S05 F-6 Class Questions Preview

Class Questions

1. CPA-00690

The following information pertains to Gali Co.'s defined benefit pension plan for 1994:

Fair value of plan assets, beginning of year Fair value of plan assets, end of year Employer contributions Benefits paid

$350,000 525,000 110,000 85,000

In computing pension expense, what amount should Gali use as actual return on plan assets? a. $65,000 b. $150,000 c. $175,000 d. $260,000

CPA-00690

Choice \"b\" is correct.

B A

Beginning Plan Assets $350,000

+ Contributions 110,000 + Actual Return

150,000 < 85,000 > $525,000

Squeeze

S – Benefits Paid E

Ending Plan Assets

The actual return must equal $150,000. SFAS 87 para. 23

Choice \"a\" is incorrect. Year-end plan assets equal beginning plan assets plus contributions less distributions plus actual return on plan assets.

Choice \"c\" is incorrect. Year-end plan assets equal beginning plan assets plus contributions less distributions plus actual return on plan assets.

Choice \"d\" is incorrect. Year-end plan assets equal beginning plan assets plus contributions less distributions plus actual return on plan assets.

1

Financial Accounting & Reporting 6

Class Questions

2. CPA-00680

On January 2, 1995, Loch Co. established a noncontributory defined-benefit pension plan covering all employees and contributed $400,000 to the plan. At December 31, 1995, Loch determined that the 1995 service and interest costs on the plan were $720,000. The expected and the actual rate of return on plan assets for 1995 was 10%. There are no other components of Loch's pension expense. What amount should Loch report as accrued pension cost in its December 31, 1995, balance sheet? a. $280,000 b. $320,000 c. $360,000 d. $720,000

CPA-00680

Choice \"a\" is correct. $280,000 is the accrued cost on the balance sheet. The amount is calculated as follows:

S Service cost* I Interest cost*

R < Return on investment > ($400,000 × 10%) A Amortization prior cost G < Gains > Losses E Existing obligation

Total pension expense Less: contributions Accrued pension cost

$720,000* (40,000)

− −

− $680,000 (400,000) $280,000 2

Financial Accounting & Reporting 6

Class Questions

3. CPA-00688

The following information pertains to Kane Co.'s defined benefit pension plan:

Prepaid pension cost, January 1, 1994 Service cost Interest cost

Actual return on plan assets

Amortization of unrecognized prior service cost Employer contributions

$2,000 19,000 38,000 22,000 52,000 40,000

The fair value of plan assets exceeds the accumulated benefit obligation. In its December 31, 1994, balance sheet, what amount should Kane report as unfunded accrued pension cost? a. $45,000 b. $49,000 c. $67,000 d. $87,000

CPA-00688

Choice \"a\" is correct. Pension expense is calculated as follows:

Service cost $ 19,000 Interest cost 38,000 Return on plan assets (22,000) Amortization of unrecognized prior service cost 52,000 $ 87,000

The unfunded accrued pension cost is calculated as follows:

Beg balance, prepaid cost Employer contributions Pension expense

End balance, unfunded cost

$ 2,000 40,000 (87,000) $(45,000) SFAS 87 para. 20, 35

Choice \"b\" is incorrect. The prepaid pension cost at 1/1/94 is not a component of pension expense. It is the beginning balance of an asset account.

Choice \"c\" is incorrect. Pension expense should include the return on plan assets, service cost, interest cost, and amortization of unrecognized prior service cost.

Choice \"d\" is incorrect. $87,000 is the pension expense rather than the unfunded accrued pension cost. The unfunded accrued pension cost includes the beginning balance (prepaid pension cost), the employer contributions, and the pension expense.

3

Financial Accounting & Reporting 6

Class Questions

4. CPA-00684

The following information pertains to Hall Co.'s defined-benefit pension plan at December 31, 1994:

Unfunded accumulated benefit obligation Unrecognized prior service cost Net periodic pension cost

$25,000 12,000 8,000

Hall made no contributions to the pension plan during 1994.

