Accounting Exam 2 Review

At the end of 2017, Payne Industries had a deferred tax asset account with a balance of $28 million attributable to a temporary book-tax difference of $70 million in a liability for estimated expenses. At the end of 2018, the temporary difference is $60 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2018 is $200 million and the tax rate is 40%. 1. Prepare the journal entry(s) to record Payne's income taxes for 2018, assuming it is more likely than not that one-fourth of the deferred tax asset will ultimately be realized. 2) Prepare the journal entry(s) to record Payne's income taxes for 2018, assuming it is more likely than not that the deferred tax asset will be realized

1. *Beginning balance of deferred tax asset: 28 *Ending balance of deferred tax asset: 60 * 40% = 24 *Decrease of deferred tax asset: 28-24=4 *Tax payable: 200 * 40% = 80 Journal Entry 1: Dr: Income Tax Expense 84 Cr: Deferred Tax Asset 4 Cr: Income Tax Payable 80 Journal Entry 2: Dr: Income Tax Expense 18 (24 * ¾) Cr: Valuation allowance - Deferred Tax Asset 18 2. Journal Entry 1: Dr: Income Tax Expense 84 Cr: Deferred Tax Asset 4 Cr: Income Tax Payable 80 Journal Entry 2: Not needed.

Dixon Development began operations in December 2016. When lots for industrial development are sold, Dixon recognizes income for financial reporting purposes in the year of the sale. For some lots, Dixon recognizes income for tax purposes when collected. Income recognized for financial reporting purposes in 2016 for lots sold this way was $22 million, which will be collected over the next three years. Scheduled collections for 2017-2019 are as follows: 2017 $ 6 million 2018 $9 million 2019 $7 million = $22 million Pretax accounting income for 2016 was $30 million. The enacted tax rate of 40% 1. Assuming no differences between accounting income and taxable income other than those described above, prepare the journal entry to record income taxes in 2016. Enter your answers in millions rounded to 1 decimal place.

1. 2016 Income tax payable: (30- 22) *40% = 3.2 Deferred Tax Liability balance December 31, 2016: 22*40% = 8.8 Dr: Income Tax Expense 12 Cr: Income Tax Payable 3.2 Deferred Tax Liability 8.8

ABC Consulting Company has a defined benefit pension plan. The following pension-related data were available for the current calendar year: PBO: Balance, Jan. 1 $ 180,000 Service cost. 30,750 Interest cost (5% discount rate) 9,000 Gain from changes in actuarial assumptions in 2016 (3,750) Benefits paid to retirees (15,000) Balance, Dec. 31. $ 201,000 Plan assets: Balance, Jan.1. $187,500 Actual return (expected return was $16,875) 15,000 Contributions 26,250 Benefits paid (15,000) Balance, Dec. 31 $ 213,750 ABO, Dec. 31 $ 183,750 January 1, 2016, balances: Prior service cost-AOCI (amortization $3,000/yr.) 3,000 Net gain-AOCI (amortization, if any, over 15 years) 30,000 There were no other relevant data. 1) Calculate the 2016 pension expense. Service Cost: 2) Prepare the 2016 journal entries to record pension expense and funding (funding refers to making a contribution to the plan) 3) Prepare any journal entries to record any 2016 gains or losses.

1. Calculate the 2016 pension expense. Service Cost: 30,750 +Interest Cost: 9,000 -Expected Return 16,875 + Prior Service Cost Amortization-OCI 3,000 -Amortization of Net Gain 750 [(30,000-18,750)/15] =Pension Expense 25,125 2. Dr: Pension Expense. 25,125 Dr: Plan Assets 16,875 Dr: Amortization of net gain - OCI 750 The amortization is calculated as [30000-the corridor: 18750 (higher of Plan Assets and PBO)*10%]/15=750 Cr: PBO 39,750 Cr: Amortization of Prior Service Cost 3,000 Dr: Plan Assets 26,250 Cr: Cash 26,250 3. Dr: Loss - OCI 1875 Cr: Plan Assets 1875 Dr: PBO 3,750 Cr: Gain- OCI 3,750

Abbott and Abbott has a noncontributory, defined benefit pension plan. At December 31, 2018, Abbott and Abbott received the following information: Projected Benefit Obligation ($ in millions) Balance, January 1 $120 Service cost 20 Interest cost 12 Benefits paid (9) = Balance, December 31 $143 Plan Assets Balance, January 1 $80 Actual return on plan assets 9 Contributions 2018 20 Benefits paid (9) = Balance, December 31 $100 The expected long-term rate of return on plan assets was 10%. There was no prior service cost and a negligible net loss-AOCI on January 1, 2018. 1. Determine Abbott and Abbott's pension expense for 2018. 2. Prepare the Journal entries to record Abbott and Abbott's pension expense, funding, and payment for 2018.

1. Pension expense: $24 million Service Cost $20 Interest Cost 12 Expected return on the plan assets ($9 actual, less $1 gain) (8) = Pension expense 24 2. 1. Pension expense 24 Plan assets. 8 PBO 32 2. Plan assets 20 Cash 20 3. PBO 9 Plan assets 9

On January 1, 2018, Princess Corporation leased equipment to King Company. The lease term is four years. The first payment of $100,000 was made on January 1, 2018. The rest of the payments were made on December 31 of 2018-2020. The useful life of this asset is ten years. Assuming the interest rate for this lease is 10%. Princess Corporation purchased this equipment on December 31, 2017. The equipment cost Princess $600,000. There is no transfer to ownership and no purchase option in the lease contract that is reasonably certain to be exercised. Assume straight-line depreciation and a December 31 year-end Present value of the lease payments: 100,000 x PVAD (n = 4,I = 10% ) = 348,685 Time Payment Effective Interest Decrease in Balance Outstanding Bal. Jan-1-18 348,685 Jan-1-18 100,000 100,000 248,685 Dec-31-18 100,000 24,869 75,131 173,554 Dec-31-19 100,000 17,355 82,645 90,909 Dec-31-20 100,000 9,091 90,909 0 1. What is the balance of King's Lease Payable on December 31, 2019? 2. What is the balance of King's right-of-use assets on December 31, 2019? 3. What is the balance of King's right-of-use assets on December 31, 2019?

1. 90,909 2. 348,685 - 75,131 - 82,645 = 190,909 3. 600,000 - 60,000x2 = 480,000

On January 1, 2018, Princess Corporation leased equipment to King Company. The lease term is four years. The first payment of $100,000 was made on January 1, 2018. The rest of the payments were made on December 31 of 2018-2020. The useful life of this asset is four years. Assume the interest rate for this lease is 10%. Assume straight-line depreciation and a December 31 year-end. Prepare the amortization schedule and answer the following questions What is the balance of King's right-of-use assets on December 31, 2019? First, calculate the present value of lease payment and prepare the amortization schedule. Present value of the lease payments: 100,000 x PVAD (n = 4,I = 10% ) = 348,685 Time Payment Effective Interest Decrease in Balance Outstanding Bal. Jan-1-18 348,685 Jan-1-18 100,000 100,000 248,685 Dec-31-18 100,000 24,869 75,131 173,554 Dec-31-19 100,000 17,355 82,645 90,909 Dec-31-20 100,000 9,091 90,909 0

348,685 - (348,685/4) x 2 = 174,343

On January 1, 2018, Princess Corporation leased equipment to King Company. The lease term is four years. The first payment of $100,000 was made on January 1, 2018. The rest of the payments were made on December 31 of 2018-2020. The useful life of this asset is four years. Assume the interest rate for this lease is 10%. Assume straight-line depreciation and a December 31 year-end. Prepare the amortization schedule and answer the following questions 5) Prepare appropriate journal entries for King for 2018 and 2019. 6) Prepare appropriate journal entries for Princess for 2018 and 2019 First, calculate the present value of lease payment and prepare the amortization schedule. Present value of the lease payments: 100,000 x PVAD (n = 4,I = 10% ) = 348,685 Time Payment Effective Interest Decrease in Balance Outstanding Bal. Jan-1-18 348,685 Jan-1-18 100,000 100,000 248,685 Dec-31-18 100,000 24,869 75,131 173,554 Dec-31-19 100,000 17,355 82,645 90,909 Dec-31-20 100,000 9,091 90,909 0

5. King Jan 1, '18 Dr: Right-of-use asset 348,685 Cr: Lease payable 348,685 Dr: Lease Payable 100,000 Cr: Cash 100,000 Dec 31, '18 Dr: Interest expense 24,869 Dr: Lease Payable 75,131 Cr: Cash 100,000 Dr: Amortization Expense 87,171 Cr: Right-of-use asset 87,171 Dec 31, '19 Dr: Interest expense 17,355 Dr: Lease Payable 82,645 Cr: Cash 100,000 Dr: Amortization Expense 87,171 Cr: Right-of-use asset 87,171 6. Princess Jan 1, '18 Dr: Lease Receivable 348,685 Cr: Equipment 348,685 Dr: Cash 100,000 Cr: Lease Receivable 100,000 Dec 31, '18 Dr: Cash 100,000 Cr: Lease Receivable 75,131 Cr: Interest Revenue 24,869 Dec 31, '19 Dr: Cash 100,000 Cr: Lease Receivable 82,645 Cr: Interest Revenue 17,355

On January 1, 2018, Princess Corporation leased equipment to King Company. The lease term is four years. The first payment of $100,000 was made on January 1, 2018. The rest of the payments were made on December 31 of 2018-2020. The useful life of this asset is four years. Assume the interest rate for this lease is 10%. Assume straight-line depreciation and a December 31 year-end. Prepare the amortization schedule and answer the following questions How much interest revenue will Princess record in 2020 on this lease? How much interest expense will King record in 2019 on this lease? First, calculate the present value of lease payment and prepare the amortization schedule. Present value of the lease payments: 100,000 x PVAD (n = 4,I = 10% ) = 348,685 Time Payment Effective Interest Decrease in Balance Outstanding Bal. Jan-1-18 348,685 Jan-1-18 100,000 100,000 248,685 Dec-31-18 100,000 24,869 75,131 173,554 Dec-31-19 100,000 17,355 82,645 90,909 Dec-31-20 100,000 9,091 90,909 0

9,091 17,355

On January 1, 2018, Princess Corporation leased equipment to King Company. The lease term is four years. The first payment of $100,000 was made on January 1, 2018. The rest of the payments were made on December 31 of 2018-2020. The useful life of this asset is four years. Assume the interest rate for this lease is 10%. Assume straight-line depreciation and a December 31 year-end. Prepare the amortization schedule and answer the following questions - What is the balance of King's Lease Payable on December 31, 2019? - What is the balance of Princess' Lease Receivable on December 31, 2019? First, calculate the present value of lease payment and prepare the amortization schedule. Present value of the lease payments: 100,000 x PVAD (n = 4,I = 10% ) = 348,685 Time Payment Effective Interest Decrease in Balance Outstanding Bal. Jan-1-18 348,685 Jan-1-18 100,000 100,000 248,685 Dec-31-18 100,000 24,869 75,131 173,554 Dec-31-19 100,000 17,355 82,645 90,909 Dec-31-20 100,000 9,091 90,909 0

90,909 90,909

At the beginning of its fiscal year, Lakeside Inc. leased office space to LTT Corporation under a seven-year operating lease agreement. The contract calls for annual rent payments of $100,000e 100,000 eachach. The office building was acquired by Lakeside at a cost of $1.8 million and was expected to have a useful life of 20 years with no residual value. What will be the effect of the lease on Lakeside's earnings for the first year (ignore taxes)?

An increase of [100,000 (rental revenue) - 90,000 (depreciation)] = 10,000 on Lakeside's earnings. What will be the effect of the lease on LLT's earnings for the first year (ignore taxes)? A decrease of 100,000 on LLT's earnings.

Before considering a net operating loss carryforward of $30 million, Fama Corporation reported $ 100 million of pretax accounting and taxable income in the current year. The income tax rate is always 40%. Fama's income tax payable and income tax expense for the current year would be: A) Income tax payable $40 million; income tax expense $52. B) Income tax payable $28 million; income tax expense $40. (Correct) C) Income tax payable $28 million; income tax expense $16. D) Income tax payable $100 million; income tax expense $30

B) Income tax payable $28 million; income tax expense $40. (Correct) Income tax payable: (100-30) x 40% = 28 DTA decreased by: 30 x 40% =12 Income tax expense: 28 + 12 = 40

A company's defined benefit pension plan had a PBO of $530,000 on January 1, 2016. During 2016, pension benefits paid were $80,000. The discount rate for the plan for this year was 10%. Service cost for 2016 was $160,000. Plan assets (fair value) increased during the year by $90,000. How much is the PBO at December 31, 2016?

Beginning Balance: 530000 + Interest Cost: 53000 + Service Cost: 160000 - Benefit Paid: 80000 = 663000

One of the five criteria for a finance lease specifies that the present value of the lease payments be equal to or greater than: A) substantially all of the cost of the asset. B) the major part (>=75%) of the fair value of the asset. C) substantially (>=90%) all of the fair value of the asset. (Correct) D) the major part of the cost of the asset.

