The Numo Company, which was acquired (and renamed) in 2003 by E. R. Numo, sells
ID: 2460949 • Letter: T
Question
The Numo Company, which was acquired (and renamed) in 2003 by E. R. Numo, sells frigets to multinational firms. In 2012, a venture capital firm provided additional funding in order to allow the company to expand operations. The following information was taken from the preliminary trial balance of Numo Company, a calendar year company, on December 31, 2012:
Cash 74,000
Accounts Receivable 60,000
Inventory 88,000
Transportation Equipment 203,000
Accumulated Depreciation - Transportation Equipment 68,000
Goodwill 200,000
Accounts Payable 20,000
Deferred Tax Liability - Depreciation 6,000
Common Stock, $2 par 62,000
Paid-in Capital in Excess of Par Value 81,000
Retained Earnings, 1/1/12 280,000
Sales 363,000
Salaries/Compensation Expense 86,000
Cost of Goods Sold 140,000
Supplies Expense 16,000
Depreciation Expense - Transportation Equipment 22,000
Municipal Bond Interest 1,000
Gain on Discontinued Operation - before tax 8,000
However, the bookkeeping staff did NOT record the following transactions and adjustments because staff members were unsure about the appropriate accounting treatment:
(1) On April 1st, 2012, Numo issued a five-year, $400,000, non-interest bearing note to the venture capital firm and received $248,368 in cash, which reflects a 10% market yield. For financial statement purposes, interest expense is recognized using the effective interest rate method. However, for tax purposes, interest is not deductible until paid, which will be at the end of the five-year period. HINT - In addition to the 4/1/12 transaction, be sure to record the required adjusting entry to record interest expense as of 12/31/12
(2) In 2012, the company was accused of patent infringement. While the company is contesting the case, management believes that there is a probably loss of between $15,000 and $40,000. This loss has NOT been recorded HINT - Record the appropriate loss. This accrued liability should be considered a current liability. Also, remember that the loss is not deductible until paid.
(3) During the last quarter of the year, Numo found that inventory originally costing $17,000 had become obsolete and was no longer saleable. However, Numo has made the decision to temporarily retain the goods to see if a buyer can be found. For tax purposes, the cost of obsolete inventory can not be deducted on the tax return until the goods are actually disposed of.
Required:
A. Record appropriate transactions and adjusting entries as described above.
B. Partially prepare a multiple-step Income Statement (through Income before Income Taxes) in accordance with GAAP.
C. Record Income tax Expense for 2012. The tax rate is 25% for all years. You have learned that the company's interest revenue is tax-exempt since it was earned on municipal bonds. In addition to the temporary differences described above, you have identified that a temporary difference exists for depreciation. As of 12/31/2011, there is a cumulative difference between tax depreciation and financial statement depreciation that amounts to $24,000. In 2012, tax depreciation was $28,000 and book depreciation (already recorded - see trial balance) was $22,000. You may assume that all deferred tax assets, if any, will be realized. Then record the tax effect of the discontinued operation. You can assume that the discontinued operation is taxable on this years tax return.
D. Complete your Income Statement. Be sure that it contains all items that are required by GAAP. You do NOT need to show Earnings Per Share data.
E. Prepare a classified Balance Sheet in accordance with GAAP.
Explanation / Answer
Before Adjustment Adjusting entries Adjusted Trial Bal. Account Titles Debit Credit Debit Credit Debit Credit Cash 74000 248368 322368 Accounts Receivable 60000 60000 Inventory 88000 88000 Transportation Equipment 203000 203000 Accumulated Depreciation - Transportation Equipment 68000 68000 Goodwill 200,000 200000 200000 Accounts Payable 20000 20000 Deferred Tax Liability - Depreciation 6000 6000 Common Stock, $2 par 62000 62000 Paid-in Capital in Excess of Par Value 81000 81000 Retained Earnings, 1/1/12 280000 280000 Sales 363000 363000 Salaries/Compensation Expense 86000 86000 Cost of Goods Sold 140000 140000 Supplies Expense 16000 16000 Depreciation Expense - Transportation Equipment 22000 22000 Municipal Bond Interest 1000 1000 Gain on Discontinued Operation - before tax 8000 8000 Discount on Note Payable 151632 18628 151632 18628 Note Payable 400000 400000 Interest Expense 18628 18628 Inventory Obsolescence 17000 17000 Allowance for obsolete inventory 17000 17000 Loss dut to patent infringement 40000 40000 Accrued liability for patent infringe. 40000 40000 Total 889000 889000 475628 475628 1364628 1364628 Adjusting Entries 1 Note Payable 400000 Cash received 248368 Discount to be amortised Over the 5 yr. period 151632 31-Dec-12 Account Titles Debit Credit a. Cash 248368 Discount on Note Payable 151632 Note Payable 400000 b Interest Expense 18628 Discount on Note Payable 18628 Interest Payable(As non-interest bearing ) 0 (Effective Interest 10% on Book Value (400000-151632) for 9 months) 2 Probable loss 40000 Contingent Liability 40000 3 Inventory Obsolescence 17000 Allowance for obsolete inventory 17000 Multi-step Income Statement before income Tax Sales 363000 Less: Cost of goods sold 140000 Gross Profit 223000 Less: Operating Expenses Inventory Obsolescence 17000 Salaries/Compensation Expense 86000 Supplies Expense 16000 Depreciation Expense - Transportation Equipment 22000 Total Operating expenses 141000 Operating Income 82000 Non-operating exp./income Municipal Bond Interest 1000 Interest Expense -18628 Probable loss -40000 Gain on Discontinued Operation - before tax 8000 Total non-operating -49628 Net Income 32372 Operating Income Excluding inventory obsolscence(82000+17000) 99000 Add:Gain on Discontinued Operation - before tax 8000 Less:Addl.Depn. For tax purposes(24000+6000) 30000 Income for tax purposes 77000 Tax @ 25% on 77000 19250 Income after tax 57750
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