Intermediate Final

Stock dividend value=

(# shares*stock dividend%)(market value)

Incremental effect=

(%*FV)-tax rate(%*FV)/conversion of bonds

after-tax interest savings=

(FV convertible bonds*rate)-(tax rate*(FV convertible bonds*rate))

How to calculate PBO

1. Use pension formula to determine benefits to date 2. Find PV of benefits at retirement date 3. Find PV of retirement benefits at current date

Steps to tax expense

1. calculate tax payable 2. calculate DTA and DTL 3. Calculate the change in DTA and DTL 4. plug in tax expense

pension formula=

1.5%*years of service*final years salary

Companies are limited offsetting up to ___% of taxable income with NOL carryforwards in a year

80

Earnings Per Share (EPS)

A measure of the net income earned on each share of common stock

to record share issue costs

Accounts (proceeds) -Common Stock (# shares*$ par) -PIC-excess

AOCI=

Beginning+changes in comprehensive income

Equity=

CS+PIC+RE+NI-TS-dividends

to record no par shares

Cash -Common Stock

to record issue of more than one security at a single price

Cash -Common Stock (# shares*par) -Pic, excess- common (# shares*$ per share)-market value -Pic, excess- preferred -Preferred stock (# shares*$ par)

To record the resell of treasury stock for more than repurchase price

Cash -Treasury Stock (repurchase price) -PIC-share repurchase

To record the resell of treasury stock for less than the repurchase price

Cash RE PIC-share repurchase (act balance if one) -Treasury stock (repurchase price)

to record issue of sale for cash

Cash (# shares)*($per share) -Common Stock (#per shares*par) -PIC- excess

to record the excise of options

Cash (exercise price*# shares) PIC-stock options FV options*# shares -CS -PIC-excess

to record a dividend on the distribution date

Cash dividends payable -Cash

to record the retirement of shares less than original issue price

Common Stock (# shares*$ par) PIC- share repurchase -PIC-excess (# shares*buyback difference) -Cash (cost)

to record the repurchase of retirement shares greater than original issue price

Common Stock (# shares*$ par) Pic-excess PIC-share repurchase (credit balance if one) RE (# shares*buyback difference) -Cash (cost)

to record the repurchase of retirement shares = to original issue cost

Common Stock (# shares*$par) Pic-excess (cost) -PIC-SR -Cash (cost)

to record compensation expense

Compensation expense -Liability-restricted stock

NOL carryforwards created a

DTA

to record NOL carryforward

DTA -Income tax expense

Estimated NRV=

DTA-Valuation allowance

Noncurrent balance sheet items

DTL DTA Valuation allowances

DTA Losses/Expenses

Estimated expenses and losses Unrealized loss from investments or inventory

T/F NOLs create a tax payable in the year it occurs

False

T/F NOLs expire

False

T/F EPS is calculated as if conversion has not occured

False; as if it has occured

T/F antidilutive securities are ignored when calculating only diluted EPS

False; it is ignored when calculating both basic and diluted EPS

T/F There is a legal obligations to pay dividends to shareholders

Falseon

To record income taxes

Income Tax expense DTA/DTL -Income Tax Payable

DTL gains/revenues

Installment sales of property Unrealized gain from recording investments

to record property dividends on the declaration date

Investment (FV-BV) -gain on appreciation RE (FV) -Property dividends payable

to record gain/loss on pension

Loss- OCI -plan assets (actual-expected return on plan assets)

What type of firm reports both diluted and basic EPS?

Ones with complex capital structure

to record the payment on pensions

PBO (benefits paid) -Plan assets

to record the expiration of unexercised options

PIC-stock options -PIC-expiration of stock options

to find increase of decrease in common stock account=

PIC/CS

to record pension expense

Pension expense Plan assets (expected return on plan assets) Amortization of net gain/loss -Amortization of prior service cost -PBO

to record the funding on pensions

Plan assets (contributions) -Cash

to record a dividend on the declaration date

RE -Cash dividends payable

Rights of preferred shareholders

Receive dividends before common shareholders Preference to distribution of assets over common shareholders Right of conversion or redemption privledge

DTA Gains/revenue

Rent collected in advanced Subscriptions collected in advanced Other revenues in advances

Rights of common shareholders

Right to vote Right to dividends Right to distribution of assets if company liquidates

authorized shares

The maximum number of shares of capital stock that can be sold to the public

How are preferred shareholders treated in the calculation of EPS?

