Calculation of current and deferred tax, and adjustment entry

The profit before tax, as reported in the statement of profit and loss for Adeline Ltd for the year ended 30 June 2021, amounted to $100 000, including the following revenue and expense items.

The statement of profit and loss for Adeline Ltd for the year ended 30 June 2021 also included a gain on sale of equipment of $10 000. According to AASB 116/IAS 16, this gain is not classified as revenue, but it is nevertheless part of the accounting profit before tax for the year. The draft statements of financial position of Adeline Ltd at 30 June 2020 and 30 June 2021 showed the following assets and liabilities.

Additional information

In the year ended 30 June 2020, Adeline Ltd had a tax loss of $65 000 that it carried over in the deferred tax asset. In June 2021, the company received an amended assessment for the year ended 30 June 2020 from the ATO, indicating that an amount of $5000 claimed as a deduction has been disallowed. Adeline Ltd has not yet adjusted its accounts to reflect the amendment.

Amounts received from sales, including those on credit terms, are taxed at the time the sale is made. All other general taxation rules apply.

The movement in the equipment account is caused by the sale of the equipment on 1 March 2021 for which a gain on sale of $10 000 was recognised as part of the profit before tax (see above). Adeline Ltd had purchased the equipment on 1 July 2019 (with an estimated useful life of 2 years and no residual value) and for taxation purposes it claimed its full cost as a deduction at 30 June 2020.

The plant is depreciated on a straight?line basis over 10 years for accounting purposes, but over 5 years for taxation purposes. The plant is not expected to have any residual value.

All research and development expenses were paid in cash during the year ended 30 June 2021.

The company tax rate is assumed to be 30% for the year ended 30 June 2020 and 28% for the year ended 30 June 2021. The balances of the deferred tax accounts at 30 June 2020 are still reflecting the 30% tax rate.

Required

1. Prepare the current tax worksheet and the journal entry to recognise current tax at 30 June 2021.

2. Prepare the deferred tax worksheet and journal entries to adjust deferred tax accounts.

COMPSYS is a start-up computer company. This year, the first year of operations, the company expects to reach a Sales Revenue of $750,000. The company expects its sales to grow at a rate of 15% per year. Its Cost of Goods Sold (COGS) is running at 34% of Sales Revenue, and is expected to remain at that rate. Its Selling Costs are 12% of Sales in the first year and are expected to increase by an additional 3% per year after that. Its General and Administrative Costs (including Research and Development) are $410,000 this year, and are scheduled to rise at 4% every year after that. Earnings Before Taxes (EBT) is Sales Revenue less Cost of Goods Sold, Selling Costs, and General and Administrative Costs. Taxes are 25% of Earnings Before Taxes, if the Earnings Before Taxes are greater than zero but less than or equal to $50,000. If earnings are greater than $50,000 per year, then the tax rate is 35%. Use IF statements for computing taxes.

a)        Design and implement a worksheet to make a 5-year income statement projection for COMPSYS starting from this year. First, plan the format and layout of your worksheet areas. You should have separate areas for documenting the spreadsheet, indicating areas of the worksheet, and identifying assumptions with well-labeled separate cells for each of the growth rates and proportional factors. You should have a separate row for each item in the income statement and a separate column for each year. The final row should be for Earnings After Taxes. Use the Fill operation wherever possible.

b)        Calculate the Net Present Value (NPV) of the Earnings After Taxes for the 5 years. Use a Discount Rate of 7%. Provide a label to indicate the results and place the value at the bottom of your worksheet.

c)         Format your spreadsheet in an attractive manner. The first sheet should contain a brief documentation of the software package that you develop. The second sheet should be the EXCEL model. Here, the assumptions (given in the initial paragraph) should be first stated followed by the actual spreadsheet. The third sheet should contain the graphs you generate.

