1.) Company As income statement showed pretax accounting income of $2,500,000.

To compute the federal income

tax liability, the following data are provided:
Income from Muni Bonds
$ 80,000
Depreciation deducted under MACRS $150,000
Depreciation for Financial reporting
$100,000
Fines paid
$ 20,000
Qualified Production Tax Credit
$100,000
Estimated Tax Payments
$575,000
Tax rate
35%
What amount of current federal income tax liability should be included in the end of year balance sheet?
A. 226,500
B. 875,000
C. 23,750
D. 373,500
(2,500,000-80,000-50,000+20,000-100,000)*.35 = 801,500 575,000 = 226,500
2.) Company B has the following information for 2012:
Pretax financial income
$3,000,000
Tax exempt interest
325,000
Originating temporary difference
345,000
Taxable income
2,330,000
The temporary difference will reverse evenly over the next three years at an enacted tax rate of 30%.
The enacted tax rate for 2012 is 35%. What amount should Company B report in its 2012 income
statement as the deferred portion for income taxes?
A. 40,250 credit
B. 34,500 debit
C. 103,500 debit
D. 120,750 credit
(345,000 * 0.30) = 103,500 debit.
3.) Company C reported financial pretax income in 2013 of 2,350,000 and taxable income of 2,945,000. The difference is
attributable to a temporary difference which will reverse in 2014. The tax rate for 2013 is 30% and the tax rate for 2014
is 35%. What should Company C record as a net deferred tax asset or liability for the year ended Dec. 31, 2013?
A. 208,250 DTL
B. 208,250 DTA
C. 178,500 DTL
D. 178,500 DTA
(2,945,000 2,350,000)*0.35 = 208,250 DTA
4.) On December 31, 2013, Company D has determined that it is more likely than not that 150,00 of a 400,000 DTA will
not be realized. The journal entry to record this will include a
A. credit to DTA
B. credit to Allowance to Reduce Deferred Tax Asset to Expected Realizable Value
C. debit to Income Tax Payable
D. credit to Income Tax Expense
Income Tax Expense..150,000
Allowance to reduce DTA to ERV.150,000

5.) Which of the following obligations is used under GAAP to calculate pension expense?
A. Vested Benefit Obligation
B. Accumulated Benefit Obligation
C. Projected Benefit Obligation
D. Qualified Benefit Obligation
6.) On Jan. 1 2013, Company E had the a PBO of 4,525,000 and Plan Assets of 4,120,000. The following data apply to the
pension for 2013.
Settlement rate
10%
Service Costs
354,000
Amortization of unrecognized PSC
120,000
Contributions
400,000
Benefits paid
269,500
Actual return on plan assets
500,000
Amortization of unrecognized net gain 27,000
What is the balance of the PBO at December 31, 2012?
A. 5,454,000
B. 5,209,000
C. 4,756,500
D. 5,062,000
Beginning Balance PBO + Service Cost + Interest Cost Benefits Paid
= 4,525,000 + 354,000 + 452,500 -269,500 = 5,062,000
7.) The following information applies to the pension plan of Company E. Calculate the pension expense for the year.
Actual return on plan assets
500,000
Amortization of net gain
150,000
Amortization of PSC due to increase in benefits
450,000
Expected return on plan assets
645,000
Interest on PBO
850,000
Service Cost
1,650,000
A. 2,155,000
B. 2,455,000
C. 2,600,000
D. 2,300,000
8.) Orange Company has a machine with a cost and FMV of 380,000 when it is leased to Brown Company. The lease is
for 6 years and is estimated to have an unguaranteed residual value of 38,000. Orange wishes to receive 12% interest
on the lease with payments starting at the inception of the lease. What should the payments be?
A.87,743
B.78,342
C.74,271
D.63,334
PVSS (i=12, n=6, factor = 0.50663) PV 38,000 = 19,251.94
380,000 19,251.94 = 360,748.06 PVAD(i=12, n=6, factor = 4.60478)
Payment = 360,748.06 / 4.60478 = 78,342

