2.

Total Rent Revenue 25,000 x 5 = 125,000

Total Operating Costs (6,000 x 5 = 30,000)
Total Depreciation Expense (80,000)
Gain on sale of Machine 22,000 20,000 = 2000
NET INCOME 17,000

2.6

a) Present value of ordinary annuity ( I = 8%, n = 20)

10,000,000 x 9.81815 = 98,181,500

b) Present value of ordinary annuity ( I = 8%, n = 19)

10,000,000 x 9.6036 = 96,036,000

c) Present value of ordinary annuity ( I = 8%, n = 18)

10,000,000 x 9.37189 = 93,718,900

2.7

2.20

ASSETS = LIABILITIES + SHAREHOLDERS EQUITY

CC AOCI RE
a Cash 50,000 Common Stock 50,000
b Building 35,000 Note Payable 30,000
Cash 5,000
c Inventory 40,000 Account Payable 40,000
d Account Receivable 65,000 Sale Revenue 65,000
Inventory 30,000 COGS 30,000
e Cash 15,000 Compensation
Expense 15,000
f Cash 45,000
Account Receivable 45,000
g Cash 28,000 Account Payable 28,000
h Accumulate Depreciation
Depreciation 7,000 Expense 7,000
i Compensation Compensation
Payable 4,000 Expense 4,000
j Cash 2,400 Interest
Expense 2,400
Cash 1,440 Deferred Tax Tax Expense 1,440
Liability 1,200
 BOOK INCOME TAX INCOME
Sales 65,000 65,000
COGS (30,000) (30,000)
Compensation Expense (15,000 + 4,000 = 19,000) (15,000 + 4,000 = 19,000)
Interest Expense (2,400) (2,400)
Depreciation Expense (7,000) (10,000)
Income before tax 6,600 3,600
Tax (40%) (2,640) (1,440)
NET INCOME 3,960 2,160
Deferred Tax Liability 2,640 1,440 = 1,200

CASE 2.1

a) Total Tax Expense = Current Tax Expense + Deferred Tax Liability = 622.7 + 51.7 = 674.4
Book Tax > IRS Tax Book Income > Taxable Income
b) We have entry below
Current Tax Expense xxx
Tax deferred liability xxx
Cash xxx
This shows us that Tax deferred liability is a non-cash expense Addition to Net income
c) Suggesting a scenario
Startbucks might rent a retail place for its coffee shop for 5 years. But there will be no lease
payments for the first two years. Startbucks pay an annual rental payment of 10 mil beginning in
year 3. We have computation below:

d) Compensation expense accrued at the end of year is deductible when paid to related party.
While Startbuck reports an expense earlier for financial reporting. This temporary difference
causes a deferred tax asset because Startbucks has to pay tax obligation for Tax purpose much
more than for Reporting purpose.
Suggesting possioble reason: Startbucks may decrease the compensation expense by decreasing
the deferred compensation benefits.
e)
IRS FINANCIAL STATEMENT
Revenue received in advance Taxed when received Tax when earned
When Startbucks sells value cards, the taxable income will increase while the Book income still
remains (it will be initially deferred). Therefore, a deferred tax asset will appear.
f) A deferred tax asset represents future income tax benefits. The tax benefit will be realized only
if there is sufficient taxable income from which the deductible amount can be deducted. If the
deferred tax asset appears doubtful, a valuation allowance account is needed. So this increase
may come from the uncertainty of their realization.
g)
FINANCIAL STATEMENT IRS
Depreciation method Straight-line Accelerated
Annual Depreciation Expense Stable High in first year and low in
the latter
During first years, Book depreciation expense is lower than IRS depreciation expenses Tax
obligation for Tax purpose is lower tax obligation for book purpose a deferred tax liability
appears
Suggesting a reason: Startburcks has invested more money in depreciable assets such as
Buildings, equipment, machines.