ACC 312 Exam 3

The unexpected gains or losses that result from changes in the projected benefit obligation are called Asset Gains and Losses / Liability Gains and Losses 1) Yes / Yes 2) No / No 3) Yes / No 4) No / Yes 3 1 2 4

4

Which of the following may decrease the annual pension expense amount? Service Cost. Actual return on plan assets. Interest on the liability. Amortization of prior service cost.

Actual return on plan assets.

Which of the following best describes current practice in accounting for leases? Leases similar to installment purchases are capitalized. All long-term leases are capitalized. All leases are capitalized. Leases are not capitalized.

All long-term leases are capitalized.

Which of the following is an advantage of leasing? Protection against obsolescence. Leases often do not require any down payment. Lease agreements may contain less restrictive provisions than other debt agreements. All of these answer choices are correct.

All of these answer choices are correct.

Which one of the following is not a component of pension expense? Service cost. Amortization of projected benefit obligation. Gain or loss. Amortization of prior service cost.

Amortization of projected benefit obligation.

A lease contains a bargain purchase option. In determining the lessee's capitalizable cost at the beginning of the lease term, the payment called for by the bargain purchase option would Be added at its exercise price. Be added at its present value. Not be capitalized. Be subtracted at its present value.

Be added at its present value.

A company has multiple defined benefit pension plans. A pension asset reported in the statement of financial position represents the amount by which the Fair value of plan assets exceeds the accumulated benefit obligation for the overfunded plans. Total fair value of plan assets exceeds the total projected benefit obligation for all overfunded and underfunded plans. Fair value of plan assets exceeds the projected benefit obligation for the company's overfunded plans. Total fair value of all plans exceeds the total accumulated benefit obligation for all overfunded and underfunded plans.

Fair value of plan assets exceeds the projected benefit obligation for the company's overfunded plans.

A deferred tax liability represents the decrease in taxes payable in future years as a result of a taxable temporary difference. True False

False

A lessee reports interest expense in both a finance lease and an operating lease. True False

False

A loss carryback may be foregone and used as a loss carryforward for up to 25 years. True False

False

Amortization of prior service cost generally decreases pension expense. True False

False

Companies should classify deferred tax accounts on the balance sheet as current assets or current liabilities. True False

False

Employers are at risk with defined-contribution plans because they must contribute enough to meet the cost of benefits that the plan defines. True False

False

Fines and penalties resulting from a violation of law result in deferred tax assets. True False

False

In a defined benefit plan, pension expense is equal to the firm's cash contribution. True False

False

In an operating lease, the lessee reports both interest expense and amortization expense on the income statement. True False

False

Permanent differences result in deferred tax consequences. True False

False

Pretax financial income is determined according to the Internal Revenue Code. True False

False

Service cost is the expense caused by the increase in pension benefits payable to employees because of their services rendered during years prior to the current year. True False

False

Taxable temporary differences give rise to recording deferred tax assets. True False

False

Lease M does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease P does not transfer ownership of the property to the lessee at the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the leased property. How should the lessee classify these leases? Lease M / Lease P Finance lease / Operating lease Operating lease / Finance lease Operating lease / Operating lease Finance lease / Finance lease

Finance lease / Finance lease

Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates? I. Accrual for product warranty liability. II. Subscriptions received in advance. III. Prepaid insurance expense. III only. II only. I and II only. I and III only.

I and II only.

Which of the following should be disclosed in a company's financial statements related to deferred taxes? I.The types and amounts of existing temporary differences. II.The types and amounts of existing permanent differences. III.The nature and amount of each type of operating loss and tax credit carryforward. II and III only. I and III only. I, II, and III. I and II only.

I and III only.

Uncertain tax positions I. Are positions for which the tax authorities may disallow a deduction in whole or in part. II. Include instances in which the tax law is clear and in which the company believes an audit is likely. III. Give rise to tax expense by increasing payables or increasing a deferred tax liability. I, II, and III. II only. I only. I and III only.

I only.

