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 $48,000 each, due annually on January 1:

Lease liability	$	365,092
Less: current portion		11,491
	$	353,601

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 $660,000. 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	MACRS Depreciation			Straight-line Depreciation			Difference
2021	$	216,000		$	132,000		$	84,000
2022		108,000			132,000			(24,000	)
2023		98,000			132,000			(34,000	)
2024		88,000			132,000			(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 $4,500 as of December 31, 2020. For the year ended December 31, 2021, CPS’s income before income taxes was $1,060,000.

On July 1, 2021, CPS Transportation issued $760,000 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.

Required:
1. Determine CPS Transportation’s income tax expense and net income for the year ended December 31, 2021.
2. Determine CPS Transportation’s interest expense for the year ended December 31, 2021.
3. Prepare the long-term liabilities section of CPS Transportation's December 31, 2021, balance sheet.

Answer 1

1)
CPS Transportation
INCOME TAX EXPENSE AND NET INCOME
For the Year Ended December 31, 2021
Income before income taxes		$1,060,000.00
Less: Income tax expense:
Current (25% x [$1,060,000 –84,000])	$244,000.00
Deferred (see calculation below)	$21,000.00	$265,000.00
Net income		$795,000.00
Deferred income tax expense
Reversal of temporary differences from depreciation giving rise to future taxable amounts
2022	-$24,000.00
2023	-$34,000.00
2024	-$44,000.00
Total	-$102,000.00
Effective tax rate for years 2022 through 2024	25%
Deferred tax liability, Dec. 31, 2018		-$25,500.00
Less: Dec. 31, 2017 deferred tax liability
Temporary difference-depreciation
2021	$84,000.00
2022	-$24,000.00
2023	-$34,000.00
2024	-$44,000.00
Total	-$18,000.00
Effective tax rate for years 2021 through 2024	25.00%
Deferred tax liability, Dec. 31, 2021		-$4,500.00
Increase (credit) needed		-$21,000.00
2)
CPS Transportation’s interest expense for the year ended December 31, 2018
Capital lease obligation : (353061 x 10%)	$35,360.10
Bonds payable = $712,643.60 x 10%/2	$35,632.18
Total Interest Expense	$70,992.28
Face Value	$760,000.00
Coupon payment = PMT = 760000x 9%/2	$34,200.00
Rate = 10%/2	5.00%
Period = 10 x 2	20
Current Price = PV	$712,643.60
3)
CPS Transportation
LONG-TERM LIABILITIES SECTION OF BALANCE SHEET
December 31, 2018
Long-term liabilities:
Lease liability - 12 payments of $48000 due annually on January 1	$353,601.00
Less: current portion ($48000 – 353061)	$12,639.90	$340,961.10
9% bonds payable due June 30, 2028,	$760,000.00
Less: unamortized discount $47,356.40 - ((4.5% x $760,000) - 35,632.18)	$48,788.58	$711,211.42
Deferred income tax liability (Part 1)		$25,500.00
Total long-term liabilities		$1,077,672.52
Face Value	$760,000.00
Issued Price	$712,643.60
Discount	$47,356.40