Practice Exam, Chapters 16-18
Problem I
Pinder Implements sometimes sells products on an installment basis. In those cases, Pinder recognizes installment income for financial reporting purposes in the year of the sale. However, for tax purposes, installment income is reported by the installment method. Installment income in 2016 was $36 million. Pinder expects to collect this amount over the next three years in the amounts of $9 million, $15 million, and $12 million, respectively.
Pinder’s tax rate is 30%. However, due to an enacted law, it is scheduled to become 40% in 2018. Pinder’s pretax accounting income for 2016 was $48.6 million, including interest revenue of $600,000 from municipal bonds it holds as an investment. There were no other differences between accounting income and taxable income.
Required:
1. What was 2016 income tax expense for Pinder? Prepare the appropriate journal entry to record Pinder’s 2016 income taxes. Show Calculations.
2. What is Pinder’s 2016 net income?
Problem II
Rand Medical has a defined benefit pension for which the following pension-related data were available on December 31, 2016 (the end of the company’s fiscal period):
Projected benefit obligation (PBO):
Balance, January 1, 2016 $1,800,000
Service cost 369,000
Interest cost, discount rate, 10% 180,000
Losses (gains) due to changes in actuarial
assumptions in 2016 0
Pension benefits paid (189,000)
Balance, December 31, 2016 $2,160,000
Accumulated benefits obligation, Dec. 31, 2016 $ 1,890,000
Plan assets:
Balance, January 1, 2016 $ 1,350,000
Actual return on plan assets 135,000
(Expected return on plan assets, $120,000)
Contributions 450,000
Pension benefits paid (189,000)
Balance, December 31, 2016 $ 1,746,000
January 1, 2016, balances:
Prior service cost
(annual amortization $36,000) 216,000
Net loss–pensions
(amortization over 10 years, if needed) 210,000
Required:
1. Calculate Rand’s 2016 pension expense. Show calculations.
2. Prepare Rand’s 2016 journal entries to record pension expense and funding.
3. Prepare the journal entry to record any 2016 gains or losses.
4. Prepare the journal entry to record the 2016 payment of retiree benefits.
Problem III
The postretirement benefit plan of Durable Campers provides health care benefits to retirees. The accumulated postretirement benefit obligation was $100 million at the beginning of 2016. Durable began funding at the end of 2008 and plan assets at the beginning of 2016 were $50 million. Pertinent data were as follows:
Discount rate 8 %
Actual and expected rate of return on plan assets 10 %
2016 service cost $12 million
Employer contribution to plan assets (end of year) 30 million
Retiree benefit payments 6 million
Because of changes in assumptions and estimates of health care costs at the end of 2016, the APBO was determined to be $3 million higher than anticipated.
Required:
1. Determine the accumulated postretirement benefit obligation (APBO) at the end of fiscal year 2016. Show calculations.
2. Determine postretirement benefit expense for fiscal year 2016. Show calculations.
Problem IV
At the beginning of 2016, Couples Home Services had the following:
30 million shares of $1 par common stock $ 30
5 million shares of $100 par, 8% cumulative,
non-participating preferred stock 500
Paid-in capital – excess of par 570
Retained earnings 200
During 2016, Couples earned $240 million. The company declared and paid the contracted amount of preferred dividends plus $2 per share to common shareholders. No dividends had been declared or paid during 2015. On January 8, Couples distributed a 3 for 2 common stock split effected in the form of a stock dividend.
Required:
Calculate the balance in retained earnings to be reported in the 2016 balance sheet.
Multiple Choice
___ 1. The interest component of the pension expense for a defined benefit pension plan is the
a. effective interest rate times the beginning balance in plan assets.
b. effective interest rate times the accumulated benefit obligation.
c. effective interest rate times the unamortized prior service cost.
d. increase in the projected benefit obligation due to the passage of time.
___ 2. Federal Delivery Service began a defined-benefit pension plan for its employees on January 1, 2016. Pertinent data are:
Projected benefit obligation, Dec. 31, 2016 $157,000
Accumulated benefit obligation, Dec. 31, 2016 148,000
Plan assets at fair value, Dec. 31, 2016 131,000
Pension expense for 2016 143,000
Employer's cash contribution, end of 2016 131,000
What amount should Federal report in the balance sheet at December 31, 2016?
a. Net pension asset of $131,000
b. Net pension liability of $157,000
c. Net pension liability of $26,000
d. Net pension liability of $46,000
___ 3. Bearings Manufacturing Company Inc. purchased a new machine on January 1, 2016 for $100,000. The company uses the straight-line depreciation method with an estimated equipment life of 5 years and a zero salvage value for financial statement purposes, and uses the 4-year Modified Accelerated Cost Recovery System (MACRS) with an estimated equipment life of 4 years for income tax reporting purposes. Bearings is subject to a 35% marginal income tax rate. Assume that the deferred tax liability at the beginning of the year is zero and that Bearings has a positive earnings tax position. The MACRS depreciation rates for 4-year equipment are shown below.
Year Rate
1 33.33%
2 44.45
3 14.81
4 7.41
What is the deferred tax liability at December 31, 2016 (rounded to the nearest whole dollar)?
a. $ 7,000
b. $33,330
c. $11,666
d. $ 4,666
___ 4. Shelby Farm has a plan under which retired employees receive medical benefits. On January 1, 2016, Shelby Farm’s accumulated postretirement benefit obligation for this plan was $225 million. Retiree benefits of $27 million were paid at the end of 2016. The service cost for 2016 is $63 million.
Health care costs rose less than expected in 2016, causing the actuary to revise downward the estimate of the APBO by $6 million. The actuary's discount rate is 8%, and there was no prior service cost and an insignificant net loss–AOCI at the end of 2016.
What is Shelby’s accumulated postretirement benefit obligation at December 31, 2016?
a. $306 million
b. $300 million
c. $279 million
d. $273 million
___ 5. A stock dividend
a. increases the debt-to-equity ratio of a firm.
b. decreases future earnings per share.
c. decreases the size of the firm.
d. increases shareholders’ wealth.