1. The proper accounting treatment for the following situations are: a. The Wesley Co.

should reveal in the notes of the existence of a possible contingent liability related to the lawsuit. The notes should signify the range of possible loss. The contingent liability should not be accrued because the loss is not credible. b. The Greer Co. should disclose in the notes to the financial statements, the nature of the contingency, the amount of the suit, the reason for the accrual, and the range of the possible loss. The accrual is made because it is probable that the liability has been incurred and the amount of the loss can be reasonably estimated. The lowest amount of the range of possible losses is used when no amount is a better estimate than any other amount. A journal entry to show this loss should be recorded as: Debit $600 000 Credit $600 000

Loss in Legal Action Contingency Liability

c. The $1,000,000 gain contingency should be disclosed only if the probability, that it will be realized very high. In that Quinn should not record the gain contingency until it is realized, because normally gain contingencies are neither accrued nor disclosed. 2. (i). The journal entry to record the partial refunding: Working showing the discount on the notes payable Discount on notes payable=$160 0009/100 =$14 400 Debit 180 000 18 000 14 400 Credit

Notes payable Interest payable Discount on notes payable Notes payable Cash

160 000 52 400

(ii). The adjusting entry at December 31 is:

Interest expense=$14 4001/3 =$4880 3. (a). Hughey Co. amortization table for 2011 and 2012 is: Date Jan.1, 2011 Dec.31, 2011 Dec. 31,2012 Annual Payments 10% Interest Reduction of Liability 179 600 197 560 Lease Liability 1,704,000 1 524 400 1 326 840

350 000 350 000

170 400 152 440

(b). Hughey Co. journal entries for 2011 are: Leased Machinery Leased Liability Debit 1 704 000 Credit 1 704 000

Interest expense Lease Liability Cash

170 400 179 600 350 000

Depreciation expense Accumulated depreciation

426 000 426 000

The accumulated depreciation is =$1 704 0007/28 =$426 000

4. (a). This is a sale-type lease to the lessor Hayes Corp. The reason for that being is firstly Hayes the manufacturers profit upon sale is $50 000, which is recognized in the year of sale that is in 2011. It is not operating lease because the title to the asset passes on to the lessee, the present value ($500 000) of the minimum lease payments equals or exceeds 90% ($400 000) of the fair value of the leased trailer. The collectability of the lease is reasonably assured, and there are no important uncertainties surrounding the amount of un-reimbursable cost yet to be incurred by the lessor. The rest of the accounting treatment is similar to that of a direct-financing lease. (b). The annual lease payment is: present value 6 years at 8% Present value factor 6yrs at 8% =4.62288 Present value =Fair value of trailer number of trailers =$50 000 10

=$500 000

$500 000 4.62288 = $108 157.69 Therefore the annual lease payment to the nearest dollar is $108 158. (c). The lease amortization schedule for Hayes Corp. for the first three years is.

Date Jan1,2011 Dec 31, 2011 Dec 31, 2012 Dec 31, 2013

Annual Lease Rental $ 108 158 108 158 108 158

Interest on Lease Receivable $ 40 000 34 547 28 658

Lease Receivable Recovery $ 68 158 73 611 79 500

Lease Receivable $ 500 000 431 842 358 231 278 731

(d). The journal entries for the lessor for 2011 and 2012 to record the lease agreement, the receipt of the lease rental and the recognition of income are: Entries for January 1, 2011 Lease Receivable Cost of goods sold Sale Revenue Inventory Entries for December 31, 2011 Cash Lease Receivable Interest Revenue 108 158 68 158 40 000 Debit 500 000 450 000 Credit

500 000 450 000

Entries for December 31, 2012 Cash Lease Receivable Interest Revenue 108 158 73 611 34 547

5.(a). Hunts Co. future taxable amounts and future deductible amounts:

Year Excess depreciation Income Tax Rate Deferred tax liability Year Future Deductible Amounts Income tax Rate Deferred Tax Asset

Future Taxable Amounts 2013 2014 2015 450 000 450 000 450 000 40% 40% 40% 180 000 180 000 180 000 Future Deductible Amounts 2013 2014 800 000 40% 320 000 300 000 40% 120 000 2015 100 000 40% 40 000

Total 1 350 000 540 000 Total 1 200 000 480 000

Formula for finding the deferred tax liability= future taxable amount Income tax rate Formula for finding deferred tax asset =future deductible amounts income tax rate (b). Income tax payable= taxable income income tax rate =$ 600 000 40% =$240 000 Income tax expense =$240 000 + ($540 000 - $480 000) =$240 000 + $60 000 =$300 000 The journal entry to record income tax expense, deferred income taxes and income taxes payable for 2012 is: Debit 300 000 480 000 Credit

Income Tax Expense Deferred tax asset Deferred Tax Liability Income Tax payable

540 000 240 000

6.The following independent situations should be treated as: a. A temporary different. This is because the difference in the timing the revenue recognition for pretax financial income and taxable income will increase the pretax financial income, but will increase taxable income by the amount if deferred gross profit as the cash is collect in the subsequent years. If the estimate as to collectability of installment receivable is valid, the total amounts reported as gross profit for accounting purposes and for tax purposes will be equal over the life of a group of installments receivables. The amount of time lagging between the accrual for accounting purposes and the recognition for tax purposes will

result in credit entries to a companys deferred tax liability as long as installment sales are level or increasing. The credit entries related to installment receivables will be reversed thus when the receivables are collected. b. A permanent different. The difference in pretax financial income and taxable income will never reverse because present tax laws allows a company that own stock in another U.S. corporation to deduct 80%of the dividend its receives from that company. The taxes will not be paid on dividends deducted and there are no tax consequences for those dividends, even though they are recognized as income for book purposes. c. A temporary difference. The full estimated three years of warranty expenses reduce the current years pretax financial income, but will reduce taxable income in varying amounts each year as paid. If the estimate for each warranty is valid, the total amounts deducted for accounting and for tax purposes will be equal over the three year period for each warranty. This is an expense in the first period, hence reduces pretax financial income more than taxable income and in the later years reverses and reduces taxable income without affecting pretax financial income.

7. (a).The taxable income for Kisson Corporation for 2010 is: Pretax financial income Excess of tax depreciation over book depreciation Rent received in advance Taxable income $350 000 (40 000) 25 000 $335 000

(b). The journal entries to record tax expense, deferred income taxes and income taxes payable for 2010 are: Temporary Difference Depreciation Unearned rent Future Taxable (Deductible) Amounts 40 000 (25 000) Tax Rate Deferred Tax Asset Deferred tax Liability 16 000 10 000 10 000 16 000

40%. 40%

Income Taxes Payable =$335 000 40% =$ 134 000

Income Tax Expense

Debit 140 000

Credit

Deferred Tax Asset Income Taxes Payable Deferred Tax Liability

10 000 134 000 16 000

(c). The journal entry to record income tax expense , deferred income taxes and income tax for 2011 are: Deferred tax liability =10 000 40% = 4 000 Deferred tax asset = 25 000 40% =10 000 Income taxes payable = 325 000 40% = 130 000 Income tax expense = $130 000 - $4 000 +$10 000 =$136 000 Debit 136 000 4 000 Credit

Income Tax Expense Deferred Tax Liability Income Taxes Payable Deferred Tax Asset

130 000 10 000