Exam 2 – Acct 414 – Fall 2008Page 1
Name: ______
Exam 2Acct 414 – Corporate Accounting & Reporting II Fall 2008
Show any necessary computations if you want to be eligible for partial credit. Present your work in a neat, well-organized manner. If you are using a PV calculator, spell out what you put in for n, i, PMT, FV, PV, etc. Follow the instructions and answer all parts of the question as directed.
Major Problems (do all three):Pension Accounting
1.Work Paper{FASB No. 158} (45 points)______
Earnings Per Share
2.Earnings per share (55 points)______
Deferred Income Taxes
3.Deferred Income Taxes (55 points)______
Select three (3) of the following problems:
4. Prior service cost (15 points)______
5.One-person pension (15 points)______
6.Stock Option Plan (15 points)______
7.Construction accounting (15 points)______
Maximum = 45 points (I will count the best 3 of 4 if all are attempted)
8.Objective Questions (Extra credit – maximum 10 points)
Total points earned (max = 200) / %
If you tear off the working papers, be sure your name is on the top AND that you staple the exam back together in page number order.
Do not attempt extra credit section until all other sections of the exam have been completed.
After Exam 2 - Course Grade
Total Points = ______/______= ______%
Quiz and HW percentage = ______%
Projects percentage =______%
This page intentionally left blank – use for scratch paper if needed
1.Pension Accounting (45 points). The Plymouth RockCorporation initiated a noncontributory defined benefit pension plan on January 1, 1980 and applied the provisions of FASB Statement 87 as of January 1, 1987. FASB Statement No. 158 was implemented as of January 1, 2006. Plymouth Plows uses the straight-line method, based on average remaining service period of employees, to amortize prior service costs.
2008BALANCES AS OF JANUARY 1, 2008
Projected Benefit Obligation / 900,000
Plan Assets at market / 925,000
Funded status / 25,000
Unrecognized transition cost/(gain)
Straight-line amortization at $0 per year / -
Unrecognized Prior Service Cost / 180,000
Straight-line amortization at $15,000 per year
Unrecognized (gains)/losses / (128,000)
OTHER INFORMATION:
Service cost for year / 50,000
Discount rate for year / 6.00%
Expected rate of return on plan assets / 9.00%
Actual return on plan assets: gain/(loss) / 93,000
Pension plan contribution / 50,000
Retirement benefits paid during year / 40,000
Average remaining service years related to active employees / 15
Increase/(decrease) in PBO during year due to revised actuarial assumptions / 27,000
REQUIRED:
a.Compute net periodic pension expense for 2008. (Be sure to show all of the components of pension expense.) Prepare the journal entry needed to record pension expense and funding of pension plan.
b.Compute the balances in accumulated other comprehensive income, projected benefit obligation, and plan assets at 1/1/09
c.Explain (or show) how the net pension obligation or net pension asset will be displayed on the balance sheet at 12/31/08. Will there be other pension related accounts on the balance sheet? If so, show where and how they will be presented. Provide amounts.
Note:Completing all parts of the worksheet provided (including the balance sheet presentation section) will be an acceptable answer
Worksheet is attached to the back of this exam.
From F07 exam - modified
2. Earnings per share (60 points).
Net income for Cherokee Corp. was $500,000 for 2008. Its tax rate was 30%.
On January 1, 2008 there were 500,000 shares of common stock outstanding. On May 1, 30,000 shares were issued. On August 31, 2008Cherokee issued a 3-for-1 stock split effected in the form of a stock dividend. On November1, Cherokee bought 80,000 shares of treasury stock for $54 per share.
There are 150,000 options to buy common stock at $50 a share outstanding. The market price of the common stock averaged $56 during 2008(both market price and option price have already been adjusted for the stock split).
During 2008, there were 180,000 shares of convertible preferred stock outstanding. The preferred is $100 par, pays $5.00 a year dividend, and is convertible into nine shares of common stock after the stock split.
