Which of the following statements typifies defined contribution plans?

I. Multiple choice (72 points) Darken the circle on the answer sheet corresponding to the best answer for each question.

1. Which of the following differences would result in future taxable amounts?
a. Expenses or losses that are tax deductible after they are recognized in financial income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in taxable income.
d. Expenses or losses that are tax deductible before they are recognized in financial income. 


2. When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be
a. handled retroactively in accordance with the guidance related to changes in accounting 
principles.
b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability 
or increases a deferred tax asset.
c. reported as an adjustment to tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date of the 
enactment of the tax rate change, but not subsequent to the date of the change. 


3. Recognition of tax benefits in the loss year due to a loss carryforward requires 
a. the establishment of a deferred tax liability.
b. the establishment of a deferred tax asset.
c. the establishment of an income tax refund receivable. d. only a note to the financial statements. 


4. With regard to uncertain tax positions, the FASB requires that companies recognize a tax benefit when 
a. it is probable and can be reasonably estimated.
b. there is at least a 51% probability that the uncertain tax position will be approved by the 
taxing authorities.
c. it is more likely than not that the tax position will be sustained upon audit. d. Any of the above exist. 


5. Deferred taxes should be presented on the balance sheet
a. as one net debit or credit amount.
b. in two amounts: one for the net current amount and one for the net noncurrent amount. c. in two amounts: one for the net debit amount and one for the net credit amount.
d. as reductions of the related asset or liability accounts.

Information for questions 6. and 7. Mathhias Co. at the end of 2018, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

Pretax financial income Estimated litigation expense Taxable income

$ 600,000 1,500,000 2,100,000

The estimated litigation expense of $1,500,000 will be deductible in 2020 when it is expected to be paid. The estimated liability for litigation is classified as noncurrent. The income tax rate is 30% for all years.

6. The income tax expense is a. $180,000. 
b. $270,000. c. $300,000. d. $600,000. 


7. The deferred tax asset to be recognized is a. $0. 
b. $90,000 current.
c. $450,000 current.
d. $450,000 noncurrent. 


Information for questions 8. and 9. Paige Company deducts insurance expense of $105,000 for tax purposes in 2018, but the expense is not yet recognized for accounting purposes. In 2019, 2020, and 2021, no insurance expense will be deducted for tax purposes, but $35,000 of insurance expense will be reported for accounting purposes in each of these years. Paige Company has a tax rate of 40% and income taxes payable of $90,000 at the end of 2018. There were no deferred taxes at the beginning of 2018.

8. What is the amount of the deferred tax liability at the end of 2018? a. $42,000 
b. $36,000 c. $15,000 d. $0 


9. What is the amount of income tax expense for 2018? a. $132,000 
b. $126,000 c. $105,000 d. $90,000 


Information for questions 10. and 11. Watson Corporation prepared the following reconciliation for its first year of operations:

Pretax financial income for 2017 $1,400,000 Tax exempt interest (permanent difference) (100,000) Originating temporary difference (300,000) Taxable income $1,000,000

The temporary difference will reverse evenly over the next two years at an enacted tax rate of 21%. The enacted tax rate for 2017 is 35%.

10. What amount should be reported in its 2017 income statement as the current portion of its provision for income taxes?
a. $350,000
b. $490,000 
c. $455,000 d. $385,000 


11. What amount should be shown on the balance sheet for Watson’s deferred taxes? 
a. $63,000 deferred tax liability – current b. $63,000 deferred tax liability – long-term c. $31,500 deferred tax asset – current
d. $31,500 deferred tax liability – long term 


12. Which of the following describes defined benefit pension plans?
a. They raise few accounting issues for employers.
b. Retirement benefits depend on how much money has accumulated in an individual's 
account.
c. They are simple to construct.
d. Retirement benefits are based on the plan benefit formula. 


13. Which of the following statements typifies defined contribution plans?
a. Investment risk is borne by the corporation sponsoring the plan.
b. The plans are more complex than defined benefit plans.
c. Present value factors are used to determine the annual contributions to the plan.
d. The employer's obligation is satisfied by making the periodic contribution to the plan. 


14. A company's defined benefit pension plan had a pension benefit obligation (PBO) of $265,000 on January 1, 2018. During 2018, pension benefits paid were $40,000. The discount rate for the plan for this year was 10%. Service cost for 2018 was $80,000. Plan assets (fair value) increased during the year by $45,000. The amount of the PBO at December 31, 2018, was: 
a. $225,000.
b. $305,000.
c. $331,500.
d. None of these answer choices is correct. 