At December 31, 1994, what amount should Hall record as additional pension liability? a. $5,000 b. $13,000 c. $17,000 d. $25,000

CPA-00684

Choice \"c\" is correct. The minimum pension liability is the excess of the accumulated benefit obligation (ABO) over the fair value of the pension plan assets: $25,000 − $0 = $25,000. The accrued pension cost is $8,000. So the additional pension liability [APL] is $17,000 [$25,000 minimum liability less $8,000 already recorded].

Choice \"a\" is incorrect. $5,000 is the excess of the additional pension liability [APL] over the

unrecognized prior service cost (PSC) [$17,000 APL less $12,000 unrecognized PSC]. This amount is reported as other comprehensive income.

Choice \"b\" is incorrect. The additional pension liability [APL] is not defined as the difference between the unfunded ABO and the unrecognized PSC.

Choice \"d\" is incorrect. The additional pension liability [APL] is not defined as equal to the unfunded ABO.

4

Financial Accounting & Reporting 6

Class Questions

5. CPA-00685

The following information pertains to Hall Co.'s defined-benefit pension plan at December 31, 1994:

Unfunded accumulated benefit obligation Unrecognized prior service cost Net periodic pension cost

$25,000 12,000 8,000

Hall made no contributions to the pension plan during 1994.

In its December 31, 1994, statement of comprehensive income, what amount should Hall report as excess of additional pension liability over unrecognized prior service cost? a. $5,000 b. $13,000 c. $17,000 d. $25,000

CPA-00685

Choice \"a\" is correct. The excess of the additional pension liability [APL] over the unrecognized prior service cost (PSC) equals $5,000 [$17,000 APL less $12,000 PSC]. This amount is reported as a component of other comprehensive income. SFAS 87 para. 36, SFAS 130

Choice \"b\" is incorrect. $13,000 is the difference between the unfunded accumulated benefit obligation and the unrecognized prior service cost (PSC).

Choice \"c\" is incorrect. $17,000 is the additional pension liability [APL]. Choice \"d\" is incorrect. $25,000 is the unfunded accumulated benefit obligation.

5

Financial Accounting & Reporting 6

Class Questions

6. CPA-00702

Bounty Co. provides postretirement health care benefits to employees who have completed at least 10 years service and are aged 55 years or older when retiring. Employees retiring from Bounty have a median age of 62, and no one has worked beyond age 65. Fletcher is hired at 48 years old. The

attribution period for accruing Bounty's expected postretirement health care benefit obligation to Fletcher is during the period when Fletcher is aged: a. 48 to 65 b. 48 to 58 c. 55 to 65 d. 55 to 62

CPA-00702

Definition: The \"attribution period\" is the period of an employee's service to which the expected

postretirement benefit obligation for that employee is assigned. Generally, the beginning of the period is the employee's date of hire (unless the plan's benefit formula grants credit only for service from a later date, in which case the beginning of the attribution period is generally the beginning of that credited service period). The end of the \"attribution period\" is the \"full eligibility date.\"

Choice \"b\" is correct, 48 to 58. Fletcher was hired at age 48, which is the beginning of the attribution period. Full eligibility is granted by this plan to employees who completed 10 years of service and are age 55 or older; therefore, Fletcher will become fully eligible at age 58.

Choice \"a\" is incorrect because Fletcher becomes fully eligible at age 58 rather than age 65, according to this plan.

Choices \"c\" and \"d\" are incorrect because Fletcher was hired at age 48, which is the beginning of the \"attribution period,\" according to this plan.

7. CPA-00703

Which of the following information should be disclosed by a company providing health care benefits to its retirees?

I. The assumed health care cost trend rate used to measure the expected cost of benefits covered by

the plan.

II. The accumulated postretirement benefit obligation.

a. I and II. b. I only. c. II only.

d. Neither I nor II.

