AFA 717 Lecture Notes - Lecture 15: Capital Cost Allowance, Tax

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bluegnat451

6 Jun 2018

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• Generally similar to IFRS except for the following differences:

• Amortization is the term used for depreciation, depletion and amortization

• Copoet depreiatio is doe oly if pratiale – therefore rarely used in practice

• Minimum Depreciation

• Determination of Impairment Losses

• Reversal of Impairment Losses

• Revaluation Accounting

• Accounting depreciation or amortization has no tax impact; depreciation or amortization of

capital assets for tax purposes is governed by the Income Tax Act and regulations and is

completely independent of accounting depreciation or amortization

• Income tax depreciation or amortization is called capital cost allowance (CCA) system

• The CCA system groups capital assets into classes of assets of similar types. Except for certain

buildings, which are each included in a separate, one-asset class, assets are not depreciated or

amortized individually.

• The ITA regulations specify a depreciation or amortization rate to be used for each class of asset;

the rate is a maximum – a company can claim less CCA in any year if management so chooses,

without losing the maximum deduction in future years.

• The half-year rule is applied to net assets acquired during a taxation year.

• Gains and losses are not recognized on the disposal of capital assets in a class, unless all of the

assets in the class are disposed of. Proceeds on disposal of individual assets are credited to the

asset class and reduce future CCA.

• The revaluation model is an alternative to the cost model for PP&E; intangible assets

with an active market; and mineral reserves. The revaluation model must be adopted

for an entire class of assets.

• Fair value is the base for the revaluation model and could be an appraisal or estimated

fair value.

• Revaluations are done with sufficient regularity that the carrying value of long-lived

assets approximate for value; frequency of revaluation depends on the volatility of the

fair value of the asset.

• Depreciation is recorded every year.

• The revaluation adjustment can be made using either the elimination or the

proportionate method.

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1. Make all adjustments on the "Adjusting Journal Entries". Remember to include a description under each journal entry.

12	. On 1/1/14, ABC Corporation purchased, as a held-to-maturity investment, $200,000 of the 8%, 5-year bonds of Intuit Corporation for $177,824,
	which provides an 11% return. Prepare ABC's 12/31/14 journal entry to reflect the receipt of annual interest and discount amortization.
	Assume the bond investment pays interest annually on 12/31 each year and that effective interest amortization is used.
	Note: Notice that a discount account is not used for this investment. Therefore, for purposes of this adjusting entry, amortize the discount directly to the
	investment account.


13.	ABC Corporation prepares an aging schedule on 12/31/14 that estimates total uncollectible accounts at $25,000. Assuming that the allowance method is used,
	prepare the entry to record bad debt expense.


14	On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make
	annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000
	unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method
	of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet
	been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal
	entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for
	this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.)


15	ABC Corporation provides a defined benefit pension plan for its employees. A combination adjusting entry should be made to correctly account for this type of pension
	plan given the following items of information for the 2014 plan year, including the recording of pension expense and the employer's contribution to the pension plan in 2014.
	Note: Use the summary entry method as demonstrated and discussed in the chapter lectures on pension accounting to prepare the adjusting entry.

	Pension asset/liability (January 1)		$0
	Actual return on plan assets		$40,000
	Expected return on plan assets		$20,000
	Contributions (funding) in 2014		$37,000
	Fair value of plan assets (December 31)		$75,000
	Settlement rate		10%
	Projected benefit obligation (January 1)		$0
	Service cost		$60,000
	Benefits paid in 2014		$0
	*For purposes of financial statement presentation, consider Pension Expense as an operating item and any resulting Pension Asset/Liability as long-term in nature.

16	On December 31, 2014, ABC Corporation issued 1,000 shares of restricted stock to its Chief Financial Officer. ABC stock had a fair value (closing market price) of
	$10 per share on December 31, 2014. Additional information is as follows:
		a. The service period related to the restricted stock is 2 years.
		b. Vesting occurs if the CFO stays with the company for a two-year period.
		c. The par value of the common stock is $3 per share.
	Make the appropriate accounting entry as of the grant date, 12/31/14. Note: use the alternative method as described in your textbook for deferred compensation.

	Do this step after preparing the Income Statement except for the Income taxes line: (You need to calculate Income Before Income Taxes in order to calcualte total Income Tax Expense)
17	Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15.
	However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full
	on the return's March 15, 2015 due date.
	ABC's income tax rate is 40%. The entire year's income tax expense was estimated at the beginning of 2014 to be $69,600,
	so January through November income tax expense recognized amounts to $63,800 (11/12 months).
	Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents
	tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities.
	Based on the income before income taxes figure from the income statement, record December's income tax expense
	so that the entire year's total tax expense is correct.

