DeVry ACC 312 All Homework Exercises Week 1-7 (2014)

Week One - Homework Exercises E16-3, E16-5, E16-10, and E16-22

E16-3 Ayres Services acquired an asset for $80 million in 2013. The asset is depreciated for financial reporting purposes over four years on a straight-line basis (no residual value). For tax purposes the asset’s cost is depreciated by MACRS. The enacted tax rate is 40%. Amounts for pretax accounting income, depreciation, and taxable income in 2013, 2014, 2015, and 2016 are as follows:

2013 2014 2015 2016

Pretax accounting income $330 $350 $365 $400

Depreciation on the income statement 20 20 20 20

Depreciation on the tax return (25) (33) (15) (7)

Taxable income $325 $337 $370 $413

Required: For December 31 of each year, determine (a) the temporary book–tax difference for the depreciable asset and (b) the balance to be reported in the deferred tax liability account.

E16-5 Lance Lawn Services reports warranty expense by estimating the amount that eventually will be paid to satisfy warranties on its product sales. For tax purposes, the expense is deducted when the cost is incurred. At December 31, 2013, Lance has a warranty liability of $1 million and taxable income of $75 million. At December 31, 2012, Lance reported a deferred tax asset of $435,000 related to this difference in reporting warranties, its only temporary difference. The enacted tax rate is 40% each year.

Required: Prepare the appropriate journal entry to record Lance’s income tax provision for 2013.

E16-10 At the end of 2012, Payne Industries had a deferred tax asset account with a balance of $30 million attributable to a temporary book–tax difference of $75 million in a liability for estimated expenses. At the end of 2013, the temporary difference is $70 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2013 is $180 million and the tax rate is 40%.

Required: 1. Prepare the journal entry(s) to record Payne’s income taxes for 2013, assuming it is more likely than not that the deferred tax asset will be realized.

2. Prepare the journal entry(s) to record Payne’s income taxes for 2013, assuming it is more likely than not that one-half of the deferred tax asset will ultimately be realized.

E16-22 "(This exercise is based on the situation described in E 16–21, modified to include a carryforward in addition to a carryback.)

Wynn Sheet Metal reported an operating loss of $160,000 for financial reporting and tax purposes in 2013. The enacted tax rate is 40%. Taxable income, tax rates, and income taxes paid in Wynn‘s first four years of operation were as follows:"

Taxable Income Tax Rates Income Taxes Paid

2009 $60,000 30% $18,000

2010 70,000 30 21,000

2011 80,000 40 32,000

2012 60,000 45 27,000

Required: 1. Prepare the journal entry to recognize the income tax benefit of the operating loss. Wynn elects the carryback option.

2. Show the lower portion of the 2013 income statement that reports the income tax benefit of the operating loss.

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Week Two - Homework Exercises E17-5, E17-7, E17-10, E17-12, and E17-15

E17-5 The following data relate to Voltaire Company’s defined benefit pension plan:

($ in millions)

Plan assets at fair value, January 1 $600

Expected return on plan assets 60

Actual return on plan assets 48

Contributions to the pension fund (end of year) 100

Amortization of net loss 10

Pension benefits paid (end of year) 11

Pension expense 72

Required: Determine the amount of pension plan assets at fair value on December 31.

E17-7 Pension data for Fahy Transportation Inc. include the following:

($ in millions)

Discount rate, 7%

Expected return on plan assets, 10%

Actual return on plan assets, 11%

Projected benefit obligation, January 1 730

Plan assets (fair value), January 1 700

Plan assets (fair value), December 31 750

Benefit payments to retirees, December 31 66

Required: Assuming cash contributions were made at the end of the year, what was the amount of those contributions?

E17-10 Abbott and Abbott has a noncontributory, defined benefit pension plan. At December 31, 2013, Abbott and Abbott received the following information:

Projected Benefit Obligation ($ in millions)

Balance, January 1 $120

Service cost 20

Interest cost 12

Benefit paid (9)

Balance, December 31 $143

Plan Assets

Balance, January 1 $80

Actual return on plan assets 9

Contributions 2013 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, 2013.

Required: 1. Determine Abbott and Abbott’s pension expense for 2013.

2. Prepare the journal entries to record Abbott and Abbott’s pension expense, funding, and payment for 2013.

E17-12 "Clark Industries has a defined benefit pension plan that specifies annual retirement benefits equal to:

1.2% × Service years × Final year’s salary

Stanley Mills was hired by Clark at the beginning of 1994. Mills is expected to retire at the end of 2038 after 45 years of service. His retirement is expected to span 15 years. At the end of 2013, 20 years after being hired, his salary is $80,000. The company’s actuary projects Mills’s salary to be $270,000 at retirement. The actuary’s discount rate is 7%."

Required: 1. Estimate the amount of Stanley Mills’s annual retirement payments for the 15 retirement years earned as of the end of 2013.

2. Suppose Clark’s pension plan permits a lump-sum payment at retirement in lieu of annuity payments. Determine the lump-sum equivalent as the present value as of the retirement date of annuity payments during the retirement period.

3. What is the company’s projected benefit obligation at the end of 2013 with respect to Stanley Mills?

4. Even though pension accounting centers on the PBO calculation, the ABO still must be disclosed in the pension disclosure note. What is the company’s accumulated benefit obligation at the end of 2013 with respect to Stanley Mills?

5. If we assume no estimates change in the meantime, what is the company’s projected benefit obligation at the end of 2014 with respect to Stanley Mills?

6. What portion of the 2014 increase in the PBO is attributable to 2014 service (the service cost component of pension expense) and to accrued interest (the interest cost component of pension expense)?

E17-15 A partially completed pension spreadsheet showing the relationships among the elements that comprise the defined benefit pension plan of Universal Products is given below. The actuary’s discount rate is 5%. At the end of 2011, the pension formula was amended, creating a prior service cost of $120,000. The expected rate of return on assets was 8%, and the average remaining service life of the active employee group is 20 years in the current year as well as the previous two years.

Required: Copy the incomplete spreadsheet and fill in the missing amounts.

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