946
SECTION 3
Liabilities and Shareholders' Equity
E 16-3
Taxable income
given; calculate
deferred tax
liability
• LO16-1
Ayres Services acquired an asset for $80 million in 2018. The asset is depreciated for financial reporting purposes
over four years on a straight-line basis (no residual value). For tax purposes the asset's cost is depreciated by
MACRS. The enacted tax rate is 40%. Amounts for pretax accounting income, depreciation, and taxable income
in 2018, 2019, 2020, and 2021 are as follows:
($ in millions)
2018
2019
2020
2021
Pretax accounting income
Depreciation on the income statement
Depreciation on the tax return
Taxable income
$330
20
(25)
$325
$350
20
(33)
$337
$365
20
(15)
$370
$400
20
(7)
$413
Required:
For December 31 of each year, determine (a) the temporary book-tax difference for the depreciable asset and (b)
the balance to be reported in the deferred tax liability account.
E 16-4
Temporary
difference:
income tax
payable given
L016-2
In 2018, DFS Medical Supply collected rent revenue for 2019 tenant occupancy. For income tax reporting, the rent
is tared when collected. For financial statement reporting, the rent is recorded as deferred revenue and then recog-
nized as income in the period tenants occupy the rental property. The deferred portion of the rent collected in 2018
amounted to $300,000 at December 31, 2018. DFS had no temporary differences at the beginning of the year
Required:
Assuming an income tax rate of 40% and 2018 income tax payable of $950.000, prepare the journal entry to record
income taxes for 2018.
Lance Lawn Services reports warranty expense by estimating the amount that eventually will be pala
E 16-5
LUI
Stock options
exercise;
expirations
LO19-2
options were granted for 40 million $1 par common shares. The exercise price is the MLL PIILU
date—$8 per
share. Options cannot be exercised prior to January 1, 2020, and expire December 31, 2024. The fair
value of the 40 million options, estimated by an appropriate option pricing model, is $1 per option.
Required:
1. Determine the total compensation cost pertaining to the incentive stock option plan.
2. Prepare the appropriate journal entry to record compensation expense on December 31, 2018.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2019.
4. Prepare the appropriate journal entry to record the exercise of 75% of the options on March 12, 2020, when
the market price is $9 per share.
5. Prepare the appropriate journal entry on December 31, 2024, when the remaining options that have vested
expire without being exercised.
E 19-9
Stock options;
exercise
LO19-2
SSG Cycles manufactures and distributes motorcycle parts and supplies. Employees are offered a variety of share-
based compensation plans. Under its nonqualified stock option plan, SSG granted options to key officers on
January 1, 2018. The options permit holders to acquire 12 million of the company's $1 par common shares for
$11 within the next six years, but not before January 1, 2021 (the vesting date). The market price of the shares
on the date of grant is $13 per share. The fair value of the 12 million options, estimated by an appropriate option
pricing model, is $3 per option.
Required:
1. Determine the total compensation cost pertaining to the incentive stock option plan.
2. Prepare the appropriate journal entries to record compensation expense on December 31, 2018, 2019, and 2020.
3. Record the exercise of the options if all of the options are exercised on May 11, 2022, when the market price
is $14 per share.
E 19-10
Employee share
purchase plan
LO19-3
In order to encourage employee ownership of the company's $1 par common shares, Washington Distribution
permits any of its employees to buy shares directly from the company through payroll deduction. There are no
brokerage fees and shares can be purchased at a 15% discount. During March, employees purchased 50,000 shares
at a time when the market price of the shares on the New York Stock Exchange was $12 per share.
Required:
Prepare the appropriate journal entry to record the March purchases of shares under the employee share
purchase plan.
19-11
Tesla Motor's disclosure notes for the year ending December 31, 2015, included the following regarding its
$0.001 par common stock:
LUI
Stock options
exercise;
expirations
LO19-2
options were granted for 40 million $1 par common shares. The exercise price is the MLL PIILU
date—$8 per
share. Options cannot be exercised prior to January 1, 2020, and expire December 31, 2024. The fair
value of the 40 million options, estimated by an appropriate option pricing model, is $1 per option.
Required:
1. Determine the total compensation cost pertaining to the incentive stock option plan.
2. Prepare the appropriate journal entry to record compensation expense on December 31, 2018.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2019.
4. Prepare the appropriate journal entry to record the exercise of 75% of the options on March 12, 2020, when
the market price is $9 per share.
5. Prepare the appropriate journal entry on December 31, 2024, when the remaining options that have vested
expire without being exercised.
E 19-9
Stock options;
exercise
LO19-2
SSG Cycles manufactures and distributes motorcycle parts and supplies. Employees are offered a variety of share-
based compensation plans. Under its nonqualified stock option plan, SSG granted options to key officers on
January 1, 2018. The options permit holders to acquire 12 million of the company's $1 par common shares for
$11 within the next six years, but not before January 1, 2021 (the vesting date). The market price of the shares
on the date of grant is $13 per share. The fair value of the 12 million options, estimated by an appropriate option
pricing model, is $3 per option.
Required:
1. Determine the total compensation cost pertaining to the incentive stock option plan.
2. Prepare the appropriate journal entries to record compensation expense on December 31, 2018, 2019, and 2020.
3. Record the exercise of the options if all of the options are exercised on May 11, 2022, when the market price
is $14 per share.
E 19-10
Employee share
purchase plan
LO19-3
In order to encourage employee ownership of the company's $1 par common shares, Washington Distribution
permits any of its employees to buy shares directly from the company through payroll deduction. There are no
brokerage fees and shares can be purchased at a 15% discount. During March, employees purchased 50,000 shares
at a time when the market price of the shares on the New York Stock Exchange was $12 per share.
Required:
Prepare the appropriate journal entry to record the March purchases of shares under the employee share
purchase plan.
19-11
Tesla Motor's disclosure notes for the year ending December 31, 2015, included the following regarding its
$0.001 par common stock:
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