CPA-00703

Choice \"a\" is correct. Actuarial assumptions and the accumulated postretirement benefit obligation must be disclosed.

6

Financial Accounting & Reporting 6

Class Questions

8. CPA-00701

An employer's obligation for postretirement health benefits that are expected to be provided to or for an employee must be fully accrued by the date the: a. Employee is fully eligible for benefits. b. Employee retires. c. Benefits are utilized. d. Benefits are paid.

CPA-00701

Choice \"a\" is correct. Postretirement health benefits are accrued in a manner similar to pension benefits. The expected postretirement health benefits must be fully accrued by the date the employee is fully

eligible for the benefits. The accrual will begin when the employee is hired through the eligibility (vesting) date.

Choice \"b\" is incorrect. The benefits are earned prior to the employee's retirement and thus must be accrued.

9. CPA-00704

Which of the following is not one of the liability reporting criteria for post-employment benefits under SFAS No. 112?

a. The amount of the obligation can be reasonably estimated. b. The obligation relates to rights that vest or accumulate.

c. The obligation depends upon whether the individual continues to be available for questions and

assistance after employment ceases.

d. The payment of the compensation is probable.

CPA-00704

Choice \"c\" is correct.

Rule: All four of the following must be met in order to meet the reporting requirements for post-employment benefits:

1. The employer's obligation relating to the employees' rights to receive compensation for future

absences is attributable to services already rendered. 2. The obligation relates to rights that vest or accumulate. 3. Payment of the compensation is probable. 4. The amount can be reasonable estimated.

Choices \"a\

7

Financial Accounting & Reporting 6

Class Questions

10. CPA-00733

Ace Co. settled litigation on February 1, 2002 for an event that occurred during 2001. An estimated liability was determined as of December 31, 2001. This estimate was significantly less than the final settlement. The transaction is considered to be material. The financial statements for year-end 2001 have not been issued. How should the settlement be reported in Ace's year-end 2001 financial statements?

a. Disclosure only of the settlement. b. Only an accrual of the settlement. c. Neither a disclosure nor an accrual. d. Both a disclosure and an accrual.

CPA-00733

Choice \"d\" is correct. As of February 1, 2002, Ace Co.'s financial statements have not been issued and the actual amount of the final settlement is known. That amount should be included in Ace Co.'s December 31, 2001 financial statements and disclosed as a \"subsequent event.\"

Choice \"a\" is incorrect. Since the amount of the settlement was known, it must be recorded as well as disclosed.

Choice \"b\" is incorrect. Whenever an accrual such as this is made, the details must be disclosed. Choice \"c\" is incorrect. The general rule governing contingencies only permits no disclosure/no accrual when the outcome is \"remote.\"

11. CPA-00736

During 1994, Haft Co. became involved in a tax dispute with the IRS. At December 31, 1994, Haft's tax advisor believed that an unfavorable outcome was probable. A reasonable estimate of additional taxes was $200,000 but could be as much as $300,000. After the 1994 financial statements were issued, Haft received and accepted an IRS settlement offer of $275,000.

What amount of accrued liability should Haft have reported in its December 31, 1994 balance sheet? a. $200,000 b. $250,000 c. $275,000 d. $300,000

CPA-00736

Choice \"a\" is correct. A contingent liability which is probable and estimable must be recognized. If all amounts within a range of values are equally likely, then the lowest amount in the range is the measurement amount. The final settlement was unknown prior to the issuance of the financial statements, so a contingent liability of $200,000 should have been recorded.

Choice \"b\" is incorrect. If all amounts within a range of values are equally likely, then the lowest amount in the range should be accrued.

Choice \"c\" is incorrect. The final settlement was unknown prior to the issuance of the financial statements.

Choice \"d\" is incorrect. If all amounts within a range of values are equally likely, then the lowest amount in the range should be accrued.

