(1) On September 30, 2017, 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 expense will be computed using the straight-line method. HINT - In addition to the 9/30/17 transaction, be sure to record the required adjusting entry to record interest expense as of 12/31/17. Also, be sure to include this in your tax computations.

(2) In 2017, the company was accused of patent infringement. While the company is contesting the case, management believes that there is a probably loss of between $26,000 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 for tax purposes until it is paid in the future.

(3) Numo has determined that supplies on hand at 12/31/17 amount to $1,300. You have also determined that Numo owes wages at 12/31/17 of $3,300 which have not yet been recorded. Neither of these two items will create a difference between financial statements and the tax return.

(4)The company has not yet recorded the allowance for doubtful accounts for 2017. Based on experience, the company estimates that 6% of current accounts receivables will not be collected. Bad debt expense is not deductible for tax purposes until actual accounts are written off. There were no write-offs during 2017.

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 2017. 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 12/31/2016, there is a cumulative difference between “tax depreciation and “financial statement depreciation” that amounts to $24,000. The appropriate DTL has been recorded for this as of 12/31/2016. In 2017,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.

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.

The Numo Company, which was acquired (and renamed) in 2003 by E. R. Numo, sells frigets to multinational firms. In 2017 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, 2017: 79,000 61,000 Cash Accounts Receivable Allowance for Doubtful Accounts 1,000 Inventory Supplies on Hand Transportation Equipment Accumulated Depreciation - Transportation Equipment 90,000 5,000 203,000 68,000 Goodwill 160,000 Accounts Payable Deferred Tax Liability - Depreciation Common Stock, $2 par 26,000 6,000 122,000 81,000 83,000 508,000 Paid-in Capital in Excess of Par Value Retained Earnings, 1/1/17 Sales Salaries/Compensation Expense Cost of Goods Sold 88,000 180,000 17,000 22,000 Supplies Expense Depreciation Expense - Transportation Equipment Municipal Bond Interest 10,000 However, the bookkeeping staff has NOT recorded the following transactions and adjustments because they were unsure about the appropriate accounting treatment: