Exam #_______
Name: ____________________________________
Exam 2
Acct 414 – Corporate Accounting & Reporting II
Fall 2009
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) ______________
Deferred Income Taxes
2.
Deferred Income Taxes (55 points)
______________
Earnings Per Share
3.
Earnings per share (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 =
___________%
Exam 2 – Acct 414 – Fall 2009
This page intentionally left blank – use for scratch paper if needed
Page 2
Exam 2 – Acct 414 – Fall 2009
1.
Page 3
Pension Accounting (45 points). The Wells Negri Corporation 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.
Wells Negri uses the straight-line method, based on average remaining service period of
employees, to amortize prior service costs.
2009
BALANCES AS OF JANUARY 1, 2009
Projected Benefit Obligation
897,000
Plan Assets at market
825,000
Funded status
(72,000)
Unrecognized transition cost/(gain)
Straight-line amortization at $0 per year
Unrecognized Prior Service Cost
Straight-line amortization at $4,500 per year
Unrecognized (gains)/losses
68,000
4,500
124,000
OTHER INFORMATION:
Service cost for year
35,000
Discount rate for year
5.00%
Expected rate of return on plan assets
7.00%
Actual return on plan assets: gain/(loss)
33,000
Pension plan contribution
50,000
Retirement benefits paid during year
29,000
Average remaining service years related to active employees
Increase/(decrease) in PBO during year due to revised actuarial assumptions
17
6700
REQUIRED:
a.
Compute net periodic pension expense for 2009. (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 1/1/10
c.
Explain (or show) how the net pension obligation or net pension asset will be displayed on the
balance sheet at 12/31/09. 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.
Exam 2 – Acct 414 – Fall 2009
2.
Page 4
Deferred tax asset (55 points)
McCoy Inc. began business on January 1, 2008. Its pretax financial income for the first 2 years
was as follows:
2008
2009
$750,000
800,000
The following items caused the only differences between pretax financial income and taxable
income.
1. On January 2, 2008, heavy equipment costing $1,000,000 was purchased. The equipment
had a life of 5 years and no salvage value. The straight-line method of depreciation is used
for book purposes and the MACRS tax deduction taken each year is shown in the table
below:
2008
2009
2010
2011
2012
Total
For tax
$200,000 $325,000 $210,000
$15,000
0
$750,000
For accounting
150,000
150,000
150,000
150,000
150,000
$750,000
2. In 2008, McCoy recognized $90,000 in unearned rent revenue. This deferral is required
under GAAP but the full amount is taxable in the year received. Rent revenue will be
recognized during the last year of the lease, 2012.
3. Interest revenue from New York municipal bonds is expected to be $25,000 each year until
their maturity at the end of 2015.
4. In 2009, McCoy accrued a contingent liability of $80,000 related to a lawsuit. It is estimated
that the litigation liability will be paid in 2010.
The enacted tax rates existing at December 31, 2008 are 32% for 2008, rising to 35% for 2009
and later years. There were no changes in the tax rates in 2009.
Instructions
(a) Compute taxable income and income tax payable/receivable for the 2009 and 2009.
(b) Prepare an inventory of the deferred tax (asset) and liability and determine the net deferred
tax asset or liability as of 12/31/08 and 12/31/09.
(c) Prepare the journal entry to record income tax expense, deferred taxes, and the income
taxes payable for 2008.
(d) What amounts will appear on the 2009 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.
Exam 2 – Acct 414 – Fall 2009
Page 5
Answers for Problem 2
(a)
Compute taxable income and income tax payable/receivable for the 2008 and 2009.
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 12/31/08 and 12/31/09.
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 2008. (Workpaper answer is NOT sufficient for this one!)
(d) What amounts will appear on the 2009 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 12/31/09 balance sheet related to deferred income taxes:
Exam 2 – Acct 414 – Fall 2009
3.
