1. (TCO A) An alternative available when the seller is exposed to continued risks of ownership
through return of the product is (Points: 10)
Recording the sale, and accounting for returns as they occur in future periods.
Not recording a sale until all return privileges have expired.
Recording the sale, but reducing sales by an estimate of future returns.
All of the above.
2. (TCO A) The percentage-of-completion method must be used when certain conditions exist.
Which of the following is NOT one of those necessary conditions? (Points: 15)
Estimates of progress toward completion, revenues, and costs are reasonably
dependable.
The contractor can be expected to perform the contractual obligation.
The buyer can be expected to satisfy some of the obligations under the contract.
The contract clearly specifies the enforceable rights of the parties, the consideration to be
exchanged, and the manner and terms of settlement.
3. (TCO A) Melton Construction Co. began operations in 2010. Construction activity for 2010 is
shown below. Melton uses the completed-contract method.
Billings Collections
Estimated
Contract
Costs to
Through
Through
Costs to
Contract
Price
12/31/10
12/31/10 12/31/10
Complete
1
$3,200,000 $3,150,000 $2,600,000 2,150,000
-0-
2
3.600,000 1,500,000 1,000,000
3
3,300,000 1,900,000 1,800,000 2,250,000 1,200,000
820,000 1,880,000
Which of the following should be shown on the balance sheet at December 31, 2010 related to
Contract 2?
(Points: 15)
Inventory, $680,000
Inventory, $820,000
Current liability, $680,000
Current liability, $1,500,000
$1,500,000 – $820,000 = $680,000
1. (TCO B) Markes Corporation's partial income statement after its first year of operations is as
follows:
Income before Income Taxes
$3,750,000
Income Tax expense
Current
$1,035,000
Deferred
90,000
__________ 1,125,000
__________
Net Income
$2,625,000
Markes uses the straight-line method of depreciation for financial reporting purposes and
accelerated depreciation for tax purposes. The amount charged to depreciation expense on its
books this year was $1,500,000. No other differences existed between book income and taxable
income except for the amount of depreciation.
Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation's tax
return for the current year?
(Points: 10)
$1,200,000
$1,425,000
$1,500,000
$1,800,000
30% × Temporary Difference) = $90,000;
Temporary Difference = ($90,000 ÷ 30%) = $300,000;
$1,500,000 + $300,000 = $1,800,000.
2. (TCO B) Machinery was acquired at the beginning of the year. Depreciation recorded during
the life of the machinery could result in
a.
b.
c.
d.
Future
Future
Taxable Amounts Deductible Amounts
Yes
Yes
Yes
No
No
Yes
No
No (Points: 8)
A
B
C
D
3. (TCO B) Deferred taxes should be presented on the balance sheet (Points: 10)
As one net debit or credit amount.
In two amounts: one for the net current amount and one for the net noncurrent amount.
In two amounts: one for the net debit amount and one for the net credit amount.
As reductions of the related asset or liability accounts.
4. (TCO B) Recognition of deferred tax asset.
a. Describe a deferred tax asset.
b. When should a deferred tax asset be reduced by a valuation allowance?
(Points: 12)
(a) A deferred tax asset is the deferred tax consequences attributable to deductible
temporary differences and operating loss carryforwards.
(b) A deferred tax asset should be reduced by a valuation allowance if, based on all
available evidence, it is more likely than not that some portion or all of the
deferred tax asset will not be realized. More likely than not means a level of
likelihood that is at least slightly more than 50%.
1. (TCO C) Measuring and recording pension expense.
Presented below is information related to the pension plan of Zimmer Inc. for the year 2011.
1. The service cost related to pension expense is $240,000 using the projected benefits approach.
2. The projected benefit obligation and the accumulated benefit obligation at the beginning of the
year are $300,000 and $280,000, respectively. The expected return on plan assets is 9% and the
settlement rate is 10%.
3. The accumulated OCI – prior service cost at the beginning of the year is $140,000. The
company has a workforce of 200 employees, and all are expected to receive benefits under the
plan. The total number of service-years is 1,000 and the service-years attributable to 2011 is 200.