Optional (the following sections: d and e are optional but will be awarded bonus points if completed correctly)

d)        The management feels that the estimate for the first year's Sales Revenue, Cost of Goods Sold, Selling Costs, and General and Administrative Expenses may not be as certain. Since these four items are critical to the success of the operations, the management would like you to perform a sensitivity analysis to see what would the NPV look like when these numbers fluctuate within a range of +/- 20% of the estimate. That is, provide estimates of costs and revenues for this range which should be 80, 85, 90, 95, 100, 105, 110, 115, and 120% of the standard estimates.

(Hint: When you are formulating for these four items, add a certainty factor to the formulas. The certainty factor should not be hardcoded in the formulas. Always keep the input assumptions in a separate area in your worksheet. Use the Create Data Table under Data to perform the sensitivity analysis.)

e)        Produce the following graphs to present to the management:

• Sales and total expenses over the five-year period. Mark where the business starts to make a profit;

• The impact of fluctuations of the initial estimates for the cost of goods sold percentage; sales revenue; and the general and administrative expenses on the NPV.

(Hint: The horizontal axis should be from 80% to 120% of the original estimates, whilst the vertical axis should be the NPV. Remember, the 100% point is your original estimates. The curves for sales, cost of goods sold and the general and administrative expenses should be in the same graph.)

1.

value:
4.68 points

Required information

- Record the closure of all revenue and expenses account.

- Record the net change in investment in capital assets.

Sonic, Inc., sells business software. Currently, all of its programs come on disks. Due to their complexity, some of these applications occupy as many as seven disks. Not only are the disks cumbersome for customers to load, but they are relatively expensive for Sonic to purchase. The company does not intend to discontinue using disks altogether. However, it does want to reduce its reliance on the disk medium.

Two proposals are being considered. The first is to provide software on computer chips. Doing so requires a $300,000 investment in equipment. The second is to make software available through a computerized “software bank.” In essence, programs would be downloaded directly from Sonic using telecommunications technology. Customers would gain access to Sonic’s mainframe; specify the program they wish to order; and provide their name, address, and credit card information. The software would then be transferred directly to the customer’s hard drive, and copies of the user’s manual and registration material would be mailed the same day. This proposal requires an initial investment of $240,000.

The following information pertains to the two proposals. Due to rapidly changing technology, neither proposal is expected to have any salvage value or an estimated life exceeding six years.

The only difference between Sonic’s incremental cash flows and its incremental income is attributable to depreciation. A minimum return on investment of 15 percent is required.

a. Compute the payback period of each proposal.

b. Compute the return on average investment of each proposal.

c. Compute the net present value of each proposal using the tables in Exhibits 26–3 and 26–4.

e. Which of Sonic’s employees would most likely underestimate the benefits of investing in the software bank? Why?

Snowman Co. had the following December 31, 2017, account balances (listed in alphabetical order):

Additional information not included in the above.

The tax rate is 30%

On April 1, 2017, the company sold Division M (a component of the company), which had been unprofitable for several years. For the first 3 months of 2017, Division M had operating revenues of $25,000 and operating expenses of $33,800. The division assets had a historical cost of $80,000, had been depreciated for seven years using the straight line method, allowing for a $5,000 residual value, and a ten year life. The assets were sold for $45,000.

In the middle of December, 2017, the company incurred a material $5,500 pretax loss as a result of a flood on a river that floods once every 25 years.

During a review of the 2017 entries to ascertain what adjusting entries needed to be made, it was discovered that Legal Fees of $14,000, incurred in 2015 and associated with researching a potential patent were capitalized to the account patents in 2015. The patent was never applied for and the product idea was scrapped. In 2016 patent amortization was recorded, based on a twenty-year patent life. No amortization entry was recorded in 2017.

The company paid cash dividends of $.90 per share on its common stock. All the stock was outstanding for the entire year.

While making its December 31, 2017 adjusting entries, the company conducted an analysis of its recent favorable experience with uncollectible accounts receivable, and decided to reduce the percentage used in computing bad debt expense. The use of the new percentage resulted in the $1,900 bad debt expense being $500 less than the amount that would have been calculated using the old percentage.

