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Ecomprehensiveexam e
Ecomprehensiveexam e
E-I
E-II
E-III
E-IV
E-V
COMPREHENSIVE EXAMINATION E
PART 5
(Chapters 18-21)
Approximate
Topic
Time
Long-Term Contracts.
15 min.
Installment Sales Method.
20 min.
Deferred Income Taxes.
25 min.
Pensions.
15 min.
Leases.
25 min.
100 min.
Billings to date
500,000 1,800,000 2,300,000
Collections to date
400,000 1,300,000 2,200,000
Instructions
(a) Calculate the income recognized by Edwards under the percentage-ofcompletion method of accounting in each of the years 2012, 2013, and
2014.
(b) Prepare all necessary entries for the year 2013.
(c) Present the balance sheet disclosures at December 31, 2013. Proper
headings or subheadings must be indicated.
Problem E-II Installment Sales Method.
E-2
Garber, Inc. accounts for all sales of its merchandise on the installment basis.
Following is the unadjusted trial balance at 12/31/14:
Cash
$ 89,200
Installment Accounts Receivable2012170,000
Installment Accounts Receivable2013400,000
Installment Accounts Receivable2014750,000
Inventory, 1/1/14
78,000
Repossessed Merchandise
22,000
Accounts Payable
$ 136,000
Deferred Gross Profit2012
84,000
Deferred Gross Profit2013
175,000
Common Stock
600,000
Retained Earnings
406,200
Installment Sales
1,000,000
Purchases
738,000
Loss on Repossession
4,000
Operating Expenses
150,000
$2,401,200 $2,401,200
Additional Data: 2012 Gross Profit Rate = 32%; Inventory 12/31/14 =
$159,000;
Repossessed merchandise 12/31/14 = $14,000;
Merchandise sold in 2013 was repossessed in 2014 and the
following
entry was prepared (assume correctly):
Deferred Gross Profit2013....... 14,000
Repossessed Merchandise............ 22,000
Loss on Repossession ................. 4,000
Installment Accounts Receivable2013
40,000
Problem E-II (cont.)
Instructions
E - 3E
Comprehensive Examination
(a) Determine collections during 2014 on Installment A/R for each of the years
2012, 2013, and 2014.
(b) Without prejudice to your answer in Part (a), assume that total collections
on Installment Accounts Receivable during 2014 were $1,060,000;
$220,000 from 2012, $300,000 from 2013, and $540,000 from 2014.
Prepare all necessary adjusting and closing entries at 12/31/14.
Problem E-III Deferred Income Taxes.
In 2013, the initial year of its existence, Dexter Company's accountant, in
preparing both the income statement and the tax return, developed the
following list of items causing differences between accounting and taxable
income:
1. The company sells its merchandise on an installment contract basis. In 2013,
Dexter elected, for tax purposes, to report the gross profit from these sales in
the years the receivables are collected. However, for financial statement
purposes, the company recognized all the gross profit in 2013. These
procedures created a $500,000 difference between book and taxable incomes.
The future collection of the installment contracts receivables are expected to
result in taxable amounts of $250,000 in each of the next two years. (Note:
the company treats installment contracts receivable as a current asset on its
balance sheet.)
2. The company has also chosen to depreciate all of its depreciable assets on an
accelerated basis for tax purposes but on a straight-line basis for accounting
purposes. These procedures resulted in $60,000 excess depreciation for tax
purposes over accounting depreciation. The temporary difference due to
excess tax depreciation will reverse equally over the three year period from
2014-2016.
3. Dexter leased some of its property to Baker Company on July 1, 2013. The
lease was to expire on July 1, 2015 and the monthly rentals were to be
$60,000. Baker, however, paid the first year's rent in advance and Dexter
reported this entire amount on its tax return. These procedures resulted in a
E-4
$360,000 difference between book and taxable incomes. (Note: this lease
was an operating lease and Dexter classified the unearned rent as a current
liability on its balance sheet.)
