Magnolia
ACCOUNTING EXAM (Evening Program)
Fall 2003
Magnolia INC. is a profitable new company that has high prospects for
growth. It is nearing the end of its first year in business and the
president (you) must make some decisions regarding accounting policies
for financial reporting to stockholders. Jan Holtz’s controller and
certified public accountant have gathered the following information:
(000)
Revenue ($100,000 was uncollected at end of year) $715
Inventory purchases ($40,000 end of year unpaid)
415
Ending Inventory - if LIFO is used 50
Ending Inventory - if FIFO is used 70
Depreciation - if straight-line is used 40
Depreciation – if ACRS accelerated depreciation is used 120
Store-opening costs (total expenditure)
60
Store-opening costs (amortized amount) 12
Other expenses (including interest of $18,000) 90
Paid down long-term debt 20
Purchased fixed assets 100
Common shares outstanding 10
Income tax rate (taxes unpaid end of year) 40%
Investment credit:
- total credit available 5
- amortized amount per year (for 5 years, starting this year)
1
ACRS accelerated depreciation and flow-through of the investment credit
will be used for tax calculation and payment purposes regardless of the
method chosen for reporting to stockholders. For all other items,
assume that the same method used for financial accounting is used for
tax purposes.
1. Prepare a columnar income statement. In column 1, show the results
using LIFO, accelerated depreciation (assumed equal to ACRS
depreciation), immediate expensing of store-opening costs, and
amortization of the investment credit. Show earnings per share as well
as net income. In successive columns, show the income statement and
earnings per share of substituting the alternative methods: column 2,
FIFO inventory; column 3, straight-line depreciation; column 4,
amortization of store-opening costs; column 5, flow-through of
investment credit. In column 6, show the total results of choosing all
the alternative methods (columns 2 through 5). Note that in columns 2
through 5, only single changes from column 1 should be shown; that is
column 3 does not show the effects of columns 2 and 3 together, nor does
column 4 show the effects of columns 2, 3, and 4 together.
2. Prepare an end-of-period columnar balance sheet consistent with
requirements of #1 above.
Prepare a columnar statement of cash flows consistent with requirements
of #1 above.
Express all numerical data in thousands (omit 000), and comment on the
results.
Which option would you recommend (select one only)? Why (relative
advantages)?
Business Homework Solutions
#11151
Follow Up on financial statements generation
In the question the teacher says that " ACRS accelerated depreciation and flow-through of the investment credit will be used for tax calculation and payment purposes regardless of the method chosen for reporting to stockholders."
It looks like on the tax calculation worksheet you sent me, that you used accelerated for some, and straight line for others...shouldn't it be 120 across the board for depreciation there? That will affect our taxes payable I think, and will actually make option #3 look better, as it will have this lower payable. Right? Or am I missing something?
3)About the ITC and the balance sheet. I am so lost on this ITC thing. Yes, I think you are right…it should be an income item and should show up as deferred investment tax credit.
Here is what was discussed and what it says in the book…. Example, $200,000 machine qualifying for a $20,000 investment tax credit….
Flow through: Reduces reported income tax expense by the whole amount in that year..OK…no problem there. So here, tax liability will be decreased by $20,000. Record like this:
Income tax Liability………….20,000
Income tax Expense……………….20,000.
So it decreases tax expense and increase net income by $20k.
Deferred: ITC is treated as a reduction in the cost of the asset (a true rebate). Spreads the tax credit over assets useful life. Reduces reported income tax expense in each year.
With deferred the ITC would initially be recorded as a deferred tax credit (a liability), analogous to unearned revenue.
Income tax liability……….20,000
Income Tax expense……………..20,000
Entry has no effect on the income statement. In future years, income tax expense would decrease by $2k a year. The entry would be:
Deferred tax Credit………2,000
Income Tax expense……..2,000
So what does this mean for the balance sheet in my problem? How do I show that? What about any affect on cash flow statement?
I am attaching the original problem (attachment 2), and where we stand as of right now(attachment 1).
Can you check my financial statements and see if they make sense...and can you also help address the question of which method of presentation is the best...
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- Depreciation Methods: straight line vs accelerated. Tax vs financial reporting - What is the difference between the straight-line method of depreciation and the accelerated methods? Why do companies use different depreciation methods for tax reporting and financial reporting?
- Management team - What is your view of a management team that fully pursues accelerated depreciation whenever they can?
- Differentiating Depreciation Methods: straight line vs accelerated - What are the advantages and disadvantages of using different depreciation methods (straight-line versus accelerated)
- What does cash flow to stockholders mean? - What does cash flow to stockholders mean?
- Understanding accelerated depreciation. - Accelerated depreciation: a. Results in lower net income in earlier years and higher net income in later years. b. Is used more often on the income statement than the straight line method c. ...
