Presented below are two independent situations related to future taxable and deductible amounts resulting from temporary differences existing at December 31, 2020. 1. Sunland Co. has developed the following schedule of future taxable and deductible amounts. 2021 2022 2023 2024 2025 Taxable amounts $200 $200 $200 $200 $200 Deductible amount — — — (1,400 ) 2. Coronado Co. has the following schedule of future taxable and deductible amounts. 2021 2022 2023 2024 Taxable amounts $200 $200 $200 $200 Deductible amount — — (2,500 ) — Both Sunland Co. and Coronado Co. have taxable income of $3,800 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 2005, North Inc. acquired an 80% interest in South Co. On the date of acquisition, the book values of South’s asset and liability accounts at that time were considered to be equal to their fair values. No allocations or goodwill resulted from the combination because North’s acquisition value corresponded to the underlying book value of South The following selected account balances were from the individual financial records of these two companies as of December 31, 2019: . North South Sales $ 896,000.00 $ 504,000.00 Cost of Goods Sold 406,000 276,000 Operating Expenses 210,000 147,000 Retained Earnings, 1/1/19 1,036,000 252,000 Inventory 484,000 154,000 Buildings, net 501,000 220,000 Investment income not provided North routinely transfers inventory to South. Of the inventory transferred to South, 30% remained in inventory at the end of 2018 and was sold in the following year. 33.33% of the 2019 intra entity sales remained on hand at the end of 2019 and were sold at the beginning of 2020. More date regarding the intra entity transfers for 2018-2019 are shown below: 2018 2019 North Sales Price to South 130000 165000 North's Cost of Goods Sold to South 104000 132000 Unsold Inventory at end of year 30% 33.33% For the consolidated financial statements for 2018, determine the balances that would appear for the following accounts: a) Cost of Goods Sold; b) Inventory; and c) Net income attributable to the noncontrolling interest.

Problem 14-5 Issuer and investor; effective interest; amortization schedule; adjusting entries [LO14-2]

On February 1, 2018, Cromley Motor Products issued 10% bonds, dated February 1, with a face amount of $60 million. The bonds mature on January 31, 2022 (4 years). The market yield for bonds of similar risk and maturity was 12%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $60,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31. (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. Determine the price of the bonds issued on February 1, 2018.
2-a. Prepare amortization schedules that indicate Cromley’s effective interest expense for each interest period during the term to maturity.
2-b. Prepare amortization schedules that indicate Barnwell’s effective interest revenue for each interest period during the term to maturity.
3. Prepare the journal entries to record the issuance of the bonds by Cromley and Barnwell’s investment on February 1, 2018.
4. Prepare the journal entries by both firms to record all subsequent events related to the bonds through January 31, 2020.

