Assessment 5 Data sheet contains the necessary information to assist with part 1,2,3 and 4. Record calculations in assessment 5 template. Explain Reasoning Assume there are no temporary differences prior to 2015 of Part 1.

Within Part 2 and 3 show all calculations leading to final solution.

Within Part 4 calculate the amount of the annual rental payment. Show journal entries for Hilton and Capital for 2015.

Assessment 5 Data Sheet Part 1: Temporary Differences Sharp Company has two temporary differences between its income tax expense and income taxes payable. The information is shown below. 2015 2016 2017 Pretax financial income $420,000 $455,000 $472,500 Excess depreciation expense on tax return (15,000) (20,000) (5,000) Excess warranty expense in financial income 10,000 5,000 4,000 Taxable income $415,000 $440,000 $471,500 The income tax rate for all years is 40%. Part 2: Carryback and Carryforward The pretax financial income (or loss) figures for Bryan Clark Company are as follows. 2013 $ 80,000 2014 125,000 2015 40,000 2016 (80,000) 2017 (190,000) 2018 60,000 2019 50,000 Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 45% tax rate for 2013 and 2014 and a 40% tax rate for the remaining years. Part 3: Lessee Entries: Capital Lease On January 1, 2015, Southern, Inc. signed a 10-year non-cancelable lease for a machine. The terms of the lease called for Southern to make annual payments of $17,336 at the beginning of each year, starting January 1, 2015. The machine has an estimated useful life of 12 years. The machine reverts back to the lessor at the end of the lease term. Southern uses the straightline method of depreciation for all of its plant assets. Southern's incremental borrowing rate is 6%, and the Lessor's implicit rate is unknown. 1 Part 4: Lessee-Lessor Entries: Sales-Type Lease On January 1, 2015, Capital Corp. leased equipment to Hinton Corporation. The following information pertains to this lease. 1. The term of the noncancelable lease is 12 years, with no renewal option. The equipment reverts to the lessor at the termination of the lease. 2. Equal rental payments are due on January 1 of each year, beginning in 2015. 3. The fair value of the equipment on January 1, 2015, is $225,000, and its cost is $180,000. 4. The equipment has an economic life of 16 years. Hinton depreciates all of its equipment on a straight-line basis. 5. Capital set the annual rental to ensure an 11% rate of return. Hinton's incremental borrowing rate is 12%, and the implicit rate of the lessor is unknown. 6. Collectability of lease payments is reasonably predictable, and no important uncertainties surround the amount of costs yet to be incurred by the lessor. 2 Assessment 5 Template Part 1: Temporary Differences Date Account Title Debit Credit 1 Assessment 5 Template Explanation: Part 2: Carryback and Carryforward Date Account Title Debit Credit 2 Assessment 5 Template Part 3: Lessee Entries: Capital Lease Date Account Title Debit Credit 3 Assessment 5 Template Explanation: 4 Assessment 5 Template Part 4: Lessee-Lessor Entries: Sales-Type Lease Date Account Title Debit Credit 5 Assessment 5 Template Explanation: 6 Assessment 5 Template Part 1: Temporary Differences Date Year-2015 Year-2016 Year-2017 Account Title Debit Income tax Expense 168000 Deferred Tax Asset 4000 Credit Notes =1000*40% Deferred Tax Liability 6000 =15000*40% Income Taxes Payable 166000 =415000*40% Income tax Expense 182000 Deferred Tax Asset 2000 =5000*40% Deferred Tax Liability 8000 =20000*40% Income Taxes Payable 176000 =440000*40% Income tax Expense 189000 Deferred Tax Asset 1600 =4000*40% Deferred Tax Liability 2000 =5000*40% Income Taxes Payable 188600 =471500*40% Current Asset Deferred Tax Asset 7600 (4000+2000+1600) Long term liability Deferred Tax liabilities 16000 (6000+8000+2000) Per tax Income 4725000 1 Assessment 5 Template Income tax Expenses 188600 Deferred Tax (net) 400 Net Income post Tax 283500 Note: Alternative deferred Tax Liability could have been shown as net of deferred tax asset. Part 2: Carryback and Carryforward Date 2015 Account Title Income Tax Expense (40,000*40%) Debit $16,000 Income Tax Payable 2016 Income Tax Refund Receivable (80,000*45%) $16,000 $36,000 Benefit Due to Loss Carryback 2017 Income Tax Refund Receivable (40,000*40%) $36,000 $16,000 Benefit Due to Loss Carryback Deferred Tax Asset [(190,000 - 40,000)*40%] $16,000 $60,000 Benefit Due to Loss Carryforward 2018 Income Tax Expense (60,000*40%) $60,000 $24,000 Deferred Tax Asset 2019 Income Tax Expense (50,000*40%) Deferred Tax Asset Credit $24,000 $20,000 $20,000 2 Assessment 5 Template Part 3: Lessee Entries: Capital Lease Date Account Title Debit Credit Journal Entry for Leased equipment January 1-2015 Leased Equipment $135,250 Lease liability $135,250.14 Journal entry for first lease payment January 1-2015 Lease liability $17,336 Cash $17,336 Journal entry for depreciation in year 2015 January 1-2015 Depreciation $13,525 Accumulated depreciation $13 ,525 Journal entry for Second lease payment on January 1-2016 January 1-2016 Lease liability $10,261 Interest expense $7,075 Cash $17,336 3 Assessment 5 Template Part 4: Lessee-Lessor Entries: Sales-Type Lease Date Account Title Debit Credit Journal Entry in the books of lesser Capital during 2015 Jan 1-2015 Jan 1-2015 Capital lease Receivables $374,661.72 Sales Income $225,000 Unearned Finance Income $149,661.72 Cost of sales $120,000 Equipment Inventory Jan 1-2015 Bank $31,221.18 $31221.81 Capital lease Receivables Dec 31-2015 Unearned Finance Income $31221.81 $21,315.60 Interest Income $21,315.60 Journal entry in the books of lessee Hilton during 2015 Jan 1-2015 Capital lease Asset (PV factor @12% for 12 $216,607.55 years and due 1 year is 6.9377 Capital lease liability Capital lease liability $216,607.55 $31,221.81 Bank Lease interest expense accrued Lease accrued expenses payable $31,221.81 $22,246.29 $22,246.29 4 Assessment 5 Template Depreciation Expense capital leases Accumulated Depreciation capital leases $18,050.63 $18,050.63 5