ACC 306 Week 3

ACC 306 Week 3 Quiz

Assignments

E 1624 - DePaul Corporation - Balance sheet classification ? LO4 LO5 LO6 LO8

At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account and a $68 million balance in its deferred tax liability account. The balances were due to the following cumulative temporary differences:

1. Estimated warranty expense, $15 million: expense recorded in the year of the sale; tax-deductible when paid (one-year warranty).

2.Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax return.

3.Income from installment sales of properties, $50 million: income recorded in the year of the sale; taxable when received equally over the next five years.

4.Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax purposes.

Required:

Show how any deferred tax amounts should be classified and reported in the December 31 balance sheet. The tax rate is 40%.

E 1625 - Case Development - Multiple tax rates; balance sheet classification ? LO1 LO4 LO5 LO8

Case Development began operations in December 2011. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the installment method. 2011 installment income was $600,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for

20122014 are as follows:

2012 $150,000 30%

2013 250,000 40

2014 200,000 40

Pretax accounting income for 2011 was $810,000, which includes interest revenue of $10,000 from municipal bonds. The enacted tax rate for 2011 is 30%.

Required:

1.Assuming no differences between accounting income and taxable income other than those described above, prepare the appropriate journal entry to record Cases 2011 income taxes.

2.What is Cases 2011 net income?

3.How should the deferred tax amount be classified in a classified balance sheet?

E 1710 - Abbott and Abbott - Determine pension expense ? LO6 LO7

Abbott and Abbott has a noncontributory, defined benefit pension plan. At December 31, 2011, Abbott and Abbott received the following information:

The expected long-term rate of return on plan assets was 10%. There was no prior service cost and a negligible net lossAOCI on January 1, 2011.

Required:

1.Determine Abbott and Abbotts pension expense for 2011.

2.Prepare the journal entries to record Abbott and Abbotts pension expense, funding, and payment for 2011.

E 1719 Record pension expense, funding, and gains and losses; determine account balances ? LO6 LO7 LO8

Beale Management has a noncontributory, defined benefit pension plan. On December 31, 2011 (the end of Beales fiscal year), the following pension-related data were available:

Required:

1.Prepare the 2011 journal entry to record pension expense.

2.Prepare the journal entry(s) to record any 2011 gains and losses.

3.Prepare the 2011 journal entries to record the contribution to plan assets and benefit payments to retirees.

4.Determine the balances at December 31, 2011, in the PBO, plan assets, the net gainAOCI, and prior service costAOCI and show how the balances changed during 2011. [Hint: You might find T-accounts useful.]

5.What amount will Beale report in its 2011 balance sheet as a net pension asset or net pension liability for the funded status of the plan?

P 167 - Sherrod, Inc. - Multiple differences; a. calculate taxable income; balance sheet classification ? LO4 LO6 LO8

Sherrod, Inc., reported pretax accounting income of $76 million for 2011. The following information relates to differences between pretax accounting income and taxable income:

a.Income from installment sales of properties included in pretax accounting income in 2011 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end had a balance of $4 million (representing portions of 2010 and 2011 installment sales), expected to be collected equally in 2012 and 2013.

b. Sherrod was assessed a penalty of $2 million by the Environmental Protection Agency for violation of a federal law in 2011. The fine is to be paid in equal amounts in 2011 and 2012.

c. Sherrod rents its operating facilities but owns one asset acquired in 2010 at a cost of $80 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):

d.Bad debt expense of $3 million is reported using the allowance method in 2011. For tax purposes, the expense is deducted when accounts prove uncollectible (the direct write-off method): $2 million in 2011. At December 31, 2011, the allowance for uncollectible accounts was $2 million (after adjusting entries). The balance was $1 million at the end of 2010.

e.In 2011, Sherrod accrued an expense and related liability for estimated paid future absences of $7 million relating to the companys new paid vacation program. Future compensation will be deductible on the tax return when actually paid during the next two years ($4 million in 2012; $3 million in 2013).

f.During 2010, accounting income included an estimated loss of $2 million from having accrued a loss contingency. The loss is paid in 2011 at which time it is tax deductible.

Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2011, were $1.2 million and $2.8 million, respectively. The enacted tax rate is 40% each year.

Required:

1.Determine the amounts necessary to record income taxes for 2011 and prepare the appropriate journal entry.

2.What is the 2011 net income?

3.Show how any deferred tax amounts should be classified and reported in the 2011 balance sheet.

P 1716 Lakeside Cable - Comprehensive reporting a pension plan; pension spreadsheet; determine changes in balances; two years ? LO3 through LO8

Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011:

Required:

1.Determine Lakesides pension expense for 2011 and prepare the appropriate journal entries to record the expense as well as the cash contribution to plan assets and payment of benefits to retirees.

2.Determine the new gains and/or losses in 2011 and prepare the appropriate journal entry(s) to record them.

3.Prepare a pension spreadsheet to assist you in determining end of 2011 balances in the PBO, plan assets, prior service costAOCI, the net lossAOCI, and the pension liability.

4.Assume the following actuary and trustee reports indicating changes in the PBO and plan assets of Lakeside Cable during 2012: Determine Lakesides pension expense for 2012 and prepare the appropriate journal entries to record the expense, the cash funding of plan assets, and payment of benefits to retirees.

5.Determine the new gains and/or losses in 2012 and prepare the appropriate journal entry(s) to record them.

6.Using T-accounts, determine the balances at December 31, 2012, in the net lossAOCI and prior service costAOCI.

7.Confirm the balances determined in Requirement 6 by preparing a pension spreadsheet.

Discussion Questions

Integrating Case 165 - Williams-Santana, Inc. - Tax effects of accounting changes and error correction; six situations ? LO1 LO2 LO8

Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training. In 2011, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2011 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.

a.A five-year casualty insurance policy was purchased at the beginning of 2009 for $35,000. The full amount was debited to insurance expense at the time.

b. On December 31, 2010, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system.

c.The company changed inventory cost methods to FIFO from LIFO at the end of 2011 for both financial statement and income tax purposes. The change will cause a $960,000 increase in the beginning inventory at January 1, 2010.

d. At the end of 2010, the company failed to accrue $15,500 of sales commissions earned by employees during 2010. The expense was recorded when the commissions were paid in early 2011.

e. At the beginning of 2009, the company purchased a machine at a cost of $720,000. Its useful life was estimated to be 10 years with no salvage value. The machine has been depreciated by the double declining- balance method. Its carrying amount on December 31, 2010, was $460,800. On January 1, 2011, the company changed to the straight-line method.

Ethics Case 176 - VXI International - 401(k) plan contributions ? LO1

You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet air- craft. VXI began a defined contribution pension plan three years ago. The plan is a so-called 401(k) plan (named after the Tax Code section that specifies the conditions for the favorable tax treatment of these plans) that permits voluntary contributions by employees. Employees contributions are matched with one dollar of employer contribution for every two dollars of employee contribution. Approximately $500,000 of contributions is deducted from employee paychecks each month for investment in one of three employer-sponsored mutual funds.

While performing some preliminary audit tests, you happen to notice that employee contributions to these plans usually do not show up on mutual fund statements for up to two months following the end of pay periods from which the deductions are drawn. On further investigation, you discover that when the plan was first begun, contributions were invested within one week of receipt of the funds. When you question the firms investment manager about the apparent change in the timing of investments, you are told, Last year Mr. Maxwell (the CFO) directed me to initially deposit the contributions in the corporate investment account. At the close of each quarter, we add the employer matching contribution and deposit the combined amount in specific employee mutual funds.

Required:

1.What is Mr. Maxwells apparent motivation for the change in the way contributions are handled?

1. Do you perceive an ethical dilemma?