15. An underfunded pension plan means that the:
a. pension benefit obligation (PBO) is less than plan assets.
b. pension benefit obligation (PBO) exceeds plan assets.
c. accumulated benefit obligation (ABO) is less than plan assets. d. accumulated benefit obligation (ABO) exceeds plan assets. 


16. The component of pension expense that results from amending a pension plan to give recognition to previous service of currently enrolled employees is the amortization of: a. Prior service costs.
b. Amendment costs. 
c. Retiree service costs. d. Transition costs. 


17. Assume that at the beginning of the current year, a company has a net gain–AOCI of $25,000,000. At the same time, assume the PBO and the plan assets are $200,000,000 and $150,000,000, respectively. The average remaining service period for the employees expected to receive benefits is 10 years. What is the amount of amortization to pension expense for the year? 
a. $3,000,000. b. $ 500,000. c. $2,500,000. d. $1,500,000. 


18. Scallion Company received the following reports of its defined benefit pension plan for the current calendar year: The long-term expected rate of return on plan assets is 10%. Assuming no other data are relevant, what is the pension expense for the year? a. $197,000. b. $227,000. c. $172,000. d. $202,000. Macintosh HD:Users:changzhou:Downloads:WX20180424-212431@2x.png

19. In an operating lease, the lessee records a. amortization expense. b. interest expense. c. lease expense. d. amortization expense and lease expense.

20. In a finance lease, the lessee records a. amortization expense only. b. interest expense only. c. lease expense only. d. amortization expense and interest expense.

21. The Lease Liability account should be disclosed as

a. a current liability. 


b. a noncurrent liability. 


c. current portions in current liabilities and the remainder in noncurrent liabilities. 


d. deferred credits. 


22. On January 1, 2019, Greg Corporation signed a ten-year noncancelable lease for certain machinery. The terms of the lease called for Greg to make annual payments of $22,000 at the end of each year for ten years with the title passing to Greg at the end of this period. The machinery has an estimated useful life of 15 years and no salvage value. Greg uses the straight- line method of depreciation for all of its fixed assets. Greg accordingly accounted for this lease transaction as a finance lease. The lease payments were determined to have a present value of $134,202 at an effective interest rate of 8%. With respect to this capitalized lease, Greg should record for 2019 
a. lease expense of $22,000.
b. interest expense of $8,947 and depreciation expense of $7,614. c. interest expense of $10,736 and depreciation expense of $8,947. d. interest expense of $9,136 and depreciation expense of $13,420. 


23. From the lessee’s perspective, in the earlier years of a lease,
a. finance leases will enable the lessee to report higher income, compared to operating leases. b. finance leases will cause debt to increase, compared to operating leases.
c. operating leases will cause income to increase, compared to finance leases.
d. operating leases will cause debt to increase, compared to finance leases. 


24. Lease A does not contain a bargain purchase option, but the lease term is equal to 90 percent of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75 percent of the estimated economic life of the leased property. How should the lessee classify these leases? 


Lease A

a. Operating lease 


b. Operating lease 


c. Finance lease 


d. Finance lease 


Lease B Finance lease Operating lease Finance lease Operating lease

22.

II. Preparation of simple tax accrual (14 points)

Tyler Corp. reports pretax accounting income of $400,000 in 2017 when the tax rate is 35%. Due to a single temporary difference that will reverse in 2018 when the tax rate is 21%, taxable income is $300,000.

Required:

1. Prepare the compound journal entry to record Tyler Corp.’s 2017 income taxes. Show well-labeled computations and include an explanation.

2. For each account included in the journal entry, show its presentation within balance sheet at the end of 2017 or income statement for the year 2017, in good form.

III.

Lease problem - Finance lease amortization and journal entries (14 points)

Amy Co. as lessee records a finance lease of machinery on January 1, 2019. The seven annual lease payments of $925,000 are made at the beginning of each year. The present value of the lease payments at 6% is $5,473,521. Amy uses the effective-interest method of amortization and straight-line depreciation (no residual value).

Instructions (Round to the nearest dollar.)
1. Prepare an amortization table for 2019 and 2020.

2. Prepare all of Hughey’s journal entries for 2019

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