Exam 2 – Acct 414 – Spring 2010 Page 18
Name: ______
Exam 2Acct 414 – Corporate Accounting & Reporting II Spring 2010
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 each 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 (50 points) ______
Short Problems
4. Construction accounting (20 points) ______
5. Stock based compensation (15 points) ______
Select ONE (1) of the following problems:
6. Prior service cost (15 points) ______
7. One-person pension (15 points) ______
Maximum = 50 points (I will count the best 1 of 2 pension answers if both 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 = ______/700 = ______%
Quiz and HW percentage = ______%
Projects percentage = ______%
This page intentionally left blank – use for scratch paper if needed
1. #18 From S09. Pension Accounting (45 points). The Deary Drums 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. Plymouth Plows uses the straight-line method, based on average remaining service period of employees, to amortize prior service costs.
2010BALANCES AS OF JANUARY 1, 2009
Projected Benefit Obligation / 240,000
Plan Assets at market / 200,000
Funded status / (40,000)
Unrecognized transition cost/(gain) / 0
Straight-line amortization at $0 per year
Unrecognized Prior Service Cost / 150,000
Straight-line amortization at $15,000 per year
Unrecognized (gains)/losses / 128,000
OTHER INFORMATION:
Service cost for year / 45,000
Discount rate for year / 6.00%
Expected rate of return on plan assets / 8.00%
Actual return on plan assets: gain/(loss) / 20,000
Pension plan contribution / 60,000
Retirement benefits paid during year / 35,000
Average remaining service years related to active employees / 16
Increase/(decrease) in PBO during year due to revised actuarial assumptions / 77,000
REQUIRED:
a. Compute net periodic pension expense for 2010. (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 1/1/11
c. Explain (or show) how the funded status of the pension plan will be displayed on the balance sheet at 12/31/10. Will there be other pension related accounts on the balance sheet? If so, explain where and how they are presented. Provide amounts.
Note: Completing the worksheet provided will be an acceptable answer for a and b and you can also put your answer to c in the bottom right hand corner of the worksheet.
#19 from S09 originally based on KWW12th 19-101
2. Deferred tax asset (55 points)
Yerba Inc. began business on January 1, 2008. Its pretax financial income for the first 3 years was as follows:
2008 $240,000
2009 560,000
2010 1,725,000
The enacted tax rate in 2008 was 35%. The enacted tax rate existing at Dec. 31, 2009 and 2010 is 40%: The following items caused the only differences between pretax financial income and taxable income.
1. On January 2, 2008, heavy equipment costing $500,000 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 / TotalFor tax / $120,000 / $200,000 / $150,000 / $30,000 / 0 / $500,000
For accounting / 100,000 / 100,000 / 100,000 / 100,000 / 100,000 / 500,000
2. In 2009, the company collected first and last years’ rent in the total amount of $180,000. Of this amount, $90,000 was earned in 2009; the other $90,000 will be earned in 2011. The full $180,000 was included in taxable income in 2009.
3. The company pays $8,000 a year for life insurance on officers.
4. In 2009, the company had a long-term construction contract on which it recognized a gross profit of $120,000 in 2009 and $150,000 in 2010 on the income statement under the percentage of completion method. For tax purposes, the company uses the completed contract method. The contract is expected to be completed in 2012.
5. In 2010, an officer of the company was killed in an automobile accident and the company collected on the $1,000,000 life insurance policy.
Instructions
(a) The working paper shows the inventory of temporary differences from 2008. You are to compute taxable income and income tax payable/receivable for the 2009 and 2010 using the working paper. If you do not use the working paper provided, prepare an inventory of the deferred tax (asset) and liability and determine the net deferred tax asset or liability as of 12/31/09 and 12/31/10.
(b) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2009.
(c) What amounts would appear on the balance sheet related to deferred taxes as of 12/31/2010 (give the section and amount).
Answers to (a) and (c) may be provided on the working paper (page 14) but please write the formal journal entry either HERE or on the bottom of the working paper.
Answers for Problem 2
(a) Compute taxable income and income tax payable/receivable for the 2009 and 2010 as well as an inventory of temporary differences to determine net deferred tax liability as of 12/31/09 and 12/31/10.
I can grade from workpaper if used
(b) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2009. (Workpaper answer is NOT sufficient for this one!)
(c) What amounts would appear on the balance sheet related to deferred taxes as of 12/31/2010 (give the section and amount).
You MAY use the worksheet but additional details about computations should be entered here if that will explain the numbers on the worksheet.
From spring 09 exam, modified – original based on KWW 12th Pr. 16-130
3. Earnings per share (50 points)
In 2009, net income for Winthrop Corp. was $5,575,000. Its tax rate was 40%.