Page 6
Earnings per share (55 points)
Assume that the following data relative to Prince Company for 2009 is available:
Net Income
Tax rate
$2,800,000
30%
Transactions in Common Shares
Jan. 1, 2009, Beginning number
Apr. 1, 2009, Purchase of treasury shares
Aug 1, 2009, 20% stock dividend
Oct. 1, 2009, Issuance of shares
Change
(70,000)
166,000
100,000
8% Cumulative Convertible Preferred Stock ($100 par)
Sold at par, 5,000 shares of preferred. Each share can be converted
into 24 shares of common stock (after adjustment for stock dividend).
Stock Options
Exercisable at the option price of $25 per share. Average
market price in 2009 was $53 (both market price and option price
have already been adjusted for stock split).
Cumulative
900,000
830,000
996,000
1,096,000
5,000 shares
100,000 shares
Convertible Bonds
Prince issued $9,000,000 of 7% convertible bonds at face value during 2006. Each $1,000 bond
was convertible into 100 shares of common stock before the stock split and is convertible into
120 shares of common stock after the stock split.
Instructions
(a) Compute the weighted average number of common shares outstanding.
Dates
Outstanding
Adjustment
Months
Weighted average = ____________________________ shares
Weighted
Exam 2 – Acct 414 – Fall 2009
Page 7
Problem 3 (continued)
Regardless of your answer to (a), assume that the weight average number of common shares
outstanding is 1,060,000 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 2009.
$_________________________
(c) Compute the diluted earnings per share for 2009. $___________________________
Net income
Numerator
$2,800,000
Denominator
1,060,000
Per Share
Exam 2 – Acct 414 – Fall 2009
4.
Page 8
Amortization of prior service cost using years-of-service method. (15 points)
On January 1, 2009, Princeton Plants Inc. amended its pension plan which caused an
increase of $5,000,000 in its projected benefit obligation. The company has 205
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
employees
25
50
30
100
205
Year of
retirement
(on Dec 31)
2013
2018
2023
2028
Remaining Years of Employment
5 years
10 years
15 years
20 years
Instructions
(a) What is the average remaining service life?
(b) Using the straight-line method, what would amortization of prior service costs be for
2009?
(c) Using the years-of-service method, what would amortization of prior services costs be
for 2024?
Exam 2 – Acct 414 – Fall 2009
Page 9
5.
Time Value of Money (15 points)
Idaho Genetics Inc. is establishing a pension plan for its sole employee. She will receive credit
for 20 years of prior service and is expected to work 15 years until retirement. After retirement,
she should collect pension payments for 25 years. Her current salary is $90,000 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 endof-year annual payments upon retirement and a 5% per annum discount rate.
Exam 2 – Acct 414 – Fall 2009
6.
Page 10
Stock option plan (15 points)
Sisters Inc. is a publicly traded company. The president, Samantha Sibling, was given stock
options to acquire 50,000 shares of Sister’s $5 par value common stock for $25 each. The
options were granted on December 31, 2008 when the stock was selling for $25 per share. Ms.
Sibling cannot exercise her stock options until January 1, 2012. If not exercised, the options will
expire on December 31, 2013. She 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 Samantha Sibling exercised all the options on June 25, 2012 when the common
stock was selling for $39 per share. If no entry is needed at the specified dates, the answer is
“not applicable.”
Date
12/31/08
12/31/09
12/31/10
12/31/11
6/25/12
Market
Price
$25
$28
$19
$26
$39
Fair
Value
$4
$8
$2
$5
$14
Prepare all necessary entries on Sisters Inc.’s books, including the exercise of all options in 2012
Exam 2 – Acct 414 – Fall 2009
Page 11
7. Long-term construction accounting (15 points)
Gem Dandy Construction Co. contracted to build a bridge for $5,000,000. Construction began in
2008 and was completed in 2009. Data relating to the construction are:
Costs incurred
Estimated costs to complete
Progress Billings
2008
$1,650,000
1,350,000
2,000,000
2009
$1,375,000
-03,000,000
Gem Dandy uses the percentage-of-completion method.
Instructions
(a) How much revenue should be reported for 2008 Show your computation.
(b) Make the entry to record the revenue and gross profit for 2008.
