Question 1

The records for Bosch Co. show this data for 2015:
Gross profit on installment sales recorded on the books was $360,000. Gross profit for tax purposes
from collections of installment receivables was $270,000.
Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year life (no
residual value) is used. For tax purposes, Accelerated depreciation is used and Bosch may deduct 20%
for 2015.
Interest received on governmental obligations was $9,000.
The estimated warranty liability related to 2015 sales was $19,600. Repair costs under warranties
during 2015 were $13,600. The remainder will be incurred in 2016.
Pretax financial income is $600,000. The tax rate is 30%.

Instructions
(a) Prepare a schedule starting with pretax financial income and compute taxable income.
(b) Prepare the journal entry to record income taxes for 2015.

Question 2

The following differences enter into the reconciliation of financial income and taxable income of Abbott
Company for the year ended December 31, 2014, its first year of operations. The enacted income tax rate
is 30% for all years.
Pretax accounting income $700,000
Excess tax depreciation (320,000)
Litigation accrual 70,000
Unearned rent revenue deferred on the books but appropriately
recognized in taxable income 50,000
Interest received on government obligations (20,000)
Taxable income $480,000

1. Excess tax depreciation will reverse equally over a four-year period, 2015-2018.
2. It is estimated that the litigation liability will be paid in 2018.
3. Rent revenue will be recognized during the last year of the lease, 2018.
4. Interest received on government obligations is expected to be $20,000 each year until their maturity
at the end of 2018.

Instructions
(a) Prepare a schedule of future taxable and (deductible) amounts.
(b) Prepare a schedule of the deferred tax (asset) and liability.
(c) Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute
the net deferred tax expense (benefit).
(d) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes
payable for 2014.
Question 3

Eubank Company, as lessee, enters into a lease agreement for equipment on July 1, 2015. The following
data are relevant to the lease agreement:
1. The term of the no cancelable lease is 4 years, with no renewal option. Payments of $782,757 are due
on July 1 of each year, beginning July 1, 2015.
2. The fair value of the equipment on July 1, 2015 is $2,800,000. The equipment has an economic life of
6 years with no salvage value.
3. Eubank depreciates similar machinery it owns on the sum-of-the-years'-digits basis.
4. The lessee pays all executory costs.
5. Eubank's incremental borrowing rate is 10% per year. The lessee is aware that the lessor used an
implicit rate of 8% in computing the lease payments (present value factor for 4 periods at 8%, 3.57710;
at 10%, 3.48685.

Instructions

(a) Indicate the type of lease Eubank Company has entered into and what accounting treatment is
applicable.
(b) Prepare the journal entries on Eubank's books that relate to the lease agreement for the following
dates: (Round all amounts to the nearest dollar. Include a partial amortization schedule.)
1. July 1, 2015.
2. December 31, 2015.
3. July 1, 2016.
4. December 31, 2016.