Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $70 million of 6% bonds, dated January 1, on January 1, 2018. Management intends to have the investment available for sale when circumstances warrant. When the company purchased the bonds, management elected to account for them under the fair value option. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $55 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2018, was $60 million. Required: 1. to 3. Prepare the relevant journal entries on the respective dates (record the interest at the effective rate). 4-a. At what amount will Fuzzy Monkey report its investment in the December 31, 2018, balance sheet? 4-b. Prepare the journal entry necessary to achieve this reporting objective. 5. How would Fuzzy Monkey’s 2018 statement of cash flows be affected by this investment assuming Fuzzy anticipates holding these investments for a sufficiently long period?

Chapter 06: Deductions and Losses:

You may use any format for the answer, however, the Conclusion, Rule, Application, Conclusion format is preferable for clarity and better understanding.

-The stock of Eagle, Inc. is owned as follows:

Tom 23%
Tom’s uncle 22%
Tom’s daughter 7%
Tom’s sister 15%
Tom’s spouse 15%
Tom’s nephew 8%
Tom’s CPA, unrelated 10%
Tom sells land and a building to Eagle, Inc. for $212,000. His adjusted basis for these assets is $225,000. Calculate Tom’s realized and recognized loss associated with the sale.

-Tracy invested in the following stocks and bonds during 2018.

Blue, Inc. $25,000 City of Falcon bonds 75,000

To finance the investments, she borrowed $100,000 from Swan Bank. Interest expense paid on the loan during 2018 was $5,000. During 2018, Tracy received $1,250 of dividend income from Blue, Inc. and $3,000 of interest income on the municipal bonds. Determine the amount of Tracy’s gross income. Determine the maximum amount of Tracy’s deductible interest expense.

-Are all personal expenses disallowed as deductions in 2018?

Taxation 2

Depreciation/sale of assets problems

On --- (a)-----, XYZ a profitable company, purchased-----(b)----. It was the only fixed asset purchased during the year.

(a) March 15, 2017

October 15, 2017- For purposes of this problem, assume that taxpayerwill elect to claim 50% bonus depreciation for any scenario for which bonus depreciation is being claimed.

(b) Commercial building costing $ 1,000,000

Machinary costing $1,000,000

Machinary costing $ 2,270,000

Machinary costing $ 3,000,000

Computer equipment cost. $ 500,000

Automobile costing $ 50,000

Required:

1. Assuming that the company wants to maximize its writeoff for 2017, what is the maximum writeoff for 2017? What would the 2018 deduction be?

2. Assuming that the company does not elect Section 179 treatment, what is the maximum writeoff for 2017? For 2018? (Bonus depreciation elected)

3. Assuming that the company elects out of bonus depreciation, what is the maximum writeoff for 2017? For 2018? (Section 179 elected)

4.Assuming that the company does not elect section 179 treatment and elects out of bonus depreciation, what is the writeoff for 2017? For 2018?

On March 1, 2018, Heinz Company paid cash to purchase the following stocks as long-term investments:

• Ketchup Corporation common stock (par $5), 2,000 shares at $5 per share (10% of outstanding shares)
• Mustard Corporation common stock (par $10), 3,000 shares at $25 per share (15% of outstanding shares)
• Mayo Corporation common stock (par $10), 3,000 shares at $20 per share (10% of outstanding shares)

The market prices per share at December 31, end of the accounting period, were as follows:

What is the dollar amount that Heinz should record as a debit to investments on March 1, 2018?

On December 31, 2018, how much should Heinz record as an unrealized gain on its investments, if any?

On December 31, 2029, how much should Heinz record as an unrealized loss on its investments, if any?

Thank you for your help!

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay one-third of the sales price of a jet ski when they initially purchase the ski, and then pay another one-third each year for the next two years. Because Lake has little information about the ability to collect these receivables, it uses the cost recovery method to recognize revenue on these installment sales. In 2017, Lake began operations and sold jet skis with a total price of $840,000 that cost Lake $420,000. Lake collected $280,000 in 2017, $280,000 in 2018, and $280,000 in 2019 associated with those sales. In 2018, Lake sold jet skis with a total price of $2,070,000 that cost Lake $1,242,000. Lake collected $690,000 in 2018, $552,000 in 2019, and $552,000 in 2020 associated with those sales. In 2020, Lake also repossessed $276,000 of jet skis that were sold in 2018. Those jet skis had a fair value of $103,500 at the time they were repossessed.

In 2019, Lake would recognize realized gross profit of:

Multiple Choice

$280,000.

$0.

$832,000.

$420,000.

On December 31, 2018, Alan and Company prepared an income statement and balance sheet but failed to take into account four adjusting journal entries. The income statement, prepared on this incorrect basis, reported income before income tax of $31,000. The balance sheet (before the effect of income taxes) reflected total assets, $92,000; total liabilities, $41,000; and stockholders’ equity, $51,000. The data for the four adjusting journal entries follow:

1. Effect of Amortization of $8,200 for the year on software was not recorded.
2. Salaries and Wages amounting to $17,200 for the last three days of December 2018 were not paid and not recorded (the next payroll will be on January 10, 2019).
3. Rent revenue of $5,100 was collected on December 1, 2018, for office space for the three-month period December 1, 2018, to February 28, 2019. The $5,100 was credited in full to Deferred Revenue when collected.
4. Income taxes were not recorded and not paid. The income tax rate for the company is 20%.

Required:

Complete the following table to show the effects of the four adjusting journal entries. (Negative amounts should be indicated by a minus sign.)

Below is the balance sheet and income statement information for Downtown Boutique, Inc. Assume the firm pays an average tax rate of 21% and did not issue or repurchase any common stock in 2018. Complete the income statement to find net income. Then calculate additions to retained earnings for 2018 (you will need to find the three missing values in the balance sheets first).

Mott Company has a line of credit with Bay Bank. Mott can borrow up to $600,000 at any time over the course of the 2018 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during 2018. Mott agreed to pay interest at an annual rate equal to 1 percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance. For example, Mott pays 5 percent (4 percent + 1 percent) annual interest on $84,000 for the month of January.

Mott earned $45,000 of cash revenue during 2018.

Prepare an income statement, balance sheet, and statement of cash flows for 2018.

Brady Construction Company contracted to build an apartment complex for a price of $6,900,000. Construction began in 2018 and was completed in 2020. The following is a series of independent situations, numbered 1 through 6, involving differing costs for the project. All costs are stated in thousands of dollars.

Required:
Complete the following table. (Do not round intermediate calculations. Enter answers in dollars. Round your final answers to the nearest whole dollar. Negative amounts should be indicated by a minus sign.)

Gross Profit (loss) Recogonized

Revenue Recogonized over time/Revenue Recogonized upon completed for situation 1-6 years 2018, 2019, 2020

Problem 19-17 EPS; options; convertible preferred; additional shares [LO19-4, 19-5, 19-6, 19-7, 19-8, 19-9]

On January 1, 2018, Tonge Industries had outstanding 460,000 common shares ($1 par) that originally sold for $25 per share, and 5,000 shares of 10% cumulative preferred stock ($100 par), convertible into 50,000 common shares.

On October 1, 2018, Tonge sold and issued an additional 12,000 shares of common stock at $35. At December 31, 2018, there were 21,000 incentive stock options outstanding, issued in 2017, and exercisable after one year for 21,000 shares of common stock at an exercise price of $32. The market price of the common stock at year-end was $50. During the year, the price of the common shares had averaged $42.

Net income was $600,000. The tax rate for the year was 40%.

Required:
Compute basic and diluted EPS for the year ended December 31, 2018. (Enter your answers in thousands.)