29 Jun Question E 16-24 Balance sheet classification LO4 LO5 LO6 LO8
Question
E 16-24 Balance sheet classification LO4 LO5 LO6 LO8
At December 31, DePaul Corporation had a $16 million balance in its deferred tax asset account
and a $68 million balance in its deferred tax liability account. The balances were due to the
following cumulative temporary differences:
1. Estimated warranty expense, $15 million: expense recorded in the year of the sale;
tax-deductible when paid (one-year warranty).
2. Depreciation expense, $120 million: straight-line in the income statement; MACRS on the tax
return.
3. Income from installment sales of properties, $50 million: income recorded in the year of the
sale; taxable when received equally over the next five years.
4. Bad debt expense, $25 million: allowance method for accounting; direct write-off for tax
purposes.
Required:
Show how any deferred tax amounts should be classified and reported in the December 31
balance sheet. The tax rate is 40%.
E 16-25 Multiple tax rates; balance sheet classification
Case Development began operations in December 2011. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the installment method. 2011 installment income was $600,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2012-2014 are as follows:
2012 $150,000 30%
2013 250,000 40
2014 200,000 40
Pretax accounting income for 2011 was $810,000, which includes interest revenue of $10,000 from municipal bonds. The enacted tax rate for 2011 is 30%.
Required:
1. Assuming no differences between accounting income and taxable income other than those described above, prepare the appropriate journal entry to record Case’s 2011 income taxes.
2. What is Case’s 2011 net income?
3. How should the deferred tax amount be classified in a classified balance sheet?
Requirement 1
P17-16 Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011:
Prior service cost at Jan. 1, 2011, from plan amendment at the
beginning of 2009 (amortization: $4 million per year) $32 million
Net loss-pensions at Jan. 1, 2011 (previous losses exceeded previous gains) $40million
Average remaining service life of the active employee group 10 years
Actuary’s discount rate 8%
($in millions) PBO Plan Assets
Beginning of 2011 $300 Beginning of 2011 $200
Service cost 48 Return on plan assets.
Interest cost, 8% 24 7.5% (10% expected) 15
Loss (gain) on PBO (2) Cash contributions 45
Less: Retiree benefits (20) Less: Retiree benefits (20)
End of 2011 $350 End of 2011 $240
Required:
1. Determine Lakeside’s pension expense for 2011 and prepare the appropriate journal entries to
record the expense as well as the cash contribution to plan assets and payment of benefits to
retirees.
2. Determine the new gains and/or losses in 2011 and prepare the appropriate journal entry(s) to
record them.
3. Prepare a pension spreadsheet to assist you in determining end of 2011 balances in the PBO,
plan assets, prior service cost—AOCI, the net loss—AOCI, and the pension liability.
4. Assume the following actuary and trustee reports indicating changes in the PBO and plan
assets of Lakeside Cable during 2012:
Determine Lakeside’s pension expense for 2012 and prepare the appropriate journal entries to
record the expense, the cash funding of plan assets, and payment of benefits to retirees.
5. Determine the new gains and/or losses in 2012 and prepare the appropriate journal entry(s) to
record them.
6. Using T-accounts, determine the balances at December 31, 2012, in the net loss–AOCI and
prior service cost–AOCI.
7. Confirm the balances determined in Requirement 6 by preparing a pension spreadsheet.
E17-19 Beale Management has a noncontributory, defined benefit pension plan. On December 31, 2011 (the end of Beale’s fiscal year), the following pension-related data were available:
Projected Benefit Obligation ($in millions)
Balance, January 1, 2011 $480
Service cost 82
Interest cost, discount rate, 5% 24
Gain due to changes in actuarial assumptions in 2011 (10)
Pension benefits paid (40)
Balance, December 31, 2011 $536
Plant Assets
Balance, January 1, 2011 $500
Actual return on plan assets 40
(Expected return on plan assets, $45)
Cash Contributions 70
Pension benefits paid (40)
Balance, December 31, 2011 $570
January 1, 2011, balances:
Pension asset $20
Prior service cost-AOCI (amortization $8 per year) 48
Net gain-AOCI (any amortization over 15 years) 80
Required:
1. Prepare the 2011 journal entry to record pension expense.
2. Prepare the journal entry(s) to record any 2011 gains and losses.
3. Prepare the 2011 journal entries to record the contribution to plan assets and benefit payments to retirees.
4. Determine the balances at December 31, 2011, in the PBO, plan assets, the net gain-ACOI, and prior service cost-ACOI and show how the balances changed during 2011. [Hint: You might find T-accounts useful.]
5. What amount will Beale report in its 2011 balance sheet as a net pension asset or net pension liability for the funded status of the plan?
P16-7 Sherrod, Inc., reported pretax accounting income of $76 million for 2011. The following information relates to differences between pretax accounting income and taxable income:
a. Income from installment sales of properties included in pretax accounting income in 2011 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end had a balance of $4 million (representing portions of 2010 and 2011 installment sales), expected to be collected equally in 2012 and 2013.
b. Sherrod was assessed a penalty of $2 million by the Environmental Protection Agency for violation of a federal law in 2011. The fine is to be paid in equal amounts in 2011 and 2012.
c. Sherrod rents its operating facilities but owns one asset acquired in 2010 at a cost of $80 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):
Income Statement Tax Return Difference
2010 $20 $26 ($6)
2011 20 35 (15)
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