Practice Exam Chapters 16-18

Solutions

Problem I 1.

($ in millions)
Current Future
Year Taxable
2011 Amounts
2012 2013 2014
Accounting income 48.6
Non-temporary difference (0.6)
Temporary difference:
Installment sales (36.0) 9 15 12

Taxable income 12.0

Enacted tax rate 30% 30% 40% 40%
Tax payable currently 3.6
Deferred tax liability 2.7 6.0 4.8 13.5

Less: beginning balance: 0

Change in balance: credit (debit) 13.5

Journal entry at the end of 2011

Income tax expense (to balance) 17.1
Deferred tax liability (determined above) 13.5
Income tax payable (determined above) 3.6

2. ($ in millions)
Pretax accounting income $48.6
Income tax expense (17.1)
Net income $31.5

Problem IIRequirement 1
Service cost $369,000
Interest cost 180,000
Expected return on the plan assets ($135 actual, less $15 gain) (120,000)
Amortization of prior service cost 36,000
Amortization of net loss (calculated below) 3,000
Pension expense $468,000
 Computation of net loss amortization:
Net loss (previous losses exceeded gains) $210,000
10% of $1,800,000 (greater than $1,350,000) (180,000)
Amount to be amortized $30,000
÷ 10
Amortization $ 3,000

Requirement 2

Pension expense (calculated above) 468,000

Plan assets (expected return on assets) 120,000
PBO ($369 service cost + $180 interest cost) 549,000
Amortization of prior service cost–OCI 36,000
Amortization of net loss–OCI 3,000

Plan assets 450,000

Cash (given) 450,000

Requirement 3

Plan assets 15,000

Gain-OCI 15,000

Requirement 4

PBO 189,000
Plan assets 189,000

Problem III Requirement 1

($ in millions)
APBO:
Beginning $100
Service cost 12
Interest cost (8% x $100) 8
Loss on APBO 3
Benefit payments (6)
Ending $117

Requirement 2
($ in millions)
Service cost $12
Interest cost 8
Return on assets (10% x $50) (5)
Postretirement benefit expense $15
 Solution:

Problem IV
Beginning balance $200
Net income 240
2011 preferred dividends (40)
2010 preferred dividends (40)
2011 common dividends (90) [30 x 150%] x $2
Ending balance $270
 Multiple Choice

1. d
2. c
3. d
4. d
5. b