Intermediate II Test 3

A. return on plan assets. Return on plan assets is reported in the income statement as a component of pension expense and is not reported as a component of other comprehensive income.

A statement of comprehensive income does not include: A. return on plan assets. B. losses from the return on assets falling short of expectations. C. gains from changes in estimates regarding the PBO. D. net income.

B. is a shareholders' equity account. Accumulated other comprehensive income (AOCI) is reported in the shareholders' equity section of the balance sheet.

Accumulated other comprehensive income: A. is a liability. B. is a shareholders' equity account. C. is an asset. D. is reported in the income statement.

A. $36 million $100 million − $64 [8% × $100 par × 4 million shares × 2 years (the current year plus one year in arrears)].

At the beginning of 2021, Priester Dental Supplies had outstanding 4 million shares of $100 par, 8% cumulative, non-participating preferred stock and 20 million shares of $1 par common stock. During 2021, Priester declared and paid cash dividends of $100 million. No dividends had been declared or paid during 2020. On January 12, Priester issued a 5% common stock dividend when the quoted market price the common stock was $20 per share. What amount of cash did Priester distribute to common shareholders? A. $36 million B. $56 million C. $68 million D. $100 million

B. Reported as a loss. A property dividend is recorded at the fair value of the assets distributed. This may require revaluing the assets prior to recording the dividend which can produce a gain or loss.

Chapman Chairs, a family-owned corporation, declared and distributed a property dividend from its overstocked inventory in place of its usual cash dividend. The inventory's book value exceeded its fair value. The excess is: A. Not reported. B. Reported as a loss. C. Reported as other comprehensive income. D. Reported as a direct reduction of shareholders' equity.

D. Option d The difference between the cash received and the treasury stock balance is credited to paid-in capital-share repurchase.

Dunavant Service Company views share repurchases as treasury stock. Dunavant purchased shares and then later sold the shares at more than their acquisition price. What is the effect of the sale of the treasury stock on each of the following? Retained Earnings. Paid-in capital A. increase increase B. increase no effect C. no effect no effect D. no effect increase A. Option a B. Option b C. Option c D. Option d

B. $13 million Plus the present value of all future interest payments at the market or effective rate of interest.

Encore Industries owned investment securities with a book value of $45 million on August 12. At that time, Encore's board of directors declared a property dividend consisting of these securities. The fair value of the securities was as follows: Declaration - August 12$58million Record date - September 1 62million Distribution date - September 20 60million What amount of gain should Encore recognize in earnings in connection with this property dividend? A. $0 B. $13 million C. $15 million D. $17 million

C. Option c The treasury stock is deducted from total shareholders' equity as a separate line item - it is not part of either paid-in capital or retained earnings.

Gabriel Company views share buybacks as treasury stock. In its first treasury stock transaction, Gabriel purchased treasury stock for more than the price at which the stock was originally issued. What is the effect of the purchase of the treasury stock on each of the following? Paid-in capital. Retained eaernings A. decrease decrease B. decrease no effect C. no effect no effect D. no effect decrease A. Option a B. Option b C. Option c D. Option d

C. The increase in the projected benefit obligation due to the passage of time. Interest cost is the amount of interest that accrues on the beginning of the period projected benefit obligation (PBO).

In an employer-sponsored defined benefit pension plan, the interest cost included in the pension expense represents: A. The effective discount rate times the unamortized balance of prior service costs. B. The increase in the fair value of plan assets due to the passage of time. C. The increase in the projected benefit obligation due to the passage of time. D. The difference between the actual and expected returns on plan assets.

B. The increase in the projected benefit obligation due to the passage of time. Interest cost is the amount of interest that accrues on the beginning of the period projected benefit obligation (PBO).

In an employer-sponsored defined benefit pension plan, the interest cost included in the pension expense represents: A. The effective discount rate times the unamortized balance of prior service costs. B. The increase in the projected benefit obligation due to the passage of time. C. The increase in the fair value of plan assets due to the passage of time. D. The difference between the actual and expected returns on plan assets.

A. The increase in the projected benefit obligation due to the passage of time. Interest cost is the amount of interest that accrues on the beginning of the period projected benefit obligation (PBO).

In an employer-sponsored defined benefit pension plan, the interest cost included in the pension expense represents: A. The increase in the projected benefit obligation due to the passage of time. B. The effective discount rate times the unamortized balance of prior service costs. C. The increase in the fair value of plan assets due to the passage of time. D. The difference between the actual and expected returns on plan assets.

D. as part of its total compensation costs. In the income statement, companies report the service cost component of pension expense as part of the total compensation costs arising from services rendered by the employees during the period, separate from the other components of pension expense. This presentation reflects the nature of service cost being different from that of the other elements of pension cost. The other components of pension expense are presented in the income statement also, but separate from the service cost component and outside the subtotal of income from operations.