They cumulative stocks are substracted from earnings before calculation EPS

to record the repurchase of treasury stock

Treasury stock -Cash

T/F Preferred stock is not deducted form the numerator in diluted EPS calculation if it is convertible preferred

True

T/F Purchase of treasury stock is viewed as a temporary reduction of equity

True

to record valuation allowance

Valuation allowance -Income Tax Expense

prior service cost

When changes in the terms of a defined benefit pension plan increase the future benefits due employees based on their prior employment with the company

Restricted Stock Unit

a right to receive a specified number of shares of company stock after the vesting requirements are met

At December 31, 2018 and 2019, Hathcock Company had outstanding 50 million common shares and 4 million shares of 10%, $10 par cumulative preferred stock. Net income for 2019 was $20 million. No dividends were declared in 2018 or 2019. EPS for 2019 was: a. $.32 b. $.37 c. $.40 d. $.48

a. $.32 =20-(4*.1*10)/50

Information regarding the defined benefit pension plan of Corey Services included the following for 2018 ($ 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 2018? a. $10 million b. $24 million c. $35 million d. $60 million

a. $10 million =105-70+17-42

M-Howard Inc. has a defined benefit pension plan. On December 31 (the end of the fiscal year), the company received the PBO report from the actuary. Among the information included in the report were the following items: ending PBO, $110,000; benefits paid to retirees, $10,000; interest cost, $7,200. The discount rate applied by the actuary was 8%. What was the beginning PBO? a. $90,000 b. $100,000 c. $107,200 d. $112,000

a. $90,000 =7,200/.08

Which of the following statements is true regarding retained earnings? a. Accumulated, undistributed net income results in a credit balance in retained earnings b. A more descriptive title would be investment earnings c. Retained earnings represent accumulated, distributed net income d. An accumulated deficit results in a credit balance in retained earnings

a. Accumulated, undistributed net income results in a credit balance in retained earnings

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 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 =(5,000,000*.4)-(4,000,000*.4)

NewsMonth has $10 million of deferred revenue—subscriptions. NewsMonth recognizes income for tax purposes when cash is collected, and pays tax at a rate of 35%. NewsMonth's balance sheet should include a: a. Deferred tax asset of $3,500,000 b. Deferred tax asset of $6,500,000 c. Deferred tax liability of $3,500,000 d. Deferred tax liability of $6,500,000

a. Deferred tax asset of $3,500,000 =10*.35

The projected benefit obligation (PBO) is best described as the: a. Present value of benefits accrued to date based on future salary levels b. Present value of benefits accrued to date based on current salary levels c. Increase in retroactive benefits at the date of the amendment of the plan d. Amount of the adjustment necessary to reflect the difference between actual and estimated actuarial returns

a. Present value of benefits accrued to date based on future salary levels

Tanzier Trading earned municipal bond interest of $50,000 during 2018. That interest is not taxable. Tanzier pays tax at a rate of $40%. Which of the following is true? a. Tanzier's tax expense will not be affected by the muni-bond interest b. Tanzier will recognize a deferred tax asset of $20,000 c. Tanzier will recognize tax payable of $20,000 d. Tanzier's taxable income will be $50,000 higher than its accounting income

a. Tanzier's tax expense will not be affected by the muni-bond interest

DTL losses/expenses

accelerated depreciation Prepaid expenses

participating preferred share

allows preferred shareholders to receive dividends beyond the stated amount

Paid in capital

amounts invested by shareholders when they purchase shares company buy backs share-based compensation activities

actuary

assess uncertainties and estimates company obligation to employees

issued shares

authorized shares that have been sold

unissued shares

authorized shares that have never been sold

On January 2, 2018, Sarah Lawrence Co. issued at face value $10,000 of 4% bonds convertible in total into 2,000 shares of Lawrence's common stock. No bonds were converted during 2018. Throughout 2018, Lawrence had 10,000 shares of common stock outstanding. Lawrence's 2018 net income was $2,000. The income tax rate is 40%. No potential common shares other than the convertible bonds were outstanding during 2018. Diluted earnings per share for 2018 would be: a. $.20 b. $.19 c. $.17 d. $.15

b. $.19 =2,000+(10,000*.04)-.4(10,000*.04)/10,000+2,000

The pension plan was amended last year, creating a prior service cost of $20 million. Service cost and interest cost for the year were $10 million and $4 million, respectively. At the end of the year, there was a negligible balance in the net gain-pensions account. The actual return on plan assets was $4 million although it was expected to be $6 million. On average, employees' remaining service life with the company is 10 years. What was the pension expense for the year? a. $8 million b. $10 million c. $12 million d. $18 million

b. $10 million =10+4-6+(20/10)

