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1. (TCO A) An alternative available when the seller is exposed to continued risks of ownership through return of the product is (Points: 10)

       MACROBUTTON HTMLDirect [pic] Recording the sale, and accounting for returns as they occur in future periods.

       MACROBUTTON HTMLDirect [pic] Not recording a sale until all return privileges have expired.

       MACROBUTTON HTMLDirect [pic] Recording the sale, but reducing sales by an estimate of future returns.

       MACROBUTTON HTMLDirect [pic] All of the above.

2. (TCO A) The percentage-of-completion method must be used when certain conditions exist. Which of the following is NOT one of those necessary conditions? (Points: 15)

       MACROBUTTON HTMLDirect [pic] Estimates of progress toward completion, revenues, and costs are reasonably dependable.

       MACROBUTTON HTMLDirect [pic] The contractor can be expected to perform the contractual obligation.

       MACROBUTTON HTMLDirect [pic] The buyer can be expected to satisfy some of the obligations under the contract.

       MACROBUTTON HTMLDirect [pic] The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.

3. (TCO A) Melton Construction Co. began operations in 2010. Construction activity for 2010 is shown below. Melton uses the completed-contract method.

|Contract |Contract Price|Billings |Collections |Costs to |Estimated |

| | |Through |Through |12/31/10 |Costs to |

| | |12/31/10 |12/31/10 | |Complete |

|1 |$3,200,000 |$3,150,000 |$2,600,000 |2,150,000 |-0- |

|2 |3.600,000 |1,500,000 |1,000,000 |820,000 |1,880,000 |

|3 |3,300,000 |1,900,000 |1,800,000 |2,250,000 |1,200,000 |

Which of the following should be shown on the balance sheet at December 31, 2010 related to Contract 2?

(Points: 15)

       MACROBUTTON HTMLDirect [pic] Inventory, $680,000

       MACROBUTTON HTMLDirect [pic] Inventory, $820,000

       MACROBUTTON HTMLDirect [pic] Current liability, $680,000

       MACROBUTTON HTMLDirect [pic] Current liability, $1,500,000

$1,500,000 – $820,000 = $680,000

1. (TCO B) Markes Corporation's partial income statement after its first year of operations is as follows:

Income before Income Taxes        $3,750,000

Income Tax expense     

   Current                 $1,035,000

   Deferred                      90,000

                              __________   1,125,000

                                                  __________

Net Income                                 $2,625,000

Markes uses the straight-line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The amount charged to depreciation expense on its books this year was $1,500,000. No other differences existed between book income and taxable income except for the amount of depreciation.

Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation's tax return for the current year?

(Points: 10)

       MACROBUTTON HTMLDirect [pic] $1,200,000

       MACROBUTTON HTMLDirect [pic] $1,425,000

       MACROBUTTON HTMLDirect [pic] $1,500,000

       MACROBUTTON HTMLDirect [pic] $1,800,000

30% × Temporary Difference) = $90,000;

Temporary Difference = ($90,000 ÷ 30%) = $300,000;

$1,500,000 + $300,000 = $1,800,000.

2. (TCO B) Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in

               Future                      Future

      Taxable Amounts   Deductible Amounts

a.               Yes                           Yes

b.               Yes                           No

c.                No                            Yes

d.                No                            No (Points: 8)

       MACROBUTTON HTMLDirect [pic] A

       MACROBUTTON HTMLDirect [pic] B

       MACROBUTTON HTMLDirect [pic] C

       MACROBUTTON HTMLDirect [pic] D

3. (TCO B) Deferred taxes should be presented on the balance sheet (Points: 10)

       MACROBUTTON HTMLDirect [pic] As one net debit or credit amount.

       MACROBUTTON HTMLDirect [pic] In two amounts: one for the net current amount and one for the net noncurrent amount.

       MACROBUTTON HTMLDirect [pic] In two amounts: one for the net debit amount and one for the net credit amount.

       MACROBUTTON HTMLDirect [pic] As reductions of the related asset or liability accounts.

4. (TCO B) Recognition of deferred tax asset.

a. Describe a deferred tax asset.

b. When should a deferred tax asset be reduced by a valuation allowance?

(Points: 12)

(a) A deferred tax asset is the deferred tax consequences attributable to deductible temporary differences and operating loss carryforwards.

(b) A deferred tax asset should be reduced by a valuation allowance if, based on all available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. More likely than not means a level of likelihood that is at least slightly more than 50%.

1. (TCO C) Measuring and recording pension expense.

Presented below is information related to the pension plan of Zimmer Inc. for the year 2011.

1. The service cost related to pension expense is $240,000 using the projected benefits approach.

2. The projected benefit obligation and the accumulated benefit obligation at the beginning of the year are $300,000 and $280,000, respectively. The expected return on plan assets is 9% and the settlement rate is 10%.

3. The accumulated OCI – prior service cost at the beginning of the year is $140,000. The company has a workforce of 200 employees, and all are expected to receive benefits under the plan. The total number of service-years is 1,000 and the service-years attributable to 2011 is 200. The company has decided to use the years-of-service method of amortization for these costs.