During 2017, the company elected to switch from the completed contract method to the percentage of completion method for the work performed by its Consulting Division. This division has been in existence since 2015. The effect of this change was an increase in revenue in 2015 of $15,000, an increase in 2016 of $20,000 and an increase in 2017 of $25,000. The percentage of completion method was applied to all consulting revenue recorded in 2017. Consulting revenue is combined with other sales revenue for reporting purposes on the financial statements.

REQUIRED:

Prepare a single step Income Statement for Snowman Co. being sure to differentiate between Selling Expenses and Administrative Expenses.

Prepare a Statement of Retained Earnings for Snowman Co.

Where needed, provide schedules to show the details of your calculations and numbers.

Which of the “additional information” items would require footnote disclosure? Briefly explain what the footnote would need to state or explain.

Fit & Slim (F&S) is a health club that offers members various gym services.

Required:
1. Assume F&S offers a deal whereby enrolling in a new membership for $1,300 provides a year of unlimited access to facilities and also entitles the member to receive a voucher redeemable for 20% off yoga classes for one year. The yoga classes are offered to gym members as well as to the general public. A new membership normally sells for $1,470, and a one-year enrollment in yoga classes sells for an additional $750. F&S estimates that approximately 40% of the vouchers will be redeemed. F&S offers a 10% discount on all one-year enrollments in classes as part of its normal promotion strategy.
a. & b. Indicate below whether each item is a separate performance obligation. For each separate performance obligation you have indicated, allocate a portion of the contract price.
c. Prepare the journal entry to recognize revenue for the sale of a new membership.
2. Assume F&S offers a “Fit 60” coupon book with 60 prepaid visits over the next year. F&S has learned that Fit 60 purchasers make an average of 50 visits before the coupon book expires. A customer purchases a Fit 60 book by paying $750 in advance, and for any additional visits over 60 during the year after the book is purchased, the customer can pay a $15 visitation fee per visit. F&S typically charges $15 to nonmembers who use the facilities for a single day.
a. & b. Indicate below whether each item is a separate performance obligation. For each separate performance obligation you have indicated, allocate a portion of the contract price.
c. Prepare the journal entry to recognize revenue for the sale of a new Fit 60 book.

Req 1A and 1B

Indicate below whether each item is a separate performance obligation. For each separate performance obligation you have indicated, allocate a portion of the contract price.

Req 1C

• Record the revenue for the sale of a new membership.

Note: Enter debits before credits.

Indicate below whether each item is a separate performance obligation. For each separate performance obligation you have indicated, allocate a portion of the contract price.

Req 2A and 2B

• Record the revenue for the sale of a new Fit 60 book.

Note: Enter debits before credits.

• 
  Record the revenue for the sale of a new Fit 60 book.

Note: Enter debits before credits.

