Exam 2 Questions | Intermediate Financial Accounting II | ACCT 414, Exams of Accounting

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Name: ____________________________________

Exam 2

Acct 414 – Corporate Accounting & Reporting II

Spring 2009

INSTRUCTIONS:

{Not following instructions could cost you up to 10 points.} Put your name on answer sheet and exam. Put your name and student ID number on answer sheet in both human and machine-readable formats. (For the ID number, do not put in a hyphen -- the last two columns will be blank.) MATCHING and MULTIPLE CHOICE: Darken your selected answer on the separate answer sheet. You should also clearly circle or otherwise mark your answer on the exam itself since the answer sheet will not be returned. There is no penalty for guessing. SHORT PROBLEMS & ESSAYS: Show any necessary computations if you want to be eligible for partial credit. Present your work in a neat, well-organized manner. Answer all parts of the problem. When you are using a financial calculator, spell out what you put in for n, i, PMT, FV, PV, etc. You could also draw a time-line if that would explain your thinking to me. You may use abbreviations in your essay answers but I need complete thoughts. 1-17 Multiple Choice Questions (5 points each, maximum 50 points) includes extra credit IFRS questions on deferred taxes

18. Pension Work Paper {FASB No. 158} (50 points)
19. Deferred Income Taxes (50 points)
20. Earnings per share (50 points)
21. Extra credit – pension computations Total points earned (max = 200) If you tear off the working papers, be sure your name is on the top AND that you staple the exam back together in page number order. DO NOT STAPLE ANSWER SHEET TO EXAM. Do not attempt extra credit section until all other sections of the exam have been completed.

After Exam 2 - Course Grade

Total Points = __________/__________ = _________%

Quiz and HW percentage = ___________%

Projects percentage = ___________%

This page left blank intentionally – use for scratch paper if needed

Multiple Choice Questions (10 points each, one point extra credit for each correct answer for the five free misses – circle your answer here and also put it on the scantron form.

1. 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.
2. Prior service cost is amortized on a a. straight-line basis over the expected future years of service. b. years-of-service method or on a straight-line basis over the average remaining service life of active employees. c. straight-line basis over 15 years. d. straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer.
3. Gillum, Inc. has a defined-benefit pension plan covering its 50 employees. Gillum agrees to amend its pension benefits. As a result, the projected benefit obligation increased by $1,500,000. Gillum determined that all its employees are expected to receive benefits under the plan over the next 5 years. In addition, 20% are expected to retire or quit each year. Assuming that Gillum uses the years-of-service method of amortization for prior service cost, the amount reported as amortization of prior service cost in year one after the amendment is a. $300,000. b. $500,000. c. $150,000. d. $400,000.

4. On January 1, 2007, Doane Corp. granted an employee an option to purchase 6, shares of Doane's $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $140,000. The option became exercisable on December 31, 2008, after the employee completed two years of service. The market prices of Doane's stock were as follows: January 1, 2007 $ December 31, 2008 50 For 2008, Doane should recognize compensation expense under the fair value method of a. $90,000. b. $30,000. c. $70,000. d. $0.
5. On January 2, 2007, for past services, Titus Corp. granted Ken Pine, its president, 16,000 stock appreciation rights (SARs) that are exercisable immediately and expire on January 2, 2009. On exercise, Pine is entitled to receive cash for the excess of the market price of the stock on the exercise date over the market price on the grant date. Pine did not exercise any of the rights during 2007. The market price of Titus's stock was $30 on January 2, 2007, and $45 on December 31, 2007. Pine chose to exercise the SARs on Sept. 1, 2008 when the price was $48. As a result of the stock appreciation rights, Titus should pay Ken Pine a. $0. b. $80,000. c. $240,000. d. $288,000.
6. Which of the following is not a characteristic of a noncompensatory stock purchase plan? a. It is open to almost all full-time employees. b. The discount from market price is small. c. The options are available to employees for 30 days. d. All of these are characteristics.