Cherokee issued $15,000,000 of 8% convertible bonds at face value during 2007. Each $5,000 bond is convertible into 240 shares of common stock after the stock split.
Instructions
(a)Compute the weighted average number of common shares outstanding.
Dates / Outstanding / Adjustment / Months / WeightedWeighted average = ______shares
Problem 2 (continued)
Regardless of your answer to (a), assume that the weight average number of common shares outstanding is 1,500,000 for parts (b) and (c). You may use the work paper provided below or formulas but please write your answers in the space provided:
(b)Compute the basic earnings per share for 2008. $______
(c)Compute the diluted earnings per share for 2008. $______
Numerator / Denominator / Per ShareNet income / $2,300,000 / 1,500,000
4. Income Taxes and Deferred Income Taxes. (55 points) – Variation of S07
Stone Co. started business in 2007 and their records show this data for 2007 and 2008:
- Pretax accounting income was $450,000 in 2007. Pretax accounting income was $530,000 in 2008.
- The enacted tax rate was 30% with a scheduled increase to 32% beginning in 2008.
- The 2007 gross profit on installment sales recognized at point of sale per GAAP was $300,000. Gross profit from collections of installment receivables was $220,000 for tax purposes. In 2008, the gross profit for GAAP was $400,000 and the gross profit from collections was $150,000. Installment sales are one-third current and two-thirds noncurrent.
- Life insurance on officers was $4,000 both years.
- Stone offers a one-year warranty on all of its products. The estimated warranty expense related to 2007 sales was $20,000 with actual repair costs under warranties at $6,000. For 2008 sales, the estimated expense was $31,000 with actual repair costs at $24,000.
- Interest received on tax exempt Idaho State bonds was $15,000 in both years.
- Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year life (no salvage value) is used. For tax purposes, MACRS depreciation is used as shown in the following schedule.
2007 / 2008 / 2009 / 2010 / 2011 / Total
For tax / $80,000 / $120,000 / $75,000 / $25,000 / 0 / $300,000
For accounting / 60,000 / 60,000 / 60,000 / 60,000 / 60,000 / 300,000
Instructions
(a)Compute taxable income and income tax payable/receivable for the 2007 and 2008.
(b)Prepare an inventory of the deferred tax (asset) and liability and determine the net deferred tax asset or liability as of 12/31/07 and 12/31/08. Stone began operations in 2007 so there were no beginning deferred tax asset or liability at 1/1/07..
(c)Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2007.
(d)What amounts will appear on the 2008 balance sheet related to the deferred taxes? Be sure to tell me whether the amount is classified as current or noncurrent.
Show your computations and answers as instructed on the next page.
Answers for Problem 3
(a) Compute taxable income and income tax payable/receivable for the 2007 and 2008.
I can grade from workpaper if used
(b) Prepare an inventory of the deferred tax (asset) and liability and determine the net deferred tax asset or liability as of 12/31/07 and 12/31/08.
I can grade from workpaper if used
(c) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2007. (Workpaper answer is NOT sufficient for this one!)
(d) What amounts will appear on the 2008 balance sheet related to the deferred taxes? Be sure to tell me whether the amount is classified as current or noncurrent. (Workpaper answer is NOT sufficient for this one!)
Amounts on 12/31/08 balance sheet related to deferred income taxes:
4.Amortization of prior service cost using years-of-service method. (15 points)
On January 1, 2008, Portland Plants Inc. amended its pension plan which caused an increase of $5,750,000 in its projected benefit obligation. The company has 400 employees who are expected to receive benefits under the company's defined benefit pension plan. The personnel department provided the following information regarding expected employee retirements:
Number of Expected Retirements Remaining Years
Employees On December 31 of Employment
10020125 years
150201710 years
50202215 years
100202720 years
400
Instructions
(a)What is the average remaining service life?