C) substantially (>=90%) all of the fair value of the asset. (Correct)

Hicks Cable Company has a defined benefit pension plan. Three alternative possibilities for pension-related data at January 1, 2018, are shown below: ($ in 000's) Case 1 Case 2 Case 3 Net loss (gain)-AOCI, Jan. 1 $100 $(300) $200 2018 loss (gain) on plan assets (4) (10) 3 2018 loss (gain) on PBO (7) 20 (250) Accumulated benefit obligation, Jan. 1 (900) (2,500) (1,200) Projected benefit obligation, Jan. 1 (1,100) (2,600) (1,800) Fair value of plan assets, Jan. 1 800 2,700 1,500 Average remaining service period of active employees (years) 12 15 10 1. For each independent case, calculate any amortization of the net loss or gain that should be included as a component of pension expense for 2018. (Input all amounts as positive values.) 2. For each independent case, determine the net loss-AOCI or net gain-AOCI as of January 1, 2019. (Amounts on the credit side are indicated by minus signs.)

Case 1 Case 2 Case 3 1. Net gain or loss 100 300 200 Less: Corridor amount 110(1,100x10%) 270(2,700x10%) 180(1,800x10%) Excess, if any 0 (because 110>100) , 30 , 20 Service period (years) 12 15 10 Amortization of gain or loss 0 2 2 2. January 1, 2018 net loss or (gain) 100 (300) 200 Loss (gain) on plan assets (4) (10) 3 Amortization - 2 (2) Loss (gain) on PBO (7) 20 (250) January 1, 2019 net loss or (gain) -AOCI 89 net loss -AOCI (288) net gain -AOCI (49) net gain-AOCI

On January 1, 2018, Burleson Corporation's projected benefit obligation was $40 million. During 2018 pension benefits paid by the trustee were $10 million. Service cost for 2018 is $10 million. Pension plan assets (at fair value) increased during 2018 by $6 million as expected. At the end of 2018, there was no amortization of prior service cost. The loss on PBO for 2018 is 10. The actuary's discount rate was 10%. Determine the amount of the projected benefit obligation at December 31, 2018. Projected Benefit Obligation Beginning of 2018 = 40 Service cost = 10 Interest cost = 4 Loss = 10 Retiree benefits = (10)

End of 2018 40 + 10 + 4 + 10 - 10 = 54

T/F: Accelerated depreciation creates deferred tax assets because they result in deductible amounts in some future years.

FALSE

T/F: Estimated expenses create deferred tax liabilities because they result in taxable amounts in some future year(s).

FALSE

T/F: Installment sales create deferred tax assets because they result in deductible amounts in the future-year(s) when the related receivables are collected.

FALSE

T/F: Prepaid expenses create deferred tax assets because they result in deductible amounts in some future year (s).

FALSE, prepaid expenses create deferred tax liabilities. The expense is only tax deductible when it is paid.

T/F: Rent collected in advance creates deferred tax liabilities because they result in taxable amounts in some future year(s).

FALSE. Rent collected in advance create deferred tax assets

The following data relate to Voltaire Company's defined benefit pension plan: (in millions) Plan assets at fair value, January 1 = 700 Expected return on plan assets = 70 Actual return on plan assets = 56 Contributions to the pension fund (end of the year) = 80 Amortization of net loss = 10 Pension benefits paid (end of the year) = 20 Pension expense = 72 Determine the amount of pension plan assets at fair value on December 31.

Pension Plan Assets Beginning of the year = 700 Actual return on assets = 56 Cash contributions = 80 Retiree benefits = (20) End of the year 700 + 56 + 80 - 20 = 816

ABC Inc., reports warranty expenses when related products are sold. For tax purposes, the warranty costs are deductible as incurred. At the end of the current year, ABC has a warranty liability of $600,000 and a taxable income of $60,000,000. At the end of the previous year, ABC reported a deferred tax asset of$240,000 related to the difference in reporting warranty expense, its only temporary difference. The enacted tax rate is 35% each year Prepare the appropriate journal entry for ABC to record the income tax provision for the current year.

Prepare the appropriate journal entry for ABC to record the income tax provision for the current year. Income tax payable: 60,000,000*35% = 21,000,000 Deferred tax asset balance on December 31 of the current year: 600,000*35% = 210,000 Deferred tax asset balance on January 1 of the current year is 240,000, so deferred tax assets decreased by 30,000 Dr: Income Tax Expense: 21030000(plug) Cr: Income Tax Payable 21000000 Cr: Deferred Tax Assets: 30000

The component of pension expense that results from amending a pension plan to give recognition to previous service of currently enrolled employees is the amortization of ______

Prior Service Cost

The projected benefit obligation attributable to employee service performed during the period is _______.