(c) If Gem Dandy uses the completed contract method (instead of the percentage of
completion method), what amount will be reported on the balance sheet at 12/31/08 with
respect to this contract? Give the account title and whether it is a current or noncurrent
asset or liability.
(d)
.
Extra Credit (up to 5 points)
Assume that Gem Dandy follows 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.
Exam 2 – Acct 414 – Fall 2009
Page 12
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.
A
B
C
D
Temporary difference – deferred tax liability
Temporary difference – deferred tax asset
Permanent difference
None of the above
______ 1.
Unrealized loss on marketable securities.
______ 2.
80% of dividends received from another domestic corporation are
excluded from taxable income under the tax code
______ 3.
Estimated future warranty costs.
______ 4.
Installment method used on tax return for sales of appliances.
______ 5.
Deductible pension contributions exceed pension expense recognized on
income statement.
_____ _6.
Excess of statutory depletion over depletion based on cost of mining coal.
______ 7.
Estimated bad debt expenses exceed direct write-offs
______ 8.
Revenues from 3-year magazine subscriptions received in advance.
______ 9.
Completed contract method for tax return and percentage of completion
for income statement
______10.
Life insurance premiums on policies that cover key managers of the firm.
Exam 2 – Acct 414 – Fall 2009
Page 13
For Problem 1
Pension Worksheet
SFAS NO. 158
Name:
1
2
Income Stmt
BS
Pension
Expense
Cash
3
4
5
Accounts on Employer's Books
Other comprehensive income stmt
Transition
(Gain)/Loss
Net actuarial
(gain)/loss
Debit
Credit
Prior Service
Cost
6
7
8
Not on Books
Memorandum Amounts
BS
Funded Status
Projected Benefit
Obligation
BALANCE FORWARD
Service Cost
Interest Cost
Expected return on plan assets
Corridor Amount
AOCI Actuarial (BoY)
Excess
AMORTIZATIONS:
Unrecognized gain/loss
Prior Service Cost
Transition Amount
Contributions to Pension Plan
Retirement Benefits Paid by Plan
Actual Return on Plan Assets
Actuarial Adjustments to PBO
Amounts for journal entry:
AOCI balance forward
BALANCES AT YEAR END
Column 6 must equal sum of columns 7 & 8
Summary journal entry
Pension expense
Cash
AOCI - transition loss
AOCI - actuarial gain/loss
AOCI - prior service cost
Net pension obligation or asset
Presentation on the balance sheet:
Plan Assets
Exam 2 – Acct 414 – Fall 2009
For Problem 3
Page 14
Name:______________________________
Deferred Tax Problems - Worksheet
2008
Pre-tax accounting income
Permanent differences:
Book TI
Temporary differences:
Taxable income
Applicable tax rate
Income taxes payable/(receivable)
Inventory of temporary differences
Total net temp differences
Applicable tax rate
Deferred taxes (net) ending
Deferred taxes (net) beginning
Change in net deferred taxes
Taxes (payable)/receivable from above
Income tax expense
2009
Exam 2 – Acct 414 – Fall 2009
Page 15
SOLUTIONS
Problem 1
Pension Worksheet
SFAS NO. 158
Wells Negri Corporation
1
2
4
5
Accounts on Employer's Books
Income Stmt
BS
AOCI
Net
Prior
Pension
actuarial
Service
Expense
Cash
(gain)/loss
Cost
2009
BALANCE FORWARD
Service Cost
5% Interest Cost
7% Expected return on plan assets
89,700 Corridor Amount
124,000 AOCI Actuarial (BoY)
34,300 Excess
AMORTIZATIONS:
17 Unrecognized gain/loss
Prior Service Cost
Transition Amount
Contributions to Pension Plan
Retirement Benefits Paid by Plan
Actual Return on Plan Assets
Actuarial Adjustments to PBO
Amounts for journal entry:
AOCI balance forward
BALANCES AT YEAR END
Summary journal entry
Pension expense
Cash
AOCI - actuarial gain/loss
AOCI - prior service cost
Net pension obligation or asset
$
35,000
44,850
-57,750
7
8
Not on Books
BS
Memorandum Amounts
Projected
Funded
Benefit
Plan
Status
Obligation Assets
-72,000
-897,000
825,000
-35,000
-44,850
57,750
2,018
4,500
0
-2,018
-4,500
-50,000
29,000
28,618
Debit
28,618
-50,000
29,432
58,050
-33,000
6,700
29,432
124,000
153,432
50,000
-29,000
33,000
-6,700
-4,500
68,000
63,500
-3,550
-75,550
-954,550
879,000
Credit
$ 50,000
$
$
$
$
6
$
$
4,500
$
3,550
$ 58,050
C. Balance sheet
Noncurrent liabilities
Funded status of pension plan
Owners equity section
Acc'd other comprehensive income
Problem 2
Parts a and b answers on next page
journal entry for 2008 (see working paper on next page)
(c) Income Tax Expense ................................................................................