8

Financial Accounting & Reporting 6

Class Questions

12. CPA-00802

For the year ended December 31, 1993, Grim Co.'s pretax financial statement income was $200,000 and its taxable income was $150,000. The difference is due to the following:

Interest on municipal bonds $70,000 Premium expense on keyman life insurance (20,000) Total $50,000

Grim's enacted income tax rate is 30%. In its 1993 income statement, what amount should Grim report as current provision for income tax expense? a. $45,000 b. $51,000 c. $60,000 d. $66,000

CPA-00802

Choice \"a\" is correct, $45,000 current provision for income tax expense ($150,000 × 30%) representing the taxes to be paid for 1993.

Note: The items causing the difference between taxable income and financial statement income are permanent and will never reverse; therefore, no deferred tax is involved.

TAX $150,000 -0- Permanent $150,000 × 30%

$45,000 +

F/S $150,000 70,000 $200,000

= $45,000

-0- Permanent (20,000) × 30% $0

9

Financial Accounting & Reporting 6

Class Questions

13. CPA-00843

Ram Corp. prepared the following reconciliation of income per books with income per tax return for the year ended December 31, 19:

Book income before income taxes Add temporary difference

Construction contract revenue which will reverse in 1993 Deduct temporary difference

Depreciation expense which will reverse in equal amounts in each of the next four years Taxable income

$750,000 100,000 (400,000) $450,000 Ram's effective income tax rate is 34% for 19. What amount should Ram report in its 19 income statement as the current provision for income taxes? a. $34,000 b. $153,000 c. $255,000 d. $2,000

CPA-00843

Choice \"b\" is correct.

TAX F/S $400,000 (100,000) $450,000 $300,000 $750,000 × 34%

× 34%

$153,000 + $102,000 = $255,000

10

Financial Accounting & Reporting 6

Class Questions

14. CPA-00782

Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, 1994, its first year of operations:

Pretax financial income

Nontaxable interest received on municipal securities Long-term loss accrual in excess of deductible amount Depreciation in excess of financial statement amount Taxable income

Zeff's tax rate for 1994 is 40%.

$160,000 (5,000) 10,000 (25,000) $140,000 In its 1994 income statement, what amount should Zeff report as income tax expense-current portion? a. $52,000 b. $56,000 c. $62,000 d. $,000

CPA-00782

Choice \"b\" is correct. The current portion of the income tax expense equals $56,000, income tax payable on taxable income [$140,000 × 40%]. SFAS 109

Choice \"a\" is incorrect. The tax rate is applied to taxable income, not to pretax financial income less the permanent difference and tax depreciation in excess of accounting depreciation.

Choice \"c\" is incorrect. The tax rate is applied to taxable income, not to pretax financial income less the permanent difference.

Choice \"d\" is incorrect. The tax rate is applied to taxable income, not to pretax financial income.

TAX Income $160,000 Muni (5,000) Est. Loss 10,000

Permanent(10,000)

=

F/S Income $160,000 -

$ 62,000 - - Excess Depr (25,000) 25,000

$140,000 $15,000 $160,000 × 40%

× 40%$ 56,000 + $ 6,000

11

Financial Accounting & Reporting 6

Class Questions

15. CPA-00783

Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, 1994, its first year of operations:

Pretax financial income

Nontaxable interest received on municipal securities Long-term loss accrual in excess of deductible amount Depreciation in excess of financial statement amount Taxable income

Zeff's tax rate for 1994 is 40%.

