Questions -
Q1. Which one of the following temporary differences will result in a deferred tax asset?
a. Use of the straight-line depreciation method for financial statement purpose and the Modified Accelerated Cost Recovery System (MACRS) for income tax purposes.
b. Installment sale profits accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes.
c. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes.
d. Prepaid expenses accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes.
Q2. SFAS 109, Accounting for Income Taxes, states that a deferred tax asset shall be reduced by a valuation allowance if it is
a. Probable that some portion will not be realized.
b. Reasonably possible that some portion will not be realized.
c. More likely than not that some portion will not be realized.
d. Likely that some portion will not be realized.
Q3. In preparing its current year-end financial statements, Green Corp. must determine the proper accounting treatment of a $180,000 loss carryforward available to offset future taxable income. There are no temporary differences. The applicable current and future income tax rate is 30%. Available evidence is not conclusive as to the future existence of sufficient taxable income to provide for the future realisation of the tax benefit of the $180,000 loss carryforward. However, based on the available evidence, Guss believes that it is more likely than not that future taxable income will be available to provide for the future realization of $100,000 of this loss carryforward. In its current-year statement of financial condition, Guss should recognize what amounts'?
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Deferred Tax Asset
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Valuation Allowance
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a.
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$0
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$0
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b.
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$30,000
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$0
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c.
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$54,000
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$24,000
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d.
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$54,000
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$30,000
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Q4. The following information pertains to McNeil Co.'s defined benefit pension plan:
Actuarial estimate of projected benefit obligation at January 1 - $144,000
Assumed discount rate - 10%
Service cost for the year - $36,000
Pension benefits paid during the year - $30,000
If no change in actuarial estimates occurred during the year, McNell's PBO at December 31 was
a. $128,400
b. $150,000
c. $158,400
d. $164,400
Q5. The following information relates to the current-year activity of the defined benefit pension plan of Kim Company, whose stock is publicly traded:
Service cost - $240,000
Expected return on plan assets - 60,000
Interest cost on pension benefit obligation - 80,000
Amortization of actuarial loss - 20,000
Amortization of prior service cost - 10,000
Kim's pension expense for the current year is
a. $240,000
b. $260,000
c. $270,000
d. $290,000
Problems -
Problem One - Hubler Company reported pretax accounting income of $45 million in 2017, included in this number was $10 million of depreciation expense calculated under the straight line method. Also included in this number was an expense of $6 million attributed to an environmental tine imposed by a state government agency. Tax depreciation for 2017 will be $15 million. The environmental fine will NOT be deductible ever for income tax purposes. These are the ONLY two differences between accounting and taxable income in 2017.. The 2017 income tax rate is 30%.
Please prepare the adjusting entry to record income tax expense, income tax payable, and deferred income taxes.
Problem Two - National Electric Company sells a wide variety of consumer good products to various retailers On March 15, 2017, National delivers to its customer, Bullseye Products, 400,000 coffeemaker machines.
The selling price is $100 per machine. National's cost for manufacturing each machine if $60. The terms of the contract between National and Bullseye allows Bullseye to return coffemakers to National for a full refund if Bullseye is unable to sell the machines to customers. The returned goods will go back to National's inventory for a later sale to another customer. Bullseye may return goods for a refund until June 30. Past experience indicates that customers such as Bullseye typically return 10% of the products purchased.
On April 10, 2017, Bullseye returns 20,000 of the coffemakers and makes a payment to National for 380,000 coffemakers. On this date the transaction is considered complete.
Please prepare the appropriate accounting entries to fully account for the transaction on:
1. March 15, 2017
2. April 10, 2017
Problem Three - Marrow Company has a defined benefit pension plan. Marrow received the following information from its actuaries for 2017.
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(in $ million)
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Projected Benefit Obligation Balance, January 1
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260
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Service cost
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40
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Interest cost
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26
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Benefits paid to retirees
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20
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Plan Assets Balance, January 1
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290
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Actual return on plan assets
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22
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Cash contribution to the plan by Marrow
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15
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Benefits paid to retirees
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20
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In addition, the following information is provided:
1. Based on historical experience, the expected return on the plan assets has been 10%.
2. The 2017 amortization of prior service costs is $8 million. Prior service cost was incurred in 2014 when the plan was amended.
3. There is no balance in the OCI gain/loss account at January 1, 2017.
Required:
1. Determine the pension expense for 2017.
2. Prepare the journal entries necessary to record the pension activity for the year. Specially, explain whether the pension plan is over or underfunded at the end of 2017.
Problem Four - Magilla Compressor Company manufactures specialty industrial equipment. Its customer, Gorilla, order specialty compressor for its Chicago manufacturing complex. The contract calls for Magilla to manufacture the compressor according to specification and to install it at the Chicago complex. The terms of the contract require Gorilla to pay the full contract price of $30,000,000 within 10 days after the installation is completed. The cost of manufacturing the equipment is $22 million. Magilla has a policy of installing its products for its customers free of charge (in other words, the contract price would be $30,000,000 even if Magilla did not do the installation). The fair value of the installation service is $300,000.
Magilla delivered the compressor to the Chicago facility on March 31, 2017. Installation was completed on April 11, 2017. Payment was received by Magilla on April 20, 2017.
Please prepare the appropriate entries for Magilla on the following dates:
1. March 31, 2017
2. April 11, 2017
Problem Five - During 2017, Continental Steel Company reported a net operating loss of $150 million for financial accounting and income tax purposes. The tax rate in 2017 is 35%. Taxable income, tax rates , and taxes paid in previous years was as follows:
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Taxable income
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Tax rate
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Taxes paid
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2015
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$10 million
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35%
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$3.5 million
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2016
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100 million
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35%
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$35 million
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Management has decided that it is more likely than not that 50% of any loss carry forward will expire unutilized.
Based on the above, please answer the following questions:
1. Prepare all the necessary entries in 2017 to account for the income taxes.
Assume that accounting and taxable income for 2018 is actually $100 million, the tax rate remains 35%, and all the loss carryforward can be used.
2. Prepare the necessary accounting entries in 2018 to account for the income taxes.
Problem Six - Dillon Aerospace Company contracted to build a plane for $8,000,000. Construction began in 2016 and was completed in 2017. Data related to construction are:
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2016
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2017
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Costs incurred during the year
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$2,640,000
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$2,200,000
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Estimated costs to complete
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$2,160,000
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0
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1. Prepare appropriate entries to record revenue and gross profit for 2016 and 2017 using the percentage of completion method.
2. Prepare the appropriate entry to record revenue and gross profit in 2017 assuming the completed contract method is used.