AC311 HOMEWORK 3

AC311—Marcus Doxey

Homework Assignment 3 – Pensions and Income Taxes

30 points

DUE Tuesday, October 8th, 2013 AT THE BEGINNING OF CLASS

NO LATE ASSIGNMENTS ACCEPTED

Required:

Complete the three problems on the following pages.

Notes and instructions:

Complete all questions by writing the answers in the spaces provided.

You may work with other people, but I recommend doing this on your own to make sure that you understand what you are doing—these concepts are very important.

It is important that you try to figure this out on your own; therefore, I will not answer any questions that give away an answer , but I am more than happy to help clarify concepts or answer other questions about the topic and assignment.

1. 3 points

On December 31, Year 1, Cohen Company established a noncontributory defined-benefit pension plan covering all of its employees. On that date, Cohen contributed $45,000 to the plan. No benefits were earned in Year 1. At December 31, Year 2, Cohen determined that the present value of all benefits earned in Year 2 was $63,000. The expected and actual return on plan assets for Year 2 was 8%. Cohen’s pension expense has no other components other than those implied by the information above. What amount should Cohen report in its December 31, Year 2, income statement as pension expense?

Work:

2. 3 points

The following information pertains to Wareham Company’s pension plan:

Actuarial estimate of projected benefit obligation (PBO) at 1/1/Year 1 $10,000

Assumed discount rate 4%

Service cost for Year 1 $2,400

Pension benefits paid during Year 1 $2,100

If no change in actuarial estimates occurred during Year 1, Wareham’s PBO at December 31, Year 1, is:

Work:

3. On December 31, Year 1 and Year 2, Cliff Garcia Company had the following defined benefit pension plan balances:

				12/31/Y1	12/31/Y2
Fair value of plan assets		2,100,000	2,065,000
Projected benefit obligation		2,250,000	2,503,500
Unrecognized prior service cost		190,000	140,000
Unrecognized net loss		250,500	308,400

At December 31, Year 1, the employees participating in the plan had an average remaining service period of 5 years. No new prior service cost arose in Year 2.

The Year 2 service cost was $310,000. The company uses an expected return on plan assets of 7% when calculating net periodic pension cost, but had an actual return on plan assets in Year 2 of 4%. The company’s discount rate is 5%.

Contributions to the plan totaled $50,000 in year 2. There were no changes in actuarial assumptions during the year.

Part 1. 15 points

Calculate net periodic pension cost for Year 2. Enter the amounts in the spaces below, making sure to put a plus sign (+) in front of numbers that increase pension cost and a negative sign (-) in front of numbers that decrease pension cost:

Service cost (3 pts)
Interest cost (3 pts)
Return on plan assets (3 pts)
Amortization of prior service cost (3 pts)
Loss amortization (3 pts)
=Total net periodic pension cost

Part 2. 9 points

On the next page, complete the t-accounts for both the Fair Value of Plan Assets and the Projected Benefit Obligation to summarize all of the activity that occurred during the year. You should also include beginning and ending balances in the t-accounts. Make sure that you include in the t-accounts the appropriate numbers as well as labeling what the numbers are (see the notes for an example to follow). You will have to determine the amount of benefits paid.

Fair Value of Plan Assets

PBO

4. 15 points

On December 31, 2011, Munson Company completed its first year of operations. It has a number of differences between its pretax financial income and its taxable income. It knows that its pretax financial income is 220,000, but does not yet know its taxable income. Munson is subject to a tax rate of 25 percent in 2011, and a recent tax law change resulted in an enacted tax rate of 32 percent for future years. The differences between pretax financial income and taxable income are described below.

Munson invested in tax-exempt bonds issued by the State of Alabama. Munson received and recorded as income for accounting purposes $7,000 of interest income in 2011.

Depreciation on machinery in 2011 was $28,000 for accounting purposes. Munson’s tax accountant correctly recorded $36,000 of depreciation on Munson’s 2011 tax return.

Munson agreed to rent space to Cerone Co. Munson received $12,000 of rent, all of which is subject to tax in 2011. However, Munson earned only half of the rent in 2011 (it will earn the other half in 2012), so just half of the payment received is income in the financial statements.

For 2011, Munson accrued $10,000 of bad debt expense on its income statement based on the allowance method. However, Munson must use the direct write-off method for tax purposes and it did not write off any accounts receivable in 2011.

Required:

i. What is Munson’s taxable income for 2011?

ii. What is current income tax expense for the year ended 12/31/11?

iii. List any deferred tax assets and/or liabilities as of 12/31/11, clearly indicating for each a dollar amount, whether it is an asset or liability, and whether it is current or long-term.

5. 15points

In 2012, Cornog Company reports a loss of $120,000 (this is both its taxable loss and pretax financial loss). Prior to 2012, Cornog had been successful and had reported and paid taxes on the following taxable income (pretax financial income was the same as taxable income in each of the three years):

2009: $37,000

2010: 50,000

2011: 54,000

Cornog had been subject to tax rates of 20% in 2009 through 2011. Its tax rate in 2012 is 35% and its enacted tax rate will be 40% in years after 2012.

Required:

a. When Cornog completes its 2012 financial statements, it will include both its 2010 and 2011 income statements along with the 2012 income statement (for comparative purposes). What will it report as pretax financial income and tax expense (benefit) for 2011 if it chooses the carryforward or carryback option for the 2012 net operating loss? Fill in the blanks below (enter tax expense, if non-zero, as a positive number for expense or negative number for benefit):

2011 Tax expense (benefit) if carryback option taken _______________

2011 Tax expense if (benefit) carryforward option taken _______________

b. If Cornog choose the carryback option, what is tax expense (benefit) for 2012? In addition, two assets will be created in the journal entry to record tax expense (benefit). Fill in the blanks below accordingly.

2012 Tax expense (benefit) $____________; and Circle one: Expense (Benefit)

Related assets as of 12/31/12:

Name of Asset __________________________; and $______________

Name of Asset __________________________; and $______________

12. 2 points

a. For the year ended December 31, 1994, its first year in existence, Tyre Co. reported pretax financial statement income of $750,000. Its taxable income was $650,000. The difference is due to a temporary difference. Tyre’s current tax rate is 30%, and its future enacted tax rate is 35%. Tyre made estimated tax payments during 1994 of $90,000. What amount should Tyre report as total deferred tax assets or liabilities as of 12/31/1994 (you must indicate a dollar amount and, if non-zero, state whether it is an asset or a liability)?

b. In its 1993 income statement, Cere Co. reported pretax financial income of $300,000. Cere determined that, because of temporary differences, taxable income for 1993 is $280,000. During 1993 Cere made estimated tax payments of $50,000, which were debited to income tax expense. Cere is subject to a 30% tax rate. What amount should Cere report as total income tax expense for 1993?