For a defined benefit pension plan, the discount rate used to calculate the projected benefit obligation is determined by the Expected return on plan assets / Actual return on plan assets Yes / No No / No No / Yes Yes / Yes

No / No

Which of the following are temporary differences that are normally classified as expenses or losses and are deductible after they are recognized in financial income? Advance rental receipts. Product warranty liabilities. Depreciable property. Fines and expenses resulting from a violation of law.

Product warranty liabilities.

Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation? Accumulated benefit obligation Vested benefit obligation Restructured benefit obligation Projected benefit obligation

Projected benefit obligation

Which of the following does the FASB argue indicates a more realistic measure of the employer's obligation under the pension plan on a going-concern basis and should be used as the basis for determining service cost? Vested benefit obligation. Projected benefit obligation. Accumulated benefit obligation. None of these answers are correct.

Projected benefit obligation.

Which of the following would not cause a change in the net gain or loss at the beginning of a period? Amortization of the beginning-of-year net gain or loss. Retroactive increase in benefits for employee service already performed. Actual return on assets different from expected return. Increase in estimated employee turnover.

Retroactive increase in benefits for employee service already performed.

Which of the following is not considered a permanent difference? Premiums paid for life insurance on a company's CEO when the company is the beneficiary. Fines resulting from violating the law. Interest received on municipal bonds. Stock-based compensation expense.

Stock-based compensation expense.

Which of the following is not a characteristic of a defined-contribution pension plan? The benefit of gain or the risk of loss from the assets contributed to the pension fund is borne by the employee. The employer's contribution each period is based on a formula. The benefits to be received by employees are determined by an employee's highest compensation level defined by the terms of the plan. The accounting for a defined-contribution plan is straightforward and uncomplicated.

The benefits to be received by employees are determined by an employee's highest compensation level defined by the terms of the plan.

Which of the following is a criterion for a lease to be classified as a finance lease in the books of a lessee? The present value of the minimum lease payments is 70% or more of the fair value of the leased property. The lease does not transfer ownership of the property to the lessee. The lease contains a bargain purchase option. The lease term is equal to 65% or more of the estimated useful life of the leased property.

The lease contains a bargain purchase option.

Marnie Company enters into a two-year lease. The terms of the lease do not transfer ownership and do not contain a bargain purchase option. The lease is for 60% of the asset's economic life and represents 80% of its fair value. The asset is not a specialized asset and does have alternative uses. How should Marnie classify and record the lease? The lease should be classified as a finance lease, and a lease liability should be recorded at the inception of the lease. The lease is classified as an operating lease, and no lease liability is recorded at the inception because it does not meet finance lease criteria. The lease should be classified as a short-term lease because it is for only two years. The lease should be classified as an operating lease, and a lease liability should be recorded at the inception of the lease.

The lease should be classified as an operating lease, and a lease liability should be recorded at the inception of the lease.

A deferred tax liability is the deferred tax consequence attributable to taxable temporary differences. True False

True

Companies must record an expense when employees earn future benefits, and recognize an existing obligation to pay pensions later based on current services received. True False

True

Companies should consider both positive and negative evidence to determine whether it needs to record a valuation allowance to reduce a deferred tax asset. True False

True

Employers are at risk with defined-benefit plans because they must contribute enough to meet the cost of benefits that the plan defines. True False

True

If the actual return on plan assets is positive, then it is subtracted from the annual pension expense. True False

True

Lessors generally fall into three categories: 1) Banks; 2) Captive leasing companies; and 3) Independents. True False

True

Proceeds from life insurance carried by the company on key officers or employees is an example of a permanent difference. True False

True

The corridor approach is used to prevent the balance of the OCI - Gain/Loss account balance from getting too large. True False

True

The difference between the expected return and the actual return is referred to as the unexpected gain or loss. True False

True

The interest component of pension expense in the current period is computed by multiplying the settlement rate by the beginning balance of the projected benefit obligation. True False

True

The valuation allowance account should be evaluated at the end of each accounting period. True False

True

Under GAAP, companies using the asset-liability method should classify all deferred taxes as non-current. True False

True

When is the balance of the Unrecognized Net Gain or Loss account subject to amortization? When it exceeds 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets. When it equals 10% of the beginning balance of the projected benefit obligation. When it equals 10% of the beginning balance of the market-related value of the plan assets. Never. The Unrecognized Net Gain or Loss account remains unrecognized.