7. On June 30, 2004, Sealey Corporation granted compensatory stock options for 30, shares of its $20 par value common stock to certain of its key employees. The market price of the common stock on that date was $36 per share and the option price was $30. The Black-Scholes option pricing model determines total compensation expense to be $360,000. The options are exercisable beginning January 1, 2007, provided those key employees are still in Sealey’s employ at the time the options are exercised. The options expire on June 30, 2008. On January 4, 2007, when the market price of the stock was $42 per share, all 30, options were exercised. What should be the amount of compensation expense recorded by Sealey Corporation for the calendar year 2006 using the fair value method? a. $0. b. $144,000. c. $180,000. d. $360,000.
8. What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? a. Decrease and increase b. Decrease and no effect c. Increase and no effect d. Increase and decrease
9. Due to the importance of earnings per share information, it is required to be reported by all Public Companies Nonpublic Companies a. Yes Yes b. Yes No c. No No d. No Yes
10. Antidilutive securities a. should be included in the computation of diluted earnings per share but not basic earnings per share. b. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share. c. include stock options and warrants whose exercise price is less than the average market price of common stock. d. should be ignored in all earnings per share calculations.
11. Taxable income of a corporation 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.

12. Taxable income of a corporation differs from pretax financial income because of Permanent Temporary Differences Differences a. No No b. No Yes c. Yes Yes d. Yes No

13. Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is recognized in financial income? a. Subscriptions received in advance. b. Prepaid royalty received in advance. c. An installment sale accounted for on the accrual basis for financial reporting purposes and on the installment (cash) basis for tax purposes. d. Interest received on a municipal obligation.

14. A company records an unrealized loss on short-term securities. This would result in what type of difference and in what type of deferred income tax? Type of Difference Deferred Tax a. Temporary Asset b. Temporary Liability c. Permanent Liability d. Permanent Asset

15. Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on a. their expected reversal dates. b. their debit or credit balance. c. the length of time the deferred tax amounts will generate future tax deferral benefits. d. the classification of the related asset or liability. IFRS Questions – Extra Credit

16. What tax rates are used for IFRS deferred tax calculations? a. Substantively enacted rates b. Enacted rates c. Proposed rates d. a and b e. a, b and c

17. Taylor Inc. has calculated the following deferred tax assets and liabilities based on temporary differences between book and tax bases. How will these deferred taxes be presented on the IFRS financial statement? a. $21,000 noncurrent liability b. $29,000 non-current liability c. $46,000 current asset, $75,000 non-current liability d. $54,000 current asset, $75,000 noncurrent liability e. $58,000 current asset, $12,000 current liability, $75,000 non-current liability

18. Pension Accounting (50 points). The Deary Drums Corporation initiated a noncontributory defined benefit pension plan on January 1, 1980 and applied the provisions of FASB Statement 87 as of January 1, 1987. FASB Statement No. 158 was implemented as of January 1, 2006. Plymouth Plows uses the straight-line method, based on average remaining service period of employees, to amortize prior service costs. 2008 BALANCES AS OF JANUARY 1, 2008 Projected Benefit Obligation 240, Plan Assets at market 200, Funded status (40,000) Unrecognized transition cost/(gain) Straight-line amortization at $0 per year - Unrecognized Prior Service Cost 150, Straight-line amortization at $15,000 per year Unrecognized (gains)/losses 128, OTHER INFORMATION: Service cost for year 45, Discount rate for year 6.00% Expected rate of return on plan assets 8.00% Actual return on plan assets: gain/(loss) 20, Pension plan contribution 60, Retirement benefits paid during year 35, Average remaining service years related to active employees 16 Increase/(decrease) in PBO during year due to revised actuarial assumptions 77, REQUIRED: a. Compute net periodic pension expense for 2008. (Be sure to show all of the components of pension expense.) Prepare the journal entry needed to record pension expense and funding of pension plan. b. Compute the balances in accumulated other comprehensive income, projected benefit obligation, and plan assets at 1/1/ c. Explain (or show) how the net pension obligation or net pension asset will be displayed on the balance sheet at 12/31/08. Will there be other pension related accounts on the balance sheet? If so, explain where and how they are presented. Provide amounts. Note: Completing the worksheet provided will be an acceptable answer for a and b and you can also put your answer to c in the bottom right hand corner of the worksheet.

