use.
8. 5/31/2020 - Misty withdraws $1,000 to take a vacation after working so hard to set up the business.

Misty Mark, an infamous archer, decided to open an archery and fitness business called Bows and Biceps. The following is a list of transactions for Bows and Biceps for the first month. Put the transactions in a T account ledger and then create a trial balance, Income Statement, Statement of Owner’s Equity, and Balance Sheet on 5/31/20.

1. 5/1/2020 - Deposited $10,000 into a bank account in the name of the business.
2. 5/1/2020 - Signed a one-year lease for a building and paid the first six month’s rent of $4,200.
3. 5/2/2020 - Bought equipment from Archery Supply, Inc for $2,000.
4. 5/10/2020 - Enrolled 10 students in a Bow Hunting for Beginners class to be held on 5/29. Each student paid $50 for the class
5. 5/15/2020 - Misty gives her personal exercise equipment with a fair market value of $3,000 to the business.
6. 5/25/2020 - Enrolled 10 students in a Fit to Shoot class to be held next month. Each student paid $25 for the class.
7. 5/28/2020 - Purchased $500 in office supplies from Andy’s Office Supply on credit. Half of the supplies were used immediately, the other half was stored in the supply closet for future use.
8. 5/31/2020 - Misty withdraws $1,000 to take a vacation after working so hard to set up the business.

Misty Mark, an infamous archer, decided to open an archery and fitness business called Bows and Biceps. The following is a list of transactions for Bows and Biceps for the first month. Put the transactions in a T account ledger and then create a trial balance, Income Statement, Statement of Owner’s Equity, and Balance Sheet on 5/31/20.

1. 5/1/2020 - Deposited $10,000 into a bank account in the name of the business.
2. 5/1/2020 - Signed a one-year lease for a building and paid the first six month’s rent of $4,200.
3. 5/2/2020 - Bought equipment from Archery Supply, Inc for $2,000.
4. 5/10/2020 - Enrolled 10 students in a Bow Hunting for Beginners class to be held on 5/29. Each student paid $50 for the class
5. 5/15/2020 - Misty gives her personal exercise equipment with a fair market value of $3,000 to the business.
6. 5/25/2020 - Enrolled 10 students in a Fit to Shoot class to be held next month. Each student paid $25 for the class.
7. 5/28/2020 - Purchased $500 in office supplies from Andy’s Office Supply on credit. Half of the supplies were used immediately, the other half was stored in the supply closet for future use.
8. 5/31/2020 - Misty withdraws $1,000 to take a vacation after working so hard to set up the business.

Presented below are two independent situations related to future taxable and deductible amounts resulting from temporary differences existing at December 31, 2020.

1. Pearl Co. has developed the following schedule of future taxable and deductible amounts.

2. Martinez Co. has the following schedule of future taxable and deductible amounts.

Both Pearl Co. and Martinez Co. have taxable income of $3,600 in 2020 and expect to have taxable income in all future years. The tax rates enacted as of the beginning of 2020 are 30% for 2020–2023 and 35% for years thereafter. All of the underlying temporary differences relate to noncurrent assets and liabilities.

1. Compute the net amount of deferred income taxes to be reported at the end of 2020, and indicate how it should be classified on the balance sheet for situation one.

2. Compute the net amount of deferred income taxes to be reported at the end of 2020, and indicate how it should be classified on the balance sheet for situation two.

In 2020, RST Corporation has $75,000 of income before taxes in its accounting records.   In computing income tax expense, RST makes the following observations of differences between the accounting records and the tax return:

1. An accelerated depreciation method is used for tax purposes. In 2020, RST reports $6,000 more depreciation expense for tax purposes than it shows in the accounting records.

2. In 2020, RST collected $60,000 from a business that is renting a portion of its warehouse. The $60,000 covers the rental payment for the four years 2021-2024, and therefore no rental revenue has been recognized for 2020. However, XYZ must pay taxes on the entire amount collected in 2020.

The enacted tax rate in 2020 is 21% and is 23% in 2021 and years following.

Required:

1.      Calculate taxable income for 2020.

2.      Prepare the journal entry necessary to record income taxes at the end of 2020.

3.      How would any deferred tax amounts be reported on a classified balance sheet?

4.     Assume that RST’s 2021 pretax accounting income is $9,000 and that RST reports $3,000 more depreciation expense for tax purposes than it shows in the accounting records. Also during 2021, RST invests in tax-free municipal bonds that earn $3,000 interest in 2021. Prepare the journal entry necessary to record income taxes at the end of 2021.

5. What is the amount of net income or loss that RST would report on its 2021 income statement and how will it be reported?

