MACC7003 Advanced Financial Accounting

Assignment 3

Topic 5: Income Taxes

Question 1 (Deferred tax liability):

Minion Motors, Inc., computed a pretax financial income of $120,000 for its first year of
-
operations ended December 31, 2023. In preparing the income tax return for the year, the tax
accountant determined the following differences between 2023 financial income and taxable
income.
Nondeductible expenses $14,000
Nontaxable revenues 26,000
Temporary difference- installment sales reported in financial income 40,000
but not in taxable income
108 , 000 .

The temporary difference is expected to reverse in the following pattern as the cash is
collected:
2024 $20,000
2025 15,000
2026 5,000
Total $40,000

The enacted tax rates for this year and the next three years are as follows:
2023 20%
2024 20%
2025 18%
2026 18%

Required:
Prepare journal entries to recorded income taxes payable and deferred income taxes for 2023.
$) 120 000
, + 14, 000 26
-

, 000 -

40 000
,
= $68 , 000
& 20 , 000 x 20 % =
4 000 ,

$ 08 000 x , 20 % =
$13
, 600 5) 15 ,
000 x 18 % =
2 700
,

$5, 000 x 18 % =
900
Dr
. Income tax expense 13 600
,

Dr Income Tax 7 600

Income Taxes
.

expense ,

Cr .

payable 13 600
,

Cr Deferred Tax Liability current 4000

-

3600
Cr Deferred Tax
Liability non-current
-

.
Question 2 (Netting of deferred tax assets and liabilities):
Stuart Corporation computed a pretax financial income of $90,000 for the first year of its
operations ended December 31, 2023. Included in financial income was $20,000 of nontaxable
revenue, $35,000 gross profit on installment sales that was deferred for tax purposes until the
installments were collected, and $50,000 in warranties payable that had been recognized as
expense on the books in 2023 when product sales were made.
The temporary differences are expected to reverse in the following pattern:

Year Gross Profit on Warranty

collections
payments
2024 $15,000 $20,000
2025 10,000 15,000
2026 5,000 10,000
2027 5,000 5,000
$35,000 $50,000

The enacted tax rates for this year and the next four years are as follows:
2023 – 35% 2026 – 25%
2024 – 30% 2027 – 25%
2025 – 30%

Required:
Prepare journal entries to record income taxes payable and deferred income taxes for the year
ended December 31, 2023. Assume there will be sufficient income in each future year to realize
any deductible amount.
Topic 6: Financial Assets and Financial Instruments:

Question 1 (Financial Assets – FVTPL and FVOCI)

Asian Surety and Fidelity buys and sells securities expecting to earn profits on short-term
differences in price. For the first 11 months of 2022, gains from selling FVTPL investments
totaled $8 million, losses were $11 million, and the company had earned $5 million in
investment revenue The following selected transactions relate to Asian’s trading account
during December, 2022, and the first week of 2023. The company’s financial year ends on
December 31. No FVTPL investments were held by Asian on December 1, 2022.

2022

Dec 12 Purchased 2 million Ferry Company ordinary shares for $22 million.

Dec 22 Purchased Treasury bills for $56 million.

Dec 23 Sold half the Ferry Company ordinary shares for $10 million.

Dec 26 Sold Treasury bills for $57 million.

Dec 28 Received cash dividends of $200,000 from the Ferry Company ordinary shares.

Dec 31 The market price of the Ferry Company shares was $10 per share.

2023

Jan 2 Sold the remaining Ferry Company ordinary shares for $10.2 million.

Required:

(1) Prepare journal entries for each transaction or event during 2022 and 2023.
(2) Indicate any amounts that Asian would report in its 2022 statement of financial
position and income statement as a result of these investments.
(3) Prepare journal entries for each transaction or event during 2022 if Asian is a
manufacturing company and buys securities not intending to profit from short-term
differences in price.
Question 2 (Financial Assets – equity method)
On January 4, 2022, Runyan Bakery paid $324 million for 10 million shares of Lavery
Labelling Company ordinary shares. The investment represents a 30% interest in the net
assets of Lavery and gave Runyan the ability to exercise significant influence over Lavery’s
operations. Runyan received dividends of $2 per share on December 15, 2022, and Lavery
reported net income of $160 million for the year ended December 31, 2022. The market value
of Laavery’s ordinary shares at December 31, 2022, was $31 per share.

Required:

(1) Prepare all appropriate journal entries related to the investment during 2022, assuming
Runyan accounts for this investment by the equity method in its separate financial
statements.
(2) Prepare the journal entries required by Runyan, assuming that the 10 million shares
represents a 10% interest in the net assets of Lavery rather than a 30% interest and
that the shares are not held for trading.
Question 3 (Hedge accounting – forward):
On July 1, 2023, Plum Company sold some limited edition art prints to Marigold Company for
¥47,850,000 to be paid on January 1, 2024. The current exchange rate on July 1, 2023, was
¥110=$1, so the total payment at the current exchange rate would be equal to $435,000. Plum
entered into a forward contract with a large bank to guarantee the number of dollars to be
received. According to the terms of the contract, if ¥47,850,000 is worth less than $435,000,
the bank will pay Plum the difference in cash. Likewise, if ¥47,850,000 is worth more than
$435,000, Plum must pay the bank the difference in cash.

Required:
(1) Prepare all necessary journal entries on Plum’s book at July 1, 2023.
(2) Prepare all necessary journal entries on Plum’s book at December 31, 2023, assuming
that the exchange rate is ¥100=$1.
(3) Prepare all necessary journal entries on Plum’s book at January 1, 2024.