Practice Exam, Chapters 16-18

Problem I Pinder Implements sometimes sells products on an installment basis. In those

cases, Pinder recognizes installment income for financial reporting purposes in
the year of the sale. However, for tax purposes, installment income is reported by
the installment method. Installment income in 2011 was $36 million. Pinder
expects to collect this amount over the next three years in the amounts of $9
million, $15 million, and $12 million, respectively.
Pinder’s tax rate is 30%. However, due to an enacted law, it is scheduled to
become 40% in 2013. Pinder’s pretax accounting income for 2011 was $48.6
million, including interest revenue of $600,000 from municipal bonds it holds as
an investment. There were no other differences between accounting income and
taxable income.

Required:

1. What was 2011 income tax expense for Pinder? Prepare the appropriate
journal entry to record Pinder’s 2011 income taxes. Show Calculations.

2. What is Pinder’s 2011 net income?

Problem II Rand Medical has a defined benefit pension for which the following
pension-related data were available on December 31, 2011 (the end of the
company’s fiscal period):

Projected benefit obligation (PBO):

Balance, January 1, 2011 $1,800,000
Service cost 369,000
Interest cost, discount rate, 10% 180,000
Losses (gains) due to changes in actuarial
assumptions in 2011 0
Pension benefits paid (189,000)
Balance, December 31, 2011 $2,160,000

Accumulated benefits obligation, Dec. 31, 2011 $ 1,890,000

Plan assets:
Balance, January 1, 2011 $ 1,350,000
Actual return on plan assets 135,000
(Expected return on plan assets, $120,000)
Contributions 450,000
Pension benefits paid (189,000)
Balance, December 31, 2011 $ 1,746,000

January 1, 2011, balances:

Prior service cost
(annual amortization $36,000) 216,000
Net loss–pensions
(amortization over 10 years, if needed) 210,000

Required:

1. Calculate Rand’s 2011 pension expense. Show calculations.

2. Prepare Rand’s 2011 journal entries to record pension expense and funding.

3. Prepare the journal entry to record any 2011 gains or losses.

 4. Prepare the journal entry to record the 2011 payment of retiree benefits.
Problem III The postretirement benefit plan of Durable Campers provides health care
benefits to retirees. The accumulated postretirement benefit obligation was $100
million at the beginning of 2011. Durable began funding at the end of 2008 and
plan assets at the beginning of 2011 were $50 million. Pertinent data were as
follows:
Discount rate 8%
Actual and expected rate of return on plan assets 10 %
2011 service cost $12 million
Employer contribution to plan assets (end of year) 30 million
Retiree benefit payments 6 million

Because of changes in assumptions and estimates of health care costs at the

end of 2011, the APBO was determined to be $3 million higher than anticipated.

Required:

1. Determine the accumulated postretirement benefit obligation (APBO) at the

end of fiscal year 2011. Show calculations.

2. Determine postretirement benefit expense for fiscal year 2011. Show

calculations.

Problem IV
At the beginning of 2011, Couples Home Services had the following:
30 million shares of $1 par common stock $ 30
5 million shares of $100 par, 8% cumulative,
non-participating preferred stock 500
 Paid-in capital – excess of par 570
Retained earnings 200

During 2011, Couples earned $240 million. The company declared and
paid the contracted amount of preferred dividends plus $2 per share to
common shareholders. No dividends had been declared or paid during
2010. On January 8, Couples distributed a 3 for 2 common stock split
effected in the form of a stock dividend.

Required:
Calculate the balance in retained earnings to be reported in the 2011 balance
sheet.

Multiple Choice ___ 1. The interest component of the pension expense for a defined
benefit pension plan is the
a. effective interest rate times the beginning balance in plan assets.
b. effective interest rate times the accumulated benefit obligation.
c. effective interest rate times the unamortized prior service cost.
d. increase in the projected benefit obligation due to the passage of
time.

___ 2. Federal Delivery Service began a defined-benefit pension plan for its
employees on January 1, 2011. Pertinent data are:
Projected benefit obligation, Dec. 31, 2011 $157,000
Accumulated benefit obligation, Dec. 31, 2011 148,000
Plan assets at fair value, Dec. 31, 2011 131,000
Pension expense for 2011 143,000
Employer's cash contribution, end of 2011 131,000

What amount should Federal report in the balance sheet at December

31, 2011?
a. Net pension asset of $131,000
b. Net pension liability of $157,000
c. Net pension liability of $26,000
d. Net pension liability of $46,000

___ 3. Bearings Manufacturing Company Inc. purchased a new machine on

January 1, 2011 for $100,000. The company uses the straight-line
depreciation method with an estimated equipment life of 5 years and a
zero salvage value for financial statement purposes, and uses the 4-
year Modified Accelerated Cost Recovery System (MACRS) with an
estimated equipment life of 4 years for income tax reporting purposes.
Bearings is subject to a 35% marginal income tax rate. Assume that
the deferred tax liability at the beginning of the year is zero and that
Bearings has a positive earnings tax position. The MACRS
depreciation rates for 4-year equipment are shown below.
 Year Rate
1 33.33%
2 44.45
3 14.81
4 7.41

What is the deferred tax liability at December 31, 2011 (rounded to the
nearest whole dollar)?
a. $ 7,000
b. $33,330
c. $11,666
d. $ 4,666
___ 4. Shelby Farm has a plan under which retired employees receive medical
benefits. On January 1, 2011, Shelby Farm’s accumulated
postretirement benefit obligation for this plan was $225 million.
Retiree benefits of $27 million were paid at the end of 2011. The
service cost for 2011 is $63 million.

Health care costs rose less than expected in 2011, causing the actuary to
revise downward the estimate of the APBO by $6 million. The
actuary's discount rate is 8%, and there was no prior service cost and an
insignificant net loss–AOCI at the end of 2011.

What is Shelby’s accumulated postretirement benefit obligation at

December 31, 2011?
a. $306 million
b. $300 million
c. $279 million
d. $273 million

___ 5. A stock dividend

a. increases the debt-to-equity ratio of a firm.
b. decreases future earnings per share.
c. decreases the size of the firm.
d. increases shareholders’ wealth.