Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

consulting services tomultinational firms. In 2009, a venture capital firm provi

ID: 2433689 • Letter: C

Question

consulting services tomultinational firms. In 2009, a venture capital firm providedadditional

funding in order toallow the company to expand operations. The following informationwas

taken from thepreliminary unadjusted trial balance of Numo Company, a calendaryear company,

on December 31,2009:

Cash 50,000

Accounts Receivable41,000

Transportation Equipment203,000

Accumulated Depreciation- Transportation Equipment---------------------cr.68,000

Goodwill200,000

Accounts Payable-------------------------------------------------------cr.16,000

Deferred Taxes -Depreciation -------------------------------------------cr.12,000

Common Stock, $2par----------------------------------------------------cr. 60,000

Paid-in Capital inExcess of Par Value-------------------------------------cr.81,000

Retained Earnings,1/1/09 --------------------------------------------------cr.192,000

Sales------------------------------------------------------------------------cr.320,000

Salaries/CompensationExpense 210,000

Supplies Expense16,000

Depreciation Expense22,000

Municipal Bond Interest-------------------------------------------cr. 1,000

Casualty Loss(extraordinary) - before tax 8,000

However, the bookkeepingstaff did not record the following transactions andadjustments

because staff memberswere unsure about the appropriate accounting treatment:

(1) On April 1, 2009,Numo issued a five-year, $100,000, non-interest bearing note tothe

venture capital firm andreceived $62,092 in cash, which reflects a 10% market yield.For

financial statementpurposes, interest expense is recognized using the effectiveinterest

rate method. However,for tax purposes, interest is not deductible until paid, whichwill

be at the end of thefive-year period.

HINT - In addition tothe 4/1 transaction, be sure to record the required adjusting entryto

record interestexpense.

(2) In 2009, the companywas accused of patent infringement. While the company is

contesting the case,management believes that there is a probably loss of between$30,000

and $50,000. This losshas NOT been recorded

HINT - Record theappropriate loss. This accrued liability should be considered acurrent

liability. Also,remember that the loss is not deductible until paid.

Required:

A. Record appropriatetransactions and adjusting entries as described above.

B. Partially prepare amultiple-step Income Statement (through Income beforeIncome

Taxes) in accordancewith GAAP.

C. Record Income taxExpense for 2009. The tax rate is 20% for all years. You havelearned

that the company'sinterest revenue is tax-exempt since it was earned on municipalbonds.

In addition to thetemporary differences described above, you have identified thata

temporary differenceexists for depreciation (depreciation on transportation equipmentfor

tax purposes was $30,000in 2009 and the cumulative difference between “tax”and

“book” was$60,000 as of 12/31/2008). You may assume that all deferred taxassets, if

any, will berealized.

Then record the taxeffect of the casualty loss. Recall that extraordinary items areshown

net of taxes on theIncome Statement

D. Complete your IncomeStatement. Be sure that it contains all items that are requiredby

GAAP. You do NOT need toshow Earnings Per Share data.

E. Prepare a classifiedBalance Sheet in accordance with GAAP.

Explanation / Answer

x.XRecord appropriate transactions and adjusting entries as