Alakazam Corp. began business on January 1, 2016. At December 31, 2016, it had a $4,500 balance in the Deferred Tax Liability account that pertains to property, plant, and equipment acquired during 2016 at a cost of $900,000. The property, plant, and equipment is being depreciated on a straight-line basis over six years for financial reporting purposes, and is a Class 8—20% asset for tax purposes. Alakazam’s income before income tax for 2017 was $60,000. Alakazam Corp. follows IFRS and the half-year convention for depreciation.

The following items caused the only differences between accounting income before income tax and taxable income in 2017.

In 2017, the company paid $56,250 for rent; of this amount, $18,750 was expensed in 2017. The other $37,500 will be expensed equally over the 2018 and 2019 accounting periods. The full $56,250 was deducted for tax purposes in 2017.

Alakazam pays $9,000 a year for a membership in a local golf club for the company’s president.

Alakazam now offers a one-year warranty on all its merchandise sold. Warranty expenses for 2017 were $9,000. Cash payments in 2017 for warranty repairs were $4,500.

Meals and entertainment expenses (only 50% of which are ever tax deductible) were $12,000 for 2017.

The maximum allowable CCA was taken in 2017. There were no asset disposals for 2017. Income tax rates have not changed since the company began operations.

Required:

1. Calculate the balance in the Deferred Tax Asset or Deferred Tax Liability account at December 31, 2017.

2. Calculate income tax payable for 2017.

3. Prepare the journal entries to record income taxes for 2017.

4. Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income tax.”

5. Indicate how deferred taxes should be presented on the December 31, 2017 statement of financial position.

6. How would your response to parts (a) to (e) change if Alakazam reported under ASPE?

LN Consulting is a calendar year, cash basis unincorporated business. The business is not required to provide audited financial statements to any external user. LN's accounting records show the following:

Cash receipts:   

Revenues from service contracts $292,000

Proceeds from sale of mutual fund shares 18,000

Insurance reimbursement for fire loss 7,000

Cash disbursements:   

Administrative salaries $32,000

Professional fees 800

Business meals 1,090

Business entertainment costs 2,000

State and local business taxes 5,000

Interest expense 7,600

Advertising 970

Office expense 1,200

Office rent 14,400

New office equipment 8,300

LN's records reveal the following facts:

• In December, the bookkeeper prepaid $1,500 interest on a business debt. This interest is related to the next taxable year.
• LN disposed of two assets during the year. It exchanged computer equipment for office furniture. (These assets are not like-kind for federal tax purposes.) The original cost of the computer equipment was $13,000, and accumulated MACRS depreciation through date of exchange was $9,700. The office furniture has a $6,000 FMV. It sold 1,200 shares in a mutual fund for $18,000. LN purchased the shares as a short-term investment of excess working capital. The cost of the shares was $16,600.
• An electrical fire completely destroyed a company car. The adjusted basis of the car was $9,100, and LN's property insurance company paid $7,000 in complete settlement of its damage claim. LN used the insurance money to pay various operating expenses.
• MACRS depreciation for assets placed in service in prior years (including the computer equipment and company car) is $4,600. The only asset acquired this year (in addition to the office furniture) was office equipment costing $8,300. The equipment was placed in service on August 19.

On the basis of these facts, compute the taxable income generated by LN Consulting's activities, before any 20 percent (QBI) deduction that might be available to LN's owners.

Home and Automobile Insurance

Newlyweds Jamie Lee and Ross have had several milestones in the past year. They are newlyweds, recently purchased their first home and now have twins on the way!

Jamie Lee and Ross have to seriously consider their insurance needs. A family, a home and now babies on the way, they need to develop a risk management plan to help them should an unexpected event arise.

Current Financial Situation:

Assets (Jamie Lee and Ross combined):

Checking account: $4,300

Savings Account: $22,200

Emergency Fund savings account: $20,500

IRA balance: $26,000

Car: $10,000 (Jamie Lee) and $18,000 (Ross)

Liabilities (Jamie Lee and Ross combined):

Student loan balance: $0

Credit Card Balance: $2,000

Car Loans: $6,000

Income:

Jamie Lee: $50,000 gross income ($37,500 net income after taxes)

Ross: $75,000 gross income ($64,000 net income after taxes)

Monthly Expenses (combined):

Mortgage: $1,252

Property Taxes and Insurance: $500

Utilities: $195

Food: $400

Gas/Maintenance: $275

Credit Card Payment: $250

Car Loan Payment: $289

Entertainment: $300

Questions:

1. Based on their current life status, what are some of the goals Jamie Lee and Ross should set to achieve when developing their insurance plan?