$160,000 (5,000) 10,000 (25,000) $140,000 In its December 31, 1994, balance sheet, what should Zeff report as deferred income tax liability? a. $2,000 b. $4,000 c. $6,000 d. $8,000

CPA-00783

Choice \"c\" is correct. The deferred income tax liability equals the 40% tax rate times $15,000 future taxable amount computed as the net of the future taxable amounts [$25,000 depreciation] and the future deductible amounts [$10,000]. SFAS 109

TAX Income $160,000 Muni (5,000) Est. Loss 10,000

Permanent(10,000)

F/S Income $160,000 - - Excess Depr (25,000)

- 25,000 $140,000 $15,000 $160,000 × 40%

× 40% =

$ 62,000 $ 56,000 + $ 6,000

12

Financial Accounting & Reporting 6

Class Questions

16. CPA-00785

As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial reporting basis of Noor Co.'s sole depreciable asset, acquired in 1994, exceeded its tax basis by $250,000 at December 31, 1994. This difference will reverse in future years. The enacted tax rate is 30% for 1994, and 40% for future years. Noor has no other temporary differences. In its December 31, 1994, balance sheet, how should Noor report the deferred tax effect of this difference? a. As an asset of $75,000. b. As an asset of $100,000. c. As a liability of $75,000. d. As a liability of $100,000.

CPA-00785

Choice \"d\" is correct, as a deferred tax liability of $100,000, since tax depreciation exceeds book depreciation.

TAX F/S $250,000 × 40% $100,000

17. CPA-00781

On its December 31, 1994, balance sheet, Shin Co. had income taxes payable of $13,000 and a current deferred tax asset of $20,000 before determining the need for a valuation account. Shin had reported a current deferred tax asset of $15,000 at December 31, 1993. No estimated tax payments were made during 1994. At December 31, 1994, Shin determined that it was more likely than not that 10% of the deferred tax asset would not be realized. In its 1994 income statement, what amount should Shin report as total income tax expense? a. $8,000 b. $8,500 c. $10,000 d. $13,000

CPA-00781

Choice \"c\" is correct. Total income tax expense for 1994:

Tax Temporary Financial Return Differences Statement $ $

× Tax Rate × Enacted Tax Rate Total $ 20,000 Allowance < 2,000> Net Ending $ 18,000 Beginning < 15,000>

$ 3,000 =$10,000 $13,000 –

13

Financial Accounting & Reporting 6

Class Questions

18. CPA-00791

Thorn Co. applies Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. At the end of 1993, the tax effects of temporary differences were as follows:

Deferred tax assets Related asset (liabilities) classification Accelerated tax depreciation ($75,000) Noncurrent asset Additional costs in inventory for tax purposes 25,000 Current asset ($50,000)

A valuation allowance was not considered necessary. Thorn anticipates that $10,000 of the deferred tax liability will reverse in 1994. In Thorn's December 31, 1993, balance sheet, what amount should Thorn report as noncurrent deferred tax liability? a. $40,000 b. $50,000 c. $65,000 d. $75,000

CPA-00791

Choice \"d\" is correct, $75,000 noncurrent deferred tax liability (based on classification of related asset as noncurrent).

14

Financial Accounting & Reporting 6

Class Questions

19. CPA-007

Mobe Co. reported the following operating income (loss) for its first three years of operations:

1992 $300,000 1993 (700,000) 1994 1,200,000

For each year, there were no deferred income taxes (before 1992), and Mobe's effective income tax rate was 30%. In its 1993 income tax return, Mobe elected the two year carry back of the loss. In its 1994 income statement, what amount should Mobe report as total income tax expense? a. $120,000 b. $150,000 c. $240,000 d. $360,000

CPA-007

Choice \"d\" is correct, $360,000 total income tax expense for 1994.

1993

DR: DR: CR:

1994

Inc. Tax Refund Rec. ($300,000 × 30%) $90,000

Deferred Tax Asset ($400,000 × 30%) 120,000

Income Tax Benefit $210,000

Beg:$400,000 TAX I/S $1,200,000 $1,200,000 NOL (400,000) (400,000) − $ 800,000

-0- $1,200,000 × 30%

-0- 120,000

$360,000

× 30% End: Beg:

$ 240,000 + $120,000 =

DR:

CR: CR:

Income Tax Expense

Income Tax Payable Deferred Tax Asset

$360,000

$240,000 120,000

15