Req 2C

Alice J. and Bruce M. Byrd are married taxpayers who file a joint return. Their Social Security numbers are 123-45-6789 and 111-11-1112, respectively. Alice’s birthday is September 21, 1971, and Bruce’s is June 27, 1970. They live at 473 Revere Avenue, Lowell, MA 01850. Alice is the office manager for Lowell Dental Clinic, 433 Broad Street, Lowell, MA 01850 (employer identification number 98-7654321). Bruce is the manager of a Super Burgers fast-food outlet owned and operated by Plymouth Corporation, 1247 Central Avenue, Hauppauge, NY 11788 (employer identification number 11-1111111). The following information is shown on their Wage and Tax Statements (Form W–2) for 2018. Line Description Alice Bruce 1 Wages, tips, other compensation $58,000 $62,100 2 Federal income tax withheld 4,500 5,300 3 Social Security wages 58,000 62,100 4 Social Security tax withheld 3,596 3,850 5 Medicare wages and tips 58,000 62,100 6 Medicare tax withheld 841 900 15 State Massachusetts Massachusetts 16 State wages, tips, etc. 58,000 62,100 17 State income tax withheld 2,950 3,100 Enlarge Table The Byrds provide over half of the support of their two children, Cynthia (born January 25, 1994, Social Security number 123-45-6788) and John (born February 7, 1998, Social Security number 123-45-6786). Both children are full-time students and live with the Byrds except when they are away at college. Cynthia earned $6,200 from a summer internship in 2018, and John earned $3,800 from a part-time job. During 2018, the Byrds provided 60% of the total support of Bruce’s widower father, Sam Byrd (born March 6, 1942, Social Security number 123-45-6787). Sam lived alone and covered the rest of his support with his Social Security benefits. Sam died in November, and Bruce, the beneficiary of a policy on Sam’s life, received life insurance proceeds of $1,600,000 on December 28. The Byrds had the following expenses relating to their personal residence during 2018: Property taxes $5,000 Qualified interest on home mortgage (acquisition indebtedness) 8,700 Repairs to roof 5,750 Utilities 4,100 Fire and theft insurance 1,900 The Byrds had the following medical expenses for 2018: Medical insurance premiums $4,500 Doctor bill for Sam incurred in 2017 and not paid until 2018 7,600 Operation for Sam 8,500 Prescription medicines for Sam 900 Hospital expenses for Sam 3,500 Reimbursement from insurance company, received in 2018 3,600 The medical expenses for Sam represent most of the 60% that Bruce contributed toward his father’s support. Other relevant information follows: When they filed their 2017 state return in 2018, the Byrds paid additional state income tax of $900. During 2018, Alice and Bruce attended a dinner dance sponsored by the Lowell Police Disability Association (a qualified charitable organization). The Byrds paid $300 for the tickets. The cost of comparable entertainment would normally be $50. The Byrds contributed $5,000 to Lowell Presbyterian Church and gave used clothing (cost of $1,200 and fair market value of $350) to the Salvation Army. All donations are supported by receipts, and the clothing is in very good condition. Via a crowdfunding site (gofundme.com), Alice and Bruce made a gift to a needy family who lost their home in a fire ($400). In addition, they made several cash gifts to homeless individuals downtown (estimated to be $65). In 2018, the Byrds received interest income of $2,750, which was reported on a Form 1099–INT from Second National Bank, 125 Oak Street, Lowell, MA 01850 (Employer Identification Number 98-7654322). The home mortgage interest was reported on Form 1098 by Lowell Commercial Bank, P.O. Box 1000, Lowell, MA 01850 (Employer Identification Number 98-7654323). The mortgage (outstanding balance of $425,000 as of January 1, 2018) was taken out by the Byrds on May 1, 2014. Alice’s employer requires that all employees wear uniforms to work. During 2018, Alice spent $850 on new uniforms and $566 on laundry charges. Bruce paid $400 for an annual subscription to the Journal of Franchise Management and $741 for annual membership dues to his professional association. Neither Alice’s nor Bruce’s employer reimburses for employee expenses. The Byrds do not keep the receipts for the sales taxes they paid and had no major purchases subject to sales tax. All members of the Byrd family had health insurance coverage for all of 2018. This year the Byrds gave each of their children $2,000, which was then deposited into their Roth IRAs. Alice and Bruce paid no estimated Federal income tax. Neither Alice nor Bruce wants to designate $3 to the Presidential Election Campaign Fund. Part 1—Tax Computation Compute net tax payable or refund due for Alice and Bruce Byrd for 2018. If they have overpaid, they want the amount to be refunded to them. If you use tax forms for your computations, you will need Forms 1040 and Schedules A and B.

Michelle J. and Fred M. Smith are married taxpayers who file a joint return. Their Social Security numbers are 123-45-6789 and 111-11-1112, respectively. Michelle’s birthday is September 21, 1971, and Fred’s is June 27, 1970. They live at 473 Revere Avenue, Stony Brook, 01850. Michelle is the office manager for Stony Brook Dental Clinic, 433 Broad Street, Stony Brook, NY 01850 (employer identification number 98-7654321). Fred is the manager of a Super Burgers fast-food outlet owned and operated by Plymouth Corporation, 1247 Central Avenue, Hauppauge, NY 11788 (employer identification number 11-1111111).


