Midterm 2 Exam-Solutions
Q1. MULTIPLE CHOICE
Select the one alternative that best answers the question by cycling or highlighting
1. At the beginning of 20x5, Rundle Ltd. reported a deferred tax liability of $300, 000. The net book
value of the capital assets was $2, 600, 000, while UCC was $1, 600, 000. In 20x5, depreciation was
$400, 000, while CCA was $625, 000. The tax rate changed in 20X5 to be 35%. What is the
adjustment required to the deferred taxes?
a.
b.
c.
d.
The future tax liability will increase by $67, 500 in 20x5.
The future tax liability will increase by $218, 750 in 20x5.
The future tax liability will increase by $128, 750 in 20x5.
The future tax liability will decrease by 120, 000
2. Reado Inc. has the following information for 20X4: Accounting income before tax is $400, 000;
Permanent difference is a non-deductible expense of $53, 000; depreciation is $260, 000 and CCA
is $310, 000. The company's tax rate for 20X3 and 20X4 is 30%. Using the short cut method:
a.
b.
c.
d.
The increase to the deferred tax liability account is: (310, 000 - 260, 000) X 30% = $15, 000.
The taxes payable is calculated to be $120, 900.
The income tax expense is calculated to be $120, 000.
The decrease to the deferred tax liability account is: (310, 000 - 260, 000) X 30% = $15, 000.
3. A firm reported the following in its income statement for the current year: depreciation expense,
$4,000; pollution violation fine, $12,000; pre-tax accounting income, $10,000. The tax rate is 40%.
For tax purposes, the CCA deduction was $9,000. What amount of CURRENT income tax expense
will be recognized for this year?
a.
b.
c.
d.
e.
$7,800
$4,000
$6,800
$400
$8,800
4.JMR Company leases an asset from KAR Company. The rate implicit in the lease is 12% and
JMR's incremental borrowing rate is 11%. JMR is aware of the implicit rate. Assuming that both rates
would provide an MLP amount well below the fair value of the leased asset, the rate that JMR should
use for discounting lease payments is:
a.
b.
c.
d.
11% under both ASPE and IFRS.
12% under ASPE and 11% under IFRS.
11% under ASPE and 12% under IFRS.
12% under both ASPE and IFRS.
5. CDE leases land and secures the landowner's permission to erect a warehouse on the leased
site. The lease has 25 years to run from the time CDE completes the warehouse at a cost of
$300,000. The warehouse is expected to last 50 years. In connection with the warehouse, CDE's
annual depreciation should be:
a. $6,000.00
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b. $7,500.00
c. $12,000.00
d. The entire $300,000 should be expensed the first year.
6. Title to a right-of-use asset with a remaining economic life of 20 years does not transfer to the
lessee at the end of the 10 year lease term, but the lessor anticipates an unguaranteed residual
value of $2,000. What is the period and residual value used by the lessee to depreciate the leased
asset?
1
2
3
4
Period
Remaining life at inception
Remaining life at inception
Lease term
Lease term
Residual value
$0
$2,000
$2,000
$0
a. Choice 1
b. Choice 2
c. Choice 3
d. Choice 4
7. A company makes the following calculations to its defined benefit plan for funding purposes for an
employee that is 40 years of age. The accumulated benefit method - $2, 111; projected unit credit
method $3, 324 and the level contribution method: $4, 227. The company uses the accumulated
benefit for funding the defined benefit plan. Record the journal entries for the pension expense and
the pension payment.
a.
b.
c.
d.
Dr. Pension expense $3, 324 Cr. Cash $3, 324
Dr. Pension expense $4, 227 Cr. Cash $2, 111 and Cr. Accrued pension liability $2, 116.
Dr. Pension expense $2, 111 Cr. Cash $2, 111
Dr. Pension expense $3, 324 Cr. Cash $2, 111 and Cr. Accrued pension liability $1, 213.
8. Pension data for ABC for three separate cases were:
Case 1
Case 2
Case 3
APO
$300,000 $300,000 $300,000
Plan assets at fair
value
$315,000 $300,000 $280,000
The funded status of the APO for each case is:
Case 2
Case 3
1 Fully funded
Case 1
Overfunded
Underfunded
2 Underfunded
Fully funded
Overfunded
3 Overfunded
Underfunded
Fully funded
4 Overfunded
Fully funded
Underfunded
a.
b.
c.
d.
Choice 1
Choice 2
Choice 3
Choice 4
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9. The accrued obligation at the beginning of the year was $456,000 and the current service cost for
the year is $67,000. Assuming an interest factor of 6%, what is the accrued obligation at the end of
the year?
a.
b.
c.
d.
$523,000
$389,000
$550,360
$554,380
10. An example of an experience gain or loss is:
a.
b.
c.
d.
The actual employee turnover rate is higher than projected.
The discount rate used for an obligation is increased from 5% to 6%.
The assumption for salary increases is reduced from 3% to 2.5%.
The funding method is changed to the accumulated benefit method.