The company has decided to use the years-of-service method of amortization for these costs.
4. At the beginning of the period, fair value of pension plan assets, $280,000. The company had an
Accumulated OCI (loss) at the beginning of the period of $90,000. Any amortization of
unrecognized net loss is recognized on a straight-line basis over the average remaining service-life
of the employees.
5. The contribution made to the pension fund in 2011 was $231,000.
Instructions
(a) Determine the pension expense to be reported on the income statement for 2011. (Round all
computations to nearest dollar.)
(b) Prepare the journal entry(ies) to record pension expense for 2011.
(Points: 25)
(a)
Service cost
Interest on projected benefit obligation (10% × $300,000)
Expected return on plan assets (9% × $280,000)
Amortization of prior service cost (1)
Amortization of loss (2)
Pension expense
$240,000
30,000
(25,200)
28,000
12,000
$284,800
(1)
$140,000
1,000
= $140
200 × $140 = $28,000
(2) Fair value of plan assets
$280,000
10%
$ 28,000
$300,000
10%
$ 30,000
Projected benefit obligation
Net loss (beginning of period)
($ 90,000)
Higher of 10% of projected benefit obligation or fair value of plan assets
30,000
Amount to be amortized
($ 60,000)
1,000
Expected Future Years of Service
=
200
$60,000
5 years
(b)
= 5 years
Number of Employees
= $12,000
Pension Expense .............................................................................
OCI (G/L)...............................................................................
OCI-PSC ................................................................................
Pension Asset / Liability ........................................................
Cash........................................................................................
284,800
2. (TCO C) A pension fund gain or loss that is caused by a plant closing should be (Points: 10)
Recognized immediately as a gain or loss on the plant closing.
Spread over the current year and future years.
Charged or credited to the current pension expense.
Recognized as a prior period adjustment.
12,000
28,000
13,800
231,000
3. (TCO C) On January 1, 2008, Nen Co. has the following balances:
Projected benefit obligation $4,200,000
Fair value of plan assets
3,750,000
The settlement rate is 10%. Other data related to the pension plan for 2008 are:
Service cost
$240,000
Amortization of unrecognized prior service costs 54,000
Contributions
270,000
Benefits paid
225,000
Actual return on plan assets
264,000
Amortization of unrecognized net gain
18,000
The fair value of plan assets at December 31, 2008 is
(Points: 10)
$3,531,000
$3,789,000
$4,059,000
$4,284,000
$3,750,000 + $264,000 + $270,000 – $225,000 = $4,059,000.
1. (TCO D) For a sales-type lease (Points: 15)
The sales price includes the present value of the unguaranteed residual
value.
The present value of the guaranteed residual value is deducted to
determine the cost of goods sold.
The gross profit will be the same whether the residual value is
guaranteed or unguaranteed.
None of the above.
2. (TCO D) In the earlier years of a lease, from the lessee's perspective, the use
of the (Points: 10)
Capital method will enable the lessee to report higher income, compared
to the operating method.
Capital method will cause debt to increase, compared to the
operating method.
Operating method will cause income to decrease, compared to the capital
method.
Operating method will cause debt to increase, compared to the capital
method.
3. (TCO D) Eby Company leased equipment to the Mills Company on July 1,
2008, for a 10-year period expiring June 30, 2018. Equal annual payments under
the lease are $80,000 and are due on July 1 of each year. The first payment was
made on July 1, 2008. The rate of interest contemplated by Eby and Mills is 9%.
The cash selling price of the equipment is $560,000 and the cost of the
equipment on Eby's accounting records was $496,000. Assuming that the lease
is appropriately recorded as a sale for accounting purposes by Eby, what is the
amount of profit on the sale and the interest revenue that Eby would record for
the year ended December 31, 2008? (Points: 20)
$64,000 and $50,400
$64,000 and $43,200
$64,000 and $21,600
$0 and $0
$560,000 – $496,000 = $64,000; ($560,000 – $80,000) × .09 × 6/12 = $21,600