Accounting -Denver Co. at the end of 20×1, its first year of operations

| January 30, 2017

Accounting Assignment 3

1. Denver Co. at the end of 20×1, its first year of operations, prepared reconciliation between pretax financial income and taxable income as follows:

Pretax financial income $300,000

Extra depreciation taken for tax purposes 900,000

Estimated litigation expenses deductible for taxes when paid 1,500,000

Rent collected on the tax return is greater than rent reported on

the income statement by $220,000

Interest income from Denver municipal bonds 100,000

Use of the depreciable assets will result in taxable amounts of $300,000 in each of the next three years. The estimated litigation expenses of $1,500,000 will be deductible in 20×4 when settlement is expected.

a) Compute the taxable income.

b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 20×1, assuming a tax rate of 40% for all years.

2. Castle Leasing signs a lease agreement on January 1, 20×1 to lease equipment to Perry Company. The lease term is 2 years and payments are required at the end of each year. The following information relates to this agreement.

Perry Company has the option to purchase the equipment for $8,000 upon the termination of the lease.

The equipment has a cost and fair value of $160,000 to Castle; the useful economic life is 2 years.

Perry Company is required to pay $5,000 each year to the lessor for executory costs.

Castle Leasing desires to earn a return of 10% on its investment (Perry’s incremental borrowing rate is also 10%).

What type of lease is this for the lessee? Explain.

Calculate the annual lease payment.

Prepare a lease amortization schedule (use the Excel).

Prepare the journal entries for the lessee for 20×1 and 20×2.

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