ACC423 Questions

Shamrock Corporation began operations in 2017 and reported pretax financial income of $234,000 for the year. Shamrock’s tax depreciation exceeded its book depreciation by $36,000. Shamrock’s tax rate for 2017 and years thereafter is 40%. In its December 31, 2017, balance sheet, what amount of deferred tax liability should be reported?

Deferred tax liability to be reported

$

At December 31, 2017, Larkspur Inc. had a deferred tax asset of $31,100. At December 31, 2018, the deferred tax asset is $62,000. The corporation’s 2018 current tax expense is $60,800. What amount should Larkspur report as total 2018 income tax expense?

Total income tax expense for 2018

$

At December 31, 2017, Cullumber Corporation had a deferred tax liability of $582,800, resulting from future taxable amounts of $1,880,000 and an enacted tax rate of 31%. In May 2018, a new income tax act is signed into law that raises the tax rate to 38% for 2018 and future years. Prepare the journal entry for Cullumber to adjust the deferred tax liability.  (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

Wildhorse Inc. incurred a net operating loss of $532,000 in 2017. Combined income for 2015 and 2016 was $321,000. The tax rate for all years is 30%. Wildhorse elects the carryback option. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years. Prepare all the journal entries necessary at the end of 2017.  (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit
(To record carryback.)
(To record carryforward.)
(To record allowance.)

Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes. For each item below, indicate whether it involves:

(1)		A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
(2)		A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
(3)		A permanent difference.

Use the appropriate number to indicate your answer for each.

(a)				The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets.
(b)				A landlord collects some rents in advance. Rents received are taxable in the period when they are received.
(c)				Expenses are incurred in obtaining tax-exempt income.
(d)				Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.
(e)				Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.
(f)				For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes, but the assets’ lives are shorter for tax purposes.
(g)				Interest is received on an investment in tax-exempt municipal obligations.
(h)				Proceeds are received from a life insurance company because of the death of a key officer. (The company carries a policy on key officers.)
(i)				The tax return reports a deduction for 80% of the dividends received from U.S. corporations. The cost method is used in accounting for the related investments for financial reporting purposes.
(j)				Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.
(k)				Expenses on stock options are accrued for financial reporting purposes.

Swifty Company has the following two temporary differences between its income tax expense and income taxes payable. 2017 2018 2019 Pretax financial income $867,000 $956,000 $940,000 Excess depreciation expense on tax return (29,500 ) (41,700 ) (10,300 ) Excess warranty expense in financial income 19,800   10,300   8,300   Taxable income $857,300   $924,600   $938,000   The income tax rate for all years is 40%.

(a) Assuming there were no temporary differences prior to 2017, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, 2018, and 2019.  (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit 2017 2018 2019

Bonita Co. establishes a $136,000,000 liability at the end of 2017 for the estimated site-cleanup costs at two of its manufacturing facilities. All related closing costs will be paid and deducted on the tax return in 2018. Also, at the end of 2017, the company has $68,000,000 of temporary differences due to excess depreciation for tax purposes, $9,520,000 of which will reverse in 2018. The enacted tax rate for all years is 40%, and the company pays taxes of $87,040,000 on $217,600,000 of taxable income in 2017. Bonita expects to have taxable income in 2018.

Determine the deferred taxes to be reported at the end of 2017. Deferred tax assets $ Deferred tax liabilities $

Indicate how the deferred taxes computed above are to be reported on the balance sheet.

Bonita Co. Balance Sheet
					$

Assuming that the only deferred tax account at the beginning of 2017 was a deferred tax liability of $13,600,000, draft the income tax expense portion of the income statement for 2017, beginning with the line “Income before income taxes.” (Hint: You must first compute (1) the amount of temporary difference underlying the beginning $13,600,000 deferred tax liability, then (2) the amount of temporary differences originating or reversing during the year, and then (3) the amount of pretax financial income.)

Bonita Co. Income Statement (Partial)
		$
	$
		$
The differences between the book basis and tax basis of the assets and liabilities of Pharoah Corporation at the end of 2016 are presented below. Book Basis Tax Basis Accounts receivable $49,400 $0 Litigation liability 28,000 0 It is estimated that the litigation liability will be settled in 2017. The difference in accounts receivable will result in taxable amounts of $31,200 in 2017 and $18,200 in 2018. The company has taxable income of $319,000 in 2016 and is expected to have taxable income in each of the following 2 years. Its enacted tax rate is 34% for all years. This is the company’s first year of operations. The operating cycle of the business is 2 years.

(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016.  (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit

Teal Inc. reports the following pretax income (loss) for both book and tax purposes. (Assume the carryback provision is used where possible for a net operating loss.) Year Pretax Income (Loss) Tax Rate 2015 $117,000 40 % 2016 86,000 40 % 2017 (255,000 ) 45 % 2018 119,000 45 % The tax rates listed were all enacted by the beginning of 2015.

(a) Prepare the journal entries for years 2015–2018 to record income tax expense (benefit) and income taxes payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming that based on the weight of available evidence, it is more likely than not that one-half of the benefits of the loss carryforward will not be realized.  (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit 2015 2016 2017 (To record refund.) (To record allowance.) 2018 (To record income taxes.) (To adjust allowance.)

Given the following items and amounts, compute the actual return on plan assets: fair value of plan assets at the beginning of the period $9,510,000; benefits paid during the period $1,490,000; contributions made during the period $1,070,000; and fair value of the plan assets at the end of the period $10,050,000.

Actual return on plan assets

$

AMR Corporation (parent company of American Airlines) reported the following (in millions).

Service cost		$366
Interest on P.B.O.		737
Return on plan assets		593
Amortization of prior service cost		13
Amortization of net loss		154

Compute AMR Corporation’s pension expense.  (Enter answer in millions.)