P.1)
Assume a firm with only one piece of PP&E with a cost of 125,000 and an estimated life of 5 years and no
residual value. Straight line is used for financial reporting. MARCS is used for tax purposes and the equipment is
classified as three year property (33.33%, 44.45%, 14.81%, 7.41%). The firm has net income before tax and depreciation
of $238,000, and the tax rate is 35%.
a.) Prepare a schedule showing the temporary differences over five years.
Year
Financial Dep
MARCS
Temp Diff
Tax Rate
DTL
1
25,000
41,662.50
16,663
0.35
5,832
2
25,000
55,562.50
30,563
0.35
10,697
3
25,000
18,512.50
(6,488)
0.35
(2,271)
4
25,000
9,262.50
(15,738)
0.35
(5,508)
5
25,000
(25,000)
0.35
(8,750)
Total
125,000.00
125,000.00
0
0
b.) Find Net Income for financial reporting and tax reporting purposes:
Financial
IBTD
238,000
Depreciation
25,000
IBT
213,000
Income Tax
74,550
Net Income
138,450
c.) Prepare journal entries for tax expense for years 1-5 (assume IBTD remains at $238,000).
Y1.
Taxes Expense..74,550.00
DTL.5,832.05
Taxes Payable....68,717.95
Y2.

Taxes Expense..74,550.00
DTL.10,697.05
Taxes Payable...63,852.95

Y3.

Taxes Expense..74,550.00
DTL..2,270.80
Taxes Payable76,820.80

Y4.

Taxes Expense..74,550.00
DTL...5,508.30
Taxes Payable80,058.30

Y5.

Taxes Expense..74,550.00
DTL...8750.00
Taxes Payable.83,300.00

Tax
238,000
41,662.50
196,337.50
68,718.13
127,619.37

P.2)
Assume a firm with only one piece of PP&E with a cost of 125,000 and an estimated life of 5 years and no residual value.
Straight line is used for financial reporting. MARCS is used for tax purposes and the equipment is classified as three year
property (33.33%, 44.45%, 14.81%, 7.41%). The firm has net income before tax and depreciation of $238,000, and the
tax rate is 35%. On June 1st, Year 3, a law is passed changing the tax rate to 40% effective year 2 and all future years.
Prepare the catch up journal entry on June 1st year 3.
Temporary differences in Y1 + Y2 = 16,662.50 + 30,562.50 = 47,225 x difference in tax rates (.40 - .35) = 0.05
47,225 x 0.05 = 2,361.25
June 1st Y3
Tax Expense
2,361.25
DTL
2,361.25

Prepare the tax expense entries for years 3-5

Y3.
Tax Expense
DTL
Taxes Payable

85,200.00
2,595.20
87,795.20

Tax Expense
DTL
Taxes Payable

85,200.00
6,295.20
91,495.20

Tax Expense
DTL
Taxes Payable

85,200.00
10,000.00
95,200.00

Y4.

Y5.

DTL
2,595
6,295
10,000

5,832
10,697
2,361
0

P3.)
The pretax financial income figures for Company G are as follows:
2007 90,000
2008 65,000
2009 40,000
2010 (230,000)
2011 70,000
2012 (50,000)
2013 280,000
Pretax financial income and taxable income were the same for all years. Assume a 35% tax rate for 2007 and
2008 and a 40% tax rate for the remaining years. Prepare the journal entries for the years 2010 2013 and the effects
of the NOL carrybacks and carryforwards assuming Company G uses the carry back provision.
2010
Carry back only years 2009 and 2008, so 65,000 + 40,000 = 105,000 CB // 230,000-(105,000) = 125,000 CF
Carry back to 2009 at 40% 40,000 * 0.4 =
16,000
Carry back to 2008 at 35% 65,000 *0.35 =
22,750
38,750
Tax refund Receivable
Tax Benefit Carryback

