ACC 3020 FA 2019 Class exercise: Chs. 15, 16 Ch. 16 The long-term liabilities section of McCavity Company's 12/31/2017 balance sheet consisted of the following two items: A. A lease liability with 10 remaining lease payments of $15,000 each, due annually on January 1. Lease liability Less: current portion $96,265 (6,336) $89,929 McCavity signed the lease on January 1, 2017 and made its first payment on that date. The incremental borrowing rate at the inception of the lease was 10 % and the lessor's implicit rate (known by McCavity) was 9%. McCavity properly classified the lease as an operating lease. B. A deferred income tax liability due to a single temporary difference. The only difference between McCavity's taxable income and pretax accounting income in 2017 is depreciation on a machine acquired during 2017 for $1,000,000. The machine's estimated useful life is 5 years, with no salvage value. McCavity uses the straight-line method of depreciation for financial reporting purposes and MACRS for tax purposes. Depreciation expense for financial reporting and tax purposes appears below. STRAIGHT-LINE MACRS DIFFERENCE DEPRECIATION DEPRECIATION YEAR s 60,000 $ 260,000 200,000 2017 120,000 200,000 320,000 2018 (40,000) (60,000) (80,000) 160,000 200,000 200,000 2019 140,000 2020 200,000 120,000 2021 McCavity paid $14,000 in premiums for a life insurance policy on the CEO during 2018. The company is the beneficiary of the policy The enacted federal income tax rate is 22 % . McCavity's 2018 accounting income before taxes was $1,250,000. Determine McCavity's income tax expense and net income for the year ended 12/31/2018. Determine the amount of lease expense that McCavity will report on its 2018 income statement. 3. Prepare the long-term liabilities section of McCavity's 12/31/2018 balance sheet. 1 2. ACC 3020 FA 2019 Class exercise: Chs. 15, 16 Ch. 16 The long-term liabilities section of McCavity Company's 12/31/2017 balance sheet consisted of the following two items: A. A lease liability with 10 remaining lease payments of $15,000 each, due annually on January 1. Lease liability Less: current portion $96,265 (6,336) $89,929 McCavity signed the lease on January 1, 2017 and made its first payment on that date. The incremental borrowing rate at the inception of the lease was 10 % and the lessor's implicit rate (known by McCavity) was 9%. McCavity properly classified the lease as an operating lease. B. A deferred income tax liability due to a single temporary difference. The only difference between McCavity's taxable income and pretax accounting income in 2017 is depreciation on a machine acquired during 2017 for $1,000,000. The machine's estimated useful life is 5 years, with no salvage value. McCavity uses the straight-line method of depreciation for financial reporting purposes and MACRS for tax purposes. Depreciation expense for financial reporting and tax purposes appears below. STRAIGHT-LINE MACRS DIFFERENCE DEPRECIATION DEPRECIATION YEAR s 60,000 $ 260,000 200,000 2017 120,000 200,000 320,000 2018 (40,000) (60,000) (80,000) 160,000 200,000 200,000 2019 140,000 2020 200,000 120,000 2021 McCavity paid $14,000 in premiums for a life insurance policy on the CEO during 2018. The company is the beneficiary of the policy The enacted federal income tax rate is 22 % . McCavity's 2018 accounting income before taxes was $1,250,000. Determine McCavity's income tax expense and net income for the year ended 12/31/2018. Determine the amount of lease expense that McCavity will report on its 2018 income statement. 3. Prepare the long-term liabilities section of McCavity's 12/31/2018 balance sheet. 1 2