Question

The Numo Company, which was acquired (and renamed) in 2003 by E. R. Numo, sells frigets to multinational firms. In 2017 a venture capital firm provided additional funding in order to allow the company to expand operations. The following information was taken from the preliminary trial balance of Numo Company, a calendar year company, on December 31, 2017:

Cash 74,000 Accounts Receivable 60,000 Allowance for Doubtful Accounts 0 Inventory 90,000 Supplies on Hand 4,000 Transportation Equipment 203,000 Accumulated Depreciation - Transportation Equipment 68,000 Goodwill 160,000 Accounts Payable 26,000 Deferred Tax Liability - Depreciation 6,000 Common Stock, $2 par 122,000 Paid-in Capital in Excess of Par Value 81,000 Retained Earnings, 1/1/17 80,000 Sales 506,000 Salaries/Compensation Expense 88,000 Cost of Goods Sold 180,000 Supplies Expense 17,000 Depreciation Expense - Transportation Equipment 22,000 Municipal Bond Interest 9,000

However, the bookkeeping staff has NOT recorded the following transactions and adjustments because they were unsure about the appropriate accounting treatment:

(1) On July 1, 2017, Numo issued a five-year, $400,000, non-interest bearing note to the venture capital firm and received $248,368 in cash, which reflects a 10% market yield. For financial statement purposes, interest expense is recognized using the effective interest rate method. However, for tax purposes, interest expense will be computed usng the straight-line method. HINT - In addition to the 7/1/17 transaction, be sure to record the required adjusting entry to record interest expense as of 12/31/17 as any required DTA or DTL.

(2) In 2017, the company was accused of patent infringement. While the company is contesting the case, management believes that there is a probably loss of between $28,000 and $40,000. This loss has NOT been recorded HINT - Record the appropriate loss. This accrued liability should be considered a current liability. Also, remember that the loss is not deductible for tax purposes until it is paid in the future.

(3) Numo has determined that supplies on hand at 12/31/17 amount to $1,300. You have also determined that Numo owes wages at 12/31/17 of $3,200 which have not yet been recorded. Neither of these two items will create a difference between financial statements and the tax return.

(4) The company has not yet recorded the allowance for doubtful accounts for 2017. Based on experience, bad debt expense should be 3% of sales. Bad debt expense is not deductible for tax purposes until actual accounts are written off. There were no write-offs during 2017.

Required: A. Record appropriate transactions and adjusting entries as described above.

B. Partially prepare a multiple-step Income Statement (through Income before Income Taxes) in accordance with GAAP.

C. Record Income tax Expense for 2017. The tax rate is 25% for all years. You have learned that the company's interest revenue is tax-exempt since it was earned on municipal bonds. In addition to the temporary differences described above, you have identified that a temporary difference exists for depreciation. As of 12/31/2016, there is a cumulative difference between “tax depreciation and “financial statement depreciation” that amounts to $24,000. The appropriate DTL has been recorded for this as of 12/31/2016. In 2017, tax depreciation was $28,000 and book depreciation (already recorded - see trial balance) was $22,000. You may assume that all deferred tax assets, if any, will be realized.

D. Complete your Income Statement. Be sure that it contains all items that are required by GAAP. You do NOT need to show Earnings Per Share data. E. Prepare a classified Balance Sheet in accordance with GAAP. Deferred taxes should be presented on the Balance Sheet using the “new” rule.

Answer 1

Numo Company For the year ended December 31,2017 No Particulars Debit Credit Date 1Jan-02 Cash 248368 Deffered Amortization 151632 Long term Notes 400000 Dec-31 Amortization Expenses(248368X1096) 24837 Deffered Amortization 24837 Dec-31 Povision for Deffered Tax 1372 Deffered Tax Liabili 1372 2 Dec-31 Provision for loss on infringement 40000 Liability on patent infringement 400000 Dec-31|Deffered Tax Asset 10000 Povision for Deffered Tax 10000 3 Dec-31 Cost of Goods Sold 9000 LIFO reserve Account 9000 4 Dec-31 Allowances for doubtful accounts 15120 Debtors 15120 Dec-31|Deffered Tax Asset 3780 Povision for Deffered Tax 3780 Dec-31 Deffered Tax Asset on Depreciation) 1500 Povision for Deffered Tax 1500

Calculation of Income Taxes: Taxable Income sales Municipal Bond Interest(tax exempt) 504000 504000 Tax Deductable Items: Cost of Goods Sold(180000+9000) Supplies Expenses Salaries Compensation Expenses 1袋 ) Interest on Long term Note(400000-248368) 303 loss on patent infringement(Basis) Allowances for doubtful accounts(Allowances when actually Taxable Income Income Taxes @ 25% 이 352326 151674 37919

INCOME STATEMENT Sales Muncipal Bond Interest 504000 9000 513000 189000 17000 Total Income Cost of Goods Sold(180000+9000) Supplies Expenses Salaries Compensation Expenses Depreciation Expense Interest on Long term Note loss on patent infringement Allowances for doubtful accounts 22000 24837 15120 395957 117043 37919 13908 93032 Total Expenses Income Before Income Taxes Income Tax Provision For Deffered Tax BALANCE SHEET EQUITY AND LIABILITIES Shareholder's funds Share Capital Share Premium Retained Earnings(81000+93032-1000) Non Current Liabilities Long Term Loans Current Liabilities Accounts Payable Allowances for Doubtfull Accounts LIFO Reserve(6000+9000) Income Tax Payable Provision for patent infringement 122000 81000 173032 376032 400000 20000 15120 15000 37919 40000128039 904071 ASSETS Non Current Assets Goodwill Transportation Equipment Less: Accumulated Depreciation DEFFERED TAX ASSETS (13908-6000) Current Assets Cash 72000+248368 Accounts Recievable Invento Deffered Amortization(151632-24837) 160000 203000 68000135000 7908 320368 60000 94000 126795601163 904071 Note: 1000 being the difference in trail balance