2. What four questions should Jamie Lee and Ross ask themselves as they develop the risk management plan?

3. Once Jamie Lee and Ross put their insurance plan into action, what should they do to maintain their plan?

4. Jamie and Ross decided to conduct a check-up on their homeowner’s insurance policy. They noticed that they had omitted covering Jamie Lee’s diamond wedding band set from their policy. What if it got lost or stolen? It was a major purchase and besides the emotional value, the cost to replace the diamond jewelry would be very high

Show how you arrived at the totals by Line item on the GST/HST return by completing the following

Additional information--$1,400 HST installment was paid to the CRA for this quarter (Hint—line 110)

Problem 3-1 (Algorithmic) Schedule C (LO 3.1) Scott Butterfield is self-employed as a CPA. He uses the cash method of accounting, and his Social Security number is 644-47-7833. His principal business code is 541211. Scott's CPA practice is located at 678 Third Street, Riverside, CA 92860. Scott’s income statement for the year shows the following: Income Statement Scott Butterfield, CPA Income Statement 12/31/2017 Current Period Prior Period 1/1/2017 to 12/31/2017 1/1/2016 to 12/31/2016 REVENUES Tax Services $156,400 $72,154 Accounting Services 15,640 50,256 Other Consulting Services 34,408 7,690 TOTAL REVENUES 206,448 130,100 COST OF SERVICES Salaries 31,280 29,400 Payroll Taxes 2,387 2,275 Supplies 300 1,225 TOTAL COST OF SERVICES 33,967 32,900 GROSS PROFIT (LOSS) 172,481 97,200 OPERATING EXPENSES Advertising and Promotion 2,000 – Business Licenses and Permits 620 250 Charitable Contributions 400 250 Continuing Education 1,500 – Dues and Subscriptions 1,640 3,500 Insurance 9,384 870 Meals and Entertainment 7,038 5,400 Office Expense 3,128 – Postage and Delivery 85 – Printing and Reproduction 1,564 – Office Rent 4,692 13,800 Travel 6,256 750 Utilities 1,877 2,724 TOTAL OPERATING EXPENSES 40,184 27,544 NET INCOME (LOSS) $132,297 $69,656 Scott also mentioned the following: The expenses for dues and subscriptions were his country club membership dues for the year. The charitable contributions were made to a political action committee. Scott does not generate income from the sale of goods and therefore does not record supplies and wages as part of cost of goods sold. Scott placed a business auto in service on January 1, 2014 and drove it 4,093 miles for business, 2,456 miles for commuting, and 4,912 miles for nonbusiness purposes. His wife has a car for personal use.

Late in 2011, JCPenney made a dramatic move, ousting CEO Myron Ulman and bringing in Ron Johnson. Johnson was perceived as a change agent who could reinvent the company as a new, hip place to shop, just as he had transformed the Apple Store from a run-of-the-mill mall store to an entertainment destination. His vision was clear, stating, "In the United States, the department store has a chance to regain its status as the leader in style, the leader in excitement. It will be a period of true innovation for this company." Johnson proposed offering new products and interesting product lines, such as Martha Stewart and Joe Fresh, to lure in high-end customers. He also envisioned JCPenney as a destination, where shoppers would look forward to spending time browsing the store, similar to the excitement one often finds in an Apple Store.

Unfortunately for JCPenney, Johnson's new vision was a near-complete failure. Penney's loyal customer base was unhappy with the new store and pricing strategies. The company failed to attract new customers and sales fell by 25 percent in one year. Even the major shareholder who championed johnson's recruitment, Bill Ackman, realized that the company had made a new fatal error, lamenting, "One of the biggest mistakes was perhaps too much change too quickly without adequate testing on what the impact would be. " Notre Dame marketing Professor Carol Phillips points out that the company failed to understand the buyer with its new value pricing, no sale strategy. "JCP's CEO Ron Johnson was ... clueless about what makes shopping fun for women. It's the thrill of the hunt, not the buying." The new strategy was a mismatch with the company's existing managers, product lines, pricing strategies, and customer base.

Do you think Ron Johnson changed the mission of JCPenney or just implemented new strategies? Be sure to support your conclusion.

1. You have recently earned the Certified Financial Planner ® designation and have increased your client base because of it. You have just added some members of the Gilligan’s Island cast to your list of clients. Some of their stories and investment goals are described below:

A. Bob Denver (Gilligan) received a large lump sum as compensation for the Season 3 DVD in the amount of $2.1 million. He wants to purchase a home on the beach in Northern California. You advise him to use the entire $2.1 million plus a $3.2 million loan from a financial institution that will charge him a 6.1% annual interest rate over ten years. His first payment is due on August 5, 2019.