The shareholders' equity of FSU Industries includes $200,000 of $1 par common stock and $400,000 par value of 6% cumulative preferred stock. The board of directors declared cash dividends of $50,000 in 2018 after paying $20,000 cash dividends in 2017 and $40,000 in 2016. What is the amount of dividends common shareholders will receive in 2018? a. $18,000 b. $22,000 c. $26,000 d. $28,000

b. $22,000

Rikart Real Estate has a $2,000,000 installment accounts receivable. Rikart recognizes income for tax purposes when cash is collected, and pays tax at a rate of 35%. Rikart's balance sheet should include a deferred tax liability of: a. $2,000,000 b. $700,000 c. $0 d. Insufficient information to answer

b. $700,000 =2,000,000*.35

On December 31, 2017, Wayne Sparks Company had 600,000 shares of common stock issued and outstanding. Sparks issued a 5% stock dividend on June 30, 2018. On September 30, 2018, 20,000 shares of common stock were reacquired as treasury stock. What is the appropriate number of shares to be used in the basic earnings per share computation for 2018? a. 595,000 b. 625,000 c. 630,000 d. 635,000

b. 625,000 =(600,000*1.05)-(20,000*3/12)

Windsor Company started 2018 with a deferred tax liability of $150. As of the end of the period, Windsor identifies future taxable amounts of $500. Windsor has a tax rate of 40%, and calculates that taxes payable will be $120. Windsor's tax expense journal entry will include a: a. Debit to tax expense for $200 b. Debit to tax expense for $170 c. Debit to tax expense for $50 d. Credit to tax for $30

b. Debit to tax expense for $170 =120+(500*.4)-150

As of the end of 2018, Elliott had a deferred tax asset of $100,000 and believed it was not more likely than not that it could realize any of the tax deductions associated with the deferred tax asset. As of the end of 2019, Elliott needed to show a deferred tax asset of $150,000, and believed it was more likely than not that it would realize $20,000 of that deferred tax asset. Assuming tax payable of $300,000 and no deferred tax liabilities, Elliott's 2019 tax expense journal entry includes a: a. Debit to tax expense for $330,000 b. Debit to tax expense for $280,000 c. Debit to tax expense for $250,000 d. Credit to tax expense for $230,000

b. Debit to tax expense for $280,000 Tax expense ? DTA 150,000-100,000 Tax Payable 300,000 Valuation allowance =(150,000-20,000)-100,000

Which of the following is not a component of paid-in capital? a. Amounts invested by shareholders when they purchase shares of stock from the corporation b. The cost of shares previously sold to shareholders that are bought back by the corporation c. Amounts arising from share-based compensation activities d. Amounts arising from share repurchases

b. The cost of shares previously sold to shareholders that are bought back by the corporation

Ending plan assets=

beginning plan assets+ return on plan assets+ cash contributions-benefits paid

Garavelli Industries granted restricted stock units (RSUs) representing 60 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $8 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives? a. $0 b. $60 million c. $160 million d. $480 million

c. $160 million =8*60/3 years

Information regarding the defined benefit pension plan of Chumlee Company included the following for 2018 ($ 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 2018? a. $30 million b. $175 million c. $210 million d. $225 million

c. $210 million =525-350+85-50

Dutch Bakers has a $100,000 deferred tax liability that will create taxable income in 2020. Dutch established the deferred tax liability in 2017 when the tax rate was 40%. What is the amount of future taxable income that Dutch will incur in 2020 associated with the deferred tax liability? a. $100,000 b. $200,000 c. $250,000 d. $400,000

