Accounting for Income Taxes C.U. Incorporated asked you to help them with their financial statements. They have two issues.
They leased some equipment and have 15 years left on the lease. They make payments of $10,000 each year and began the first day of 2015. The company’s required rate of return was 11% and the lessor’s rate which was known by C.U. Inc. was 10%.
They bought a machine that is depreciated using straight-line depreciation for their books and uses MACRS depreciation for tax purposes. It was purchased the first day of 2015 for $500,000. The machine’s estimated useful life is five years with no salvage value. Year MACRS Depreciation Straight-line Depreciation Difference 2016 $160,000 $100,000 $60,000 2017 80,000 100,000 (20,000) 2018 70,000 100,000 (30,000) 2019 60,000 100,000 (40,000) The enacted federal income tax rates are 35% for 2015 and 40% for 2016 through 2019. For the year ended December 31, 2016, C.U. Inc.’s income before taxes was $900,000.
On July 1, 2016, C.U. Inc. issued $900,000 of 9% bonds. The bonds mature in 20 years and interest is payable each January 1 and July 1. The bonds were issued at a price to yield the investors 10%. They record interest at the effective interest rate.
1. What is the company’s income tax expense and net income for the year ended Dec. 31, 2016?
2. What is their interest expense for the year?
3. Show the liabilities part of the balance sheet.