(b)Using the straight-line method, what would amortization of prior service costs be for 2008?
(c)Using the years-of-service method, what would amortization of prior services costs be for 2018?
5.Time Value of Money (15 points)
From S07 Acct 414 exam, modified
Eugene Genetics Inc. is establishing a pension plan for its sole employee. She will receive credit for 15 years of prior service and is expected to work 22 years until retirement. After retirement, she should collect pension payments for another 20 years. Her current salary is $80,000 with estimated future pay increases to average 5% per year. What will be the initial amount of projected benefit obligation (i.e., prior service cost) at the inception of the plan if the benefit formula is final year’s annual salary times years of service times 2%? You may assume ordinary annuities and end-of-year annual payments upon retirement and a 6% per annum discount rate.
6.Stock option plan (15 points)
Sibling Inc. is a publicly traded company. The president, Bob Brothers, was given stock options to acquire 10,000 shares of Sibling’s $5 par value common stock for $20 each. The options were granted on December 31, 2008 when the stock was selling for $20 per share. Mr. Brothers cannot exercise his stock options until January 1, 2011. If not exercised, the options will expire on December 31, 2011. He cannot receive the cash value of difference between market price and exercise price. The relevant market prices and fair values are given in the table below. Assume that Bob Brothers exercised all the options on June 25, 2011 when the common stock was selling for $39 per share. If no entry is needed at the specified dates, the answer is “not applicable.”
12/31/08 / $20 / $3
12/31/09 / $25 / $9
12/31/10 / $19 / $1
6/25/11 / $39 / $19
Prepare all necessary entries on Sibling Inc.’s books.
12/31/08
12/31/09
12/31/10
6/15/11
7. Long-term construction accounting (15 points)
On July 14, 2008 Eastern Construction Co. entered into a contract with the Falls City to build a bridge for $10,000,000. Construction began immediately and was completed in November 2009. Data relating to the construction are:
2008 2009
Costs incurred$1,750,000$7,250,000
Estimated costs to complete 5,250,000 —
Progress Billings 2,000,000 8,000,000
Instructions
a.How much revenue should be reported for 2008 under the percentage-of-completion method? Show your computation.
b.Make the entry to record the revenue and gross profit for 2008 (percentage-of-completion method).
c.What is the amount that will appear on the balance sheet for the year ended 12/3108 assuming the completed contract method is used? (Give the title as well as the amount and the section where it will appear.)
d. Extra Credit (up to 5 points)
.Assume thatEasternfollows IFRS and could not make sufficiently reliable estimates of progress toward completion. Prepare any journal entry that would be recorded on the profit and loss statement for 2008.
8. EXTRA CREDIT: Permanent and temporary differences (10 points maximum)
Listed below are items that are treated differently for accounting purposes than they are for tax purposes. Indicate whether the items are permanent differences or temporary differences. For temporary differences, indicate whether they will create deferred tax assets or deferred tax liabilities.
ATemporary difference – deferred tax liability
BTemporary difference – deferred tax asset
CPermanent difference
DNone of the above
______1.80% of dividends received from another domestic corporation are excluded from taxable income under the tax code
______2. Amortization of goodwill on tax return.
______3.Estimated future warranty costs.
______4.Contingent liability for court costs related to customer injury case.
______5.First and last year’s rent received in advance on a 5 year lease.
______6.Depreciation of capitalized cost related to estimated liability for asset retirement obligation.
______7.Revenues from 3-year magazine subscriptions received in advance.
______8.Unrealized gain on marketable securities.
______9.Completed contract method for tax return and percentage of completion for income statement
______10.Proceeds from life insurance policy received by company on death of president.
Exam 2 – Acct 414 – Fall 2008Page 1
For Problem 1Name:
Exam 2 – Acct 414 – Fall 2008Page 1
For Problem 3Name:______
SOLUTIONS
Problem 1
Note that the amortization of unrecognized GAIN results in reduction of pension expense because you need a DEBIT in the AOCI column to reduce (amortize) the gain.