19. Deferred tax asset (50 points) Yerba Inc. began business on January 1, 2007. Its pretax financial income for the first 3 years was as follows: 2007 $240, 2008 560, 2009 725, The enacted tax rate in 2007 was 35%. The enacted tax rate existing at Dec. 31, 2008 is 40%: The following items caused the only differences between pretax financial income and taxable income.

1. On January 2, 2007, heavy equipment costing $500,000 was purchased. The equipment had a life of 5 years and no salvage value. The straight-line method of depreciation is used for book purposes and the MACRS tax deduction taken each year is shown in the table below: 2007 2008 2009 2010 2011 Total For tax $120,000 $200,000 $150,000 $30,000 0 $500, For accounting 100,000 100,000 100,000 100,000 100,000 500,
2. In 2008, the company collected first and last years’ rent in the total amount of $180,000. Of this amount, $90,000 was earned in 2008; the other $90,000 will be earned in 2015. The full $180,000 was included in taxable income in 2008.
3. The company pays $8,000 a year for life insurance on officers.
4. In 2008, the company had a long-term construction contract on which it recognized a gross profit of $120,000 on the income statement. For tax purposes, the company uses the completed contract method. The total estimated gross profit is $360,000 and the remaining 240,000 is expected to be realized equally in 2009 and 2010. Instructions (a) The working paper shows the inventory of temporary differences from 2007. You are to compute taxable income and income tax payable/receivable for the 2008 using the working paper. If you do not use the working paper provided, prepare an inventory of the deferred tax (asset) and liability and determine the net deferred tax asset or liability as of 12/31/08. (b) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2008. (c) What amounts would appear on the balance sheet related to deferred taxes (give the section and amount). Answers to (a) and (c) may be provided on the working paper (page ____) but please write the formal journal entry either HERE or on the bottom of the working paper.

20. Earnings per share (50 points). Net income for Arcadia Corp. was $3,575,000 for 2008. Its tax rate was 40%. On January 1, 2008 there were 1,000,000 shares of common stock outstanding. On June 1, 500,000 shares were issued. On Sept 30, 2008 Arcadia issued a 50% stock dividend. On November 1, Arcadia bought 150,000 shares of treasury stock for $49 per share. There are 500,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $52 during 2008 (both market price and option price have already been adjusted for the stock dividend). During 2008, there were 200,000 shares of convertible 8% preferred stock outstanding. The par value is $100 par and each share is convertible into 15 shares of common stock after the stock dividend. Arcadia issued $10,000,000 of 9% convertible bonds at face value during 2006. The semiannual bonds mature in 2016. Each $1,000 bond is convertible into 150 shares of common stock after the stock dividend. Instructions (a) Compute the weighted average number of common shares outstanding. Dates Outstanding Adjustment Months Weighted Weighted average = ____________________________ shares

Problem 20 (continued) Regardless of your answer to (a), assume that the weight average number of common shares outstanding is 1,800,000 for parts (b) and (c). You may use the work paper provided below or formulas but please write your answers in the space provided: (b) Compute the basic earnings per share for 2008. $_________________________ (c) Compute the diluted earnings per share for 2008. $___________________________ Numerator Denominator Per Share Net income $3,575,000 1,800,

21. EXTRA CREDIT – UP TO 10 POINTS

Pension Present Value Computations. Francisca’s Finest Furs Inc. has a defined benefit pension plan. The formula is the final year’s annual salary times 2% times years of service. Consider one employee in the plan – Franny Florence. Franny is expected to be making $90,000 when she retires 10 years from now. She already has 10 years of prior service and she is expected to live 20 years after she retires. You may assume ordinary annuities and end-of-year annual payments upon retirement and a 5% per annum discount rate. What is the service cost related to Franny Florence for the year just completed?