4. Dexter owns $200,000 of bonds issued by the State of Oregon upon which
5% interest is paid annually. In 2013, Dexter showed $10,000 of income
from the bonds on its income statement but did not show any of this amount
on its tax return. (Note: these bonds are classified as long-term investments
on Dexter's balance sheet.)
5. In 2013, Dexter insured the lives of its chief executives. The premiums paid
amounted to $12,000 and this amount was shown as an expense on the
income statement. However, this amount was not deducted on the tax return.
The company is the beneficiary.
Problem E-III (cont.)
Instructions
Assuming that the income statement of Dexter Company showed "Income
before income taxes" of $1,200,000; that the enacted tax rates are 40% for all
years; and that no other differences between book and taxable incomes existed,
except for those mentioned above:
(a) Compute the income tax payable.
(b) Prepare a schedule of future taxable and (deductible) amounts at the end of
2013.
(c) Prepare a schedule of deferred tax (asset) and liability at the end of 2013.
(d) Compute the net deferred tax expense (benefit) for 2013.
(e) Make the journal entry recording income tax expense, income tax payable,
and deferred income taxes for 2013.
(f) Indicate how income tax expense and any deferred income taxes should be
disclosed on the financial statements under generally accepted accounting
E - 5E
Comprehensive Examination
principles. Show the amounts for these items and indicate specifically
where they would be disclosed.
Problem E-IV Pensions.
Presented below is information related to Stage Department Stores, Inc.
pension plan for 2013.
Service cost
$520,000
Funding contribution for 2013
500,000
Settlement rate used in actuarial computation
10%
Expected return on plan assets
9%
Amortization of PSC (due to benefit increase) 90,000
Amortization of unrecognized net gains
48,000
Projected benefit obligation (at beginning of period)540,000
Fair value of plan assts (at beginning of period)360,000
Instructions
(a) Compute the amount of pension expense to be reported for 2013. (Show
computations.)
(b) Prepare the journal entry to record pension expense and the employers
contribution for 2013.
Problem E-V Leases.
On January 1, 2013, Foley Company (as lessor) entered into a noncancelable
lease agreement with Pinkley Company for machinery which was carried on
the accounting records of Foley at $5,436,000 and had a market value of
$5,760,000. Minimum lease payments under the lease agreement which expires
on December 31, 2022, total $8,520,000. Payments of $852,000 are due each
January 1. The first payment was made on January 1, 2013 when the lease
agreement was finalized. The interest rate of 10% which was stipulated in the
lease agreement is the implicit rate set by the lessor. The effective interest
method of amortization is being used. Pinkley expects the machine to have a
ten-year life with no salvage value, and be depreciated on a straight-line basis.
E-6
E - 7E
Comprehensive Examination
790,000
$1,000,000
Current liabilities:
Billings ($1,800,000) in excess of costs and
recognized profit ($1,725,000) $75,000
Problem E-II Solution.
(a) Collections in 2014 on installment accounts receivable:
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2012
2013
2014
E - 9E
Comprehensive Examination
202,300
2014
2015
2016
Total
Future taxable (deductible) amounts:
Installment sales
$250,000$250,000
$500,000
Depreciation
20,000 20,000$20,000 60,000
Unearned rent
(360,000)
(360,000)
Deferred Tax
Rate (Asset)
Liability
40%
$200,000
40
24,000
40 $(144,000)
$(144,000)$224,000
$224,000
(144,000)
$ 80,000
$1,200,000
$400,800
80,000
480,800
$719,200
Balance sheet
Current liabilities:
Deferred tax liability ($200,000 $144,000)$56,000
E - 11E
Comprehensive Examination
Long-term liabilities:
Deferred tax liability
$24,000
Problem E-IV Solution.
(a) Service cost
$520,000
Interest on projected benefit obligation ($540,000 10%)
Expected return on plan assets ($360,000 9%)(32,400)
Amortization of PSC
90,000
Amortization of net gains
(48,000)
Pension expense2013
$583,600
54,000
852,000
852,000