Deferred Taxes
Carastro Company had the following tax items in 2015 and 2016, its first two years of operations. The enacted income tax rate is 30 percent for 2015, 34 percent for 2016, 32 percent for 2017 and 26 percent for 2018 and each year thereafter. It is âmore likely than notâ that the company will benefit from all future-deductible amounts.
2015 - Pretax financial income is $123,000.
- Depreciation for accounting purposes was based on the straight-line method with no residual value, and MACRS was used for income tax purposes. The equipment has an original cost of $120,000 and an estimated five-year life. MACRS was calculated as follows for each year of the equipmentâs four-year tax life: $60,000, $22,000, $20,000, $18,000. (Hint: The straight-line depreciation period will be longer than the MACRS depreciation period).
- Carastro accrued interest revenue on municipal bonds totaling $3,800. Interest will be received during 2016.
2016 - Pretax financial income is $160,000.
- Depreciation differences from 2015 reverse as expected
- Bond interest was received as expected.
- Carastro sold $120,000 of concert tickets; half of the performances took place during 2016 and the other half during 2017.
- Carastro purchased shares of Dolan Company common stock for $46,000 and accounted for it under the cost method.
- Carastro received cash dividends totaling $5,000 from its investment in Posner Company; these qualify as 80 percent domestic dividends.
- A late tax payment was made for payroll and Carastro was assessed a $1,000 penalty and $500 in interest as a result of the late payment.
Required:
1. Calculate taxable income for 2016.
2. How much is income tax expense for 2016?
Bond Problem
On April 1, 2016, Becker Company issued 8 percent bonds with a face value of $800,000. The bonds were issued at a price to yield at 10 percent return. The bonds pay semiannual interest on April 1 and October 1. The bonds are dated April 1, 2016, and are due in five years. At the time of issuance, Becker paid $4,000 for legal costs and brokerage expenses associated with the bond issuance. The company uses the straight-line method of amortization for issue costs and the effective interest method of amortization for bond premium or discount and records amortization on each of the semiannual interest payment dates. Becker Company's year ends December 31. On June 1, 2017, Becker retired $200,000 of bonds at 103 plus accrued interest.
Required:
1. Record all entries necessary on April 1, 2016, related to the bonds.
2. Record all entries necessary on October 1, 2016, related to the bonds.
3. Record all necessary adjusting entries on December 31, 2016.
4. Determine the amount of gain or loss on the bonds redeemed on June 1, 2017.
5. Record the entries necessary for the bond redemption.
6. Determine the amount of discount on bonds and the amount of issue costs that should be amortized for the period ended October 1, 2017.