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 differen
Trang 1COMPREHENSIVE EXAMINATION E
PART 5
(Chapters 18-21)
E-I Long-Term Contracts 15 min E-II Installment Sales Method 20 min
E-III Deferred Income Taxes 25 min
E-IV Pensions 15 min E-V Leases 25 min
Trang 2Problem E-I — Long-Term Contracts
Edwards Company contracted on 4/1/12 to construct a building for $2,300,000 The project was
completed in 2014 Additional data follow:
2012 2013 2014 Costs incurred to date $ 560,000 $1,350,000 $1,900,000
Estimated cost to complete 1,040,000 450,000 —
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-of-completion 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
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 Receivable—2012 170,000
Installment Accounts Receivable—2013 400,000
Installment Accounts Receivable—2014 750,000
Inventory, 1/1/14 78,000
Repossessed Merchandise 22,000
Accounts Payable $ 136,000
Deferred Gross Profit—2012 84,000
Deferred Gross Profit—2013 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 Profit—2013 14,000 Repossessed Merchandise 22,000
Loss on Repossession 4,000 Installment Accounts Receivable—2013 40,000
Trang 3Problem E-II (cont.)
Instructions
(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 $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
Trang 4Problem 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 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 employer’s contribution for
2013
Trang 5Problem 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 Collectibility of the rentals is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by the lessor
Instructions
(a) From the lessee's viewpoint, what kind of lease is the above agreement? From the lessor's viewpoint, what kind of lease is the above agreement?
(b) What should be the income before income taxes derived by Foley from the lease for the year ended December 31, 2013?
(c) Ignoring income taxes, what should be the expenses incurred by Pinkley from this lease for the year ended December 31, 2013?
(d) What journal entries should be recorded by Pinkley Company on January 1, 2013?
(e) What journal entries should be recorded by Foley Company on January 1, 2013?
Trang 6Solutions — Comprehensive Examination E
Problem E-I — Solution
(a) 2012 income = ($560,000 ÷ $1,600,000) × $700,000 = $245,000
2013 income = ($1,350,000 ÷ $1,800,000) × $500,000 = $375,000 – $245,000 = $130,000
2014 income = $400,000 – $375,000 = $25,000
(b) Construction in Process 790,000
Accounts Payable, Cash, Inventory, etc 790,000 Accounts Receivable 1,300,000
Billings on Construction in Process 1,300,000 Cash 900,000
Accounts Receivable 900,000 Construction Expenses 790,000
Construction in Process 130,000
Revenue from Long-Term Contracts 920,000 (c) Current assets:
Accounts receivable $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:
2012 $84,000 ÷ ($170,000 + collections) = 32%
Collections equal $92,500
2013 $175,000 ÷ ($400,000 + collections) = 35% *
Collections equal $100,000
2014 Installment Sales – Installment Accounts Receivable = Collections
$1,000,000 – $750,000 = $250,000
*14,000 ÷ 40,000 = 35%
Trang 7Problem E-II — Solution (cont.)
(b) Inventory 12/31/14 159,000
Repossessed Merchandise 12/31/14 14,000
Cost of Goods Sold 665,000
Purchases 738,000 Inventory 1/1/14 78,000
Repossessed Merchandise 22,000 Installment Sales 1,000,000
Cost of Goods Sold 665,000 Deferred Gross Profit—2014 (33.5%) 335,000 Deferred Gross Profit—2012 (32% × $220,000) 70,400
Deferred Gross Profit—2013 (35% × $300,000) 105,000
Deferred Gross Profit—2014 (33.5% × $540,000) 180,900
Realized Gross Profit 356,300 Realized Gross Profit 356,300
Loss on Repossession 4,000 Operating Expenses 150,000 Income Summary 202,300 Income Summary 202,300
Retained Earnings 202,300
Problem E-III — Solution
(a) The computation of income tax payable is as follows:
Pretax financial income $1,200,000
Permanent differences:
State of Oregon bonds (10,000)
Executive insurance premiums 12,000
Temporary differences:
Installment contracts (500,000)
Excess tax depreciation (60,000)
Lease rental 360,000
Taxable income 1,002,000
Tax rate 40%
Income tax payable $400,800
(b) 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)
Trang 8Problem E-III — Solution (cont.)
(c) Future Taxable
(Deductible) Tax Deferred Tax Temporary Differences Amounts Rate (Asset) Liability Installment Sales $500,000 40% $200,000 Depreciation 60,000 40 24,000 Rent (360,000) 40 $(144,000)
Totals $200,000 $(144,000) $224,000 (d) Deferred tax asset at end of 2013 $(144,000)
Deferred tax asset at beginning of 2013 -0-
Deferred tax (benefit) $(144,000)
Deferred tax liability at end of 2013 $224,000
Deferred tax liability at beginning of 2013 -0-
Deferred tax expense $224,000
Deferred tax expense $224,000
Deferred tax (benefit) (144,000)
Net deferred tax expense for 2013 $ 80,000
(e) Income Tax Expense ($400,800 + $80,000) 480,800
Deferred Tax Asset 144,000
Deferred Tax Liability 224,000 Income Tax Payable 400,800 (f) Income statement
Income before income taxes $1,200,000
Income tax expense:
Current $400,800
Deferred 80,000 480,800
Net income $719,200
Balance sheet
Current liabilities:
Deferred tax liability ($200,000 – $144,000) $56,000
Long-term liabilities:
Deferred tax liability $24,000
Trang 9Problem E-IV — Solution
(a) Service cost $520,000
Interest on projected benefit obligation ($540,000 × 10%) 54,000
Expected return on plan assets ($360,000 × 9%) (32,400)
Amortization of PSC 90,000
Amortization of net gains (48,000)
Pension expense—2013 $583,600
(b) Pension Expense 583,600
Other Comprehensive Income (G/L) 48,000
Cash 500,000
Other Comprehensive Income (PSC) 90,000
Pension Asset/Liability 41,600
Trang 10Problem E-V — Solution
(a) From the viewpoint of the lessee (Pinkley Company), the lease is a capital lease because the present value of the minimum lease payments ($5,760,000) exceeds 90% of the fair market value of the leased property The lease term also is in excess of 75% of the property's estimated economic life For those same reasons and because of the predictable collectibility, absence of uncertainties surrounding costs yet to be incurred by the lessor, and presence of a dealer's profit, the lease is a sales-type lease to the lessor, Foley Company (b) Profit on sale $564,000
Interest on outstanding balance
($5,760,000 – $852,000) × 10 490,800
Income of lessor in 2012 $1,054,800
(c) Interest on outstanding balance
($5,760,000 – $852,000) × 10 $490,000
Depreciation ($5,760,000 ÷ 10) 576,000
Expenses incurred by lessee in 2012 $1,066,800
(d) Leased Equipment 5,760,000
Lease Liability 5,760,000 Lease Liability 852,000
Cash 852,000 (e) Lease Receivable 5,760,000
Cost of Goods Sold 5,436,000
Sales Revenue 5,760,000 Inventory 5,436,000 Cash 852,000
Lease Receivable 852,000