Congress should retire, not reform, the Generalized System of Preferences BY MARC L. BUSCH, OPINION CONTRIBUTOR — THE HILL.com September 15, 2020 The United States’ Generalized System of Preferences (GSP) is set to expire at the end of the year. This trade program, which started up in 1976, grants developing countries zero-tariffs on eligible goods. U.S. Trade Representative Robert Lighthizer says he may want to reform GSP before renewing it. GSP can’t be reformed. Instead, Congress should start the process of retiring it. The U.S. extends one of 13 GSP programs in today’s global economy. All of them aim to help poor nations boost their exports through tariff preferences. U.S. GSP, in particular, comes with political conditionality and caps annual import growth. The U.S. “suspends” recipients that fall short on labor standards or intellectual property rights, for example, and has “competitive limitations” on a recipients’ year-on-year exports. These design features rub poor nations the wrong way, but the main problem with GSP is what it does inside developing countries. At first blush, GSP sounds like a free lunch because developing countries get tariff cuts without having to give them. But it’s not. One indication is that GSP is underused: The average utilization rate is a respectable 72 percent, but for some of the poorest nations, such as Ghana, Lesotho and Sierra Leone, it’s only 27 percent, 38 percent and 36 percent, respectively. The reason for this underuse is that GSP’s margin of preference, in relation to the most-favored nation (MFN) tariffs under the World Trade Organization (WTO), isn’t big. It’s certainly not big enough to take on the risk of being suspended or staying below competitive limitations. Things were different in the 1970s. Most recipients didn’t belong to the General Agreement on Tariffs and Trade (GATT), so GSP’s margin of preference was sizable. Today, far more recipients are members of the WTO, such that GSP’s preference margin over MFN averages a mere 2.4 percent. This underutilization of GSP isn’t the problem. The problem is that GSP does bad things to the domestic trade politics of recipients that belong to the WTO. The issue lies with the exporters. They get market access abroad regardless of whether their government liberalizes. That’s because GSP is nonreciprocal. But conditionality still looms large. That’s where the WTO comes in. Although not a WTO obligation, GSP is permitted by the WTO and has been the subject of litigation. The ruling says that conditionality has to be applied the same way across recipients in similar situations. The WTO, in other words, helps to insulate exporters from ad hoc conditionality, and thus reduces their incentive to lobby against tariffs at home. This leads the recipient to import less, hurting consumers and industries that make use of imported inputs. So, what is there to reform? GSP works exactly as intended. It’s just that GSP happens to distort trade politics in recipients that belong to the WTO. This wasn’t entirely unanticipated. In 1968, at a conference in New Delhi that brought the idea of GSP to life, developing countries asked how the program would work with the GATT’s multilateral rules. It didn’t fit back then, and it can’t be made to fit now. Proponents of GSP will push back. One line of argument is that developing countries are unable to go without GSP. This is a stretch. GSP covers only about 3 percent of U.S. imports. Even India, a relatively large user of GSP, reported little change in exports to the U.S. after being suspended in 2019. India also wants a free trade deal with the U.S. That’s the future, not GSP. Another line of argument is that GSP is a useful foreign policy tool for dealing with labor standards. This is also a stretch. Not one measure of labor standards, conditional on the margin of preference, predicts GSP utilization. This says recipients that are weak on labor standards are enticed by the same margins as those that are strong on labor standards, suggesting that they don’t see themselves as being at greater risk of suspension. GSP doesn’t need to be shut down overnight. But this December, Congress should begin to retire this antiquated program. Do you agree with the author that Congress should retire, not reform, the United States’ Generalized System of Preferences? Why or why not?

1. Han Industries Inc. constructed a building and acquired five assets during the current year.

Construction of Building: Han constructed a building on land that it purchased last year at a cost of $240,000. Construction began on March 1 and was completed on October 1. The payments to the contractor were as follows.

Date          Payment

March 1 $360,000

July 1        275,000

October 1 325,000

Han obtained a $700,000, 8% construction loan on March 1. Han repaid the loan on October 1. Han had $400,000 of other outstanding debt during the year at a borrowing rate of 9%.

Asset 1: Han acquired office furniture by making a $7,500 down payment and issuing a $10,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $5,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $16,200.

Asset 2: Han acquired manufacturing equipment by trading in used manufacturing equipment. (The exchange lacks commercial substance.) Facts concerning the trade-in are as follows.

Cost of equipment traded in                    $52,000

Accumulated depreciation on equipment

Asset 3: Four computers were acquired by issuing 500 shares of $1 par value common stock. The stock had a market price of $12 per share.

Assets 4 and 5: Han purchased these assets together for a lump sum of $230,000 cash. The following information was gathered.

Initial Cost onDepreciation to Date onBook Value on

DescriptionSeller's Books            Seller's Books            Seller's BooksAppraised Value

Instructions

Record the acquisition of each of these assets.

1. Profit Center Responsibility Reporting for a Service Company

   Thomas Railroad Company organizes its three divisions, the North (N), South (S), and West (W) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31:

   Revenues—N Region	$1,095,000
   Revenues—S Region	1,306,900
   Revenues—W Region	2,356,700
   Operating Expenses—N Region	693,900
   Operating Expenses—S Region	777,800
   Operating Expenses—W Region	1,425,200
   Corporate Expenses—Dispatching	561,600
   Corporate Expenses—Equipment Management	254,200
   Corporate Expenses—Treasurer’s	166,500
   General Corporate Officers’ Salaries	367,800

   The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer’s Department. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the railroad cars inventories. It makes sure the right freight cars are at the right place at the right time. The Treasurer’s Department conducts a variety of services for the company as a whole. The following additional information has been gathered:

   	North		South		West
   Number of scheduled trains	5,900		7,000		10,500
   Number of railroad cars in inventory	1,000		1,600		1,500

   Required:

   1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.