When it exceeds 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets.

Temporary differences arise when revenues are taxable After they are recognized in financial income / Before they are recognized in financial income No / Yes No / No Yes / Yes Yes / No

Yes / Yes

Gulfport Corporation's taxable income differed from its accounting income computed for this past year. An item that would create a permanent difference in accounting and taxable incomes for Gulfport would be a fine resulting from violations of OSHA regulations. making installment sales during the year. using accelerated depreciation for tax purposes and straight-line depreciation for book purposes. a balance in the Unearned Rent account at year-end.

a fine resulting from violations of OSHA regulations.

In a defined benefit plan, the funding level depends on all of the following factors except: compensation levels. interest earnings. age of the employer company. turnover.

age of the employer company.

All of the following increase pension expense except: service cost. interest on the liability. amortization of prior service cost. all of these answers are correct.

all of these answers are correct.

A single lease expense is recognized on the income statement for an operating lease. a finance lease. both a finance lease and an operating lease. neither a finance lease or an operating lease.

an operating lease.

The unrecognized net gain or loss balance must be amortized when it exceeds 10% of the larger of the: beginning accumulated benefit obligation or the market-related asset value. ending projected benefit obligation or the market related asset value. ending accumulated benefit obligation or the market-related asset value. beginning projected benefit obligation or the market-related asset value.

beginning projected benefit obligation or the market-related asset value.

All of the following are examples of temporary differences that result in tax deductions (benefits) in future years, except: depreciable property. litigation accruals. estimated liabilities related to discontinued operations. product warranty liabilities.

depreciable property.

Taxable income of a corporation differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting. differs from accounting income due to differences in intraperiod allocation between the two methods of income determination. is reported on the corporation's income statement. is based on generally accepted accounting principles.

differs from accounting income because companies use the full accrual method for financial reporting but use the modified cash basis for tax reporting.

Commonly, in a defined benefit plan, the contributions to the plan are made by the: independent third party. employee. employer. both employee and employer.

employer.

Appalachian Company maintains a defined-benefit pension plan for its employees. At each balance sheet date, Appalachian should report a pension asset / liability equal to the funded status relative to the projected benefit obligation. projected benefit obligation. accumulated benefit obligation. actual return on the plan assets.

funded status relative to the projected benefit obligation.

Seigel Co. maintains a defined-benefit pension plan for its employees. At each balance sheet date, Seigel should report a pension asset / liability equal to the restructured benefit obligation. funded status relative to the projected benefit obligation. projected benefit obligation. accumulated benefit obligation.

funded status relative to the projected benefit obligation.

The actual return on plan assets includes interest, dividends, and changes in the fair value of the fund assets. is equal to interest expenses accrued each year on the projected benefit obligation, just as it does on any discounted debt. is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period. is equal to the change in the fair value of the plan assets during the year.

includes interest, dividends, and changes in the fair value of the fund assets.

Deferred tax expense is the: increase in a deferred tax asset. decrease in a deferred tax liability. increase in a deferred tax liability. amount of income taxes payable for the period.

increase in a deferred tax liability.

The deferred tax expense is the decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability. increase in balance of deferred tax liability minus the increase in balance of deferred tax asset. increase in balance of deferred tax liability from the beginning to the end of the accounting period. increase in balance of deferred tax asset minus the increase in balance of deferred tax liability.

increase in balance of deferred tax liability from the beginning to the end of the accounting period.

A deferred tax liability represents the: increase in taxes saved in future years as a result of deductible temporary differences. increase in taxes payable in future years as a result of taxable temporary differences. decrease in taxes saved in future years as a result of deductible temporary differences. decrease in taxes payable in future years as a result of taxable temporary differences.

increase in taxes payable in future years as a result of taxable temporary differences.

