Question

The long-term liabilities section of CPS Transportation’sDecember 31, 2017, balance sheet included the following: (FV of $1,PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)(Use appropriate factor(s) from the tablesprovided.)

a. A lease liability with 13 remaining lease payments of $16,000each, due annually on January 1:

Lease liability	$	113,654
Less: current portion		4,635
	$	109,019

The incremental borrowing rate at the inception of the lease was11% and the lessor’s implicit rate, which was known by CPSTransportation, was 10%.

b. A deferred income tax liability due to a single temporarydifference. The only difference between CPS Transportation’staxable income and pretax accounting income is depreciation on amachine acquired on January 1, 2017, for $580,000. The machine’sestimated useful life is five years, with no salvage value.Depreciation is computed using the straight-line method forfinancial reporting purposes and the MACRS method for tax purposes.Depreciation expense for tax and financial reporting purposes for2018 through 2021 is as follows:

	MACRS			Straight-line
Year	Depreciation			Depreciation			Difference
2018	$	182,000		$	116,000		$	66,000
2019		91,000			116,000			(25,000	)
2020		81,000			116,000			(35,000	)
2021		71,000			116,000			(45,000	)

The enacted federal income tax rates are 35% for 2017 and 40% for2018 through 2021. For the year ended December 31, 2018, CPS’sincome before income taxes was $980,000.

On July 1, 2018, CPS Transportation issued $680,000 of 9% bonds.The bonds mature in 10 years and interest is payable each January 1and July 1. The bonds were issued at a price to yield the investors10%. CPS records interest at the effective interest rate.

Required:
1. Determine CPS Transportation’s income taxexpense and net income for the year ended December 31, 2018.
2. Determine CPS Transportation’s interest expensefor the year ended December 31, 2018.
3. Prepare the long-term liabilities section ofCPS Transportation's December 31, 2018, balance sheet.