For Problem 18 Name: Pension Worksheet 1 2 3 4 5 6 7 8 SFAS NO. 158 Income Stmt BS BS Pension Expense Cash Transition (Gain)/Loss Net actuarial (gain)/loss Prior Service Cost Funded Status Projected Benefit Obligation Plan Assets BALANCE FORWARD Service Cost Interest Cost Expected return on plan assets Corridor Amount AOCI Actuarial (BoY) Excess AMORTIZATIONS: Unrecognized gain/loss Prior Service Cost Transition Amount Contributions to Pension Plan Retirement Benefits Paid by Plan Actual Return on Plan Assets Actuarial Adjustments to PBO Amounts for journal entry: AOCI balance forward BALANCES AT YEAR END Column 6 must equal sum of columns 7 & 8 Summary journal entry Debit Credit Pension expense Cash AOCI - transition loss AOCI - actuarial gain/loss AOCI - prior service cost Net pension obligation or asset Not on Books Other comprehensive income stmt Memorandum Amounts Accounts on Employer's Books

For Problem 19 Name:______________________________ Remember – you only need to do the 2008 column!

Deferred Tax Problems - Worksheet

Pre-tax accounting income

Permanent differences:

Book TI

Temporary differences:

Taxable income

Applicable tax rate

Income taxes payable/(receivable)

Inventory of temporary differences

Depreciation (20,000)

Total net temp differences (20,000)

Applicable tax rate 35%

Deferred taxes (net) ending (7,000)

Deferred taxes (net) beginning -

Change in net deferred taxes (7,000)

Taxes (payable)/receivable from above

Income tax expense

Classification:

Current deferred tax assets

Noncurrent deferred tax assets

Current deferred tax liabilities

Noncurrent deferred tax liabilities

Total net deferred tax

SOLUTIONS Multiple Choice Answers:

1. A 2. B 3. B 4. C 5. D
2. D 7. B 8. A 9. B 10. D
3. B 12. C 13. C 14. A 15. D
4. D 17. B Problem 18 Pension Working Paper Pension Worksheet 1 2 4 5 6 7 8 SFAS NO. 158 Deary Drums Corporation Income Stmt BS BS 2008 Pension Expense Cash Net actuarial (gain)/loss Prior Service Cost Funded Status Projected Benefit Obligation Plan Assets BALANCE FORWARD -40,000 -240,000 200, Service Cost 45,000 -45, 6% Interest Cost 14,400 -14, 8% Expected return on plan assets -16,000 16, 24,000 Corridor Amount 128,000 AOCI Actuarial (BoY) 104,000 Excess AMORTIZATIONS: 16 Unrecognized gain/loss 6,500 -6, Prior Service Cost 15,000 -15, Transition Amount 0 Contributions to Pension Plan -60,000 60, Retirement Benefits Paid by Plan 35,000 -35, Actual Return on Plan Assets -20,000 20, Actuarial Adjustments to PBO 77,000 -77, Amounts for journal entry: 64,900 -60,000 66,500 -15,000 -56, AOCI balance forward 128,000 150, BALANCES AT YEAR END 194,500 135,000 -96,400 -341,400 245, Summary journal entry Debit Credit Pension expense $ 64,900 C. Balance sheet Cash $ 60,000 Noncurrent liabilities Funded status of pension plan 96, AOCI - actuarial gain/loss $ 66,500 $ - credit AOCI - prior service cost $ - $ 15,000 Owners equity section Net pension obligation or asset $ - $ 56,400 Acc'd other comprehensive income 329, $ 131,400 $ 131,400 debit Accounts on Employer's Books Not on Books AOCI Memorandum Amounts Problem 19 Deferred taxes (a), and (c) on working paper (next page) (c) Income Tax Expense ($175,200 + 53,000)............................................. 228, Deferred Tax Asset................................................................................. 53, Income Tax Payable ($350,000 × 35%)..................................... 175,

