Question 1
Lancos Company commenced operations at the beginning of 2024. The following information is relevant to this company.
i. Pretax financial income for Lancos Company in 2024 is £105,000.
ii. The tax rate for 2024 and subsequent years is 20%.
iii. Differences between the 2024 income statement and tax return are listed below:
1) Warranty expense accrued for financial reporting purposes amounts to £7,200. Warranty deductions per the tax return amount to £2,600.2) Gross profit on a construction contract is recognised as £95,000 for financial reporting purposes. However, for tax purposes, the gross profit amounts to £69,000.3) Depreciation of property, plant, and equipment (PP&E) for financial reporting purposes amounts to £61,000. Depreciation for PP&E assets amounts to £83,000 for the tax return.4) Interest revenue recognized on an investment in municipal bonds is tax-exempt and amounts to £1,800.
iv. Taxable income is expected for the next few years.
Instructions:
a. Calculate taxable income of Lancos Company for 2024.
b. Calculate the deferred taxes at 31 December 2024, that relate to the temporary differences described above. Please appropriately label them as deferred tax asset or liability.
c. Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2024.
d. Prepare the income tax expense section of the income statement, beginning with “Income before income taxes”.
Question 2
Lanco Group is a construction company and on 1 January 2024, it sold its machine to Northwest Capital for £360,000. The carrying amount of themachine on Lanco Group’s book is £300,000. Lanco Group immediately leased the machine back from Northwest Capital under the following conditions.
The term of the lease is 5 years. The lease agreement is non-cancellable, requiring equal rental payments of £50,000 at the end of each year, beginning 31 December 2024.
The lease contains no renewal or purchase options. The machine reverts to Northwest Capital at the termination of the lease. Northwest Capital can use the machine for other purposes.
The machine has a fair value of £360,000 on 1 January 2024, and an estimated remaining economic life of 10 years.
The annual payments assure the lessor an 8% return.
Instructions:
a. Has the control of the machine passed to Northwest Capital?
b. What are the entries that Lanco Group should make to record the sale and leaseback transaction?
c. What are the entries that Lanco Group should make for the first two years of the lease?