38,750

DTA(125,000 * 0.40)
Tax Benefit Carryforward

50,000
50,000

2011
Beginning Balance DTA = 50,000, less pretax financial income * income tax rate (70,000 * .40) = 22,000 = Ending DTA
Tax Expense
DTA

28,000
28,000

2012
Loss in this year can only be carried forward. 80,000 * 0.40 = 32,000
DTA
32,000
Tax Benefit Carryforward
32,000
2013
Beginning Balance DTA = 54,000, tax on financial income = 280,000 * 0.40 = 112,000, use all of the DTA
Tax Expense
DTA
Income Tax Payable

112,000
54,000
58,000

P.4)
Smith Incs only temporary difference at the beginning and end of 2010 is caused by a 4 million litigation accrual
that is expected to be settled in two equal installments in 2011 and 2012. The related deferred tax asset at the
beginning of the year is 1,600,000. In the third quarter of 2010, a new tax rate of 45% is enacted into law and is
scheduled to become effective for 2012. Taxable income for 2010 is 11,600,000 and taxable income is expected in all
future years.
a.) Determine the amount to report in the DTA at the end of 2010.
Beginning DTA = 1,600,000 so the tax rate when the DTA originated was 40% (1.6/4.0). The 40% tax rate will
remain in effect till 2012. So the first payment made in 2011 is at 40% and the second made in 2012 is at 45%.
2,000,000 * 0.40 =
2,000,000 * 0.45 =

800,000
900,000
1,700,000

b.) Prepare the journal entry necessary to adjust the DTA when the new tax rate is enacted into law.
When the law is passed, not when it becomes effective the journal entry is made.
DTA(2,000,000 *0.05)
100,000
Tax Expense
100,000

c.) Prepare the income tax expense portion of the income statement for 2010. Start with Income before income taxes.
No permanent differences exist.
Income before taxes
Income Tax Expense
Current Income Taxes
Deferred Income Taxes
Net Income

11,600,000
4,640,000
( 100,000)

(4,540,000)
7,060,000

P.5)
Brewer Corp. provides the following information related to its defined-benefit pension plan for 2012.
Pension asset / liability (1-1-12)
500,000 (credit)
Accumulated Benefit Obligation (1-1-12)
1,250,000
Actual return on plan assets
20,000
Expected return on plan assets
2%
Contributions in 2012
250,000
FV of plan assets (12-31-12)
1,520,000
Settlement rate
9%
Projected benefit obligation(1-1-12)
1,750,000
Service cost
250,000
Benefits paid
100,000
Compute the pension expense and prepare the end of year journal entry.
PBO
100,000
1,750,000
157,500
250,000
2,057,500

Pension Expense
157,500
20,000
250,000
5,000
382,500

PA
1,250,000*
20,000
250,000
1,420,000

AOCI (G/L)
5,000
5,000

Cash
250,000
250,000

Pension Expense
Acc. OCI (G/L)
Pension A/L
Cash

100,000

382,500
5,000
137,500
250,000

P A/L
500,000
137,500
637,500

AOCI (PSC)

P.6)
Year
2010
2011
2012
2013

The actuary for the pension plan of Garrison Inc. calculated the following net gains and losses.
(gain) or loss
(660,000)
250,000
1,004,000
400,000

PBO / PA information
As of January 1st
PBO
PA
2010
4,000,000
3,400,000
2011
4,500,000
3,640,000
2012
4,900,000
3,900,000
2013
5,250,000
4,360,000
Garrison Inc. had a stable labor force of 450 employees, and the total service years are 6,300. The beginning balance in
the Acc. OCI (G/L) account is 0 on Jan, 1 2010. Determine what the amortization of the AOCI (G/L) account should be per
year.
BB
EB
Year
BB PBO
BB PA
Corridor AOCI(G/L)
Excess
Years
Amort
AOCI(G/L)
2010 4,000,000