In its income statement, a company should report the service cost component of pension expense: A. separate from the other (non-service cost) components and outside the subtotal of income from operations. B. as part of its total service cost that includes past service cost. C. as part of its non-operating income. D. as part of its total compensation costs.

C. $680 million $680 million: Service cost ($490) + interest expense ($380) − expected return on plan assets ($220) + amortization of net loss-AOCI ($30) [in millions]

Information regarding the defined benefit pension plan of Amber Beverages included the following for 2021 ($ in millions): Service cost $490 Interest cost 380 Actual and expected return on plan assets 220 Amortization of net loss-AOCI 30 Prior service cost-AOCI none Employer contributions to the pension plan (end of year) 500 Amber should report pension expense for 2021 in the amount of: A. $180 million B. $650 million C. $680 million D. $870 million

A. $10 million $10 million: Beginning balance ($70) + actual return (?) + contributions ($42) − retiree benefits paid ($17) = ending balance ($105) [in millions]

Information regarding the defined benefit pension plan of Certainty Services included the following for 2021 ($ in millions): Plan assets, January 1$70 Plan assets, December 31 105 Retiree benefits paid (end of year) 17 Employer contributions to the pension plan (end of year) 42 What was the actual return on plan assets for 2021? A. $10 million B. $24 million C. $35 million D. $60 million

C. $216 million $216 million: Beginning balance ($210) + actual return ($30) + contributions ($126) − retiree benefits paid ($150) = ending balance (?) [in millions]

Information regarding the defined benefit pension plan of Glavin Industries included the following for 2021 ($ in millions): Plan assets, January 1 $210 Retiree benefits paid (end of year) 150 Actual return on plan assets 30 Employer contributions to the pension plan (end of year) 126 Expected rate of return on plan assets 10% What was the amount of Glavin's plan assets at December 31, 2021? A. $156 million B. $207 million C. $216 million D. $516 million

C. $210 million $210 million: Beginning balance ($350) + actual return ($50) + contributions (?) − retiree benefits paid ($85) = ending balance ($525) [in millions]

Information regarding the defined benefit pension plan of Melrose Products included the following for 2021 ($ in millions): Plan assets, January 1 $350 Plan assets, December 31 525 Retiree benefits paid (end of year) 85 Return on plan assets 50 What were the employer contributions to the pension plan at the end of 2021? Multiple Choice A. $30 million B. $175 million C. $210 million D. $225 million

B. $51 million $51 million: Beginning balance ($210) + actual return ($30) + contributions ($126) − retiree benefits paid (?) = ending balance ($315) [in millions]

Information regarding the defined benefit pension plan of Neo Products included the following for 2021 ($ in millions): Plan assets, January 1 $210 Plan assets, December 31 315 Return on plan assets 30 Employer contributions to the pension plan (end of year) 126 What amount of retiree benefits was paid at the end of 2021? A. $21 million B. $51 million C. $72 million D. $105 million

A. $56 million Explanation $56 million. Service cost ($48) + interest cost ($32) − expected return on plan assets ($26) − amortization of unrecognized net gain ($3) + amortization of unrecognized prior service cost ($5) [in millions]

Information regarding the defined benefit pension plan of Tri Cities Transport included the following for 2021 ($ in millions): Service cost$48 Interest cost 32 Actual and expected return on plan assets 26 Amortization of net gain-AOCI 3 Amortization of prior service cost-AOCI 5 Retiree benefits paid (end of year) 50 What is Tri Cities' pension expense for 2021? A. $56 million B. $62 million C. $98 million D. $164 million

D. $35 million $35 million: Pension liability is the difference between PBO and the fair value of the plan assets.

Information regarding the defined-benefit pension plan of Pauline Products included the following for 2021 ($ in millions): December 31: Projected benefit obligation (PBO) $85 Accumulated benefit obligation (ABO) 75 Plan assets 50 Pension expense 8 No contributions were made to the pension plan assets during 2021. At December 31, 2021, what amount should Hall report as its net pension liability? A. $10 million B. $25 million C. $27 million D. $35 million

C. accumulated other comprehensive income will increase by $18 million. Accumulated other comprehensive income will increase by $18 million. $24 − ($54 − $48)

JL Health Services reported a net loss-AOCI in last year's balance sheet. This year, the company revised its estimate of future salary levels causing its PBO estimate to decline by $24. Also, the $48 million actual return on plan assets was less than the $54 million expected return. As a result: A. the statement of comprehensive income will report a $6 million gain and a $24 million loss. B. the net pension liability will increase by $18 million. C. accumulated other comprehensive income will increase by $18 million. D. the net pension liability will decrease by $24 million.