   Thomas Railroad Company
   Divisional Income Statements
   For the Quarter Ended December 31
   	North	South	West
   Revenues	$	$	$
   Operating expenses
   Income from operations before service department charges	$	$	$
   Service department charges:
   Dispatching	$	$	$
   Equipment Management
   Total service department charges	$	$	$
   Income from operations	$	$	$

   Feedback

   2. What is the A component of the rate of return on investment, computed as the ratio of income from operations to sales.profit margin of each division? Round to one decimal place.

   Region	Profit Margin
   North Region	%
   South Region	%
   West Region	%

   Identify the most successful region according to the profit margin.
   

   • North
   • South
   • West

   3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions?

   1. The method used to evaluate the performance of the divisions should be reevaluated.
   2. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).
   3. A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).
   4. None of these choices would be included.
   5. All of these choices (a, b & c) would be included.
   • a
   • b
   • c
   • d
   • e

Chapter 24-Problems

1. PR.24-02.ALGO
2. PR.24-03.ALGO

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   Profit Center Responsibility Reporting for a Service Company

   Thomas Railroad Company organizes its three divisions, the North (N), South (S), and West (W) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31:

   Revenues—N Region	$868,700
   Revenues—S Region	1,063,800
   Revenues—W Region	1,840,300
   Operating Expenses—N Region	550,500
   Operating Expenses—S Region	633,100
   Operating Expenses—W Region	1,112,900
   Corporate Expenses—Dispatching	424,800
   Corporate Expenses—Equipment Management	223,600
   Corporate Expenses—Treasurer’s	132,100
   General Corporate Officers’ Salaries	291,800

   The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer’s Department. The Treasurer’s Department and general corporate officers’ salaries are not controllable by division management. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the inventories of railroad cars. It makes sure the right freight cars are at the right place at the right time. The Treasurer’s Department conducts a variety of services for the company as a whole. The following additional information has been gathered:

   	North		South		West
   Number of scheduled trains	4,400		5,300		8,000
   Number of railroad cars in inventory	1,300		2,100		1,800

   Required:

   1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.

   Thomas Railroad Company
   Divisional Income Statements
   For the Quarter Ended December 31
   	North	South	West
   Revenues	$	$	$
   Operating expenses
   Income from operations before service department charges	$	$	$
   Less service department charges:
   Dispatching	$	$	$
   Equipment Management
   Total service department charges	$	$	$
   Income from operations	$	$	$

   2. What is the profit margin of each division? Round to one decimal place.

   Region	Profit Margin
   North Region	%
   South Region	%
   West Region	%

   Identify the most successful region according to the profit margin.
   

   3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions?

   1. The method used to evaluate the performance of the divisions should be reevaluated.
   2. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).
   3. A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).
   4. None of these choices would be included.
   5. All of these choices (a, b & c) would be included.

Barry Potter and Winnie Weasley are considering making an S election on March 1, 2019, for their C corporation, Omniocular. However, first they want to consider the implications of the following information:

• Winnie is a U.S. citizen and resident.
• Barry is a citizen of the United Kingdom, but a resident of the United States.
• Barry and Winnie each own 50 percent of the voting power in Omniocular. However, Barry’s stock provides him with a claim on 60 percent of the Omniocular assets in liquidation.
• Omniocular was formed under Arizona state law, but it plans on eventually conducting some business in Mexico.

a. Is Omniocular eligible to elect S corporation status?

For the remainder of the problem, assume Omniocular made a valid S election effective January 1, 2019. Barry and Winnie each own 50 percent of the voting power and have equal claim on Omniocular’s assets in liquidation. In addition, consider the following information:

• Omniocular reports on a calendar tax year.
• Omniocular’s earnings and profits as of December 31, 2018, were $55,000.
• Omniocular’s 2018 taxable income was $15,000.
• Omniocular’s assets at the end of 2018 are as follows:

*$110,000 under FIFO accounting.

• On March 31, 2019, Omniocular sold the land for $42,000.
• In 2019, Omniocular sold all the inventory it had on hand at the beginning of the year. This was the only inventory it sold during the year.

