Intermediate Accounting III - Online Midterm Exam

Intermediate Accounting III - Online
Midterm Exam

*You may use book, notes, and homework, but you are NOT allowed to communicate with others about this exam.
We are able to track e-mail communication if determined necessary, so please do your own work.
*SHOW YOUR WORK! I cannot give you partial credit if you do not provide your calculations

Problem
1
2
3
4
5
6
7
8
9
10
11
Total

Title
Present Value of Minimum Lease Payments
Lease Determination
Lease Entries
Accounting for Leases
Income Tax Accounting
Operating Loss Carryforward/back
Compensated Absences
Payroll Journal Entries
Pension Worksheet
Weighted # Shares Outstanding
Basic & Diluted EPS

Points
5
5
10
20
20
10
10
15
15
20
20
150

Earned

-


4. Pursuit Company leased a machine on July 1, 2014, under a 10-year lease. The economic life of the machine is estimated to be 15 years. Title to the machine
passes to Pursuit at the expiration of the lease, and thus, the lease is a capital lease. The lease payments at $97,000 per year, including executory costs of $3,000
per year, all payable in advance annually. The incremental borrowing rate of the company is 9%, and the lessor's implicit interest rate is unknown. Pursuit Company
uses the straight-line method of amortization and the calendar year for reporting purposes.
Required: Give all entries on the books of the lessee relating to the lease for 2008. For your convenience, descriptions are provided.
Date
7/1/14

Account Description

Debit

Credit

12/31/14

12/31/14

657,549

Dr. Lease Expense
Dr. Obligations under Capital Leases
Cr.
Cash
To record first lease payment

3,000
94,000

Dr. Interest Expense
Cr.
Capital Leases
To accrue interest payable on capital lease at end of year

25,360

Dr. Amortization Expense on Leased Equipment
Cr.
Leased Equipment
To record amortization of the leased asset.

7/1/14

Dr. Leased Equipment
Cr.
Obligations under Capital Leases
To record lease

21,919

Dr. Prepaid Lease Expense
Cr.
Lease Expense
To record the prepaid executory costs

657,549

97,000

25,360

21,919

1,500

Remember, half of a year (July - December)
1,500

5. Talbert, Inc. computed pretax financial income of $40,000 for the first year of its operations ended December 31, 2014. Included in financial income was $25,000 of nondeductible expenses, $22,000 gross profit on installment sales that was deferred for tax purposes until the installments were collected, and $18,000 in bad debt expense that had been accrued on 
the books in 2008.
The temporary differences are expected to reverse in the following patterns:
Year
2015
2016
2017
2018
Total

Gross Profit on Collections
5,000
7,000
4,000
6,000
22,000

Bad Debt Write-Offs
6,000
12,000
18,000

The enacted tax rates for this year and the next four years are as follows
2014
40%
2015
35%
2016
32%
2017
30%
2018
32%
Assume that there will be sufficient income in each future year to realize any deductible amounts. For classification purposes, the bad debt write-offs are considered to be associated with a current asset, and the receivable for installment sales is classified as both current and noncurrent, depending on the expected timing of the receipt.
REQUIRED:
A) Complete the chart below.
B) Prepare the journal entries necessary to record income taxes for 2014.
A)
2015
2016
2017
2018

Enacted
Deductible
Rate
Amount
35%
6,000
32%
12,000
30%
32%
18,000

Asset
Valuation
2,100
3,840

5,940

Taxable
Amount
5,000
7,000
4,000
6,000
22,000

Liability
Valuation
1,750
2,240
1,200
1,920
7,110

B)
Account Description
Dr.
Cr.

Income tax expense
income tax payable
To record income taxes payable

Dr.
Dr.
Cr.
Cr.

Deferred tax asset-current
income tax expense
Deferred tax liability- current
Deferred tax liability- non current
To account for deferred items

Debit

Credit
24,400
24,400

5,940
1,170
1,750
5,360



7. Young Fashions, Inc's employees are paid on the 6th and 22nd of each month for the period ending the last day of the previous moth and the 15rh of the current month, respectively. An analysis of the payroll on Monday, October 6, 2014 revealed the following data:

Office staff salaries
Officer salaries
Sales salaries
Totals

Gross
Pay
15,450
31,000
20,000
66,450

FICA
810
286
834
1,930

Federal
State
Income Tax Income Tax Insurance
2,400
450
410
6,300
1,000
500
4,200
690
480
12,900
2,140
1,390

