ACT 205 Lecture Notes - Lecture 24: Preferred Stock, Operating Lease, Finance Lease
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6. On June 28 Lexicon Corporation acquired 100% of the common stock of Gulf & Eastern. The purchase price allocation included the following items: $5.7 million, patent; $4.7 million, developed technology; $3.7 million, in-process research and development; $6.7 million, goodwill. Lexiconâs policy is to amortize intangible assets using the straight-line method, no residual value, and a five-year useful life.
What is the total amount of expenses (ignoring taxes) that would appear in Lexiconâs income statement for the year ended December 31 related to these items? (Enter your answers in whole dollars.)
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7. On January 2, 2018, the Jackson Company purchased equipment to be used in its manufacturing process. The equipment has an estimated life of eight years and an estimated residual value of $56,625. The expenditures made to acquire the asset were as follows:
| Purchase price | $ | 242,000 | |
| Freight charges | 8,400 | ||
| Installation charges | 12,000 | ||
Jacksonâs policy is to use the double-declining-balance (DDB) method of depreciation in the early years of the equipmentâs life and then switch to straight line halfway through the equipmentâs life.
Required:
1. Calculate depreciation for each year of the assetâs eight-year life.
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8. In 2018, internal auditors discovered that PKE Displays, Inc., had debited an expense account for the $369,000 cost of equipment purchased on January 1, 2015. The equipmentâs life was expected to be five years with no residual value. Straight-line depreciation is used by PKE.
Required:
1. Prepare the correcting entry assuming the error was discovered in 2018 before the adjusting and closing entries. (Ignore income taxes.)
2. Assume the error was discovered in 2020 after the 2019 financial statements are issued. Prepare the correcting entry.
Prepare the correcting entry assuming the error was discovered in 2018 before the adjusting and closing entries. (Ignore income taxes.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Peace Corporation acquired 100 percent of Harmony Inc in anontaxable transaction on December 31, 20X1. The following balancesheet information is available immediately following thetransaction: |
Peace Corporation | Harmony Inc | |||||||||||
| BookValue | FairValues | BookValue | FairValues | |||||||||
| Cash | $ | 30,000 | $ | 30,000 | $ | 8,000 | $ | 8,000 | ||||
| Accounts Receivable,net | 50,000 | 50,000 | 12,000 | 12,000 | ||||||||
| Inventory | 75,000 | 82,000 | 7,000 | 10,000 | ||||||||
| Deferred Tax Asset | 8,000 | 1,000 | ? | |||||||||
| Investment inHarmony | 60,000 | 60,000 | ||||||||||
| Equipment, net | 160,000 | 195,000 | 25,000 | 40,000 | ||||||||
| Patent | 0 | 20,000 | ||||||||||
| TotalAssets | $ | 383,000 | $ | 53,000 | ||||||||
| Accounts Payable | $ | 62,000 | $ | 62,000 | $ | 13,000 | $ | 13,000 | ||||
| Accrued VacationPayable | 15,000 | 15,000 | ||||||||||
| Deferred TaxLiability | 6,000 | 2,000 | ? | |||||||||
| Long-Term Debt | 100,000 | 110,000 | 8,000 | 8,000 | ||||||||
| Common Stock | 150,000 | 20,000 | ||||||||||
| Retained Earnings | 50,000 | 10,000 | ||||||||||
| TotalLiabilities and Equity | $ | 383,000 | $ | 53,000 | ||||||||
| AdditionalInformation |
| 1. | The current and future effective tax rate for both Peace andHarmony is 40 percent. |
| 2. | The recorded deferred tax asset for Peace relates to the booktaxdifferences arising from the allowance for doubtful Accounts andthe Accrued vacation payable. The expenses associated with each ofthese amounts will not be deductible for tax purposes until therelated accounts receivable are written off or until the employeevacation is actually paid out. |
| 3. | The recorded deferred tax asset for Harmony is related solely tothe booktax difference arising from the allowance for doubtfulaccounts. |
| 4. | The recorded deferred tax liability in both Peace and Harmonyrelates solely to the booktax differences arising from thedepreciation of their respective equipment. |
| 5. | Accumulated depreciation on the financial accounting records ofPeace and Harmony is $40,000 and $10,000, respectively. |
| 6. | The Harmony patent was identified by Peace in the due diligenceprocess and has not previously been recorded in the accountingrecords of Harmony. |
| 7. | The book and tax bases of all other assets and liabilities ofPeace and Harmony are the same. |
| Required: |
| a. | Compute the tax bases of the assets and liabilities for Peaceand Harmony, where different from the amounts recorded in therespective accounting records. |
| b. | Compute the fair value of the deferred tax assets and deferredtax liabilities for Harmony. |
| c. | Prepare all of the consolidation entries needed to prepare theworksheet for Peace and Harmony at the date of acquisition.(If no entry is required for a transaction/event, select"No journal entry required" in the first accountfield.) |
| d. | Prepare the consolidation worksheet for Peace and Harmony at thedate of acquisition. (Values in the first two columns (the"parent" and "subsidiary" balances) that are to be deducted shouldbe indicated with a minus sign, while all values in the"Consolidation Entries" columns should be entered as positivevalues. For accounts where multiple adjusting entries are required,combine all debit entries into one amount and enter this amount inthe debit column of the worksheet. Similarly, combine all creditentries into one amount and enter this amount in the credit columnof the worksheet.) |
