Study Guide for Exam 2 – Spring 2011
There will be no multiple choice questions and the exam will consist of three major problems
and several shorter problems/essays.
Major problems: Pension, Deferred Taxes, Earnings per Share
Pension
There will be a one year pension problem, working paper provided. It is similar to Project 5 & the inclass example. Do not use any pension problems from exams dated Spring 2006 or earlier. Do not use
older pension questions from earlier exams as the answers are for “old GAAP.”
Accounting for Income Taxes
There will be a multi-year problem with several temporary and/or permanent differences selected from
the following. I will provide the deferred taxes work paper for you. Use any of the posted exams for
examples.
Taxable temporary differences
(give rise to deferred tax liabilities)
Deductible temporary differences
(give rise to deferred tax assets)
Revenues or gains are recognized for accounting
purposes before they are taxable
 Installment sale on tax return (but accrual method
for accounting purposes)
 Percentage of completion contracts for accounting
purposes, completed contract on tax return
 Income from equity method investments
 Unrealized gains on trading securities or other
investments
Revenues or gains are taxable before they are
recognized for accounting purposes
 Subscription revenue collected in advance but not
yet earned
 Rent revenue received in advance
Expenses or losses are deductible for tax purposes
before they are recognized for accounting purposes
 Excess depreciation expense (e.g., MACRS in
excess of accounting depreciation)
 Amortization of goodwill
 Prepaid rent, insurance, etc.
 Contributions to pension plans in excess of
recognized expense on income statement
Expenses or losses are recognized for accounting
purposes before they are tax deductible.
 Product warranties
 Estimated liabilities (litigation, asset retirement, and
other contingencies)
 Estimated bad debt expenses
 Unrealized losses on trading securities or other
investments
In the computation of taxable income:
Permanent differences subtracted from pre-tax
accounting income
Permanent differences added to pre-tax
accounting income
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Interest on municipal bonds
Proceeds from life insurance on officer’s life
Dividend exclusion (from domestic corporations,
generally 70-80% of total dividend received
amount)
Statutory depletion in excess of cost depletion on
natural resources
Expenses incurred in obtaining tax-exempt income
Fines and penalties
Life insurance premiums (officers)
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Earnings per share
You will have a problem that has several potentially dilutive securities and a complicated weightedaverage computation. It will in fact be similar to the Example 8 we did in class but a little bit shorter.
You will compute basic and diluted earnings per share. Any of the posted Exam 2 files will have an
example.
Three to five short problems selected from the following:
Note: Do not expect “optional” problems on this exam (as compared to several old exams
where you could choose 3 of 4 questions).
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You will have a simple long-term construction accounting question (percentage of
completion and completed contract) similar to homework but short - you need to know how
to make all the journal entries but I will only ask for selected entries. See Exam 1 from
Spring 2007 & 2008 or Fall 2007 for examples and Exam 2 from Fall 2009 & 2010, Spring
2009 & 2010.
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Be prepared for present value computations for a one-person pension plan (similar to Project
4 - the pension accumulation and amortization spreadsheet). You could be asked to compute
service cost for a particular year, prior service cost at date of plan amendment or adoption,
projected benefit obligation at a particular point in time or accumulated benefit obligations
at a particular point in time. I could also ask you to compute the even annual amount needed
to fund a plan. You had to do all of these computations for Project #4. See old exams for
examples.
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You should know the “years of service method” and be able to determine the amortization of
prior service cost. This could include determining the average remaining service life for the
straight-line method.
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Stock-based compensation will be covered. You will need to be able to do an equity award
or a liability-type award similar to Examples 1 and 3 we did in class and the examples in the
textbook. I added a couple of old exams from different courses that provide examples of
this type of problem to the old exam page. The two variations are found on Exam 2 from
Spring 2008 and Fall 2007 exams as well as in the more recent exams. Read the problem to
be sure you are doing the “right one” – the key difference is whether the employee can take
the value in cash (liability award) or can only receive shares of stock (equity award).
Extra credit
I will probably have a matching question similar to the quiz – you need to be able to identify
taxable and deductible temporary differences and permanent differences (accounting for income
taxes) both to earn extra credit and to successfully complete the deferred tax problem.
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