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ACCT-4021EL Lecture Notes - Lecture 7: Canada Savings Bond, Property Income, Passive Income

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plumbee368
5 Nov 2018
School
Laurentian
Department
Accounting
Course
ACCT-4021EL
Professor
Kayla Levesque

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Document Summary

Income from property is what is known as passive income. It is generally earned from an investment of capital of some type that generates a return without the investor having to actively earn the income, hence passive income. It includes the following types of investment income: interest income, dividend income, royalty income, and rental property income. Corporations, partnerships and certain trusts must use the accrual method for including interest in income from property. Individuals must include interest income on an investment contract on every anniversary (yearly) of that contract, to the extent that it has not previously been included in income. It does not matter whether the interest income (cash) has been received or not! For example, assume a person buys a ,000 canada savings bond (csb) on oct. 31, 2016, paying 3% interest. For an individual, no interest would be claimed in the year 2016.

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Related Questions

2.
A. Prepare a multiple-step income statement for the year endedDecember 31, 2016, concluding with earnings per share. In computingearnings per share, assume that the average number of common sharesoutstanding was 100,000 and preferred dividends were $100,000.(Round earnings per share to the nearest cent.)
• Refer to the Chart of Accounts for exact wording of accounttitles.
•

Refer to the Labels and Amount Descriptions for exact wording oftext entries.

B. Prepare a retained earnings statement for the year endedDecember 31, 2016.
• Refer to the Chart of Accounts for exact wording of accounttitles.
• Refer to the Labels and Amount Descriptions for exact wordingof text entries.
• You will need to enter the word “Less” or “Add” asnecessary.
C. Prepare a balance sheet in report form as of December 31, 2016.You are not required to present the details of Preferred and CommonStock (i.e., number of shares authorized, issued and outstanding).
• Refer to the Chart of Accounts for exact wording of accounttitles.
• Refer to the Labels and Amount Descriptions for exact wordingof text entries.
• “Less” , “Deduct”, “Add” and colons will appearautomatically.
• Available-for-sale investments should be reported as a singleasset on the balance sheet, regardless of how many accounts existin the ledger for such assets.
• Recall that current assets are to be reported in order ofliquidity. Available-for-sale investments are considered to be moreliquid that accounts receivable.
• Report fixed assets and paid-in capital accounts inaccount-number order.
• Omit the description of bonds and stocks (i.e., percentagerates, due date, number of shares, etc.)
• Enter all amounts as positive numbers, with one exception: Ifan unrealized loss has occurred, it must be reported as a negativeamount on the balance sheet.
Labels

In CengageNOW, a Label is a text entry that does not have anamount associated with it.
Current assets
Current liabilities
December 31, 2016
For the Year Ended December 31, 2016
Intangible assets
Investments
Less dividends
Long-term liabilities
Operating expenses
Other income and expenses
Paid-in capital
Add dividends
Property, plant, and equipment
Amount Descriptions

In CengageNOW, an Amount Description is a text entry other thanan Account that has an amount associated with it.
Available-for-sale investments
Decrease in retained earnings
Excess of issue price over par
Gross profit
Income before income tax
Income from operations
Increase in retained earnings
Miscellaneous selling expense
Net income
Net loss
Retained earnings, January 1, 2016
Retained earnings, December 31, 2016
Sales commissions
Sales salaries expense
Store supplies expense
Total administrative expenses
Total assets
Total (before treasury stock)
Total current assets
Total current liabilities
Total liabilities
Total liabilities and stockholders’ equity
Total long-term liabilities
Total investments
Total operating expenses
Total paid-in capital
Total property, plant, and equipment
Total selling expenses
Total stockholders’ equity
Unamortized premium

Unamortized discount

Income Statement data:
Advertising expense $ 150,000
Cost of merchandise sold 3,700,000
Delivery expense 30,000
Depreciation expense-office buildings and equipment 30,000
Depreciation expense-store buildings and equipment 100,000
Dividend revenue 4,500
Gain on sale of investments 4,980
Income from Pinkberry Co. investment 76,800
Income tax expense 140,500
Interest expense 21,000
Interest revenue 2,720
Miscellaneous administrative expense 7,500
Miscellaneous selling expense 14,000
Office rent expense 50,000
Office salaries expense 170,000
Office supplies expense 10,000
Sales 5,254,000
Sales commissions 185,000
Sales salaries expense 385,000
Store supplies expense 21,000