3,400,000

400,000

2011 4,500,000

3,640,000

450,000

2012 4,900,000

3,900,000

2013 5,250,000

4,360,000

14

(660,000)

210,000

14

490,000

(395,000)

14

525,000

609,000

14

(6,000)

84,000

0
15,000

(660,000)
(395,000)
609,000
1,003,000

P.7) On Jan 1, 2012, Bird Co. signs a 6-year non-cancelable lease agreement to lease a press brake from Industrial
Leasing. Rental payments of $81,680 are due annually starting Jan 1 2012. The FV of the machine on Jan 1 2012 is
$400,000 and has a useful life of 10 years with an unguaranteed residual value of 28,660. Depreciation is done on a
straight line basis. The lease is nonrenewable and at the end of the lease the machine reverts to Industrial Leasing.
Birds borrowing rate is 8% per year, and Industrial Leasings implicit rate is not known. The rental payments include
$1,563.19 for insurance that is payable to Industrial Leasing
-- Prepare an amortization schedule for Bird Co, and prepare the journal entries for 2012 and 2013.
First, is it a capital lease? No transfer of ownership, no BPO, less than 75% of economic life, PV of MLS 90% Cap Lease.
PVAD(i=8%, n=6, factor = 4.99271) Rent = (81,680-1,563.19) x 4.99271 = 400,000

Date
1/1/2012
1/1/2012
1/1/2013
1/1/2014
1/1/2015
1/1/2016
1/1/2017

Cash
0
80,116.81
80,116.81
80,116.81
80,116.81
80,116.81
80,116.81

Interest Exp(8%)
0
0
25,590.66
21,228.56
16,517.50
11,429.56
5,934.58

Jan-1-2012
Leased Asset
Leased Liability
Insurance Expense
Lease Liability
Cash

400,000
400,000
1,563.19
80,116.81
81,680

Dec 31-12
Interest Expense
Interest Payable
Depreciation Expense
Acc. Dep.

25,590.66
25,590.66
40,000
40,000

Jan-1-2013
Lease Liability
Interest Payable
Insurance Expense
Cash

54,526.15
25,590.66
1,563.19
81,680

Dec 31-13
Interest Expense
Interest Payable
Depreciation Expense
Acc. Dep

21,228.56
21,228.56
40,000
40,000

Amort
0
80,116.81
54,526.15
58,888.25
63,599.31
68,687.25
74,182.23

CV
400,000.00
319,883.19
265,357.04
206,468.79
142,869.48
74,182.23
0.00

P.8) Assume the same facts as Problem 7, but record information in Industrial Leasings books for 2012 and 2013.
First find the CV to amortize.
PVAD (i=10, n=6, factor = 4.79079) rent = 80,116.81 x 4.79079
PVSS (i=10, n=6, factor = 0.56447) x 28,660
Prepare an amortization Schedule
Date
Cash
1/1/2012
0
1/1/2012
80,116.81
1/1/2013
80,116.81
1/1/2014
80,116.81
1/1/2015
80,116.81
1/1/2016
80,116.81
1/1/2017
80,116.81
1/1/2018
28,660.00

=
=

Interest Rev (10%)

0
0
31,988.37
27,175.53
21,881.40
16,057.86
9,651.96
2,605.22

1-1-12
Lease Receivable
Equipment
Cash
Lease Receivable
12-31-12
Interest Receivable
Interest Revenue

400,000.52
400,000.52
80,116.81
80,116.81
31,988.37
31,988.37

1-1-13
Cash
Interest Receivable
Lease Receivable
12-31-13
Interest Receivable
Interest Revenue

80,116.81
31,988.37
48,128.44

27,175.53
27,175.53

383,822.81
16,177.71
400,000.52
Amort
0
80,116.81
48,128.44
52,941.28
58,235.41
64,058.95
70,464.85
26,054.78

CV
400,000.52
319,883.71
271,755.27
218,813.99
160,578.58
96,519.62
26,054.78
0