Solution 1. Inferring cash flows from depreciation disclosures Proceeds from sale of PPE = $14,000 Cash BB Purchase of PPE –230,000 PPE at cost –Acc Depr 400,000 180,000 230,000 Depreciation 50,000 Sale of PPE 14,000 EB RE –80,000 –70,000 550,000 160,000 –50,000 Depr exp 4,000 Gain 2. TJ Company a. Depreciation for financial statements is (2,000,000 – 500,000)/10 = 150,000 per year. Tax depreciation is 2,000,000 * ratio for that year. Income before depr Depr. exp (finl report) Earnings b4 tax (EBT) 1996 1,000,000 –150,000 850,000 1997 1,000,000 –150,000 850,000 1998 1,000,000 –150,000 850,000 1999 1,000,000 –150,000 850,000 2000 1,000,000 –150,000 850,000 Income before depr Depr. deduction (tax) Taxable income 1,000,000 –666,600 333,400 1,000,000 –889,000 111,000 1,000,000 –296,200 703,800 1,000,000 –148,200 851,800 1,000,000 0 1,000,000 b. The sale will generate a loss of $250,000 for financial reporting purposes. Ignoring taxes, the entry would be: Cash Balance b4 sale Sale of PPE 1,000,000 PPE at cost –Acc Depr 2,000,000 750,000 –2,000,000 –750,000 RE 250,000 Loss For tax purposes, there would be a gain of 1,000,000 since the asset is been fully depreciated on the tax books at the time of sale. 3. Levy Company and Guyer Books a. Guyer Books Balance Income Sheet Value Effect Investment classified as: Trading securities $9,000 $6,600 Available-for-sale $9,000 0 Levy Co. Balance Income Sheet Value Effect $9,000 $9,000 $6,600 $6,600 b. Guyer and Levy’s income statements would differ only if the security is classified as available for sale. The reason: unrealized gains for AFS securities flow directly to the stockholders’ equity section (other equity). Guyer’s gains remain unrealized at December 31, whereas Levy realized the gain by selling on December 31 (and then repurchasing). Only when AFS securities are sold is the income statement affected. 4. O’Leary Enterprises Houser and Miller are classified as trading; Nordic is AFS. The balance sheet equation entries are as follows: MS MSadj MS MSadj Cash (Trdng) (Trdng) (AFS) (AFS) = DTL OE RE Purch Houser –1980 1980 Purch Miller –7200 7200 Purch Nordic –11900 11900 Div received 175 175 Tax exp –52.5 –52.5 Sales of securities: Houser 1500 –1320 +180 Tax –54 –54 Miller 2700 –3600 –900 Tax 270 270 Nordic 13775 –10150 3625 Tax –1087.5 –1087.5 Dec 31 Mark-to-market adjustments: Houser 90 90 Tax 27 –27 Miller –450 –450 * Tax –135 135 Nordic 500 500 Tax 150 –150 Dec 31 Bal –3854 4260 –360 1750 500 42 350 1904 * For this assignment, tax benefit on unrealized loss from Trading Securities rate, may be recorded as DTA or –DTL.