4. At the beginning of the period, fair value of pension plan assets, $280,000. The company had an Accumulated OCI (loss) at the beginning of the period of $90,000. Any amortization of unrecognized net loss is recognized on a straight-line basis over the average remaining service-life of the employees.

5. The contribution made to the pension fund in 2011 was $231,000.

Instructions

(a) Determine the pension expense to be reported on the income statement for 2011. (Round all computations to nearest dollar.)

(b) Prepare the journal entry(ies) to record pension expense for 2011.

(Points: 25)

MACROBUTTON HTMLDirect [pic]

MACROBUTTON HTMLDirect [pic]

(a) Service cost $240,000

Interest on projected benefit obligation (10% × $300,000) 30,000

Expected return on plan assets (9% × $280,000) (25,200)

Amortization of prior service cost (1) 28,000

Amortization of loss (2) 12,000

Pension expense $284,800

(1)

|$140,000 |= $140 |

|1,000 | |

200 × $140 = $28,000

(2) Fair value of plan assets $280,000

10%

$ 28,000

Projected benefit obligation $300,000

10%

$ 30,000

Net loss (beginning of period) ($ 90,000)

Higher of 10% of projected benefit obligation or fair value of plan assets 30,000

Amount to be amortized ($ 60,000)

|1,000 |= |Expected Future Years of Service |= 5 years |

| | | | |

|200 | |Number of Employees | |

| | | | |

|$60,000 |= $12,000 |

|5 years | |

(b) Pension Expense 284,800

OCI (G/L) 12,000

OCI-PSC 28,000

Pension Asset / Liability 13,800

Cash 231,000

2. (TCO C) A pension fund gain or loss that is caused by a plant closing should be (Points: 10)

       MACROBUTTON HTMLDirect [pic] Recognized immediately as a gain or loss on the plant closing.

       MACROBUTTON HTMLDirect [pic] Spread over the current year and future years.

       MACROBUTTON HTMLDirect [pic] Charged or credited to the current pension expense.

       MACROBUTTON HTMLDirect [pic] Recognized as a prior period adjustment.

3. (TCO C) On January 1, 2008, Nen Co. has the following balances:

Projected benefit obligation    $4,200,000

Fair value of plan assets           3,750,000

The settlement rate is 10%. Other data related to the pension plan for 2008 are:

Service cost                                                             $240,000

Amortization of unrecognized prior service costs    54,000

Contributions                                                              270,000

Benefits paid                                                              225,000

Actual return on plan assets                                      264,000

Amortization of unrecognized net gain                      18,000

The fair value of plan assets at December 31, 2008 is

(Points: 10)

       MACROBUTTON HTMLDirect [pic] $3,531,000

       MACROBUTTON HTMLDirect [pic] $3,789,000

       MACROBUTTON HTMLDirect [pic] $4,059,000

       MACROBUTTON HTMLDirect [pic] $4,284,000

$3,750,000 + $264,000 + $270,000 – $225,000 = $4,059,000.

1. (TCO D) For a sales-type lease (Points: 15)

       MACROBUTTON HTMLDirect [pic] The sales price includes the present value of the unguaranteed residual value.

       MACROBUTTON HTMLDirect [pic] The present value of the guaranteed residual value is deducted to determine the cost of goods sold.

       MACROBUTTON HTMLDirect [pic] The gross profit will be the same whether the residual value is guaranteed or unguaranteed.

       MACROBUTTON HTMLDirect [pic] None of the above.

2. (TCO D) In the earlier years of a lease, from the lessee's perspective, the use of the (Points: 10)

       MACROBUTTON HTMLDirect [pic] Capital method will enable the lessee to report higher income, compared to the operating method.

       MACROBUTTON HTMLDirect [pic] Capital method will cause debt to increase, compared to the operating method.

       MACROBUTTON HTMLDirect [pic] Operating method will cause income to decrease, compared to the capital method.

       MACROBUTTON HTMLDirect [pic] Operating method will cause debt to increase, compared to the capital method.

3. (TCO D) Eby Company leased equipment to the Mills Company on July 1, 2008, for a 10-year period expiring June 30, 2018. Equal annual payments under the lease are $80,000 and are due on July 1 of each year. The first payment was made on July 1, 2008. The rate of interest contemplated by Eby and Mills is 9%. The cash selling price of the equipment is $560,000 and the cost of the equipment on Eby's accounting records was $496,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Eby, what is the amount of profit on the sale and the interest revenue that Eby would record for the year ended December 31, 2008? (Points: 20)

       MACROBUTTON HTMLDirect [pic] $64,000 and $50,400

       MACROBUTTON HTMLDirect [pic] $64,000 and $43,200

       MACROBUTTON HTMLDirect [pic] $64,000 and $21,600

       MACROBUTTON HTMLDirect [pic] $0 and $0

$560,000 – $496,000 = $64,000; ($560,000 – $80,000) × .09 × 6/12 = $21,600

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