• Assume that if Omniocular were a C corporation for 2019, its taxable income would have been $88,500.

2. How much LIFO recapture tax (in total) is Omniocular required to pay and when is the first installment due?
3. How much built-in gains tax, if any, is Omniocular required to pay?
4. How much excess net passive income tax, if any, is Omniocular required to pay?
5. Assume Barry's basis in his Omniocular stock was $40,000 on January 1, 2019. What is his stock basis on December 31, 2019?

For the following questions, assume that after electing S corporation status Barry and Winnie had a change of heart and filed an election to terminate Omniocular’s S election, effective August 1, 2020.

• In 2020, Omniocular reported the following income/expense items:

6. For tax purposes, how would you recommend Barry and Winnie allocate income between the short S corporation year and the short C corporation year if they would like to minimize double taxation of Omniocular’s income?
7. Assume in part (f) that Omniocular allocates income between the short S and C corporation years in a way that minimizes the double taxation of its income. If Barry’s stock basis in his Omniocular stock on January 1, 2020, is $50,000, what is his stock basis on December 31, 2020?
8. When is the earliest tax year in which Omniocular can be taxed as an S corporation again?

Question:

How much LIFO recapture tax (in total) is Omniocular required to pay and when is the first installment due? As per new tax rule, the corporate tax rate is 21% .

Due Date

Total LIFO recapture tax -----------------?             April 15,2019

--------------------------------------------------------------------------------------------------------------------------------------

e. Assume Barry's basis in his Omniocular stock was $40,000 on January 1, 2019. What is his stock basis on December 31, 2019? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)
g. Assume in part (f) that Omniocular allocates income between the short S and C corporation years in a way that minimizes the double taxation of its income. If Barry’s stock basis in his Omniocular stock on January 1, 2020, is $50,000, what is his stock basis on December 31, 2020? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)

e.Stock basis   -------------------------?

g. Stock basis ------------------------?

Answer ALL the following questions. Show calculations for full credit:

Question # 1: (CLO 4)     

The following items were the account balances of Perth Company:
Accumulated depreciation £5,455 Unearned Revenues £   743
Accounts payable 1,244 Patent 680
Notes payable after 2020 168 Equipment 11,300
Shaer capital-ordinary 9,800 Land held for investment 464
Retained earnings 3,263 Short-term investments 3,490
Accounts receivable 1,496 Notes payable in 2020 681
Cash 2,868 Inventories 1,056

Instructions: Prepare a classified statement of financial position in good form as of December 31, 2019.


Question #2: (CLO 5)  

Sawyer Stores is a merchandising company that uses a perpetual inventory system. The following selected transactions occurred during April, 2018:

 April 1, purchased merchandise for $6,200 on account from Clark Company terms 2/15, n/30, FOB Destination. The appropriate party made a cash payment of $200 for freight on that date.
 April 6, returned $200 of the merchandise purchased on April 1 from Clark Company.
 April 10, sold merchandise for $7,500 (costing $5,000), on account to Nolan Company terms 2/10, n/30, FOB Destination. The appropriate party made a cash payment of $200 in freight charges on that date.
 April 12, Nolan Company returned defective merchandise for $500 (costing $300) from April 10 sale.
 April 14, paid the amount due to Clark Company for the purchases on account on April 1.
 April 23, received cash in full settlement of the account related to the sale of April 10 to Nolan Company.
 April 24, purchased merchandise from Ford Company for $1,600 Cash.
 April 26, returned $100 of the merchandise purchased on April 24 from Ford Company.

Instructions: Journalize the April transactions on the books of Sawyer Stores:

Question 3: (CLO 4 and 5)  

The adjusted trial balance of Miracle Company contained the following information:
Debit        Credit
Sales $1,420,000
Interest Revenue 100,000
Sales Returns and Allowances $40,000
Sales Discounts 14,000
Cost of Goods Sold 872,000
Freight-out 4,000
Advertising Expense 30,000
Interest Expense 36,000
Store Salaries Expense 110,000
Utilities Expense 56,000
Depreciation Expense 14,000
Dividends 50,000


Instructions:
1) Use the above information to prepare an income statement for the year ended December 31, 2019.
2) Prepare the closing entries for Miracle Company at December 31, 2019.