A: A capital lease liability with 20 remaining lease payments of$12,300 each, due annually on January 1:
Lease liability $93,555
Less current portion 2,945
$90,610
The incremental borrowing rate at the inception of the lease was 11.7% and the lessor’s implicit rate, which was known by Dayton Inc., was 10.5%.
B: A deferred income tax liability due to a single temporary difference. The only difference between Dayton Inc.’s taxable income and pretax accounting income is depreciation on a machine acquired on January 1, 2008, for $617,500. The machine’s estimated useful life is five years, with no salvage value.
Depreciation is computed using the straight-line method for financial reporting purposes and the MACRS method for tax purposes. Depreciation expense for tax and financial reporting purposes for 2009 through 2012 is as follows:
| Year |
MACRS Depreciation |
Straight line Depreciation |
Difference |
| 2009 |
197,600 |
123,500 |
74,100 |
| 2010 |
118,560 |
123,500 |
-4,940 |
| 2011 |
71,136 |
123,500 |
-52,364 |
| 2012 |
71,136 |
123,500 |
-52,364 |
The enacted federal income tax rates are 35% for 2008 and 40% for 2009 through 2012. For the year ended December 31, 2009, Dayton Inc.’s income before income taxes was $1,120,000.
C: On July 1, 2009, Dayton Inc. issued $900,000 of 10% bonds. The bonds mature in 20 years and interest is payable each January 1 and July 1. The bonds were issued at a price to yield the investors 12%. Dayton Inc. records interest at the effective interest rate.
Question 1: Determine Dayton Inc.’s income tax expense and net income for the year ended December 31, 2009
Question 2: Determine Dayton Inc.’s interest expense for the year ended December 31, 2009.
Question 3. Prepare the long-term liabilities section of Dayton Inc.’s December 31, 2009, balance sheet.