On January 1, 2009 there were 1,000,000 shares of common stock outstanding with another 100,000 shares held as treasury stock. On Feb. 1, Winthrup issued 800,000 new shares of common stock. On June 30, Winthrop issued a 50% stock dividend. On November1, Winthrup sold 50,000 shares of the treasury stock for $53 per share.
There are 750,000 options to buy common stock at $50 a share outstanding. The market price of the common stock averaged $60 during 2009 (both market price and option price have already been adjusted for the stock dividend).
During 2009, there were 500,000 shares of convertible 8% preferred stock outstanding. The par value is $100 and each share is convertible into 30 shares of common stock after the stock dividend. No preferred shares were converted during 2009.
Winthrop issued $10,000,000 of 9% convertible bonds at face value during 2006. The semiannual bonds mature in 2016. Each $5,000 bond is convertible into 300 shares of common stock after the stock dividend. No bonds were converted during 2009.
Instructions
(a) Compute the weighted average number of common shares outstanding.
Dates / Outstanding / Adjustment / Months / WeightedWeighted average = ______shares
Problem 3 (continued)
Regardless of your answer to (a), assume that the weighted average number of common shares outstanding is 2,000,000 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. $______
Numerator / Denominator / Per ShareNet income / $5,575,000 / 2,000,000
4. #7 from F08 Long-term construction accounting (20 points)
On July 14, 2009 Western Construction Co. entered into a contract with the Falls City to build a bridge for $12,000,000. Construction began immediately and was completed in November 2010. Data relating to the construction are:
2009 2010
Costs incurred $2,750,000 $7,250,000
Estimated costs to complete 6,250,000 —
Progress Billings 3,000,000 9,000,000
Instructions
a. How much revenue should be reported for 2009 under the percentage-of-completion method? Show your computation. (Please round % to two decimal places, e.g., 14.33%)
b. Make the entry to record the revenue and gross profit for 2009 (percentage-of-completion method).
c. What is the amount that will appear on the balance sheet for the year ended 12/3109 assuming the percentage of completion method is used? (Give the title as well as the amount and the section where it will appear.)
d. What is the amount that will appear on the balance sheet for the year ended 12/3109 assuming the completed contract method is used? (Give the title as well as the amount and the section where it will appear.)
5. Stock option plan (15 points) Extremely similar to F08 & F09 questions
Family Inc. is a publicly traded company. The president, John Brothers, was given stock options to acquire 60,000 shares of Family’s $5 par value common stock for $35 each. The options were granted on December 31, 2009 when the stock was selling for $35 per share. Mr. Brothers cannot exercise his stock options until January 1, 2012. If not exercised, the options will expire on December 31, 2014. There is no way he will be allowed to receive the cash value of difference between market price and exercise price. The relevant market prices and fair values at each date are given in the table below. Assume that John Brothers exercised all the options on Sept. 25, 2013 when the common stock was selling for $49 per share. If no entry is needed at the specified dates, the answer is “not applicable.”
12/31/09 / $35 / $4
12/31/10 / $38 / $8
12/31/11 / $31 / $7
12/31/12 / $42 / $9
9/25/13 / $49 / $14
Prepare all necessary entries on Family Inc.’s books, including the exercise of all options in 2012.
Work ONE of the two following pension-related problems (If you work both, I’ll count the higher of the two scores)
6. #4 from F09 modified. Amortization of prior service cost using years-of-service method. (15 points)
On January 1, 2010, Harvard Harvester Inc. amended its pension plan which caused an increase of $8,000,000 in its projected benefit obligation. The company has 153 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 / Year of retirement (on Dec 31) / Remaining Years of Employment20 / 2014 / 5 years
15 / 2019 / 10 years
38 / 2024 / 15 years
80 / 2029 / 20 years
153
Instructions
(a) What is the average remaining service life?
(b) Using the straight-line method, what would amortization of prior service costs be for 2010?
(c) Using the years-of-service method, what would amortization of prior services costs be for 2023?
7. Time Value of Money (15 points)
Basically same as F09 but this one asks for service cost instead of PBO
Idaho Genetics Inc Inc. has a pension plan for its sole employee. She has already received credit for 20 years of prior service and is expected to work 15 years more years until retirement. After retirement, she should collect pension payments for 25 years. The pension plan's benefit formula is final year’s annual salary times years of service times 2%. Her current salary is $90,000 with estimated future pay increases to average 5% per year for 15 years. What is the normal service cost related to the year just ended for the work she performed during 2009?
You may assume ordinary annuities and end-of-year annual payments upon retirement and a 5% per annum discount rate.
Normal service cost for 2009 = $______
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 Temporary difference – deferred tax liability
B Temporary difference – deferred tax asset
C Permanent difference
D None of the above
______1. Unrealized gain on marketable securities.
______2. Contingent liability for court costs related to customer injury case.