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 72,000

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 364,000

Salaries/Compensation Expense 88,000

Cost of Goods Sold 140,000

Supplies Expense 17,000

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 1, 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 expense will be computed usng

the straight-line method.

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 $6,000

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 $10,000

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. Obsolete inventory is considered to be a ?normal? part of the overall

business operations.

(4) The company has not yet recorded an allowance for doubtful accounts. Based on

experience, bad debt expense should be 2% of sales. You can assume that the balance in

the allowance for doubtful accounts as of 12/31/11 was zero.

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 year?s 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.

F. Prepare the Footnote for Income Taxes.

NOTE - This is a graded assignment. You are allowed to discuss this case with other

students. However, each student is required to prepare their own solution.

Seton Hall University Intermediate Accounting II BACC3111 - Fall 2016 Due Thursday, November 10, April 5, 2016 35 points 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 Accounts Receivable Inventory Transportation Equipment Accumulated Depreciation - Transportation Equipment Goodwill Accounts Payable Deferred Tax Liability - Depreciation Common Stock, $2 par Paid-in Capital in Excess of Par Value Retained Earnings, 1/1/12 Sales Salaries/Compensation Expense Cost of Goods Sold Supplies Expense Depreciation Expense - Transportation Equipment Municipal Bond Interest Gain on Discontinued Operation - before tax 72,000 60,000 88,000 203,000 68,000 200,000 20,000 6,000 62,000 81,000 280,000 364,000 88,000 140,000 17,000 22,000 1,000 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 1, 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 expense will be computed usng the straight-line method. 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 $6,000 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 $10,000 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. Obsolete inventory is considered to be a \"normal\" part of the overall business operations. (4) The company has not yet recorded an allowance for doubtful accounts. Based on experience, bad debt expense should be 2% of sales. You can assume that the balance in the allowance for doubtful accounts as of 12/31/11 was zero. 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 year's 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. F. Prepare the Footnote for Income Taxes. NOTE - This is a graded assignment. You are allowed to discuss this case with other students. However, each student is required to prepare their own solution