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    Accounting for capital lease, deferred tax, bond issuance

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    The long-term liabilities section of Dayton Inc.'s December 31, 2008, balance sheet included the
    following:

    a. A capital lease liability with 20 remaining lease payments of$12,300 each, due annually on January 1:
    Lease liability $93,555
    Less current portion 2,945
    $90,610
    The incremental borrowing rate at the inception of the lease was 11.7% and the lessor's implicit rate,
    which was known by Dayton Inc., was 10.5%.

    b. A deferred income tax liability due to a single temporary difference. The only difference between
    Dayton Inc.'s taxable income and pretax accounting income is depreciation on a machine acquired on
    January 1, 2008, for $617,500. The machine's estimated useful life is five years, with no salvage value.
    Depreciation is computed using the straight-line method for financial reporting purposes and the
    MACRS method for tax purposes. Depreciation expense for tax and financial reporting purposes for 2009
    through 2012 is as follows:

    Year MACRS Depreciation Straight line Depreciation Difference
    2009 197,600 123,500 74,100
    2010 118,560 123,500 -4,940
    2011 71,136 123,500 -52,364
    2012 71,136 123,500 -52,364
    The enacted federal income tax rates are 35% for 2008 and 40% for 2009 through 2012. For the year
    ended December 31, 2009, Dayton Inc.'s income before income taxes was $1,120,000.

    c. On July 1, 2009, Dayton Inc. issued $900,000 of 10% bonds. The bonds mature in 20 years and interest
    is payable each January 1 and July 1. The bonds were issued at a price to yield the investors 12%. Dayton
    Inc. records interest at the effective interest rate.

    1. Determine Dayton Inc.'s income tax expense and net income for the year ended December 31, 2009

    2. Determine Dayton Inc.'s interest expense for the year ended December 31, 2009.

    3. Prepare the long-term liabilities section of Dayton Inc.'s December 31, 2009, balance sheet.

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