Deferred Taxes (net) .................................................................
Income Tax Payable ..................................................................
75,550
debit
216,932
debit
232,000
12,800
244,800
(d) Deferred taxes are presented at bottom of working paper (next page) but here is the computation
Balance sheet computations:
Unearned rental income
Contingent liability
Net current items
Tax rate (in future years)
Net current (liability) asset
32%
-
80,000
80,000
35%
28,000
Depreciation
Unearned rental income
Net noncurrent items
Tax rate (in future years)
Net noncurrent (liability) asset
(50,000)
90,000
40,000
35%
14,000
(225,000)
90,000
(135,000)
35%
(47,250)
Exam 2 – Acct 414 – Fall 2009
Page 16
Deferred Tax Problems - Worksheet
Pre-tax accounting income
Permanent differences:
Tax-exempt interest
2008
750,000
2009
800,000
(25,000)
(25,000)
Book TI
Temporary differences:
Depreciation
Unearned rental income
Contingent liability
725,000
775,000
(50,000)
90,000
(175,000)
Taxable income (a)
Applicable tax rate
Income taxes payable/(receivable) (a)
Inventory of temporary differences (b)
Depreciation
Unearned rental income
Contingent liability
765,000
32%
244,800
680,000
35%
238,000
(50,000)
90,000
-
(225,000)
90,000
80,000
-
40,000
35%
14,000
14,000
(244,800)
230,800
(55,000)
35%
(19,250)
14,000
(33,250)
(238,000)
271,250
14,000
14,000
28,000
(47,250)
(19,250)
80,000
0
Total net temp differences
Applicable tax rate
Deferred taxes (net) ending
Deferred taxes (net) beginning
Change in net deferred taxes
Taxes (payable)/receivable from above
Income tax expense
Classification on balance sheet (d)
Current deferred tax assets
Noncurrent deferred tax assets
Current deferred tax liabilities
Noncurrent deferred tax liabilities
Total net deferred tax
Problem 3 a
Transactions in Common Shares
Jan 1 to March 31
April 1, purchase treasury shares
April 1 to July 31
Aug 1, 20% stock dividend
Aug 1 to Sept 30
Oct 1, issued new shares
Oct 1 to Dec 31
Cumulative
Adjustment
900,000
1.20
-70,000
830,000
1.20
166,000
996,000
1.00
100,000
1,096,000
1.00
Weighted average shares
Months
3
Weighted
3,240,000
4
3,984,000
2
1,992,000
3 3,288,000
12 12,504,000
1,042,000
Computational notes for 3b
Convertible preferred: Dividend = $40,000 ($8 * 5,000) divided by 120,000 (5,000 * 24) = index 0.33
Convertible bonds: $9,000,000 face * 7% = 630,000 interest * (1-30% tax rate) = $441,000 divided by
1,080,000 (9,000 bonds * 120) = index 0.41
Options: Proceeds $2,500,000 divided by average mkt $53 = 47,170 shares purchased out of 100,000 so
there were 52,830 net new shares (index 0/52,380 = 0)
Exam 2 – Acct 414 – Fall 2009
Page 17
3b
Net income
Preferred dividend
Options
Cumulative convertible preferred
Bonds
Numerator
Denominator
2,800,000
-40,000
2,760,000
1,060,000 basic=
52,830
2,760,000
1,112,830
40,000
120,000
2,800,000
1,232,830
441,000
1,080,000
3,241,000
2,312,830 diluted=
Problem 4. Years of service method
Number of expected
retirements
Year of retirement (on Dec 31)
25
2013
50
2018
30
2023
100
2028
205
Years of Work
Remaining
5 years
10 years
15 years
20 years
EPS
$
2.60
$
2.48
$
2.27
$
1.40
TOTAL
125
500
450
2,000
3,075
a. Average remaining service life = 3,075/205 employees = 15 years
b. For SL, divide total by average remaining service life: $5,000,000/15 years = $333,333
c. For the first five years, there are 205 employees so 205/3,075 * $5,000,000 = $333,333 (same as
straight-line method). For the next 5 years, there are only 180 employees left so 180/3,075 * $5,000,000
= $292,683 per year. 2024 is in the last fraction so there are only 100 employees left and the fraction will
be 100/3,075 * $5,000,000 = $162,602, The schedule below is not necessary!
