Question

Problem 16-12 Integrating problem-bonds, leases, taxes (LO16-1, 16-5, 16-8] The long-term liabilitles section of CPS Transportation's December 31, 2017, balance sheet Included the following: (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.) a. A lease liability with 15 remaining lease payments of $22,000 each, due annually on January 1: $ 188, 309 Lease liability Less: current portion 6,935 $ 181,374 The Incremental borrowing rate at the Inception of the lease was 9% and the lessor's Implicit rate, which was known by CPS Transportation, was 8%. b. A deferred Income tax liability due to a single temporary difference. The only difference between CPS Transportation's taxable Income and pretax accounting Income is depreciation on a machine acquired on January 1, 2017, for $640,000. The machine's estimated useful life is five years, with no salvage value. Depreciation is computed using the straight-line method for financial reporting purposes and the MACRS method for tax purposes. Depreciation expense for tax and financial reporting purposes for 2018 through 2021 is as follows: Year 2018 2019 2020 2021 MACRS Depreciation $191,00 95,500 85,500 75,500 Straight-line Depreciation $128, eee 128,000 128, eee 128,000 Difference $ 63, eee (32,500) (42,500) (52,500) The enacted federal Income tax rates are 35% for 2017 and 40% for 2018 through 2021. For the year ended December 31, 2018, CPS's Income before Income taxes was $1,040,000. On July 1, 2018, CPS Transportation Issued $740,000 of 7% bonds. The bonds mature in 12 years and Interest is payable each January 1 and July 1. The bonds were issued at a price to yleld the Investors 8%. CPS records Interest at the effective Interest rate. Required: 1. Determine CPS Transportation's Income tax expense and net Income for the year ended December 31, 2018. 2. Determine CPS Transportation's Interest expense for the year ended December 31, 2018 3. Prepare the long-term liabilitles section of CPS Transportation's December 31, 2018, balance sheet.

Answer 1

1. Determination of CPS transportation Income tax expense and the net income for the year ended , December 31, 2018

Since as per IAS – 12, Income taxes, if depreciation expenses as per income tax are higher than the depreciation as per the financial reporting then deferred tax liability would be created and the tax expenses on such liability would hit to the profit and loss account.

and, if depreciation expenses as per income tax are lesser than the depreciation as per the financial reporting then deferred tax assets would be created and the tax income on such assets would credit to the profit and loss account.

In our case, we are using MACRS method for the purpose calculation of depreciation for the income tax and depreciation would be charged for $ 191,000 for the year ended December 2018 however for financial statement preparation the Straight-line method is being used and the depreciation is being charged with $ 128,000 in the profit and loss account and the same is lower by $ 63,000. Thus, Deferred tax liability would be created.

In question, it is given that the rate of tax would be 40% hence the deferred tax liability would be created for $63,000 * 40% = $25,200.

And the total income tax expenses would be $367,150 ($25,200+$341,950).

And the net income would be $672,850.