A deferred tax asset represents the: increase in taxes saved in future years as a result of deductible temporary differences. increase in taxes payable in future years as a result of deductible temporary differences. decrease in taxes payable in previous years as a result of cumulative temporary differences. decrease in taxes saved in future years as a result of deductible temporary differences.

increase in taxes saved in future years as a result of deductible temporary differences.

Interest cost included in pension expense recognized for a period by an employer sponsoring a defined-benefit pension plan represents the increase in the projected benefit obligation due to the passage of time. increase in the fair value of plan assets due to the passage of time. amortization of the discount on accumulated OCI (PSC). shortage between the expected and actual returns on plan assets.

increase in the projected benefit obligation due to the passage of time.

In a defined-benefit plan, the process of funding refers to determining the amount that might be reported for pension expense. determining the accumulated benefit obligation. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims. determining the projected benefit obligation.

making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.

In a defined-benefit plan, the process of funding refers to determining the amount that might be reported for pension expense. determining the projected benefit obligation. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims. determining the accumulated benefit obligation.

making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.

A net operating loss (NOL) occurs for tax purposes in a year when tax-deductible expenses exceed taxable revenues. Companies can reduce future taxable income on the amount of NOL in the following way: must always be carried forward 20 years. may carry the net operating loss forward indefinitely. may be carried back 2 years or carried forward up to 20 years. must always be carried back 2 years.

may carry the net operating loss forward indefinitely.

Under the asset-liability method, a deferred income tax asset or liability is usually classified as a current asset. non-current asset or liability. current or non-current based on the classification of the related asset (liability) for financial reporting purposes. current or non-current according to the expected reversal date of the temporary difference.

non-current asset or liability.

When the employer bears the entire cost of a pension plan's costs, the plan is called a funded plan. contributory plan. noncontributory plan. voluntary plan.

noncontributory plan.

The classifications of a lease by the lessee are operating and finance leases. operating, sales, and finance leases. operating and leveraged leases. None of these answers are correct.

operating and finance leases.

When a company adopts a pension plan, prior service costs should be charged to retained earnings. operations of prior periods. other comprehensive income (PSC). accumulated other comprehensive income (PSC).

other comprehensive income (PSC).

In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as an offset to the liability for prior service cost. as other comprehensive income (G/L). pension asset/liability. as accumulated other comprehensive income (PSC).

pension asset/liability.

A pension asset is created when pension plan assets at fair value exceed the projected benefit obligation. pension plan assets at book value exceed the projected benefit obligation. the accumulated benefit obligation exceeds the fair value of pension plan assets. the accumulated benefit obligation exceeds the fair value of pension plan assets, but accrued pension cost and unrecognized prior service cost is greater than this excess.

pension plan assets at fair value exceed the projected benefit obligation.

Income tax expense is computed as income tax payable: less a decrease in a deferred tax asset. plus or minus the change in deferred income taxes. plus or minus the change in provision for income taxes. less an increase in a deferred tax liability.

plus or minus the change in deferred income taxes.

Income tax expense is based on: income from continuing operations. pretax income. operating income. taxable income.

pretax income.

The ending balance in the Pension Asset/Liability is the difference between the: projected benefit obligation and the fair value of plan assets. accumulated benefit obligation and the fair value of plan assets. accumulated benefit obligation and the market-related asset value. projected benefit obligation and the market-related asset value.

projected benefit obligation and the fair value of plan assets.

A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the amount of employer contributions exceeds the pension expense. fair value of the plan assets exceeds the projected benefit obligation. projected benefit obligation exceeds the fair value of the plan assets. amount of pension expense exceeds the amount of employer contributions.

projected benefit obligation exceeds the fair value of the plan assets.

The approach adopted by the accounting profession to measure a firm's pension obligation is the: vested benefit obligation. accumulated benefit obligation. projected benefit obligation. defined benefit obligation.

projected benefit obligation.

Companies generally design pension plans that are: contributory. noncontributory. insured. qualified.

qualified.

Gains and losses that relate to the computation of pension expense should be amortized over a 15-year period. recorded only if a loss is determined. recorded currently as an adjustment to pension expense in the period incurred. recorded currently and in the future by applying the corridor method which provides the amount to be amortized.

recorded currently and in the future by applying the corridor method which provides the amount to be amortized.

