consulting services tomultinational firms. In 2009, a venture capital firm provi
ID: 2433689 • Letter: C
Question
consulting services tomultinational firms. In 2009, a venture capital firm providedadditional
funding in order toallow the company to expand operations. The following informationwas
taken from thepreliminary unadjusted trial balance of Numo Company, a calendaryear company,
on December 31,2009:
Cash 50,000
Accounts Receivable41,000
Transportation Equipment203,000
Accumulated Depreciation- Transportation Equipment---------------------cr.68,000
Goodwill200,000
Accounts Payable-------------------------------------------------------cr.16,000
Deferred Taxes -Depreciation -------------------------------------------cr.12,000
Common Stock, $2par----------------------------------------------------cr. 60,000
Paid-in Capital inExcess of Par Value-------------------------------------cr.81,000
Retained Earnings,1/1/09 --------------------------------------------------cr.192,000
Sales------------------------------------------------------------------------cr.320,000
Salaries/CompensationExpense 210,000
Supplies Expense16,000
Depreciation Expense22,000
Municipal Bond Interest-------------------------------------------cr. 1,000
Casualty Loss(extraordinary) - before tax 8,000
However, the bookkeepingstaff did not record the following transactions andadjustments
because staff memberswere unsure about the appropriate accounting treatment:
(1) On April 1, 2009,Numo issued a five-year, $100,000, non-interest bearing note tothe
venture capital firm andreceived $62,092 in cash, which reflects a 10% market yield.For
financial statementpurposes, interest expense is recognized using the effectiveinterest
rate method. However,for tax purposes, interest is not deductible until paid, whichwill
be at the end of thefive-year period.
HINT - In addition tothe 4/1 transaction, be sure to record the required adjusting entryto
record interestexpense.
(2) In 2009, the companywas accused of patent infringement. While the company is
contesting the case,management believes that there is a probably loss of between$30,000
and $50,000. This losshas NOT been recorded
HINT - Record theappropriate loss. This accrued liability should be considered acurrent
liability. Also,remember that the loss is not deductible until paid.
Required:
A. Record appropriatetransactions and adjusting entries as described above.
B. Partially prepare amultiple-step Income Statement (through Income beforeIncome
Taxes) in accordancewith GAAP.
C. Record Income taxExpense for 2009. The tax rate is 20% for all years. You havelearned
that the company'sinterest revenue is tax-exempt since it was earned on municipalbonds.
In addition to thetemporary differences described above, you have identified thata
temporary differenceexists for depreciation (depreciation on transportation equipmentfor
tax purposes was $30,000in 2009 and the cumulative difference between “tax”and
“book” was$60,000 as of 12/31/2008). You may assume that all deferred taxassets, if
any, will berealized.
Then record the taxeffect of the casualty loss. Recall that extraordinary items areshown
net of taxes on theIncome Statement
D. Complete your IncomeStatement. Be sure that it contains all items that are requiredby
GAAP. You do NOT need toshow Earnings Per Share data.
E. Prepare a classifiedBalance Sheet in accordance with GAAP.
Explanation / Answer
x.XRecord appropriate transactions and adjusting entries as
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