Retained earnings and balance sheet data:
Accounts payable $ 194,300
Accounts receivable 545,000
Accumulated depreciation—office buildings and equipment 1,580,000
Accumulated depreciation—store buildings and equipment 4,126,000
Allowance for doubtful accounts 8,450
Available-for-sale investments (at cost) 260,130
Bonds payable, 5%, due 2024 500,000
Cash 246,000
Common stock, $20 par
(400,000 shares authorized; 100,000 shares issued, 94,600outstanding) 2,000,000
Dividends:
Cash dividends for common stock 155,120
Cash dividends for preferred stock 100,000
Goodwill 500,000
Income tax payable 44,000
Interest receivable 1,125
Investment in Pinkberry Co. stock (equity method) 1,009,300
Investment in Dream Inc. bonds (long term) 90,000
Merchandise inventory (December 31, 2016),
at lower of cost (FIFO) or market 778,000
Office buildings and equipment 4,320,000
Paid-in capital from sale of treasury stock 13,000
Excess of issue price over par:
-Common 886,800
-Preferred 150,000
Preferred 5% stock, $80 par
(30,000 shares authorized; 20,000 shares issued) 1,600,000
Premium on bonds payable 19,000
Prepaid expenses 27,400
Retained earnings, January 1, 2016 9,319,725
Store buildings and equipment 12,560,000
Treasury stock
(5,400 shares of common stock at cost of $33 per share) 178,200
Unrealized gain (loss) on available-for-sale investments (6,500)
Valuation allowance for available-for-sale investments (6,500)

none

X

Chart of Accounts

CHART OF ACCOUNTS
Equinox Products Inc.
General Ledger
ASSETS
110 Cash
121 Accounts Receivable
122 Allowance for Doubtful Accounts
131 Merchandise Inventory
132 Interest Receivable
133 Prepaid Expenses
141 Investments-Solstice Corp.
142 Investment in Pinkberry Co. Stock
143 Investment in Dream Inc. Bonds
144 Valuation Allowance for Available-for-Sale Investments
181 Store Buildings and Equipment
182 Accumulated Depreciation-Store Buildings and Equipment
183 Office Buildings and Equipment
184 Accumulated Depreciation-Office Buildings and Equipment
191 Goodwill
LIABILITIES
211 Accounts Payable
221 Income Tax Payable
225 Cash Dividends Payable
251 Bonds Payable
252 Discount on Bonds Payable
253 Premium on Bonds Payable
EQUITY
311 Preferred Stock
312 Paid-in Capital in Excess of Par-Preferred Stock
321 Common Stock
322 Paid-in Capital in Excess of Par-Common Stock
331 Retained Earnings
341 Cash Dividends
351 Treasury Stock
352 Paid-in Capital from Sale of Treasury Stock
361 Unrealized Gain (Loss) on Available-for-Sale Investments
REVENUE
410 Sales
611 Dividend Revenue
621 Interest Revenue
631 Income from Pinkberry Co.
641 Gain on Sale of Investments
EXPENSES
511 Cost of Merchandise Sold
512 Bad Debt Expense
520 Sales Salaries Expense
521 Sales Commissions
522 Office Salaries Expense
531 Advertising Expense
532 Delivery Expense
537 Store Supplies Expense
538 Office Supplies Expense
539 Office Rent Expense
541 Income Tax Expense
551 Depreciation Expense-Store Equipment
552 Depreciation Expense-Office Equipment
591 Miscellaneous Selling Expense
592 Miscellaneous Administrative Expense
710 Interest Expense
731 Loss on Sale of Investments

none

X

Labels and Amount Descriptions

Labels

In CengageNOW, a Label is a text entry that does not have anamount associated with it.
Current assets
Current liabilities
December 31, 2016
For the Year Ended December 31, 2016
Intangible assets
Investments
Less dividends
Long-term liabilities
Operating expenses
Other income and expenses
Paid-in capital
Add dividends
Property, plant, and equipment
Amount Descriptions

In CengageNOW, an Amount Description is a text entry other thanan Account that has an amount associated with it.
Available-for-sale investments
Decrease in retained earnings
Excess of issue price over par
Gross profit
Income before income tax
Income from operations
Increase in retained earnings
Miscellaneous selling expense
Net income
Net loss
Retained earnings, January 1, 2016
Retained earnings, December 31, 2016
Sales commissions
Sales salaries expense
Store supplies expense
Total administrative expenses
Total assets
Total (before treasury stock)
Total current assets
Total current liabilities
Total liabilities
Total liabilities and stockholders’ equity
Total long-term liabilities
Total investments
Total operating expenses
Total paid-in capital
Total property, plant, and equipment
Total selling expenses
Total stockholders’ equity
Unamortized premium
Unamortized discount

61-David R. and Ella M. Cole (ages 39 and 38,respectively) are husband and wife who live at 1820 Elk Avenue,Denver, CO 80202. David is a regional sales manager for WrenIndustries, a national wholesaler of plumbing and heating supplies,and Ella is a part-time dental hygienist for a chain of dentalclinics.