Pension expense

$  millions

Indigo Corporation amended its pension plan on January 1, 2017, and granted $153,180 of prior service costs to its employees. The employees are expected to provide 2,070 service years in the future, with 380 service years in 2017. Compute prior service cost amortization for 2017.

Prior service cost amortization for 2017

$

At December 31, 2017, Stellar Corporation had a projected benefit obligation of $614,600, plan assets of $338,700, and prior service cost of $132,300 in accumulated other comprehensive income. Determine the pension asset/liability at December 31, 2017.  (Enter liability using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Pension asset/liability at December 31, 2017

$

Martinez Corporation has the following balances at December 31, 2017.

Projected benefit obligation		$2,474,000
Plan assets at fair value		1,851,000
Accumulated OCI (PSC)		1,126,000

What is the amount for pension liability that should be reported on Martinez's balance sheet at December 31, 2017?

Pension liability balance at December 31, 2017

$

Pearl Corp. has three defined benefit pension plans as follows.

		Pension Assets (at Fair Value)		Projected Benefit Obligation
Plan X		$637,000		$476,000
Plan Y		825,000		712,000
Plan Z		550,000		747,000

How will Pearl report these multiple plans in its financial statements?

Pension Asset		$
Pension Liability		$

Sandhill Corporation has the following information available concerning its postretirement benefit plan for 2017.

Service cost		$39,300
Interest cost		46,200
Actual and expected return on plan assets		24,900

Compute Sandhill’s 2017 postretirement expense.

Postretirement expense 2017

$

Bonita Company provides the following information about its defined benefit pension plan for the year 2017. Service cost $91,600 Contribution to the plan 104,400 Prior service cost amortization 10,800 Actual and expected return on plan assets 64,600 Benefits paid 40,300 Plan assets at January 1, 2017 650,000 Projected benefit obligation at January 1, 2017 692,000 Accumulated OCI (PSC) at January 1, 2017 150,000 Interest/discount (settlement) rate 11 %

(a) Prepare a pension worksheet inserting January 1, 2017, balances, showing December 31, 2017.  (Enter all amounts as positive.) BONITA COMPANY Pension Worksheet—2017. General Journal Entries   Memo Record Items   Annual Pension Expense Cash OCI Prior Service Cost Pension Asset/ Liability Projected Benefit Obligation Plan Assets Balance, January 1, 2017 $ $ $ $ $ $ Service cost Interest cost Actual return Amortization of PSC Contributions Benefits Journal entry for 2017 $ $ Accumulated OCI, Dec. 31, 2016 Balance, Dec. 31, 2017 $ $ $ $

Sweet Company sponsors a defined benefit pension plan for its employees. The following data relate to the operation of the plan for the year 2017 in which no benefits were paid. 1. The actuarial present value of future benefits earned by employees for services rendered in 2017 amounted to $56,200. 2. The company’s funding policy requires a contribution to the pension trustee amounting to $146,676 for 2017. 3. As of January 1, 2017, the company had a projected benefit obligation of $906,400, an accumulated benefit obligation of $800,900, and a debit balance of $398,600 in accumulated OCI (PSC). The fair value of pension plan assets amounted to $595,400 at the beginning of the year. The actual and expected return on plan assets was $53,400. The settlement rate was 9%. No gains or losses occurred in 2017 and no benefits were paid. 4. Amortization of prior service cost was $50,400 in 2017. Amortization of net gain or loss was not required in 2017.

(a) Determine the amounts of the components of pension expense that should be recognized by the company in 2017.  (Enter amounts that reduce pension expense with either a negative sign preceding the number e.g. -45 or parenthesis e.g. (45).) Components of Pension Expense $ $

Flounder Co. provides the following information about its postretirement benefit plan for the year 2017.

Service cost		$ 48,700
Contribution to the plan		10,700
Actual and expected return on plan assets		11,000
Benefits paid		21,400
Plan assets at January 1, 2017		106,100
Accumulated postretirement benefit obligation at January 1, 2017		318,500
Discount rate		8	%

Compute the postretirement benefit expense for 2017.

Postretirement benefit expense

$

Marin Inc. provides the following information related to its postretirement benefits for the year 2017.

Accumulated postretirement benefit obligation at January 1, 2017		$725,900
Actual and expected return on plan assets		31,000
Prior service cost amortization		20,300
Discount rate		9	%
Service cost		87,400

Compute postretirement benefit expense for 2017.

Postretirement benefit expense

$

Flounder Co. provides the following information about its postretirement benefit plan for the year 2017.

Service cost		$83,900
Prior service cost amortization		3,100
Contribution to the plan		51,000
Actual and expected return on plan assets		67,100
Benefits paid		42,700
Plan assets at January 1, 2017		697,300
Accumulated postretirement benefit obligation at January 1, 2017		756,400
Accumulated OCI (PSC) at January 1, 2017		103,300	Dr.
Discount rate		8	%

Prepare a worksheet inserting January 1, 2017, balances, showing December 31, 2017, balances, and the journal entry recording postretirement benefit expense.  (Enter all amounts as positive.)

FLOUNDER CO. Postretirement Benefit Worksheet—2017

General Journal Entries

Memo Record

Items

Annual Postretirement Expense

Cash

OCI—Prior Service Cost

Postretirement Asset/ Liability

APBO

Plan Assets

Balance, Jan. 1, 2017

$

$

$

$

$

$

Service cost

Interest cost

Actual return

Contributions

Benefits

Amortization of PSC

Journal entry for 2017

$

$

Accumulated OCI, Dec. 31, 2016

Balance, Dec. 31, 2017

$

$

$

$