Q2. Problem Solving (15 marks)
Olong Ltd. started operations in 20X6. The company provided the following information for its
warranty balances for the past four years:
20X6
20X7
20X8
20X9
$ 34,000
$ 29,000
$ 32,000
$ 49,000
27,000
22,000
39,000
32,000
54,000
59,000
69,000
34,000
0
9,000
23,500
34,000
40 %
38%
38%
36%
Warranty costs accrued
Costs incurred—warranty work
Costs incurred—development costs
Amortization—development costs
Tax rate
Required:
1. What is the tax basis for development costs and the provision for warranty costs in each year?
Please feel free to enter your answer(s) in the template below:
20X6
20X7
Development costs:
Tax basis
Warranty costs:
Tax basis
3
20X8
20X9
Solutions:
2. What is the accounting basis for development costs and the provision for warranty costs in each
year? Please feel free to enter your answer(s) in the template below:
20X6
20X7
20X8
20X9
Development costs:
Accounting basis
Warranty costs:
Accounting basis
Solutions:
3. What is the deferred tax balance in each year?
Please feel free to enter your answer(s) in the template below:
20X6
20X7
Development costs:
Deferred income tax balance
Warranty costs:
Deferred income tax balance
4
20X8
20X9
Solutions:
20X6
20X7
20X8
20X9
Development costs:
Deferred income tax balance
$(21,600) $(39,520) $(56,810)
$(53,820)
Warranty costs:
Deferred income tax balance
$2,800
$5,320
$2,660
$8,640
4. Is the balance an asset or a liability?
Please feel free to enter your answer(s) in the template below:
Deferred Income Tax Balance:
Development cost
Warranty cost
Solutions:
Deferred Income Tax Balance:
Development cost
Liability
Warranty cost
Asset
Explanation:
1. & 2.
Development Costs
Tax basis
Accounting basis
Temporary difference
20X6
$
Warranty Costs
Tax basis
Accounting basis
Temporary difference
20X7
0 $
0
54,000
104,000
(54,000) (104,000)
$
20X6
0
(7,000)
7,000
$
20X7
0
(14,000)
14,000
20X8
0
149,500
(149,500)
$
$
20X8
0
(7,000)
7,000
20X9
0
149,500
(149,500)
$
20X9
$
0
(24,000)
24,000
Q3 Problem Solving (15 marks)
The pre-tax income statements for Moonstone Ltd. for two years (summarized) were as follows:
Revenues
Expenses
Pre-tax income
20X8
$274,000
185,000
$ 89,000
20X9
$338,000
241,000
$ 97,000
For tax purposes, the following income tax differences existed:
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a. Revenues on the 20X9 statement of profit and loss include $41,000 rent, which is taxable in
20X8 but was unearned at the end of 20X8 for accounting purposes.
b. Expenses on the 20X9 statement of profit and loss include political contributions of $14,500,
which are not deductible for income tax purposes.
c. Expenses on the 20X8 statement of profit and loss include $21,300 of estimated warranty
costs, which are not deductible for income tax purposes until 20X9.
Required:
1. What was the accounting carrying value and tax basis for unearned revenue and the warranty
liability at the end of 20X8 and 20X9? Please feel free to enter your answer(s) in the template below:
Year
20X8
20X9
Unearned Rent Warranty Unearned Rent Warranty
Accounting carrying value
Tax basis
Solutions:
Year
20X8
20X9
Unearned Rent Warranty Unearned Rent Warranty
Accounting carrying value
41,000
21,300
0
0
0
0
0
0
Tax basis
2. Compute (a) income tax payable, (b) deferred income tax, and (c) income tax expense for each
period. Assume a tax rate of 30%. Please feel free to enter your answer(s) in the template below:
20X8
20X9
a. Income tax payable
b. Deferred income tax
c. Total income tax expense
Solutions:
a. Income tax payable
b. Deferred income tax
c. Total income tax expense
20X8
20X9
$45,390
$14,760
$(18,690)
$18,690
$26,700
$33,450
3. Give the entry to record income taxes for each period. Please feel free to enter your answer(s) in
the template below:
6
No
Transaction
1
20X8
2
20X9
General
Journal
Credit
Debit
Solutions:
No
Transaction
1
20X8
General Journal
Debit
Credit
Income tax expense
26,700
Deferred income tax
18,690
Income tax payable
2
20X9
45,390
Income tax expense
33,450
Deferred income tax
18,690
Income tax payable
14,760
Q4 Problem Solving (10 marks)
Sotherlin Inc. has a defined contribution plan. It has agreed to pay $210,000 now at the end of 20X4
and another payment of $135,000 at the end of 20X6 for employees’ services for 20X4. The current
interest rate is 5%.
Required:
Prepare the journal entry for the pension expense for 20X4. Please feel free to enter your answer(s)
in the template below:
No
Transaction
1
1
General Journal
Solutions
7
Debit
Credit
Explanation:
The defined contribution expense for 20X4 is equal to:
Payment made in the year
Present value of the delayed payment, discounted at 5% 5% $135,000 ×
(P/F, 5%, 2 = 0.90703)
Total expense
$210,000
122,449
$332,449
Q5 Problem Solving (10 marks)
USLM Inc. has a defined benefit pension plan. At the end of the year 20X4, the pension fund assets
were $7,690,000 and the defined benefit obligation was $7,260,000. Invoking the asset ceiling caps
the net defined benefit asset at $319,000.
Required:
Prepare the journal entry to correctly recognize the net defined benefit asset. Please feel free to
enter your answer(s) in the template below:
No
Transaction
1
1
General Journal
Solutions:
----End of Exam---
8
Debit
Credit