WX Company produced an oil based chemical product which it sells to paint manufacturers.
Because of the unique nature of the chemical product, price is not driven by the market.
In year 2020 with good market condition, it incurred total cost of $412,000 to produce the
chemical. The invested asset is $1,487,500. The cost per unit to manufacture a gallon of the
chemical is presented as belowDirect Labor $2
Direct Material $5
Apart from this, the variable manufacturing overhead is incurred at a rate of 40% of the cost of
direct labor. Assume that 40% of the variable manufacturing cost is indirect labor, 35% of the
variable manufacturing cost is indirect material and the remaining 25% is utilities. Fixed
manufacturing overhead is also incurred.
WX Company decided to price its product to earn a 16% return on its investment, and it has taken
into account the total cost plus the mark up when pricing its chemical product. The market price
of the chemical is $13.3.
In year 2019, it reported that 40,000 gallons of chemical have been produced by WX Company. It
is the company policy to set the production volume of the current year based on the production
volume of the preceding year and the market condition in the current year. If the market condition
of the current year is good, there will be 25% increase in production volume compared with the
preceding year. If the market condition of the current year is bad, there will be 20% decrease in
production volume compared with the preceding year.
In year 2020, WX Company is considering whether it can manufacture the paint itself. If the
company process the chemical further and manufacture the paint by itself (one gallon of chemical
can be further processed into one gallon of paint), the cost of indirect material will increase by
50%, the cost of indirect labor will rise by $0.09, the cost of utilities will remain the same,
additional cost for direct material per gallon is $1.8 and additional cost for direct labor per gallon
is $0.7. It is the company policy that the selling price of paint is driven by the market. If the
company processes the chemical further and manufactures the paint by itself, the invested assets
will increase by 41% and the fixed cost of production will increase by 50% compared with the
original situation that it produced an oil-based chemical product which it sells to paint
manufactures. The market price of the paint product is $16.5.

Required:
(a) Determine the fixed cost per unit (gallon) for the original situation that it produced an oil
based chemical product which it sells to paint manufactures. Show workings.

(b) Determine the net income per gallon for selling chemical. Reconcile the net income per gallon
with the difference between selling price and total cost per gallon. Show workings.

(c) Determine the incremental per gallon increase in net income and the total increase in net
income if the company manufactures the paint (under the same 2020 production volume).

(d) What is the accounting implication if there is high differentiation between the paint products
produced by WX Company and that produced by other competitors? Explain and provide
supporting calculations.

(e) What is the accounting implication if the invested asset amount has been overstated? Explain.

(f) What is the accounting implication if the company has considered the variable cost only
instead of full cost when pricing its chemical product? Explain.

WX Company produced an oil based chemical product which it sells to paint manufacturers. Because of the unique nature of the chemical product, price is not driven by the market. In year 2020 with good market condition, it incurred total cost of $412,000 to produce the chemical. The invested asset is $1,487,500. The cost per unit to manufacture a gallon of the chemical is presented as below

Direct Labor $2

Direct Material $5

Apart from this, the variable manufacturing overhead is incurred at a rate of 40% of the cost of direct labor. Assume that 40% of the variable manufacturing cost is indirect labor, 35% of the variable manufacturing cost is indirect material and the remaining 25% is utilities. Fixed manufacturing overhead is also incurred.

WX Company decided to price its product to earn a 16% return on its investment, and it has taken into account the total cost plus the mark up when pricing its chemical product. The market price of the chemical is $13.3.

In year 2019, it reported that 40,000 gallons of chemical have been produced by WX Company. It is the company policy to set the production volume of the current year based on the production volume of the preceding year and the market condition in the current year. If the market condition of the current year is good, there will be 25% increase in production volume compared with the preceding year. If the market condition of the current year is bad, there will be 20% decrease in production volume compared with the preceding year.

In year 2020, WX Company is considering whether it can manufacture the paint itself. If the company process the chemical further and manufacture the paint by itself (one gallon of chemical can be further processed into one gallon of paint), the cost of indirect material will increase by 50%, the cost of indirect labor will rise by $0.09, the cost of utilities will remain the same, additional cost for direct material per gallon is $1.8 and additional cost for direct labor per gallon is $0.7. It is the company policy that the selling price of paint is driven by the market. If the company processes the chemical further and manufactures the paint by itself, the invested assets will increase by 41% and the fixed cost of production will increase by 50% compared with the original situation that it produced an oil-based chemical product which it sells to paint manufactures. The market price of the paint product is $16.5.

(a) Determine the fixed cost per unit (gallon) for the original situation that it produced an oil based chemical product which it sells to paint manufactures. Show workings.

(b) Determine the net income per gallon for selling chemical. Reconcile the net income per gallon with the difference between selling price and total cost per gallon. Show workings.

(c) Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint (under the same 2020 production volume).

(d) What is the accounting implication if there is high differentiation between the paint products produced by WX Company and that produced by other competitors? Explain and provide supporting calculations.

(e) What is the accounting implication if the invested asset amount has been overstated? Explain.

(f) What is the accounting implication if the company has considered the variable cost only instead of full cost when pricing its chemical product? Explain.

