Name: __________________________ Fall 08 Test 3 Accounting 3312 25 points 1. Deferred income taxes. Earl Co.

at the end of 2007, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 750,000

Estimated expenses deductible for taxes when paid 1,200,000

Extra depreciation (1,350,000)

Taxable income $ 600,000

Estimated warranty expense of $800,000 will be deductible in 2008, $300,000 in 2009, and $100,000 in 2010. The use of the depreciable assets will result in taxable amounts of $450,000 in each of the next three years. Instructions (a) Prepare a table of future taxable and deductible amounts. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007, assuming an income tax rate of 40% for all years.

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25 points

2. Instr uctio ns (a) Deter mine the projec ted benefi t obliga tion at Dece mber 31, 2008. There are no net gains or losses . (b) Deter mine the fair value of plan assets at Dece mber 31, 2008. (c) Calcu late pensi on expen se for

Pension plan calculations and journal entry. On January 1, 2008, Stine Co. had the following balances: Projected benefit obligation $7,200,000

Fair value of plan assets 7,200,000

Other data related to the pension plan for 2008: Service cost 315,000

Unrecognized prior service cost -0-

Contributions to the plan 459,000

Benefits paid 450,000

Actual return on plan assets 432,000

Settlement rate 9%

Expected rate of return 6%

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25 points 3. Lessor accountingsales-type lease. Piper Corp. is a manufacturer of truck trailers. On January 1, 2008, Piper Corp. leases ten trailers to Runyan Company under a six-year noncancelable lease agreement. The following information about the lease and the trailers is provided: 1. Equal annual payments that are due on December 31 each year provide Piper Corp. with an 8% return on net investment (present value factor for 6 periods at 8% is 4.62288). 2. Titles to the trailers pass to Runyan at the end of the lease. 3. The fair value of each trailer is $50,000. The cost of each trailer to Piper Corp. is $45,000. Each trailer has an expected useful life of nine years. 4. Collectibility of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by Piper Corp. Instructions (a) What type of lease is this for the lessor? Discuss. (b) Calculate the annual lease payment. (Round to nearest dollar.) (c) Prepare a lease amortization schedule for Piper Corp. for the first three years. (d) Prepare the journal entries for the lessor for 2008 and 2009 to record the lease agreement, the receipt of the lease rentals, and the recognition of income (assume the use of a perpetual inventory method and round all amounts to the nearest dollar).

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25 points

1. Taxable income of a corporation

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A) differs from accounting income due to differences in intraperiod allocation between the two methods of income determination. B) differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination. C) is based on generally accepted accounting principles.

D) is reported on the corporation's income statement.

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2. The rationale for interperiod income tax allocation is to

A) recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date. B) recognize a distribution of earnings to the taxing agency. C) reconcile the tax consequences of permanent and temporary differences appearing on the current year's financial statements.

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D) adjust income tax expense on the income statement to be in agreement with income taxes payable on the balance sheet. 3. In a defined-benefit plan, a formula is used that A) requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee. B) defines the benefits that the employee will receive at the time of retirement. C) requires that pension expense and the cash funding amount be the same. D) defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees. 4. The accumulated benefit obligation measures A) the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels. B) the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels. C) an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement. D) the shortest possible period for funding to maximize the tax deduction. 5. What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee? A) No impact as the option does not enter into the transaction until the end of the lease term. B) The lessee must increase the present value of the minimum lease payments by the present value of the option price. C) The lessee must decrease the present value of the minimum lease payments by the present value of the option price. D) The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

Answer Key
1.

2. (a) Projected benefit obligation, January 1 $7,200,000

Service cost 315,000

Interest cost (9% $7,200,000)

648,000

Benefits paid (450,000)

Projected benefit obligation, December 31 $7,713,000 (b) Fair value of plan assets, January 1 $7,200,000

Actual return 432,000

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Contributions 459,000

Benefits paid (450,000)

Fair value of plan assets, December 31 $7,641,000 (c) Service cost $315,000

Interest cost (9% $7,200,000)

648,000

Actual return on plan assets (432,000)

Pension expense $531,000 (d) Pension Expense 531,000

Accrued/Prepaid Pension Cost

72,000

Cash 459,000

3. (a) It is a sales-type lease to the lessor, Piper Corp. Piper's (the manufacturer) profit upon sale is $50,000, which is recognized in the year of sale (2008). It is not an operating lease because title to the assets passes to the lessee, the present value ($500,000) of the minimum lease payments equals or exceeds 90% ($450,000) of the fair value of the leased trailers, collectibility is reasonably assured, and no important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor. The remaining accounting treatment is similar to that accorded a direct-financing lease. (b) ($50,000 10) 4.62288 = $108,158.

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1. B 2. A 3. B 4. A 5. B