c. $250,000 =100,000/.4

Ellsworth Corporation was organized on January 1, 2018. The firm was authorized to issue 150,000 shares of $1 par common stock. During 2018, Ellsworth had the following transactions relating to shareholders' equity: •Issued 20,000 shares of common stock at $7 per share •Issued 20,000 shares of common stock at $8 per share •Reported a net income of $100,000 •Paid dividends of $50,000 •Purchased 3,000 shares of treasury stock at $10 What was total shareholders' equity at the end of 2018? a. $270,000 b. $350,000 c. $320,000 d. $380,000

c. $320,000 (20,000*7)+(20,000*8)+100,000-50,000-30,000

The balance sheet of Chunn Industries included the following shareholders' equity section at December 31, 2018 ($ in millions): Common stock ($1 par value, authorized 100M shares, issued and outstanding 90M shares) $ 90 Paid-in capital—excess of par 540 Retained earnings 280 Total shareholders' equity $910 On January 5, 2019, Chunn purchased and retired 1 million 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: a. $540, $280 b. $540, $272 c. $534, $278 d. $532, $280

c. $534, $278 =540-(540/90) =280-2

Ellen Kelly Inc. had 200,000 shares of $.50 par common stock, 10,000 shares of 5%, $20 par cumulative preferred stock, and 30,000 shares of 5%, $10 par preferred stock convertible into 10,000 common shares. Net income after taxes was $1,500,000. No dividends were declared during the year. Diluted EPS would be: a. $7.14 b. $7.07 c. $7.10 d. $7.00

c. $7.10 =1,500,000-(10,000*.05*20)/200,000+10,000

Brendon 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. Accumulated other comprehensive income will increase by $18 million =24-6

In 2018, Broyles, Inc. reacquired 3,000 shares of its common stock at $55 per share. In 2019, Broyles, Inc. reissued 1,000 shares of the stock at $75 per share. Which of the following would be included in the 2019 entry? a. Credit Cash for $165,000 b. Debit Treasury Stock for $75,000 c. Credit Treasury Stock for $55,000 d. Credit Cash for $75,000

c. Credit Treasury Stock for $55,000

Duchess Company started the period with a deferred tax asset of $400. As of the end of the period, Duchess identifies future deductible amounts of $700. Duchess has a tax rate of 40%, and calculates that taxes payable will be $200. Duchess's tax expense journal entry would include a: a. Debit to tax expense of $280 b. Credit to tax expense of $120 c. Debit to tax expense of $320 d. Credit to tax expense of $320

c. Debit to tax expense of $320 =200+400-(700*.4)

Which of the following items would not be reported in the statement of comprehensive income as Other Comprehensive Income? a. Decrease in the value of available-for-sale debt securities b. Loss on postretirement benefit plan assets c. Gain on sale of equipment d. Adjustment for foreign currency translation

c. Gain on sale of equipment

Which of the following describes defined benefit pension plans? a. The investment risk is borne by the employee b. The plans are simple and easy to construct c. The investment risk is borne by the employer d. Retirement benefits depend on the individual's account balance

c. The investment risk is borne by the employer

Limited liability

corporations are a seperate legal entity responsible for their own debts; not the owner

Types of preferred shares

cumulative, noncumulative participating, nonparticipating

On January 1, 2018, Parker and Ryan Insurance Company granted 30,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2020, and expire on January 1, 2024. Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant. The market price of the company's stock was as follows: January 1, 2018 $14 December 31, 2018 15 What amount should Parker and Ryan recognize as compensation expense for 2018? a. $10,000 b. $20,000 c. $30,000 d. $50,000

d. $50,000 =5*30,000/3 years

Zarshenas Jewelers granted restricted stock units (RSUs) representing 120 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within four years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $5 per share on the grant date. The total compensation cost pertaining to the restricted stock units is: a. $15 million b. $120 million c. $150 million d. $600 million

d. $600 million =120*5

The following data were reported in the shareholders' equity section of the Brandon Industries' comparative balance sheets for the years ended December 31 ($ in millions): 2018 2017 Common stock, $1 par per share $306 $300 Paid-in capital—excess of par 174 150 Retained earnings 314 300 During 2018, Brandon declared and paid cash dividends of $45 million. The company also issued a stock dividend. No other changes occurred in shares outstanding during 2018. What was Brandon's net income for 2018? a. $14 million b. $59 million c. $65 million d. $89 million

d. $89 million =314-300+45+30

Corbin Company had 100,000 shares of common stock outstanding. Options to purchase 5,000 shares of common stock were outstanding at the beginning of the year. The options can be exercised to purchase stock at $50 per share. The average market price of the stock was $80. The net increase in the dilutive earnings per share denominator is: a. 25,000 shares b. 5,000 shares c. 3,125 shares d. 1,875 shares

d. 1,875 shares= 5,000-(5,000*50/80)