C. $130,000 $130,000: Net pension liability is the difference between PBO and the fair value of the plan assets.

McLimore Inc. began a defined-benefit pension plan for its employees on January 1, 2021. The following data are provided for 2021, as of December 31, 2021: Projected Benefit obligation: 785,000 Accumulated Benefit Obligation: 740,000 Plan Assets at Fair Value: 655,000 Pension Expense: 715,000 Employer's Cash Contributions: 655,000 What amount should Van Nuen report as its net pension liability at December 31, 2021? A. $45,000 B. $85,000 C. $130,000 D. $0

A. Option a Paid-in capital is reduced (debited) for the purchase price. Cash is credited for the amount paid to reacquire the stock. The (debit) plug is to retained earnings.

Motorsports Company retires shares it buys back. In its first share repurchase transaction, Motorsports purchased stock for more than the price at which the stock was originally issued. What is the effect of the purchase of the stock on each of the following? Retained Earnings Paid-in capital A. decrease decrease B. decrease no effect C. no effect no effect D. no effect increase A. Option a B. Option b C. Option c D. Option d

B. $540 million $540 million. Service cost ($480) + interest expense ($150) − expected return on plan assets ($105) + amortization of unrecognized prior service cost ($15) [in millions]

Panther Products sponsors a defined benefit pension plan. The following information pertains to that plan: Service cost for 2021 $480million Actual and expected return on plan assets for 2021 $105million 2021 amortization of prior service cost $15million Interest on pension obligation for 2021 $150million Retiree benefits paid during 2021 $30million The pension expense that Panther should report in its 2021 income statement is: A. $510 million B. $540 million C. $630 million D. $750 million

C. $11 million Increase each year during the term $13 million ($22 − $9) would be allocated to the common stock. The Common stock account would be credited for $2 million, with the remaining $11 million going to paid-in capital - excess of par to maturity. The bonds are recorded as maturity value minus unamortized discount. As the discount is amortized to zero, the reported liability increases.

Sanderson Sofas, a family-owned corporation, issued 6.75% bonds with a face amount of $12 million, together with 2 million shares of its $1 par value common stock, for a combined cash amount of $22 million. The market value of Sanderson's stock cannot be determined. The bonds would have sold for $9 million if issued separately. Sanderson should record for paid-in capital - excess of par on the transaction in the amount of: A. $8 million B. $9 million C. $11 million D. $13 million

$164.4 million Explanation: $164.4 million. Beginning balance ($144) + service cost ($36) + interest expense ($144 × 10%) − benefits paid ($30) [in millions]

The Colorado Copper Company sponsors a defined benefit pension plan. The following information pertains to that plan: Projected Benefit Obligation at Jan. 1 2021: $144 million Service Cost for 2021: $36 million Retiree benefits paid (end of year): $30 million Discount rate: 10% No change in actuarial estimates occurred during 2021. What is CCC's projected benefit obligation at December 31, 2021? A. $164.4 million B. $158.4 million C. $150.0 million D. $128.4 million

C. Option c Common stock is debited for $1 ($1/share × 1); Paid-in capital is debited for $6 ($6/share × 1); Cash is credited for $9; Retained earnings is debited for $2 (plug). [all amounts in millions, unless otherwise specified].

The balance sheet of Epsom Services included the following shareholders' equity section at December 31, 2021: ($ in millions) Common stock ($1 par value, authorized 100 million shares, issued and outstanding 90 million shares) $90 Paid-in capital - excess of par 540 Retained earnings 280 Total shareholders' equity $910 On January 5, 2022, Epsom purchased and retired 1 million shares for $9 million. Immediately after retirement of the shares, the balances in the paid-in capital - excess of par and retained earnings accounts are: Paid-in capital - Retained excess of par earnings A. $540 $280 B. $534 $272 C. $534 $278 D. $532 $280 A. Option a B. Option b C. Option c D. Option d

A. Option a The treasury stock is deducted from total shareholders' equity as a separate line item - it is not part of either paid-in capital or retained earnings.

The balance sheet of Holmes Services included the following shareholders' equity section at December 31, 2021: ($ in millions) Common stock ($1 par value, authorized 100 million shares, issued and outstanding 90 million shares) $90 Paid-in capital - excess of par 540 Retained earnings 280 Total shareholders' equity $910 On January 5, 2022, Holmes purchased 1 million treasury shares for $9 million. Immediately after the purchase of the shares, the balances in the paid-in capital - excess of par and retained earnings accounts are: Paid-in capital - Retained excess of par. earnings A. $540 $280 B. $540 $272 C. $534 $278 D. $532 $280 A. Option a B. Option b C. Option c D. Option d

B. Service cost. Service cost is the increase in the PBO attributable to employee service performed during the period.

The component of periodic pension expense that represents the present value of the increase in an employer's pension obligation to employees because of their services rendered during the current period is the: A. Current cost. B. Service cost. C. Accumulated benefit obligation (ABO). D. Projected benefit obligation (PBO).