205/3,075
205/3,075
205/3,075
205/3,075
205/3,075
180/3075
180/3075
180/3075
180/3075
180/3075
130/3075
130/3075
130/3075
130/3075
130/3075
100/3075
100/3075
100/3075
100/3075
100/3075
Fractions for
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
1/15
1/15
1/15
1/15
1/15
12/205
12/205
12/205
12/205
12/205
26/615
26/615
26/615
26/615
26/615
4/123
4/123
4/123
4/123
4/123
100.00%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
333,333
333,333
333,333
333,333
333,333
292,683
292,683
292,683
292,683
292,683
211,382
211,382
211,382
211,382
211,382
162,602
162,602
162,602
162,602
162,602
5,000,000
Exam 2 – Acct 414 – Fall 2009
Problem 5
Current salary
Annual raise
Years until retirement
PMT
Salary at retirement
Future salary
Benefit formula
Benefit per yr
Life expectancy
Prior service cost
90,000
5%
15
0
187,104
$
187,104
2.0%
$
3,742.07
25
20
Benefit for service cost $
74,841.41
PMT = $
N=
FV =
INT RATE =
PV = $
PMT =
N=
INT RATE =
FV = $
PV = $
(74,841.41)
25
$0.00
5%
1,054,810.75
0
15
5%
(1,054,810.75)
507,381.49
Page 18
Step 1
at retirement
per year of service
Step 2
years after retirement
years credited for prior service
Step 3
benefit from 20 years of prior service
life expectancy after retirement
no final payment
discount rate
Needed at retirement
(not an annuity)
Step 4
years until retirement
discount rate
Needed at retirement for 15 years prior service
Prior service cost & increase to PBO
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 & 12/31/11
Compensation expense (50,000 * $4 fair value * 1/3 earned)
APIC – stock options
66,666.67
66,666.67
Same entry would be made at 12/31/10 & 12/31/11 because the service period is three years
and the compensation expense would be recognized equally in each of the 3 years. (obviously
there is a small rounding error to fix in the third year – 66,666.66 instead,)
6/25/12 – all options are exercised
Cash (50,000 * $25 each)
APIC – stock options (50,000 * $4 each)
Common stock (50,000 * $5 par value)
APIC – common stock (what it takes to balance)
1,250,000
200,000
250,000
1,200,000
7. Construction accounting
(a)
$1,650
———---—— = Percent of completion = 55% × $5,000,000 = $2,750,000 construction revenue
$1650+1350
Exam 2 – Acct 414 – Fall 2009
(b)
Page 19
Construction Expenses................................................................ 1,650,000
Construction in Process .............................................................. 1,100,000
Revenue from Long-Term Contracts ...............................
2,750,000
(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 $1,650,000 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. $350,000
(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 ....................................................$1,650,000
Revenue on long-term construction projects .................... $1,650.000
8 Matching – extra credit
1. B
2. C
6. C
7. B
3. B
8. B
4. A
9. A
5. A
10. C