Determine the monthly payment on the loan.

2. Alan Hale Jr (the Skipper) currently has $3.8 million invested in a well-diversified portfolio of securities earning 12%. Alan has two children (ages 15 and 10) and would like to create a trust fund for each child so that each would have $10 million on their 25^th birthdays (10 and 15 years from today). Alan would like to save quarterly for the next 5 years to provide for his children.

Determine the quarterly amount (beginning today) Alan must save to reach the goal for both children assuming the new funds will earn 12% annually.

C. Tina Louise (Ginger) has recently seen her entertainment income reduced to zero because the industry has typecast her. Luckily, she has $10 million invested in a retirement fund earning 10% per year. She is considering retirement in three years when she turns 60. Tina believes she can live until she is 90.

Determine the monthly retirement income if she earns 6% during retirement years if she wants to leave $1 million to the Howell Estate on the date of her death.

Capstone Case H: Cost-Effectiveness Analysis of Type II Diabetes

Diabetes is a major health problem, particularly for the millions of Americans with undiagnosed diabetes, for whom treatment and glycemic control could substantially reduce the onset of complications of this disease. The CDC Diabetes Cost-Effectiveness Group has published a number of articles based on cost-effectiveness analyses (CEA) using a sophisticated Markov simulation model. This probability- based model predicts the onset of diabetes in a hypothetical cohort of patients and follows them as they transition into the various disease states associated with complications and ultimately death. The first analysis (1998) estimates the cost-effectiveness of one-time opportunistic screening (i.e., done during routine contact with a health system). Two cohorts were used in this study, (1) a hypothetical population without diabetes assigned to either opportunistic screening or current clinical practice, and (2) a hypothetical cohort of 10,000 newly diagnosed diabetics who are followed for the development of major complications under the two screening alternatives. The second analysis (2002) estimates the cost-effectiveness of three interventions for the hypothetical cohort of 10,000 newly diagnosed diabetics: (1) intensive glycemic control; (2) intensive hypertension control; and (3) reduction in serum cholesterol. Hoerger and colleagues (2004) use the CDC Markov model to estimate the cost-effectiveness of two screening strategies: (1) diabetes screening targeted at those individuals with hypertension and (2) universal diabetes screening.

Questions

1. What is the difference between cost–benefit, cost-effectiveness, and cost–utility analysis?

2. What is the relationship between cost and effectiveness? Does more effectiveness always cost more money?

3. When doing CEA it is important to identify the perspective from which the analysis is conducted. In other words, from whose perspective are the costs and benefits recognized? What are the different perspectives? With the diabetes CEA, a single-payer perspective is assumed. What does this mean, and what kinds of costs are ignored?

4. What kinds of costs are usually included in a CEA? The diabetes CEA included screening costs, treatment costs, diabetes intervention costs, and diabetes complication costs. Under what category of costs would screening and treatments fall?

) In the mid-1990s, Colgate-Palmolive developed a new toothpaste for the U.S. market, Colgate Total, with an antibacterial ingredient that was already being successfully sold overseas. At that time, the word antibacterial was not allowed for such products by the Food and Drug Administration (FDA). In response, the name “Total” was given to the product in the United States. The one word would convey that the toothpaste is the “total” package of various benefits. Young & Rubicam developed several commercials illustrating Total’s benefits and tested the commercials with focus groups. One commercial touting Total’s long-lasting benefits was particularly successful. The product was launched in the United States in January of 1998 using commercials that were designed from the more successful ideas of the focus group tests. Suppose 32% of all people in the United States saw the Total commercials. Of those who saw the commercials, 40% purchased Total at least once in the first 10 months of its introduction. According to U.S. Census Bureau data, approximately 20% of all Americans were in the 45-64 age category. Suppose 24% of the consumers who purchased Total for the first time during the initial 10-month period were in the 45-64 age category. Within three months of the Total launch, Colgate-Palmolive grabbed the number one market share for toothpaste. Ten months later, 21% of all U.S. households had purchased Total for the first time. The commercials and the new product were considered a success. During the first 10 months of its introduction, 43% of those who initially tried Total purchased it again. a) What percentage of U.S. households purchased Total at least twice in the first 10 months of its release? b) Can you conclude the initial purchase of Total was independent of age? Use a quantitative argument to justify your answer. c) Calculate the probability that a randomly selected U.S. consumer is either in the 45-64 age category or purchased Total during the initial 10-month period. d) What is the probability that a randomly selected person purchased Total in the first 10 months given that the person is in the 45-64 age category? e) What percentage of people who did not see the commercials purchased Total at least once in the first 10 months of its introduction?