Problem 2a – earnings per share
Transactions in Common Shares / Cumulative / Adjustment / Months / WeightedJan 1 to May 1 / 500,000 / 3.00 / 4 / 6,000,000
May 1, 2008, issued shares / 30,000
May 1, 2008 to August 31 / 530,000 / 3.00 / 4 / 6,360,000
Aug 31, 2008, 3 for 1 split / 1,060,000
Sept 1 to Oct 31 / 1,590,000 / 1.00 / 2 / 3,180,000
Nov 1, purchased treasury stock / -80,000
Nov. 1, 2008 - Dec 31 / 1,510,000 / 1.00 / 2 / 3,020,000
12 / 18,560,000
Weighted average shares / 1,546,667
For Problem 2b & 2c
Solution 3 – Deferred Tax Problem
Deferred Tax Problems - Worksheet / 2007 / 2008Pre-tax accounting income / 450,000 / 530,000
Permanent differences:
Tax-exempt interest / (15,000) / (15,000)
Life insurance premiums / 4,000 / 4,000
Book TI / 439,000 / 519,000
Temporary differences:
Depreciation / (20,000) / (60,000)
Warranties / 14,000 / 7,000
Installment sales / (80,000) / (250,000)
Taxable income (a) / 353,000 / 216,000
Applicable tax rate / 30% / 32%
Income taxes payable/(receivable) (a) / 105,900 / 69,120
Inventory of temporary differences (b)
Depreciation / (20,000) / (80,000)
Warranties / 14,000 / 21,000
Installment sales / (80,000) / (330,000)
0 / - / -
Total net temp differences / (86,000) / (389,000)
Applicable tax rate / 32% / 32%
Deferred taxes (net) ending / (27,520) / (124,480)
Deferred taxes (net) beginning / - / (27,520)
Change in net deferred taxes / (27,520) / (96,960)
Taxes (payable)/receivable from above / (105,900) / (69,120)
Income tax expense / 133,420 / 166,080
Problem 3, continued
(c)Income Tax Expense...... 133,420
Deferred Taxes (net) ...... 27,520
Income Tax Payable ...... 105,900
(d)Take each temporary difference and multiply by the tax rate (32%). Combine current items and combine noncurrent items. If the net is a debit, classify as asset. If the net is a credit, classify as a liability. In this case, the 2008 balance sheet will show a current deferred tax liability of $28,480 and a noncurrent deferred tax liability of $96,000.
Balance sheet computations:Warranties / 14,000 / 21,000
Installment sales / (26,667) / (110,000)
Net current items / (12,667) / (89,000)
Tax rate (in future years) / 32% / 32%
Net current (liability) asset / (4,053) / (28,480)
Depreciation / (20,000) / (80,000)
Installment sales (2/3) / (53,333) / (220,000)
Net noncurrent items / (73,333) / (300,000)
Tax rate (in future years) / 32% / 32%
Net noncurrent (liability) asset / (23,467) / (96,000)
4. Years of service method
Number of expected retirements / Year of retirement (on Dec 31) / Years of Work Remaining / TOTAL100 / 2012 / 5 years / 500
150 / 2017 / 10 years / 1,500
50 / 2022 / 15 years / 750
100 / 2027 / 20 years / 2,000
400 / 4,750
a. Average remaining service life = 4,750/400 employees = 11.875 years
b. For SL, divide total by average remaining service life: $5,750,000/11.875 years = $484,210
c. For the first five years, there are 400 employees so 400/4,750 * $5,750,000 = $484,211 (same as straight-line method). However, for the next 5 years, there are only 300 employees left so 300/4,750 * $5,750,000 = $363,158 per year. For 2018, the fraction will be 150/4,750 * $5,750,000 = $181,579, and so on. The schedule below is not necessary!
