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This 0 page Class Notes was uploaded by Odell Schimmel on Sunday November 1, 2015. The Class Notes belongs to ACC422 at Miami University taught by PhilipCottell in Fall. Since its upload, it has received 9 views. For similar materials see /class/233333/acc422-miami-university in Accounting at Miami University.
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Date Created: 11/01/15
Rose Office Equipment Deferred Taxes For the Year Ended 2006 Gross profit for financial accounting 2250000 Gross profit for tax accounting 450000 Revenue accrued before taxed 1800000 Warranty expense for financial accouting 430000 Warranty expense for tax accounting 130000 Expense accrued before deducted 300000 Enacted tax rate 35 Future Taxable Future Deductible Accounting Event Amount Pretax income Deferred Tax Deferred Tax Liabilitv Asset Noncurrent None Current Installment method 1800000 630000 Warranties 300000 105000 Total current 630000 105000 Permanent Items Municipal bond interest Insurance for executives Taxable income Because there is negative taxable income there will be an operating loss carryback or carryforward Because this is Rose39s first year in business no carryback is available Therefore there is a carryforward The carryforward is a future deductible ammount resulting in a deferred tax asset We will assume that it will not be used until beyond 2007 Operating loss carryforward 907000 Enacted tax rate 35 Noncurrent deferred tax asset 317450 69 Taxable Income 675000 1800000 00000 90000 8000 907000 Journal entry Provision for income taxes Current deferred tax asset Noncurrent deferred tax asset Current Deferred tax liability To record income taxes 207550 105000 317450 630000 Objectives At the end of this session students should 2 Have an enhanced awareness of why com anies hedge 2 Be able to define derivative as well as understand the four common types of derivatives and their uses as hedging instruments Hedging 2 Examples of Risk Exposures in the Cash Market otoPrice risk in commodities ozolnterest rate risk in lnvestmentsporrowmgs Foreign exchange rate risk in cross border investmentsborrowings or other anticipated transactions 2 How can these risk exposures be addressed Definition of Derivative A financial instrument or other contract with all of the following characteristics l lt nas one or more underlyng and one orrnore notional a s rpavrnel39ltprovlslol39ls or botn 2 lt requires no initial net investment or an initial net investrn ent tnat is srnallertnan would be required forothertvpes of contracts tnat would be expected to have a sirnilar response to cnanges in market factors net by a rneans outside tne contract orit provides fordellverv of an asset tnat puts tne recipient in a position not substantlallv dirrerent from net settlement Definition of Derivative Derivative Underlying Notional Amount Stock option stock price Number of shares Currency forward Exchange rate Number of currency units Commodity future Commodttl rice Number of commodity units interest rate swap interest index Dollar amount Fundamental Building Blocks of Derivatives 39239 Forwards thslcalFll lal lclal at Futures at Swaps 39239 Options 39 Calls 39 Puts Common Terminology 39239 Long position A lung pusitiuri makes money it priees increase and eenverseiyi ieses money it priees decrease 39239 Short position A snert pusitiuri makes money it priees decrease and eenverseiyi ieses money it priees increase Forward Contracts A contract that obligates one counterparty to buy and he other to sel a speci c underlying and notional amount at a speci c date in the future 7 A forward market exists fora multitude ofuriderlyirigs including agricultural and physical commodities currencies arid interest rates 7 Buyer 7 Seller 7 Settlement Maturity or Expiration e ContractSiZe 7 Forward Contract Price invoice Amount Value of a Purchased Forward Contract Long Position Prices Decline Prices Rise gt Value of a Sold FonNard Contract Short Position Losses 4 Prices Decline Prices Rise gt Forward Contract Characteristics at Terms and conditions are negotiated 39239 llliquid market 39239 Credit risk at Un regulated market not exch an getraded Forward Contract Closing Out a Forward Contract e Entering into an offsetting transaction 7 Making taking physical delivery 7 Casn settlement Futures Contract Standardized Forward Contract 7 All proyisions in tne untram are standardized Exceptfurtne price 7 Liqui et 7 Regulated market excnangetraded 7 Examples 7sugar 7cuid Curn 7Ltsweetcrude 7Ven oats 7Heating Elli 7Nst index Soybeans 7unieaded gas 7Eiectncity Lumber 7Naturaigas 7Prupane Futures Contract Standardized Terms at The standard terms of a futures contract typically include 7 A description of tne underiying asset 7 Quantity and ouaiity of tne underiying asset 7 Time and piace of deiiyery 7 Metnod of ament Swap Contract Characteristics Contractual agreement between two parties Payments based upon price fiuctuations in an underlying Notional principai amount7 nypotneticai pnncipai amount upon wnicn casn fiows are caicuiated Swap Contract Typicaiiyi one oftne casn fiow streams is xed and tne otneris referenced to an index tnatyanes oyertime interim payments are generaiiy netted witn tne difference being paid by one party to tne otner Swap Contract Fixed Price Payor A swap contract is essentiaiiy a series of forward contracts fr Loss 39 Mam um um mm 2 i ii i pnct Swap Contract w Swaps have several advantages including lFlegtltibilil 2Low transaction costs Swap Contract 39239 Swaps have several disadvantages including i Locate appropriate counterparty 2 lllquldlly 3 Credit l lSk Example Summary Swap Term Sheet ripatihg Price Payur Fixed Rate investment Bank 2 Company 3 r mcmth LlElOR ZEI miiiiph octpper zuua thmugh Septemperzui 7 El Option Contracts Call uptiph optiph to buy F39ut uptiuri Opticiri to sell Buyer Holder hasthe righttp Exercise the Dptl n Buyer pays premiumtu acquire right Seller Writer is ppiigated tn perrprm at the buyer s dlSErEtan Writeris paid up hunt a fixed sum premium to incur Dbllgatlun ihsurahce Buyer hpider pays a premium tor the right to pe cpmpehsated in the Event at a speciried pccurrehce Sellervvriter receivesthe premium and is ppiigated to compensate the policy holder in the Event at a speciried pccurrehce Option Attributes 39239 Asset to Holder 39239 Con ingent Liability to Writer Option Contracts Characteristics Multiple underlyl gs iBondsi equities currencies and commodities OTCExchange Traded icredlt risk iquuldlty Option Valuation ritrll islcvalue Time premium iDuratlon orthe optioh ilrnplied volatility ilnterest rates iAssetyield Buy a Call Right to Buy Buying a Put Right to Sell cast at Premium Brezkwen 55 Begin iMnnrng Strike Price ce Mb Price Rises gt Sell Call Begin Lnsing B rezkzven Premium Receiveri Strike Price 4 Price Falls Price Rises gt Sell Put Begin Lnsing P rem ium Receiveri Break tv2n Strike Price Price Falls Price R39sizs gt Call Options czu union Em Prufit m warm Emzk rm rnees ASSET Vremium PRl CE in ee Luss czu epian said Put Options Prufit Emzk Even mm em rm WW heme AS SET mam Egg PRlCE Luss
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