Net Pay
11,380
22,914
13,796
48,090

It is determined that for the September 30 pay period, no additional employees exceeded the wage base for FICA purposes
than had done so in prior pay periods. All of the officer salaries, 75% of the office staff salaries, and 40% of the sales salaries for the payroll period ending September 30 were paid to employees who had exceeded the wage base for unemployment taxes. Assume the unemployment tax rates in force are as follows: federal unemployment tax, .08%, state unemployment tax, 5.4%
Prepare the adjusting entries that would be required at September 30, the end of Young Fashion's fiscal year, to reflect the accrual of the payroll and any related payroll taxes. Separate salaries and payroll tax expense accounts are used for each of the three employee categories: office staff, officer, and sales salaries. The schedule of employer's payroll taxes can assist
you (complete the shaded cells). Don't forget the limits for unemployment taxes 

Total
Office Staff Salaries:
FICA (given)
FUTA (calculate)
SUTA (calculate)

Officer Salaries
FICA (given)
FUTA (calculate)
SUTA (calculate)

Sales Salaries
FICA (given)
FUTA (calculate)
SUTA (calculate)

Total taxes

FICA

FUTA

SUTA

-

-

-

-

-

Record the journal entries:
Account Description

Debit

Credit

-

8. During Year 1 (the first year of the company's existence), employees of the company earned vacation days as follows:

Employee
1
2
3

Average Wage
Vacations Days Vacation Days
Per Day
Earned this Year Taken this Year
$
160
10
10
$
200
15
10
$
250
20
5

Required:
A) Make the journal entry necessary at the end of Year 1 to record the unused vacation days earned during the year.
Account Description

Debit

Credit

B) Make the journal entry necessary in Year 2 to record the use of all of these vacation days. Assume that all employees
received at 10% pay raise in Year 2.
Account Description

Debit

Credit

9. On January 1 of Year 1, the company had a projected benefit obligation (PBO) of $10,000 and a pension fund with a fair value of $9,200. Unrecognized prior service cost
was $2,000; it was being amortized on a straight-line basis over the 5-year average remaining life of the affected employees. The balance in the unrecognized (or deferred)
pension gain was $700. The following information relates to the pension plan during the year:
Service cost
Actual return on the pension fund
Benefits paid to retirees
Contribution to the pension fund
Discount rate for PBO
Expected return on pension fund

1,200
1,550
300
1,050
8%
11%

Enter all of the pension information, including the beginning balances, in a pension worksheet. Use the worksheet to display the computation of pension expense for the year
as well as the ending balances for all pension related items.
Company
Pension Worksheet for 2014
Formal Accounts
Prepaid/
Periodic
Net
Accrued
Pension
Pension
Pension
Cost
Expense
Cash
Cost
Items
Balance, January 1
(a) Service Cost
(b) Interest Cost
(c) Actual Return on Assets
(d) Benefits Paid
(e) Deferred Gain
(f) Amortization of PSC
Summary Journal Entries
(1) Annual Pension Expense Accrual
(2) Annual Pension Contribution
Balance, December 31

Memorandum Accounts
Fair
UnrecogProjected
Value of
nized Net
Benefit
Pension
Pension
Obligation
Items
Gain/Loss

Unrecognized Prior
Service
Cost

10. Transactions involving the common stock of Par-More Company during the 2-year period 2008 and 2009 were as follows:
2013
Jan
Apr
July
Oct

1
1
1
1

2014
Apr
Oct

1 Declared a 2-for-1 stock split
1 Sold 170,000 shares for $30 a share

Had a balance of 200,000 shares of $10 par common stock
Converted $2,500,000 of convertible bonds with 50 shares issued for each $1,000 bond.
Declared a 10% stock dividend
Employees exercised options to purchase 7,000 shares for $20 a share

From the information given, compute the comparative number of weighted-average shares outstanding for 2013 and 2014 to be used
for basic EPS computations at the end of 2009.
Weighted average shares - 2013
Weighted average shares - 2014
Show your work:

11. Marcina Shoes reports long-term liabilities and stockholders' equity balances at December 31, 2014, as follows:
Convertible 5% bonds (par)
Common stock, $25 par, 100,000 shares issued and outstanding

$
$

800,000
2,500,000

$
$
$

199,800
43,520
243,320

Additional information is determined as follows:
Conversion term of bonds - 50 shares for each $1,000 bond
Income before extraordinary items - 2014
Extraordinary gain (net of tax)
Net income - 2014

Required:
Compute the basic and diluted EPS for the company for 2014 (using the schedule below), assuming that
the income tax rate is 30%. No changes occurred in the debt and equity balances during 2014.
BASIC EPS
Income before extraordinary gain
Extraordinary gain
Net income

$

-

DILUTED EPS (in dollars)
Income before extraordinary gain
Add interest on convertible bonds, net of taxes
Interest
Less income taxes at 30%
Adjusted income before extraordinary gain

$
$

-

Actual number of shares outstanding
Additional shares assumed issued on conversion
Total shares for computing diluted EPS
Diluted EPS (in PER SHARE)
Income before extraordinary gain
Extraordinary gain
Net Income

Show per share
Show per share
Show per share