The following information is shown on their Wage and Tax Statements (Form W–2) for 2018.

The Smiths provide over half of the support of their two children, Cynthia (born January 25, 1994, Social Security number 123-45-6788) and John (born February 7, 1998, Social Security number 123-45-6786). Both children are full-time students and live with the Smiths except when they are away at college. Cynthia earned $6,200 from a summer internship in 2018, and John earned $3,800 from a part-time job.


During 2018, the Smiths provided 60% of the total support of Fred’s widower father, Sam Smith (born March 6, 1942, Social Security number 123-45-6787). Sam lived alone and covered the rest of his support with his Social Security benefits. Sam died in November, and Fred, the beneficiary of a policy on Sam’s life, received life insurance proceeds of $1,600,000 on December 28.


The Smiths had the following expenses relating to their personal residence during 2018:

•                    When they filed their 2017 state return in 2018, the Smiths paid additional state income tax of $900.

•                    During 2018, Michelle and Fred attended a dinner dance sponsored by the Stony Brook Police Disability Association (a qualified charitable organization). The Smiths paid $300 for the tickets. The cost of comparable entertainment would normally be $50.

•                     The Smiths contributed $5,000 to Stony Brook Presbyterian Church and gave used clothing (cost of $1,200 and fair market value of $350) to the Salvation Army. All donations are supported by receipts, and the clothing is in very good condition.

•                     Via a crowdfunding site (gofundme.com), Michelle and Fred made a gift to a needy family who lost their home in a fire ($400). In addition, they made several cash gifts to homeless individuals downtown (estimatedto be $65).

•                     In 2018, the Smiths received interest income of $2,750, which was reported on a Form 1099–INT from Second National Bank, 125 Oak Street, Stony Brook, NY 01850 (Employer Identification Number 98-7654322).

•                     The home mortgage interest was reported on Form 1098 by Stony Brook Commercial Bank, P.O. Box 1000, Stony Brook, NY 01850 (Employer Identification Number 98-7654323). The mortgage (outstanding balance of $425,000 as of January 1, 2018) was taken out by the Smiths on May 1, 2014.

•                    Michelle’s employer requires that all employeeswear uniforms to work. During 2018, Michelle spent $850 on new uniforms and $566 on laundry charges.

•                     Fred paid $400 for an annual subscription to the Journal of Franchise Managementand $741 for annual membership dues to his professional association.

•                    Neither Michelle’s nor Fred’s employer reimburses for employee expenses.

•                     The Smiths do not keep the receipts for the sales taxes they paid and had no major purchases subject to sales tax.

•                     All members of the Smith family had health insurance coverage for all of 2018.

•                     This year the Smiths gave each of their children $2,000, which was then deposited into their Roth IRAs.

•                    Michelle and Fred paid no estimated Federal income tax. Neither Michelle nor Fred wants to designate $3 to the Presidential Election Campaign Fund.

REQUIRED: Tax Computation


Prepare their Federal and NYS tax returns. Compute net tax payable or refund due for Michelle and Fred Smith for 2018. If they have overpaid, they want the amount to be refunded to them. If you use tax forms for your computations, you will need Forms 1040 and Schedules A and B.


You must prepare Form 1040, Schedules A & B and any other appropriate forms and schedules.  You may use tax software such as ProConnect or TurboTax, or manually prepare their tax returns.

Prepare their Federal and NYS income tax returns. Assume they were NYS residents for the entire year

Suppose the following information (in millions of dollars) is available for Limited Brands for a recent year: sales revenue $9,170, net income $268, preferred dividend $0, and weighted-average common shares outstanding 400 million.

Compute the earnings per share for Limited Brands. (Round answer to 2 decimal places, e.g. 15.25.)