WX Company produced an oil based chemical product which it sells to paint manufacturers. Because of the unique nature of the chemical product, price is not driven by the market.

In year 2020 with good market condition, it incurred total cost of $412,000 to produce the chemical. The invested asset is $1,487,500. The cost per unit to manufacture a gallon of the chemical is presented as below

Direct Labor $2

Direct Material $5

Apart from this, the variable manufacturing overhead is incurred at a rate of 40% of the cost of direct labor. Assume that 40% of the variable manufacturing cost is indirect labor, 35% of the variable manufacturing cost is indirect material and the remaining 25% is utilities. Fixed manufacturing overhead is also incurred.

WX Company decided to price its product to earn a 16% return on its investment, and it has taken into account the total cost plus the mark up when pricing its chemical product. The market price of the chemical is $13.3.

In year 2019, it reported that 40,000 gallons of chemical have been produced by WX Company. It is the company policy to set the production volume of the current year based on the production volume of the preceding year and the market condition in the current year. If the market condition of the current year is good, there will be 25% increase in production volume compared with the preceding year. If the market condition of the current year is bad, there will be 20% decrease in production volume compared with the preceding year.

In year 2020, WX Company is considering whether it can manufacture the paint itself. If the company process the chemical further and manufacture the paint by itself (one gallon of chemical can be further processed into one gallon of paint), the cost of indirect material will increase by 50%, the cost of indirect labor will rise by $0.09, the cost of utilities will remain the same, additional cost for direct material per gallon is $1.8 and additional cost for direct labor per gallon is $0.7. It is the company policy that the selling price of paint is driven by the market. If the company processes the chemical further and manufactures the paint by itself, the invested assets will increase by 41% and the fixed cost of production will increase by 50% compared with the original situation that it produced an oil-based chemical product which it sells to paint manufactures. The market price of the paint product is $16.5.

Required:

(a) Determine the fixed cost per unit (gallon) for the original situation that it produced an oil based chemical product which it sells to paint manufactures. Show workings.

(b) Determine the net income per gallon for selling chemical. Reconcile the net income per gallon with the difference between selling price and total cost per gallon. Show workings.

(c) Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint (under the same 2020 production volume).

(d) What is the accounting implication if there is high differentiation between the paint products produced by WX Company and that produced by other competitors? Explain and provide supporting calculations.

(e) What is the accounting implication if the invested asset amount has been overstated? Explain.

(f) What is the accounting implication if the company has considered the variable cost only instead of full cost when pricing its chemical product? Explain.

WX Company produced an oil based chemical product which it sells to paint manufacturers. Because of the unique nature of the chemical product, price is not driven by the market. In year 2020 with good market condition, it incurred total cost of $412,000 to produce the chemical. The invested asset is $1,487,500. The cost per unit to manufacture a gallon of the chemical is presented as belowDirect Labor $2 Direct Material $5 Apart from this, the variable manufacturing overhead is incurred at a rate of 40% of the cost of direct labor. Assume that 40% of the variable manufacturing cost is indirect labor, 35% of the variable manufacturing cost is indirect material and the remaining 25% is utilities. Fixed manufacturing overhead is also incurred. WX Company decided to price its product to earn a 16% return on its investment, and it has taken into account the total cost plus the mark up when pricing its chemical product. The market price of the chemical is $13.3. In year 2019, it reported that 40,000 gallons of chemical have been produced by WX Company. It is the company policy to set the production volume of the current year based on the production volume of the preceding year and the market condition in the current year. If the market condition of the current year is good, there will be 25% increase in production volume compared with the preceding year. If the market condition of the current year is bad, there will be 20% decrease in production volume compared with the preceding year. In year 2020, WX Company is considering whether it can manufacture the paint itself. If the company process the chemical further and manufacture the paint by itself (one gallon of chemical can be further processed into one gallon of paint), the cost of indirect material will increase by 50%, the cost of indirect labor will rise by $0.09, the cost of utilities will remain the same, additional cost for direct material per gallon is $1.8 and additional cost for direct labor per gallon is $0.7. It is the company policy that the selling price of paint is driven by the market. If the company processes the chemical further and manufactures the paint by itself, the invested assets will increase by 41% and the fixed cost of production will increase by 50% compared with the original situation that it produced an oil-based chemical product which it sells to paint manufactures. The market price of the paint product is $16.5.

(a) Determine the fixed cost per unit (gallon) for the original situation that it produced an oil based chemical product which it sells to paint manufactures. Show workings. (b) Determine the net income per gallon for selling chemical. Reconcile the net income per gallon with the difference between selling price and total cost per gallon. Show workings. (c) Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint (under the same 2020 production volume). (d) What is the accounting implication if there is high differentiation between the paint products produced by WX Company and that produced by other competitors? Explain and provide supporting calculations. (e) What is the accounting implication if the invested asset amount has been overstated? Explain. (f) What is the accounting implication if the company has considered the variable cost only instead of full cost when pricing its chemical product? Explain.