Homework 3, Spring 2016, 311, Kim

1.MasonCompanyhadthefollowingsecuritiesat12/31/14.
Acquisition 12/31/14

Cost

FairValue
Tradingsecurities
8,000sharesofRadnorstock640,000

654,000

Availableforsalesecurities
$1M,5%,5year,GEbonds957,878 952,000
(purchasedon1/1/13,effectiverate=6%
interestpaymentsat12/31,maturesat12/31/17)

Heldtomaturitysecurities
$3M,7%,10year,TWRbonds3,220,789 3,200,000
(purchasedon1/1/14,effectiverate=6%
interestpaymentsat12/31,maturesat12/31/23)

During2015thefollowingtransactions/eventsoccurred.
(a) On1/9/15MasonsoldentireRadnorstockfor$650,000cash.
(b) On 8/3/15 Mason purchased 70,000 shares of ICRR stock for
$870,000cashandclassifieditasavailableforsalesecurity.
(c) The fair market values of securities at 12/31/15 were:
GE bonds
TWR bonds
ICRR stock

975,000
3,186,000
950,000

Give all entries relatedtoMasonsecuritiesfor2015 andshow

relatedsectionsofthe2015balancesheetandincomestatement.

2.DavidsonCompanyjustpurchased250,000sharesofLearyInc.
whichrepresent25%interestofLeary.Davidsonintendstohold
themforalongtimeandbelievesthatthepriceofLearystock
will rise at least for the next 20 years. Is it possible for
Davidson to have its own future earnings increase due to the
futureriseoftheLearystockprice?Ifyes,how,andifnot,
whynot?

3. 2015 is the first year of operation for Jindal Company.

Applicable tax rates enacted by the end of 2015 are as follows:
2015
2016
2017 and later

20%
25%
30%

Compute the amount of deferred taxes to appear on the balance

sheet at 12/31/15 with proper classifications, prepare the
journalentrytorecordincometaxexpensefor2015,andshowthe
currentanddeferredportionsofincometaxexpenseontheincome
statementfor2015.
(a)In2015Jindalhadpretaxfinancialincomeof$660,000.
(b) Pretax financial income was different from taxable income
duetothefollowing:
Prepaidrent

(expensein2016,taxdeductiblein2015)

4,000

DividenddecuctionfromUScorporations
(revenuein2015,nottaxable)

50,000

Lossbytheequitymethodsubsidiarywhile
costmethodisusedfortaxpurpose
(taxdeductiblein2016,expensein2015)

70,000

Stockbasedcompensationtoemployees

72,000
(expensein2015,taxdeductiblein201640,000
in201732,000)
Unrealizedholdinggainfortradingsecurities
(revenuein2015,taxablein2016)

15,000

Amortizationofpurchasedtechnology,shorteruseful
lifefortaxpurpose

36,000
(taxdeductiblein2015,expensein201620,000
in201716,000)

4.WilliamsonCompanyreportsthefollowingpretaxincome(loss)
forbothbookandtaxpurposes(assumethecarrybackprovisionis
used where possible). 2011 is its first year of operation.
Preparethejournalentrytorecordtaxexpenseforyear2015.
Year

PretaxIncome(Loss)

TaxRate

2011
2012
2013
2014
2015
2016

$120,000
300,000
150,000
(240,000)
(380,000)
400,000

15%
25%
20%

35%(expected)

5. Answer the following questions.

A.Tycorp switched from LIFO to FIFO for valuing inventory as of
1/1/15. If FIFO had been used in 2013 and 2014, it would have
decreased costs of goods sold by $500,000 in 2013 and $340,000 in
2014. Prepare the 2015 journal entry to record the accounting
method change. Use Deferred Tax Liability account for the tax
effect and 40% tax rate.

B. Tycorp uses the percentage-of-completion method for a bridge

that takes 3 years to build. 2014 was the first year and the
actual cost was $4M while the estimated total cost was $8M. Thus,
50% ($4M/$8M) of the total contract price $18M, i.e., $9M
($18M50%) was recognized as revenue in 2014. In 2015 the actual
cost was $2M but the total cost estimate increased to $15M due to
rapidly rising costs. As a result, the percent complete was 40%
([4M+2M]/15M). How much revenue should be recognized in 2015?

C. In August 2015 Tycorp sold its wholly owned subsidiary

Masontech.Tycorpreported$316Mliabilitiesat12/31/14,which
included Masontechs liabilities of $20M. On the 2015
consolidated balance sheet, the 2014 numbers must also be
presented next to the 2015 numbers. Should Tycorp show 2014
liabilitiesof$316Mor$296Monthe2015balancesheet? Why?