Service Cost

For its first year of operations, Tringali Corporation's reconciliation of pretax accounting income to taxable income is as follows: Pretax accounting income $ 400,000 Permanent difference (25,000) = 375,000 Temporary difference-depreciation (20,000) = Taxable income $ 355,000 Tringali's tax rate is 40%. Assume that no estimated taxes have been paid. What should Tringali report as its income tax expense for its first year of operations?

Solution: Income tax payable is 355,000 x 40% = 142,000 Deferred tax liability balance: 20,000 x 40% = 8,000 Deferred tax liability (Cr: 8,000-0=8,000) Income tax expense: 142,000 + 8,000 = 150,000

Shortly before the end of 2018, Colter Company makes an installment sale that generates $200 of before-tax income. Colter recognizes income for accounting purposes when the sale is made, but will recognize income for tax purposes when cash is subsequently collected in the year 2019 and 2020. Colter has total accounting income before tax expense 2,000 in 2018. This 2,000 already includes the 200 installment sales income. Colter has a tax rate of 20%. What is Colter's tax expense journal entry for 2018?

Step 1: Income tax payable for 2018 2,000 - 200 = 1,800 1,800 x 20% =360 Step 2: change of DTL or DTA for 2019. An increase of DTL by 200x20% = 40 Step 3: Calculate income tax expense and finish the journal entry Tax expense 400 Deferred tax liability 40 Income tax payable 360

T/F: Accelerated depreciation creates deferred tax liabilities because they result in taxable amounts in some future years.

TRUE

T/F: Estimated expenses create deferred tax assets because they result in deductible amounts in some future year(s).

TRUE

T/F: Prepaid expenses create deferred tax liabilities because they result in taxable amounts in some future year (s).

TRUE

T/F: Rent collected in advance creates deferred tax assets because they result in deductible amounts in some future year(s).

TRUE

T/F: installment sales create deferred tax liabilities because they result in taxable amounts in the future-year(s) when the related receivables are collected

TRUE

Alvis Corporation reports pretax accounting income of $400,000, but due to a single temporary difference, taxable income is only $300,000. At the beginning of the year, no temporary differences existed. Assuming a tax rate of 25%. What will be Alvis's net income, and what will Alvis report in the balance sheet pertaining to income taxes?

Tax payable: 300000*25% = 75,000 Deferred Tax Liability: (400,000-300,000)*25% = 25,000 Income Tax Expenses: 75,000 + 25,000 = 100,000 Net Income: 400,000 - 100,000 = 300,000 Balance sheet: 1) Income tax payable 75,000 2) DTL: 25,000

Windsor Company started 2018 with a deferred tax liability of $100. As of the end of 2018, Windsor identifies total future taxable amounts of $300. Windsor has a tax rate of 40% and calculates that income taxes payable will be $120. What is Windsor's income tax expense for 2018?

The change of DTL is an increase of 20. Total DTL balance at the end of 2018: 300 x 40% = 120. The increase is 120-100 = 20 Dr: Income Tax Expenses 140 Cr: Deferred Tax Liabilities 20 Cr: Income Tax Payable 120

Western Mountain Sports started 2018 having recognized $5,000,000 more depreciation for tax purposes than for accounting purposes since the company began. It ended 2018 having recognized $4,000,000 more depreciation for tax purposes than for accounting purposes since the company began. Assume a tax rate of 40%. With respect to depreciation, Western's tax expense journal entry for 2018 would include a: a. Debit to deferred tax liability for $400,000 (Correct) b. Credit to deferred tax liability for $400,000 c. Debit to deferred tax liability for $1,600,000 d. Credit to deferred tax liability for $1,600,000

a. Debit to deferred tax liability for $400,000 (Correct) Future taxable amount decreased from 5,000,000 to 4,000,000. DTA decreased from 2,000,000 (5 million x 40%) to 1,600,000 (4 million x 40%). Dr: Income tax expense X- 400,000 Dr: Deferred tax liability 400,000 Cr: Income tax payable X

Duchess Company started the period with a deferred tax asset of $200. As of the end of the period, Duchess identifies future deductible amounts of $350. Duchess has a tax rate of 40% and calculates that taxes payable will be $100. Duchess's tax expense journal entry would include a: a. Debit to tax expense of $140 b. Credit to tax expense of $60 c. Debit to tax expense of $160 (Correct) d. Credit to tax expense of $160

c. Debit to tax expense of $160 (Correct) DTA balance: 350x0.4 = 140 Change of DTA decrease of 60. Dr: Income Tax expense 160 Cr: DTA 60 Cr: Income tax payable 100