David is classified by Wren as a statutory employee withcompensation for 2014 (based on commissions) of $95,000. He isexpected to maintain his own office and pay for all businessexpenses from this amount. Wren does not require him to render anyaccounting as to the use of these funds. It does not withholdFederal and state income taxes but does withhold and account forthe payroll taxes incurred (e.g., Social Security and Medicare).The Coles are adequately covered by Wren’s noncontributory medicalplan but have chosen not to participate in its §401(k) retirementplan.

David’s employment-relatedexpenses for 2014 are summarized below:

Airfare $8,800

Lodging 5,000

Meals (during travelstatus) 4,800

Entertainment 3,600

Ground transportation (e.g.,limos, rental cars, and taxis) 800

Businessgifts 900

Office supplies (includepostage, overnight delivery, andcopying) 1,500

The entertainment involvedbusiness meals for purchasing agents, store owners, and buildingcontractors. The business gifts consisted of $50 gift certificatesto a national restaurant. These were sent by David during theChristmas holidays to 18 of his major customers.

In addition, David drove his2012 Ford Expedition 11,000 miles for business and 3,000 forpersonal use during 2014. He purchased the Expedition on August 15,2011, and has always used the automatic (standard) mileage methodfor tax purposes. Parking and tolls relating to business use total$340 in 2014.

When the Coles purchased their present residence inApril 2011, they devoted 450 of the 3,000 square feet of livingspace to an office for David. The property cost $440,000 ($40,000of which is attributable to the land) and has since appreciated invalue. Expenses relating to the residence in 2014 (except formortgage interest and property taxes; see below) are asfollows:

Repairs andmaintenance900

Painting office area; arearugs and plants (in the office)1,800

In terms of depreciation, theColes use the MACRS percentage tables applicable to 39-yearnonresidential real property. As to depreciable property (e.g.,office furniture), David tries to avoid capitalization and useswhatever method provides the fastest write-off for taxpurposes.

Ella works part-time as a substitute for whicheverhygienist is ill or on vacation or when one of the clinics isparticularly busy (e.g., prior to the beginning of the schoolyear). Besides her transportation, she must provide and maintainher own uniforms. Her expenses for 2014 appear below.

State and city occupationallicenses380

Professional journals andmembership dues in American Dental

HygieneAssociation340

Correspondence study course(taken online) dealing with teeth whitening

Ella’s salary for the year is$42,000, and her Form W-2 for the year shows income taxwithholdings of $4,000 (Federal) and $1,000 (state) and the properamount of Social Security and Medicare taxes. Because Ella is apart-time employee, she is not included in her employer’s medicalor retirement plans.

Besides the items already mentioned, the Coles had thefollowing receipts during 2014.

Interest income-

State of Colorado generalpurpose bonds$2,500

IBM bonds800

Wells Fargo BankCD1,000$4,500

Federal income tax refund foryear 2013510

Life insurance proceeds paidby Eagle Assurance

Inheritance of savingsaccount from Sarah Cole 50,000

Sales proceeds from twoATVs9,000

For several years, theColes’s household has included David’s divorced mother, Sarah, whohas been claimed as their dependent. In late November 2014, Sarahhad a life insurance policy and savings account (with David as thedesignated beneficiary of each). In 2013, the Coles purchased twoATVs for $14,000. After several near mishaps, they decided that thesport was too dangerous. In 2014, they sold the ATVs to theirneighbor.

Additional expenditures for 2014 include:

Funeral expenses forSarah$4,500

Real property taxes onpersonal residence$6,400

Colorado state income tax due(paid in April 2014

For tax year2013)3106,710

Mortgage interest on personalresidence6,600

Paid churchpledge2,400

Contributions to traditionalIRAs to Ella and David

($5,500 +$5,500)11,000

In 2014, the Coles madequarterly estimated tax payments of $1,400 (Federal) and $500(state) for a total of $5,600 (Federal) and $2,000(state).

Part 1- TaxComputation

Using the appropriate formsand schedules, compute the Coles’s Federal income tax for 2014.Disregard the alternative minimum tax (AMT) and various educationcredits as these items are not discussed until later in the text(Chapters 12 and 15).

Relevant Social Securitynumbers are:

DavidCole123-45-6788

EllaCole123-45-6787

SarahCole123-45-6799

The Coles do not want tocontribute to the Presidential Election Campaign Fund. Also, theywant any overpayment of tax refunded to them and not applied towardnext year’s tax liability. Suggested software: H&R BLOCK TaxSoftware.

Part 2-Follow-UpAdvice

Ella has always wanted topursue a career in nursing. To this end, she has earned asubstantial number of college credits on a part-time basis. WithSarah no longer requiring home care, Ella believes she can nowcomplete her degree by attending college on a full-timebasis.

David would like to know howElla’s plans will affect her income tax position.

