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(solution) Hi, I need chapter 22 solution can u plz help me. bisma


Hi,

I need chapter 22 solution can u plz help me.

bisma  



Chapter 19

 

Accounting in Action: CM2

 

When you arrive at CM2 for the afternoon, Conner and Martin are arguing with

 

Lopez and Knepp about, of all things, the corporate income taxes. As you walk

 

in, you hear Conner saying, "there?s no way I?m putting a valuation allowance on

 

the deferred tax asset." Knepp is concerned that it will be misleading if it turns

 

out that the company cannot benefit from the deferred tax asset in the future, but

 

has not looked at the exact US GAAP rules since taking an Intermediate

 

Accounting class. Knepp knows that Conner and Martin are planning to increase

 

research and development substantially in 2014 and 2015 and project there will

 

be losses before taxes of roughly $200,000 in each of those years until the

 

Company can return to profitability in 2016 and benefit from the R&D.

 

During the meeting in the afternoon, you ask Knepp and Lopez if there

 

were any temporary differences in 2013 as you do not see a deferred tax asset

 

recorded on the preliminary balance sheet yet. They responded that they were

 

not aware of any differences for 2013. However, Knepp tells you that

 

depreciation expense recorded for tax will be $30,000 higher than that recorded

 

for the books. That is, the book value of the fixed assets for GAAP will be

 

$30,000 higher compared to their book value reported on the tax return.

 

Knepp then mentions that CM2 will begin offering a six-month

 

warranty on its RFID product in 2013. The forecasted income statement includes

 

estimated warranty expense accrual of $100,000; one-fourth of this amount will

 

be settled in 2013 through actual claims being filed. You remember from your Continuing Case 1 Intermediate Accounting class that for tax purposes, only the cash expense

 

incurred in doing the work is deductible.

 

Also, the allowance for doubtful accounts is estimated to be $119,000 at

 

the end of 2013. You believe that these three items may be part of a deferred

 

tax calculation but you have to refresh your recollection by looking back at your

 

intermediate accounting textbook.

 

Instructions

 

(a) Using the Excel file of the financial statements of CM2 for 2013 and 2012

 

and the FASB Codification (access is provided in course Resources in

 

Blackboard), write a memo that you can take to Conner and Martin to

 

analyze the factors that indicate whether a valuation allowance is

 

necessary, and apply each to CM2. Draw a conclusion as to whether a

 

valuation allowance should be recorded at the end of 2013. As part of the

 

memo, you will have to first determine what the net deferred tax asset will

 

be at the end of 2013. [For simplicity, assume that all deferred tax items

 

are current, and that the Company will book either book a full allowance or

 

not book any allowance at all?ignore the possibility of recording a partial

 

allowance.] The memo should be in good form, meaning it should have

 

clearly marked sections that describe the:

 

a. Purpose of the memo in a sentence, the

 

b. Background facts, the

 

c. sections of the Guidance that is relevant and which will be quoted, Continuing Case 2 d. an Analysis of the guidance against the facts by going through the

 

relevant guidance section by section (or paragraph by paragraph),

 

and then a

 

e. Conclusion.

 

(b) During the meeting in the afternoon, you ask Knepp and Lopez if there

 

were permanent or temporary differences in 2012 and whether they will

 

continue into 2013. They responded that they were not aware of any

 

differences for either 2012 or 2013. However, in 2013 Conner and Martin

 

were given life insurance policies. The insurance premium on these

 

policies amounted to $80,000 per year. CM2 also anticipates investing in

 

local county bonds which should earn about $7,000 investment income in

 

2013. Both of these items are reported on the forecasted income

 

statement. In addition, Knepp tells you that depreciation expense recorded

 

for tax will be $30,000 higher than that recorded for the books. That is, the

 

book value of the fixed assets for GAAP will be $30,000 higher compared

 

to their book value reported on the tax return.

 

Knepp then mentions that CM2 will begin offering a six-month

 

warranty on its RFID product. The forecasted income statement includes

 

estimated warranty expense accrual of $100,000; one-fourth of this

 

amount will be settled in 2013 through actual claims being filed. You

 

remember from your Intermediate Accounting class that for tax purposes,

 

only the cash expense incurred in doing the work is deductible. Continuing Case 3 (b) The memo should include in the Background section a description of the

 

entry that would be made if a valuation allowance must be recorded

 

against the deferred tax asset if Conner and Martin believe that the future

 

benefits from the deferred tax asset probably will not be realized.