Read the 2015 annual report of Air France â KLM and answer the 20 questions asked regarding the accounting issues. Link is provided below:

http://www.airfranceklm.com/sites/default/files/publications/afkl_registration_doc_2015.pdf

1. Air France-KLM reports âConsolidated statement of recognized income and expensesâ for the year ended December 31, 2015. If this statement was a U.S. GAAP statement, what would be the title of this statement?

a. Consolidated statement of total net income

b. Consolidated statement of other comprehensive income

c. Consolidated statement of comprehensive income

d. Consolidated statement of recognized net income

2. What method does Air France-KLM use for the Statement of Cash Flows?

a. Indirect method

b. Direct method

c. Gross method

d. Net method

3. The basic and diluted earnings per share for the year ended December 31, 2015, indicates that Air France-KLM has:

a. no convertible debts.

b. some dilutive securities.

c. no preferred stocks.

d. some treasury stocks.

4. What method is used to account for investments in companies over which Air France-KLM can âexercise significant influence on financial and operating policy decisions?â

a. Cost method

b. Liability method

c. Equity method

d. Fair value method

5. Sale of passenger tickets is accounted for at the time of ticket sale as:

a. Sales revenue

b. Deferred revenue

c. Contingent asset

d. No recognition

6. How does Air France account for business combination costs other than those related to the issuance of debt or equity securities?

a. Expensed as incurred

b. Capitalized as incurred

c. Included in goodwill

d. Used to offset fair value of the acquisition

7. Which of the following is not an âaccumulated other comprehensive incomeâ item among those reported in the âreserves and retained earningsâ in the 2015 consolidated balance sheet of Air France-KLM?

a. Available for sale securities reserves.

b. Derivatives reserves.

c. Legal reserves.

d. Pension defined benefits reserves.

8. What is the carrying amount of investments in debt and equity securities that are classified as available-for-sale?

a. Fair value Cost

b. Amortized cost

c. Lower of cost or market

9. Inventories are carried at:

a. The lower of the first-in-first-out cost or net realizable value.

b. The first-in-first-out cost.

c. The lower of the weighted-average cost or net realizable value.

d. The weighted-average cost.

10. Air France-KLM classifies its frequent flyer programs as:

a. Noncurrent liability

b. Current liability

c. Current asset

d. Other debt

11. The followings are included in Air France-KLMâs intangible assets, except for:

a. Trademarks

b. Leased aircraft

c. Customer relationships

d. Slots for takeoff and landing

12. Air France-KLM reports bank overdrafts as:

a. A contra account to cash and cash equivalents.

b. A current liability.

c. An expense.

d. A bank deposits in transit.

13. Which method does Air France-KLM use to record depreciation expense for its flight equipment?

a. The activity-based method.

b. The sum-of-yearsâ-digit method.

c. The straight-line method.

d. The group method.

14. Which accounting standards does Air France-KLM use?

a. U.S. GAAP

b. French GAAP

c. Netherlands GAAP

d. International Financial Reporting Standards

15. As of December 31, 2015, what assets are held for sale?

a. Land

b. Aircraft

c. Equipment

d. Buildings

16. Which of the following is included in âincome from operating activitiesâ but not in âincome from current operations?

a. Sale of aircraft equipment

b. Research and development costs

c. Bad debt expense

d. Interest revenue

17. Which of the following is not true about accounting treatment for the overhaul cost of major airframe and engine?

a. The cost is treated as separate asset component.

b. The cost is capitalized.

c. The cost is depreciated over the remaining useful life.

d. The cost is expensed as incurred.

18. How are financial assets accounted for if the Air France-KLM intends to sell them in the near future to realize capital gains?

a. At fair value with fair value changes recognized in the current period profit and loss

b. At fair value with fair value changes recognized as other comprehensive income

c. At cost with no recognition of fair value changes

d. At amortized cost with no recognition of fair value changes

19. Which of the following is not true about impairment test?

a. Tangible fixed assets, intangible assets, goodwill, and other assets with indefinite useful life are subject to an impairment test.

b. The impairment test is done at least once a year.

c. Recoverable value is the lower of the net realizable value and value in use.

d. The value in use is determined according to the discounted future cash flow method.

20. Which of the following is not an âother non-current income and expensesâ item?

a. Restructuring costs

b. Gains and losses on disposal of shares available for sale

c. Gains and losses on disposal of subsidiaries and affiliates

d. Gains and losses on sale of trading securities

AFA 717 Lecture Notes - Lecture 15: Capital Cost Allowance, Tax

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