Question -
I. Zurich Co. reports pretax financial income of $70,000 for 20x1. The following items cause taxable income to be different than pretax financial income:
1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.
2. Rent collected on the tax return is greater than rent earned on the income statement by $22,000.
3. Fines for pollution appear as an expense of $11,000 on the income statement.
Zurich's tax rate is 30% for all years and the company expects to report taxable income in all future years.
a) Compute taxable income.
b) Prepare the journal entry to record income tax expense, deferred income tax, and income tax payable for 20x1
c) Prepare the income tax expense section of the income statement for 20x1, beginning with the line "Income before income taxes."
II. Marie Leasing signs an agreement on January 1, 20x1 to lease equipment to Metro Company. The following information relates to this agreement.
1. The lease term is 6 years. The equipment has an estimated economic life of 6 years.
2. The cost of the asset to the lessor is $245,000. The fair value at January 1, 20x1 is also $245,000.
3. The asset will revert to the lessor at the end of the lease term at which time the asset is expected to have a residual value of $43,622 (guaranteed by lessee).
4. The agreement requires equal annual payments (each January 1), beginning on January 1, 20x1.
5. Collectibility of the lease payment s is reasonably assured. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.
a) Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual lease payment required.
b) Prepare an amortization schedule for the lease term using the Excel.
c) Prepare all of the journal entries for the lessor for 20x1 and 20x2. Assume the lessor's annual accounting period ends on December 31.
III. Castle Leasing signs a lease agreement on January 1, 20x1 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 (on 12/31) 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%).
a) What type of lease is this for the lessee? Explain.
b) Calculate the annual lease payment.
c) Prepare a lease amortization schedule (use the Excel).
d) Prepare the journal entries for the lessee for 20x1 and 20x2.