Reduction is Capital Lease Liability

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noseykibitzer

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Somebody help me clarify

let's say I have a, 10%, 10 year capital lease with PV of obligation = $3,600,000, with guaranteed residual value of 600,000, and lease payment of 500,000

So the interest expense in the first year = 360,000

Depreciation expense = 3,600,000 - 600,000/10 = 300,000

Now my question is... the remaining portion of payment 500,000 - 360,000 = 140,000
goes to reduce the liability but why isn't this number also considered in addition to depreciation and interest expense when reporting the total lease related expense on the income statement? Thanks.
 
Because the rest of the amount is used to decrease lease liability. Its a BS amount, not IS amount.

Only the interest and deprecation expense for the lease is reported on IS for capital lease.

So for above example, the $500,000 would be for:

Debit:
Int Expense
Lease Liability
Credit - Cash.
 
Thanks dude...

Got another one that was freaking tricky...

12/31/01 ABC corp sold computer equipment on 4 year installment basis, total sale is $10,000,000, computers cost 6,000,000, with 25% paid at point of sale

- computers carry 2 year warranty estimated @ 600,000
- for reporting they recognize revenue at point of sale and expense at time of accrual
- for tax they recognize income when cash is received and is not permitted to recognize warranty expense until actual expense occurs
- Tax Rate is 30%

For year ended 12/31/01 ABC should show an increase in its tax-deferred

1) liability account of 720,000
2) asset liability 720,000
3) liability account of 900,000 and an increase in its tax-deferred asset account of 180,000
4) asset account of 900,000 and an increase in its tax-deferred account of 180,000

if you get this you are a tax god
 
Eh, this one's kind of confusing.

My guess:

Financial -
Sale - 10MM
Cost - 6MM
waranty Exp - 600K
NI - 3.4MM
Taxes - 1.02MM

Tax reporting:
Sale - 2.5MM
Cost - 1.5MM
No warranty exp
NI - 1MM
Taxes - 300K

Different - 720K - Liability? 1???

I don't think I have this right at all. :(
 
I got the same answer as you did b/c i forgot that a reported warranty without any or only a portion reported for taxes creates a deferred tax asset

So in this case "C" is the answer

Income Tax expense = 1,200,000

Income tax payable = 300,000

Creating a DTL of 900,000

Warranty portion would show a tax reduction(DTA) of 600,000 * .30 = 180,000, taxes payable are not reduced because no warranty expense has been incurred. So essentially you are recognizing the expense for reporting and not tax so you get DTA.

So I guess the trick is to treat them as separate items and remember that DTL and DTA do not net. I think if you can handle this one any tax question should be a breeze. At least i hope so.
 
Answer is 3:
3) liability account of 900,000 and an increase in its tax-deferred asset account of 180,000

Deferred tax asset (result in future cash savings) is created as warranty expense is recognised in Income statement but not considered in tax return
DTA=600,000*0.3=180,000

Deferred tax liability( result in future cash outflow) is created as only cash sales (2,500,000) is recognised in tax return, which reduces taxable income and tax payable. whereas financial statement recognises revenue at time of sale(10,000,000).
Income statement:
Revenue=10,000,000; computer Cost =6,000,000; gross profit=4000,000;
tax expense on income excluding warranty=4,000,000*0.3=1,200,000

Tax Return(Follows installment sales method of revenue recognition)
Revenue=2,500,000;Cost=1,500,000, taxable income=1,000,000,
tax payable=1,000,000*0.3=300,000
Deferred tax liability=tax expense -tax payable=1,200,000-300,000=900,000
 
Nosey -

Hm.I get it.

Ah, I guess i'm not a tax goddess :(



Edited 1 time(s). Last edit at Wednesday, May 3, 2006 at 04:03PM by CFAHouston.
 
CFAHouston Wrote:
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> what?


I'm just really confused by that and didn't know where to start...and you guys were all over that and a bag of chips. Nice one! I printed it out and am trying to work through it...getting caught up in the words though.
 
CFAHouston Wrote:
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> oh okay. No, it was cofusing.

Yeah, but now that I look at it...it could've been easily answered in 10 seconds if I would've just isolated the warranty expense portion and solved for the DTA, because it says that it could be recognized for income reproting purposes but not for tax reporting. Doing that simple DTA calculation, I could've immediately eliminated all three other answers, as long as I was clear that they had paid more on their taxes because taxable income was higher (versus being reduced already by the warranty expense on the IS).

I really need to look look for the short-cuts and to read between the lines on some of these, as valuable time and energy can be saved.

Great questions guys - keep 'em coming.
 
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