Fractions for400/4750 / 2008 / 8/95 / $484,211
400/4750 / 2009 / 8/95 / $484,211
400/4750 / 2010 / 8/95 / $484,211
400/4750 / 2011 / 8/95 / $484,211
400/4750 / 2012 / 8/95 / $484,211
300/4750 / 2013 / 6/95 / $363,158
300/4750 / 2014 / 6/95 / $363,158
300/4750 / 2015 / 6/95 / $363,158
300/4750 / 2016 / 6/95 / $363,158
300/4750 / 2017 / 6/95 / $363,158
150/4750 / 2018 / 3/95 / $181,579
150/4750 / 2019 / 3/95 / $181,579
150/4750 / 2020 / 3/95 / $181,579
150/4750 / 2021 / 3/95 / $181,579
150/4750 / 2022 / 3/95 / $181,579
100/4750 / 2023 / 2/95 / $121,053
100/4750 / 2024 / 2/95 / $121,053
100/4750 / 2025 / 2/95 / $121,053
100/4750 / 2026 / 2/95 / $121,053
100/4750 / 2027 / 2/95 / $121,053
100.00% / 5,750,000
Problem 5 / Prior service cost
Current salary / 80,000 / Step 1
Annual raise / 5%
Years until retirement / 22
PMT / 0
Salary at retirement / 234,021
Future salary / $ 234,021 / at retirement / Step 2
Benefit formula / 2.0% / per year of service
Benefit per yr / $ 4,680.42
Life expectancy / 20 / years after retirement
worked one more yr / 15 / years credited for prior service
Benefit for service cost / $ 70,206.26
Step 3
PMT = / $ (70,206.26) / benefit from 15 years of prior service
N = / 20 / life expectancy after retirement
FV = / $0.00 / no final payment
INT RATE = / 6% / discount rate
PV = / $ 805,260.24 / Needed at retirement
PMT = / 0 / (not an annuity) / Step 4
N = / 22 / years until retirement
INT RATE = / 6% / discount rate
FV = / $ (805,260.24) / Needed at retirement for 15 years prior service
PV = / $ 223,463.10 / Prior service cost & increase to PBO
6.Employee stock options – this is an equity award so the fair value is measured at the grant date and is not changed thereafter.
12/31/08 – NO ENTRY on grant date because the options have not yet been earned
12/31/09 & 12/31/10
Compensation expense (10,000 * $3 * 50% earned) 15,000
APIC – stock options 15,000
Same entry would be made at 12/31/10 because the service period is two years and the compensation expense would be recognized equally in each of the 2 years.
6/25/11
Cash (10,000 * $20 each) 200,000
APIC – stock options (10,000 * $3 each) 30,000
Common stock (10,000 * $5 par value) 50,000
APIC – common stock (what it takes to balance) 180,000
7. Construction accounting
(a) $1,750
———---—— = Percent of completion = 25% × $10,000,000 = $2,500,000 construction revenue
$1750+5250
(b)Construction Expenses...... 1,750,000
Construction in Process ...... 750,000
Revenue from Long-Term Contracts ...... 2,500,000
(c)The following entry would be made to record progress billings – giving a balance of $2,000,000 credit
Accounts Receivable ...... 2,000,000
Billings on Construction in Process ...... 2,000,000
Construction in progress under the completed contract method contains just the costs incurred or $1,750,000 debit.
The two accounts (construction in progress and partial billings) are combined and since the credits are bigger than the debits, it is reported under current liabilities on the balance sheet:
Current liabilities:
Billings in excess of costs on uncompleted contracts$250,000
(d) extra credit – Under IFRS, the zero profit method would be used and the following entry would be recorded (to offset the expenses incurred):
Construction Costs ...... $1,750,000
Revenue on long-term construction projects...... $1,750.000
8 Matching – extra credit
1. C / 2.A / 3. B / 4. B / 5. B6. B / 7. B / 8. A / 9. A / 10. C