Question 1 - Werner Chemical, Inc., leased a protein analyzer on September 30, 2013. The five-year lease agreement calls for Werner to make quarterly lease payments of $391,548, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2013. Werner's incremental borrowing rate is 12%. Depreciation is recorded on a straight-line basis at the end of each fiscal year. The useful life of the equipment is five years. Use PVAD of $1.
Required:
1. Determine the present value of the lease payments at September 30, 2013.
2. What pretax amounts related to the lease would Werner report in its balance sheet at December 31, 2013?
3. What pretax amounts related to the lease would Werner report in its income statement for the year ended December 31, 2013?
4. What pretax amounts related to the lease would Werner report in its statement of cash flows for the year ended December 31, 2013?
Question 2 - The difference between pretax accounting income and taxable income is due to subscription revenue for one-year magazine subscriptions being reported for tax purposes in the year received, but reported in the income statement in later years when earned. The income tax rate is 40% each year. Times-Roman anticipates profitable operations in the future.
Required:
1. What is the balance sheet account for which a temporary difference is created by this situation?
2. For each year, indicate the cumulative amount of the temporary difference at year-end.
3. Determine the balance in the related deferred tax account at the end of each year. Is it a deferred tax asset or a deferred tax liability?