Specifically, he wants toknow:

How much Federal income tax they will save if Ella quitsher job.

Any tax benefits that might be available from cost ofthe education.

Write a letter to Davidaddressing these concerns. Note: In making your projections, assumethat David’s salary and expenses remain the same. Also disregardany consideration of the various educational tax credits as theseare not discussed until Chapter 12.

Please post the entries into the following ledger accounts

On December 1, 2015, John and Patty Driver formed a corporation called Susquehanna Equipment Rentals. The new corporation was able to begin operations immediately by purchasing the assets and taking over the location of Rent-It, an equipment rental company that was going out of business. The newly formed company uses the following accounts:

Cash Capital stock
Accounts receivable Retained earnings
Prepaid rent Dividends
Unexpired insurance Income summary
Office supplies Rental fees earned
Rental equipment Salaries expense
Accumulated depreciation: Rental equipment Maintenance expense
Notes payable Utilities expense
Accounts payable Rent expense
Interest payable Office supplies expense
Salaries payable Depreciation expense
Dividends payable Interest expense
Unearned rental fees Income taxes expense
Income taxes payable

The corporation performs adjusting entries monthly. Closing entries are performed annually on December 31. During December, the corporation entered into the following transactions:
Dec. 1

Issued to John and Patty Driver 20,000 shares of capital stock in exchange for a total of $200,000 cash.
Dec. 1

Purchased for $240,000 all of the equipment formerly owned by Rent-It. Paid $140,000 cash and issued a one-year note payable for $100,000. The note, plus all 12-months of accrued interest, are due November 30, 2016.
Dec. 1

Paid $12,000 to Shapiro Realty as three months’ advance rent on the rental yard and office formerly occupied by Rent-It.
Dec. 4

Purchased office supplies on account from Modern Office Co., $1,000. Payment due in 30 days. (These supplies are expected to last for several months; debit the Office Supplies asset account.)
Dec. 8

Received $8,000 cash as advance payment on equipment rental from McNamer Construction Company. (Credit Unearned Rental Fees.)
Dec. 12 Paid salaries for the first two weeks in December, $5,200.
Dec. 15

Excluding the McNamer advance, equipment rental fees earned during the first 15 days of December amounted to $18,000, of which $12,000 was received in cash.
Dec. 17

Purchased on account from Earth Movers, Inc., $600 in parts needed to repair a rental tractor. (Debit an expense account.) Payment is due in 10 days.
Dec. 23 Collected $2,000 of the accounts receivable recorded on December 15.
Dec. 26

Rented a backhoe to Mission Landscaping at a price of $250 per day, to be paid when the backhoe is returned. Mission Landscaping expects to keep the backhoe for about two or three weeks.
Dec. 26 Paid biweekly salaries, $5,200.
Dec. 27 Paid the account payable to Earth Movers, Inc., $600.
Dec. 28 Declared a dividend of 10 cents per share, payable on January 15, 2016.
Dec. 29

Susquehanna Equipment Rentals was named, along with Mission Landscaping and Collier Construction, as a co-defendant in a $25,000 lawsuit filed on behalf of Kevin Davenport. Mission Landscaping had left the rented backhoe in a fenced construction site owned by Collier Construction. After working hours on December 26, Davenport had climbed the fence to play on parked construction equipment. While playing on the backhoe, he fell and broke his arm. The extent of the company’s legal and financial responsibility for this accident, if any, cannot be determined at this time. ( Note: This event does not require a journal entry at this time, but may require disclosure in notes accompanying the statements.)
Dec. 29

Purchased a 12-month public-liability insurance policy for $9,600. This policy protects the company against liability for injuries and property damage caused by its equipment. However, the policy goes into effect on January 1, 2016, and affords no coverage for the injuries sustained by Kevin Davenport on December 26.
Dec. 31

Received a bill from Universal Utilities for the month of December, $700. Payment is due in 30 days.
Dec. 31

Equipment rental fees earned during the second half of December amounted to $20,000, of which $15,600 was received in cash.
Data for Adjusting Entries
a. The advance payment of rent on December 1 covered a period of three months.
b. The annual interest rate on the note payable to Rent-It is 6 percent.
c. The rental equipment is being depreciated by the straight-line method over a period of eight years.
d. Office supplies on hand at December 31 are estimated at $600.
e.

During December, the company earned $3,700 of the rental fees paid in advance by McNamer Construction Company on December 8.
f.

As of December 31, six days’ rent on the backhoe rented to Mission Landscaping on December 26 has been earned.
g.

Salaries earned by employees since the last payroll date (December 26) amounted to $1,400 at month-end.
h.

It is estimated that the company is subject to a combined federal and state income tax rate of 40 percent of income before income taxes (total revenue minus all expenses other than income taxes). These taxes will be payable in 2016.