Deferred Tax Problems - Worksheet 2007 2008 2009 Pre-tax accounting income 240,000 560,000 725, Permanent differences: Life insurance premiums 8,000 8,000 8, Book TI 248,000 568,000 733, Temporary differences: Depreciation (20,000) (100,000) (50,000) Rent 90, Construction contract (120,000) (120,000) Taxable income (a) 228,000 438,000 563, Applicable tax rate 35% 40% 40% Income taxes payable/(receivable) (a) 79,800 175,200 225, Inventory of temporary differences (b) Depreciation (20,000) (120,000) (170,000) Rent - 90,000 90, Construction contract - (120,000) (240,000) 0 - - - Total net temp differences (20,000) (150,000) (320,000) Applicable tax rate 35% 40% 40% Deferred taxes (net) ending (7,000) (60,000) (128,000) Deferred taxes (net) beginning - (7,000) (60,000) Change in net deferred taxes (7,000) (53,000) (68,000) Taxes (payable)/receivable from above (79,800) (175,200) (225,200) Income tax expense 86,800 228,200 293, Classification on balance sheet (d) Current deferred tax assets - - - Noncurrent deferred tax assets - - (96,000) Current deferred tax liabilities - - Noncurrent deferred tax liabilities (7,000) (60,000) (32,000) Total net deferred tax (7,000) (60,000) (128,000) Comments: I considered the construction gross profit as noncurrent because it won’t be taxed until

2010. However, it could be current if the company’s operating cycle is longer than one year – in other words, construction in progress (where the GP is located) would then be considered a current asset account. I accepted either choice but the other two items are clearly noncurrent because the depreciation is associated with a noncurrent asset and the last year’s rent will not be recognized for many years. 2008 Balance Sheet – alternate presentation: Current deferred tax liability 48,000 (CIP – oper cycle > 1 yr assumption) Noncurrent deferred tax liability 12,000 (Depr & last year’s rent)

Problem 20 Earnings per share 20a Weighted average = 1,912, Transactions in Common Shares Cumulative Adjustment Months Weighted Jan 1 to May 31 1,000,000 1.50 5 7,500, Issued new shares of common stock 500, June 1 to Sept. 30 1,500,000 1.50 4 9,000, Sept 30, 50% stock dividend issues 750, Oct 1 to Oct 31 2,250,000 1.00 1 2,250, Nov 1, purchased treasury stock -150, Nov. 1, 2008 - Dec 31 2,100,000 1.00 2 4,200, 12 22,950, Weighted average shares 1,912, For Problem 20b & 20c Potentially dilutive securities Cumulative convertible preferred 200,000 shares Options 8% $ 100.00 par 500, conversion ratio 15 Price $ 40. Dividend per share $ 8.00 Mkt $ 52. Dividend $ 1,600,000 = short-cut mtd: Shares converted into 3,000,000 $ 0.53 115, Proceeds 20,000, Treasury stock method Buy back 384, Net new 115, Bonds 10,000,000 face 9% interest rate Face value of each bond 1,000 40% tax rate Number of bonds 10,000 interest expense Conversion ratio 150 900, 540,000 after tax After tax interest $ 540,000 = bonds convert to shares 1,500,000 $ 0. Numerator Denominator EPS Net income 3,575, Preferred dividend -1,600, 1,975,000 1,800,000 basic= $ 1. Options 115, 1,975,000 1,915,385 $ 1. Bonds 540,000 1,500, 2,515,000 3,415,385 $ 0. Cumulative preferred $ 1,600,000 3,000, 4,115,000 6,415,385 diluted= $ 0.

Extra Credit Problem 21 Service Cost Extra Credit Current salary 55,252 -55, Annual raise 5% Years until retirement 10 PMT 0 Salary at retirement 90,000 GIVEN Future salary $ 90,000 at retirement Step 1 Benefit formula 2.0% per year of service Benefit per yr $ 1,800.00 for the year just ended Life expectancy 20 years after retirement worked one more yr 10 years credited for prior service Benefit for service cost $ 1,800.00 TO COMPUTE SERVICE COST Step 2 PMT = $ (1,800.00)Additional benefit from one more year of work N = 20 life expectancy after retirement FV = $0.00 no final payment INT RATE = 5% discount rate PV = $22,431.98 Needed at retirement PMT = 0 (not an annuity) Step 3 N = 10 years until retirement INT RATE = 5% discount rate FV = $ (22,431.98)Needed at retirement for year just completed PV = $ 13,770.90 Service cost & increase to PBO Pension Present Value C Francisca’s Finest Fu year’s annual salary t Franny Florence. Fra now. She already ha she retires. You may retirement and a 5 % What is the service cost fo