Tax Accounting (Schedule M) and Lease Accounting ASC 842

ABC Company
Comparative Income Statement – books vs. taxable income
For the year ended December 31, 2024
(all amounts are in USD)
#1: Please enter the amounts for all schedule M’s to determine the taxable income for the Company given t
#2: What is 2024 Taxable Income:
etermine the taxable income for the Company given the information in the balance sheet information and additional
Year Ended
31-Dec-24
Per Books Schedule M’s
Sales
Cost of sales
Cost of sales
Change in obsolete inventory reserve
Net cost of sales
10,000,000
Gross profit
3,982,000
Operating expenses:
Salaries
Payroll Benefits
Rent
Utilities (gas, electricity, water)
Repairs & Maintenance
Business meals
Staff meals
Recruitment / training / relocation
Insurance
Promotion & advertising
Repairs & Maintenance
(Gain) Loss on Disposal of Assets
Depreciation
Bad Debt Expense
Professional Fees
Bank charges
Realized Foreign Currency Losses (Gains)
Unrealized Foreign Currency Losses (Gains)
Penalties
Interest Expense
Interest (Income)
Total operating expenses
1,950,000
500,000
95,500
20,000
15,000
1,000
500
9,500
18,500
3,200
5,000
(3,500)
19,300
5,000
19,800
2,400
45,000
(39,500)
3,200
43,200
(23,400)
2,689,700
Net Income
6,000,000
18,000
6,018,000
1,292,300
–
tion and additional
Year Ended
31-Dec-24
Per Tax
10,000,000
6,000,000
18,000
6,018,000
3,982,000
1,950,000
500,000
95,500
20,000
15,000
1,000
500
9,500
18,500
3,200
5,000
(3,500)
19,300
5,000
19,800
2,400
45,000
(39,500)
3,200
43,200
(23,400)
2,689,700
1,292,300
ABC Company
Comparative Balance Sheet
As of 31 December 2023 and 31 December 2024
(all amounts are in USD)
Assets:
Cash and cash equivalents
Accounts and notes receivable
Allowance for doubtful accounts
Net accounts and notes receivable
Inventories
Obsolete inventory reserve
Inventories, net
Prepaid expenses and other current assets
Total current assets
PP&E placed in service at cost
Accumulated depreciation
Net PP&E placed in service
Investment in subsidiary (at Historical Cost)
Goodwill
Total assets
Liabilities
Accounts payable
Accrued expenses (See detailed schedule)
Debt
Accrued current taxes
Deferred tax liabilities
Total Liabilities
Stockholders equity:
Paid in capital
Retained earnings:
Beginning balance:
Net income
Ending balance
Total stockholders equity
Total liabilities & stockholders equity
31-Dec-23
31-Dec-24
55,000
100,000
190,000
(13,000)
177,000
250,000
(10,000)
240,000
950,000
(12,000)
938,000
1,300,000
(30,000)
1,270,000
20,000
1,190,000
40,000
1,650,000
1,000,000
(460,000)
540,000
1,200,000
(450,000)
750,000
1,000,000
100,000
2,830,000
1,000,000
100,000
3,500,000
30,000
25,000
1,893,000
20,000
23,000
1,991,000
22,000
29,000
1,285,200
15,000
17,500
1,368,700
10,000
10,000
787,000
42,000
829,000
829,000
1,292,300
2,121,300
839,000
2,131,300
2,830,000
–
3,500,000
–
ABC Company
For the year ended December 31, 2024
(all amounts in USD)
Accrued liabilities detail & payment schedule:
Accrued Liabilities
Payroll
Utilities
Interest Expense
Professional Fees
Accrual
Balance as of
31-Dec-24
19,000
2,000
3,000
5,000
29,000
Loss/(gain) on disposal of fixed assets:
Loss/(gain) per Books
Loss/(gain) per Tax
Difference
UNICAP rollforward:
Capitalized UNICAP Costs – Current Year Balance
Capitalized UNICAP Costs – Prior Year Balance
Difference
Depreciation expense:
Book Depreciation
Tax Depreciation
Difference
Amount of
Accrual Paid by
15-Mar-25
16,000
3,000
19,000
Amount of
Accrual Paid by
15-Sep-25
3,000
2,000
5,000
(3,500)
(1,000)
(2,500)
80,000
75,000
5,000
19,300
11,000
8,300
Amount of
Not Paid by
15-Sep-25
5,000
5,000
Facts:
– The Company entered into a leased space on January 1, 2020. Base rent per the agreement with the lessor is $1
beginning of each month, increasing 3% annually.
– The lease term is 5 years. The lease has a 5-year renewal option under similar terms, (3% increase annually) how
has determined it is not reasonably certain to exercise the option.
– The lessor provided an incentive for $60K and the Company was required to provide the lessor with a $100K refun
– The Company’s risk free rate as of 1/1/2020 is 2.8% and its risk free rate as of 1/1/2022 is 3%.
– The Company is anticipated to adopt ASC 842 on January 1, 2022, utilizing the modified retrospective transition a
currently accounts for its leases under ASC 840.
Assignment:
The Corporate Controller has requested you do the following:
1- Prepare two journal entries, one to record day 1 transition accounting, and another to illustrate how the Company
the effects of this lease on a go-forward basis. Please provide your supporting calculations, making sure to include
schedules that detail the life of the lease.
2- Please prepare a short memo documenting the effects of adopting ASC 842 for the Company, ensuring to includ
relevant accounting guidance. In your memo, please describe the effects of adoption on the Balance Sheet, Income
Statement of Cash Flows – please indicate how each financial statement caption will be impacted. Note, assume thi
lease held by the Company on the date of adoption.
ment with the lessor is $100K paid at the
% increase annually) however, the Company
essor with a $100K refundable deposit.
s 3%.
retrospective transition approach. It
ustrate how the Company should recognize
, making sure to include amortization
mpany, ensuring to include reference to
e Balance Sheet, Income Statement, and
pacted. Note, assume this lease is the only