 

(c) Also include in the Background section of the memo to Conner and Martin

 

an explanation of how there might be the potential for earnings

 

management when recording valuation allowances for deferred tax assets. Continuing Case 4 Chapter 21

 

Accounting in Action: CM2

 

Earlier, Conner and Martin had asked you to analyze four proposals for acquiring

 

a very expensive, very large piece of equipment using debt financing. None of

 

the proposals they asked you to review involved leasing the new equipment. In

 

light of concerns expressed about the potentially short period of time before new

 

technology makes a machine obsolete, you are surprised that leasing was not

 

considered. From what you remember, leasing provides some real benefits. The

 

fair value of the new equipment is approximately $685,000 and is expected to

 

have an economic life of eight years.

 

When the possibility of leasing equipment is discussed, both Conner and

 

Martin express much interest. They have had prior business dealings with Tyler

 

Leasing Company, and the results have been satisfactory. You call Buzz Tyler

 

and ask him about leasing the new equipment; the next day, he sends you the

 

following proposal:

 

Tyler Leasing Company would acquire the equipment and lease it to CM2.

 

The lease payments would be $145,661 for five years, paid at the

 

beginning of each period. CM2 would guarantee the residual value of

 

$125,000 at the end of the lease period. The fair market value of similar

 

equipment is $685,000.

 

The implicit interest rate in this offer is 10%, which is also CM2 ?s borrowing rate.

 

Conner and Martin like the proposal and want to know more about the

 

benefits of leasing versus owning. Remember that their focus is to go to the bond Continuing Case 5 or equity market at the end of 2013. They do not want to guarantee the residual

 

value, but Conner and Martin place a conference call with Buzz Tyler. He

 

expresses his company?s concern that they stand to lose a considerable amount

 

if the equipment is run down when it is returned to them. Conner and Martin are

 

also excited about the possibility of reporting only the rental expense on the

 

income statement. In addition, they understand that they may not have to report

 

a liability on the balance sheet, which makes them even happier.

 

Instructions

 

(a) Analyze the Tyler Leasing Company proposal. Write a memo using the

 

format described in Chapter 19 above that shows Conner and Martin (and

 

also Lopez and Knepp, since they appear to be slightly skeptical of this

 

idea) the effect of the proposal on the company?s balance sheet

 

depending on whether the lease would be treated as an operating lease or

 

a capital lease (ignore income taxes). The memo should go through the

 

factors that determine whether the lease is an operating or capital lease

 

and draw a conclusion as to which it would be. (b) Access file 4a on the website (Excel File) for information about the

 

company?s current debt and equity positions. In the background section of

 

your memo explain the debt and equity relationships assuming the leasing

 

proposal results in an operating lease versus a capital lease. If your

 

analysis indicates the lease would be a capital lease, suggest how CM2

 

could negotiate the terms so that it meets the definition of an operating

 

lease. Continuing Case 6 Chapter 22

 

Accounting in Action: CM2

 

Conner and Martin have appreciated your involvement in all aspects of the

 

company?s operations throughout the year. They now want you to take the

 

accounting records over these past three years and give them advice on any

 

errors and/or corrections you may find. You tell them this may take a while, and

 

you ask if they can give you a few days to conduct your review. They agree.

 

Access File 4a on the website (Excel File) containing CM2 ?s financial

 

statements for 2011, 2012, and the forecasted trial balance and financials for

 

2013. After carefully examining three years of information, you come up with the

 

following:

 

(1) Ending inventory in 2011 was overstated by $32,000 as a result of

 

errors in the inventory count-sheet footings. (2) Prepaid rent of $9,500 for 2013 was expensed at the end of 2012. (3) Depreciation was understated in 2011, 2012, and 2013. This was

 

due to a piece of equipment costing $110,000 which was

 

purchased in 2011 and was expected to have a five-year life and no

 

residual value. Instead of using straight-line depreciation for the

 

expense in 2011, the whole $110,000 was expensed. (4) Employee wages of $26,000, earned at the end of 2011, were not

 

accrued but were expensed in 2012 when they were paid. Continuing Case 7 Instructions

 

(a) Prepare a worksheet in a similar format to the one in Illustration 22-24 of

 

the text. Ignore income taxes.

 

(b) Write a memo in the format described for Chapter 19 above that clearly

 

describes the purpose, background, relevant guidance, analyzes the

 

guidance against the errors/misstatements above, and draws a conclusion

 

on what Connor and Martin should do to present the 2011 through 2013

 

financial statements correctly. Continuing Case 8

 


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