A valuation account is used to: reduce a deferred tax liability. increase a deferred tax liability. increase a deferred tax asset. reduce a deferred tax asset.

reduce a deferred tax asset.

The last step (procedure) in the computation of deferred income taxes is to identify the types and amounts of existing temporary differences. measure deferred tax assets for each type of tax credit carryforward. measure the total deferred tax asset (liability) using the appropriate tax rate. reduce deferred tax assets by a valuation allowance if necessary.

reduce deferred tax assets by a valuation allowance if necessary.

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or increases a deferred tax asset. applied to all temporary or permanent differences that arise prior to the date of the enactment of the tax rate change, but not subsequent to the date of the change. reported as an adjustment to income tax expense in the period of change. handled retroactively in accordance with the guidance related to changes in accounting principles.

reported as an adjustment to income tax expense in the period of change.

In a defined-contribution plan, a formula is used that defines the benefits that the employee will receive at the time of retirement. ensures that employers are at risk to make sure funds are available at retirement. ensures that pension expense and the cash funding amount will be different. requires an employer to contribute a certain sum each period based on the formula.

requires an employer to contribute a certain sum each period based on the formula.

According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the projected benefit obligation, the Board does not permit recognition of an asset. recommends recognition of an asset but does not require such recognition. requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount. requires recognition of an asset.

requires recognition of an asset.

The interest rate used to determine the interest on the liability component of pension expense is the: expected rate on plan assets. employer's incremental rate. settlement rate. actuarial rate used to calculate the present value of pension benefits.

settlement rate.

All of the following are examples of temporary differences that result in taxable amounts in future years except: investments accounted for under the equity method. installment sales. subscriptions received in advance. long-term construction contracts (percentage-of-completion).

subscriptions received in advance.

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount for financial statement reporting if it appears likely that a future tax rate will be greater than the current tax rate. the enacted tax rate is expected to apply in future years. it is probable that a future tax rate change will occur. it appears likely that a future tax rate will be less than the current tax rate.

the enacted tax rate is expected to apply in future years.

Recognition of tax benefits in the loss year due to a loss carryforward requires the establishment of a deferred tax liability. the establishment of an income tax refund receivable. only a note to the financial statements. the establishment of a deferred tax asset.

the establishment of a deferred tax asset.

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if it appears likely that a future tax rate will be less than the current tax rate. the future tax rates have been enacted into law. it appears likely that a future tax rate will be greater than the current tax rate. it is probable that a future tax rate change will occur.

the future tax rates have been enacted into law.

In computing the service cost component of pension expense, the FASB concluded that a company should employ an actuarial funding method to report pension expense that best reflects the cost of benefits to employees. the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense. the accumulated benefit obligation provides a more realistic measure of the pension obligation on a going concern basis. the projected benefit obligation using current compensation levels provides a realistic measure of present pension obligation and expansion.

the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense.

Future deductible amounts will cause: a decrease in pretax financial income in future years. the recording of a deferred tax asset. taxable income to be more than pretax financial income in the future. the recording of a deferred tax liability.

the recording of a deferred tax asset.

In computing the present value of lease payments, the lessee should use the lessee's incremental borrowing rate unless the lessor's implicit interest rate is known to the lessee. expected rate of return settlement rate none of these answers are correct.

use the lessee's incremental borrowing rate unless the lessor's implicit interest rate is known to the lessee.

Amortization of prior service costs is based on the: units of production method. years of service method. number of employees method. none of these answers are correct.

years of service method.

Prior service cost is amortized on a straight-line basis over the expected future years of service. years-of-service method or on a straight-line basis over the average remaining service life of active employees. straight-line basis over 15 years. straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer.

years-of-service method or on a straight-line basis over the average remaining service life of active employees.

Prior service cost is amortized on a straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer. years-of-service method or on a straight-line basis over the average remaining service life of active employees. straight-line basis over 15 years. straight-line basis over the expected future years of service.

years-of-service method or on a straight-line basis over the average remaining service life of active employees.