Question

The long-term liabilities section of CPS Transportation's December 31, 2020, 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 $24,000 each, due annually on January 1: Lease liability Less: current portion $182,546 5,745 $176, 801 The incremental borrowing rate at the inception of the lease was 11% and the lessor's implicit rate, which was known by CPS Transportation, was 10%. 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, 2020, for $420,000. 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 2021 through 2024 is as follows: Year 2021 MACRS Depreciation $120,000 60,000 50,000 40,000 Straight-line Depreciation $ 84,000 84,000 84,000 84,000 2022 2023 2024 Difference $ 36,000 (24,000) (34,000) (44,000) The enacted federal income tax rates are 20% for 2020 and 25% for 2021 through 2024. CPS had a deferred tax liability of $16,500 as of December 31, 2020. For the year ended December 31, 2021, CPS's income before income taxes was $820,000. On July 1, 2021, CPS Transportation issued $520,000 of 9% bonds. The bonds mature in 10 years, and interest is payable each January 1 and July 1. The bonds were issued at a price to yield the investors 10%. CPS records interest at the effective interest rate.

you can find all the tables online

Answer 1

Part 1

CPS Transportation INCOME TAX EXPENSE AND NET INCOME For the Year Ended December 31, 2021
Income before income taxes		820000
Income tax expense:
Current (25% x [$820,000 – 36,000])	196000
Deferred	9000	205000
Net income		$615000

Reversal of temporary differences from depreciation giving rise to future taxable amounts:
2022	(24000)
2023	(34000)
2024	(44000)	(102000)
Effective tax rate for years 2022 through 2024		25%
Deferred tax liability, Dec. 31, 2021		(25500)
Less:
Dec. 31, 2020 deferred tax liability:
Temporary difference-depreciation
2021	36000
2022	(24000)
2023	(34000)
2024	(44000)	(66000)
Effective tax rate for years 2021 through 2024		25%
		(16500)
Increase (credit) needed		(9000)

           

Part 2

CPS Transportation Calculation of Interest Expense For the Year Ended December 31, 2021
Lease obligation (176801*10%)	17680
Bonds payable (475389*10%*1/2)	23769
Total interest expense	$41449

Bond price = (520000*0.14205)+((520000*9%/2)*17.15909) = 73866+401523 = $475389

Present value of an ordinary annuity of $1: n=40, i=5% is 17.15909

present value of $1: n=40, i=5% is 0.14205

Part 3

CPS Transportation LONG-TERM LIABILITIES SECTION OF BALANCE SHEET December 31, 2021
Long-term liabilities:
Lease liability – 15 payments of $24,000 due annually on January 1	176801
Less: current portion ($24,000 – 17680)	(6320)	170481
9% bonds payable due June 30, 2039, less unamortized discount of $44242		475758
Deferred income tax liability		25500
Total long-term liabilities		$834265

Unamortized discount = (520000-475389)-((5%*475389)-(4.5%*520000)) = 44242