Plaxco had a before-tax loss of $100,000 for both financial accounting and tax purposes in 2021, and pays tax at a rate of 25%. As a result Plaxco will have: a. A 2021 net loss of $100,000 and a deferred tax asset of $100,000. b. A 2021 net loss of $100,000 and a deferred tax asset of $25,000. c. A 2021 net loss of $75,000 and a deferred tax asset of $100,000. d. A 2021 net loss of $75,000 and a deferred tax asset of $25,000.

d. A 2021 net loss of $75,000 and a deferred tax asset of $25,000

Shortly before the end of 2018, Colter Company makes an installment sale that generates $400 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 2019. Colter has a tax rate of 40%. As a result of this transaction, Colter's tax expense journal entry would include a: a. Debit to deferred tax liability for $400 b. Credit to deferred tax liability for $400 c. Debit to deferred tax liability for $160 d. Credit to deferred tax liability for $160

d. Credit to deferred tax liability for $160 =400*.4

When stock is issued in exchange for property, the best evidence of fair value might be any of the following except: a. The appraised value of the property received b. The selling price of the stock in a recent transaction c. The price of the stock quoted on the stock exchange d. The average book value of outstanding stock

d. The average book value of outstanding stock

When stock dividends are distributed, the market price per share will

decrease

retained earnings restrictions

designated a portion of the RE balance as being unavailable for dividends; communicated management's intention to withhold assets

liquidating dividends

dividend exceeds RE balance

Cumulative preffered share

dividends in arrears acccumulate and must be made up in a later dividend year before they are paid to common shareholders

Disadvantages of corporations

expensive reporting requirements, double taxation

Issuance of shares should be recorded at

fair value

DTL

future deductible amounts

corridor

greater if PBO or FV of plan assets-.1

What is the effect on EPS when the exercise price is higher than the buyback price?

increase EPS

service cost

increase in the projected benefit obligation attributable to employee service performed during the period

Stock splits are motivated by

increasing marketability

interest cost

interest accrued on the projected benefit obligation calculated as the discount rate multiplied by the projected benefit obligation at the beginning of the year

Advantages of corporations

limited liability, ease of raising capital, ease of transfer of ownership, perpetual life, specialized management

Intrinsic value=

market price of shares-option price at which they can be acquired

valuation allowance

more likely than not that some or all of a DTA will not be realized

Plan asset> PBO=

net pension asset

Plan asset<PBO=

net pension liability

permanent difference

never affects taxable income or income tax payable

When is a liability reported for dividends?

on the declaration date

convertible securities are considred

potentially dilutive

Taxable income=

pretax income-bond interest-installment income

defined contribution pension plan

promises a fixed annual contribution to a pension fund

Defined benefit pension plan

promises a fixed retirement benefit

to record property dividends on the distribution date

property dividends payable (FV) -Investment

DTA

reflects the benefit of future deductible amounts

a more descriptive title of retained earnings would be

reinvested earnings

Preemptive right

right to maintain one's ownership percentage in a firm before public sale of new shares

PBO changes through these

service cost interest cost prior service cost (loss) or gain on PBO (retiree benefits paid)

Pension expense=

service cost+ interest- expected return on plan assets- amortization of prior service cost+/- gain/loss

amortization of prior service cost=

service cost/remaining service life

potential common shares

shares that are not common stock but might become common stock convertible bonds, convertible preferred stock, stock options, contingently issuable securities

effective tax rate=

tax expense/pretax accounting income

statutory tax rate

tax rate set by the code

temporary differences arise from

tax rules and accounting rules recognize income in different periods

Shareholders liability is limited to?

the amounts they invest through shares

Antidilutive securities

the effect of the conversion or exercise of potential common shares would be to increase rather than decrease, EPS

Why do companies buyback shares?

to offset the increase in shares issued in employees in compensation plans

Yearly compensation=

total compensation/years allocated

PBO

uses estimated future compensation levels

ABO

uses existing compensation levels