C . $58 million On Feb 4, additional paid-in capital was credited for $56 [4 million shares × $14/share ($15 − $1 par)]. On Oct 12, there was no impact on the account. On Dec 30, it was credited for $2 [1 million shares − $2/share ($20 − $18 cost)].

The corporate charter of CD, Inc. authorized the issuance of 6 million, $1 par common shares. During 2021, its first year of operations, CD had the following transactions: February 4 sold 4 million shares at $15 per share October 12 purchased 1 million treasury shares at $18 per share December 30 resold the 1 million treasury shares at $20 per share What amount should CD report as additional paid-in capital in its December 31, 2021, balance sheet? A. $37 million B. $56 million C . $58 million D. $61 million

D. $61 million On Feb 4, additional paid-in capital was credited for $56 [4 million shares × $14/share ($15 − $1 par)]. On Oct 12, it was debited for $14 (1 million shares × $14/share). On Dec 30, it was credited for $19 [1million shares × $19/share ($20 − $1 par)].

The corporate charter of Pharaoh Tent Co. authorized the issuance of 6 million, $1 par common shares. During 2021, its first year of operations, Pharaoh had the following transactions: February 4 sold 4 million shares at $15 per share October 12 retired 1 million shares at $18 per share December 30 sold the 1 million shares at $20 per share What amount should Pharaoh report as additional paid-in capital in its December 31, 2021, balance sheet? A. $37 million B. $56 million C. $58 million D. $61 million

D. $89 million The beginning balance in retained earnings ($300) + net income (?) − cash dividends ($45) − the amount capitalized in the stock dividend [$6 (common stock) + $24 (paid-in capital − excess of par)] = ending balance in retained earnings ($314).

The following data were reported in the shareholders' equity section of the Jetson Company's comparative balance sheets for the years ended December 31: 2021 2020 Common stock, $1 par/share.$306 $300 Paid-in capital - excess par. 174. 150 Retained Earnings 314. 300 During 2021, Jetson declared and paid cash dividends of $45 million. The company also declared and issued a stock dividend. No other changes occurred in shares outstanding during 2021. What was Jetson's net income for 2021? A. $14 million B. $59 million C. $65 million D. $89 million

B. A decrease in the balance of retained earnings. The only impact on shareholders' equity accounts of treasury stock transactions are: Paid-in capital - treasury stock may either increase or decrease, and retained earnings may decrease.

Treasury stock transactions may cause: A. An increase in the balance of retained earnings. B. A decrease in the balance of retained earnings. C. An increase or a decrease in the amount of net income. D. An increase or a decrease in the par value per share.

D. Option d The stock dividend is a capitalization of retained earnings.

What is the effect of the declaration and subsequent issuance of a 5% stock dividend on each of the following? Retained Earnings. Paid-in capital A. No effect No effect B. No effect Increase C. Increase Decrease D. Decrease Increase A. Option a B. Option b C. Option c D. Option d

A. Option a Common stock is increased for the par value of the shares issued, and paid-in capital-excess of par is debited for the same amount. Both of these accounts are paid-in capital accounts.

What is the effect of the declaration and subsequent issuance of a stock split (effected in the form of a stock dividend) on each of the following? Retained Earnings. paid-in capital A. no effect no effect B. no effect increase C. increase decrease D. increase increase A. Option a B. Option b C. Option c D. Option d

A. Option a No journal entry is made. The par value per share is reduced to maintain the same balance in the common stock account.

What is the effect of the declaration and subsequent issuance of a stock split (not effected in the form of a stock dividend) on each of the following? Retained earnings. Paid-in capital A. no effect no effect B. no effect increase C. increase decrease D. decrease increase A. Option a B. Option b C. Option c D. Option d

A. $143 million $140 million (beginning balance) + $48 million (net income) − $27 million (common stock dividend − $3/share × 6 million shares × 3/2 split adjustment) − $18 million [preferred stock − 9% × $100 par × 1 million shares × 2 years (the current year plus one year in arrears)].

When the 2021 year began, Senatobia Furniture's shareholders' equity included the following: ($ in millions) 6 million shares of $1 par common stock $6 Paid-in capital - excess of par 114 1 million shares of $100 par, 9% cumulative, non-participating preferred stock 100 Retained earnings $140 The company earned $48 million during 2021. At the end of the year, the board of directors declared and paid the contracted amount of preferred dividends as well as $3 per share to common shareholders. No dividends had been declared or paid during 2020. On January 5, the company distributed a 3 for 2 common stock split effected in the form of a stock dividend. What is the balance in retained earnings to be reported on the 2021 balance sheet? A. $143 million B. $152 million C. $160 million D. $188 million