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Chapter 12 - Solution Manual

Case 12 7 262 a i 20x7 20x8 20x9 gross profit on

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Case 12-7
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262 a. i. 20x7 20x8 20x9 Gross Profit on Sales $350,000 $349,000 $351,000 Operating Expenses 210,000 210,000 210,000 Rent Expense 60,000 0 0 Taxable Income $ 80,000 $139,000 $141,000 Tax rate x30% x30% x30% Taxes paid $24,000 $ 41,700 $ 42,300 Net Income 56,000 97,300 98,700 ii. 20x7 20x8 20x9 Gross Profit on Sales $350,000 $349,000 $351,000 Operating Expenses 210,000 210,000 210,000 Rent Expense 20,000 20,000 20,000 Income before taxes $120,000 $119,000 $121,000 Tax Expense @ 30% 36,000 35,700 36,300 Net Income $ 84,000 $ 83,300 $ 84,700 b. The student may have his/her own opinion regarding this question. We believe that no allocation does distort net income. The company has performed essentially the same for all three years, yet no allocation gives the appearance, looking at net income, that the company performed significantly better the latter two years, almost twice as well. c.i. 20x7 20x8 20x9 Gross Profit on Sales $350,000 $349,000 $351,000 Operating Expenses 210,000 210,000 210,000 Rent Expense 20,000 20,000 20,000 Income before taxes $120,000 $119,000 $121,000 Tax Expense 36,000 39,870 40,530 Net Income $ 84,000 $ 79,130 $ 84,700 20x8 Tax expense: $139,000 x 33% = $45,870 20,000 x 30% = ( 6,000) $39,870 20x9 Tax expense: $141,000 x 33% = $46,530 20,000 x 30% = ( 6,000) $40,530 ii. 20x7 20x8 20x9 Gross Profit on Sales $350,000 $349,000 $351,000 Operating Expenses 210,000 210,000 210,000 Rent Expense 20,000 20,000 20,000 Income before taxes $120,000 $119,000 $121,000
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263 Tax Expense 36,000 40,470 39,930 Net Income $ 84,000 $ 79,130 $ 81,070 20x7 Deferred Tax Liab = 40,000 x 30% = $12,000 20x8 Deferred Tax Liab = 20,000 x 33% = 6,600 Decrease $(5,400) Taxes paid 45,870 $40,470 20x9 Deferred Tax Liab = 0 Decrease ( 6,600) Taxes paid $46,530 $39,930 a. The asset/liability approach provides measures that are more useful. The asset/liability approach reports the deferred tax liability at the amount expected to be paid when the temporary difference reverses - i.e., when tax is paid on the taxable amount. The deferred method reports the deferred tax liability measured at the old tax rate. Hence, it does not reflect the expected cash outflow and the measurement is not consistent with the measurement implied in the definition of a liability as the probable future sacrifice. FASB ASC 12-1 Tax Effect of Translation Adjustment Accounting for foreign currency translation adjustments is located at FASB ASC 830-30-45. It is found through the Broad Transactions ling at Foreign Currency Matters The students’ summaries should include the following: Other Presentation Matters 45-1The guidance in this Section discusses how a reporting entity translates foreign currency statements and analyzes changes in the cumulative translation adjustment. It also addresses two related reporting matters. The guidance is organized as follows: a. Translation of foreign currency statements b. Analysis of changes in cumulative translation adjustment c. Reporting other comprehensive income—income tax consequences of rate changes d. Transaction gains and losses not extraordinary. > Translation of Foreign Currency Statements 45-2This guidance on translation of foreign currency statements is organized as follows: a. Translation using current exchange rate b. Elimination of intra-entity profits c. Translation after a business combination d. Reporting translation adjustments
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264 e. Subsequent change in exchange rate f. Cumulative translation adjustments attributable to noncontrolling interests.
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