Exam 3 Take-home Exam (Ch. 11A, 19, 20, XXXXXXXXXXSpring 2020
Name:
Problem 1 (10 points):
Listed below are ten separate situations. For each item indicate whether the difference is (1) temporary creating a defe
ed tax asset (DTA) or a defe
ed tax liability (DTL) or (2) permanent by marking an X in the appropriate column.
ITEM
Temporary - DTA
Temporary - DTL
PERMANENT
Pension fund contributions are less than pension expense for the cu
ent year, resulting in a pension liability on the company’s balance sheet.
Dividend revenue recognized for accounting while a portion is deductible for taxes (dividends received deduction)
Estimated wa
anty costs: accrual basis for accounting and cash basis for income tax
Fines expensed for accounting but not deductible for tax purposes
Straight-line depreciation for accounting and accelerated depreciation for income tax
Unrealized gain on investments - Income recognized for accounting, but gain recognized only on disposal of the asset for income tax
Rent revenue collected in advance: accrual basis for accounting, cash basis for income tax
Unrealized loss on investments - Income recognized for accounting, but loss recognized only on disposal of the asset for income tax
Probable and estimable litigation contingency: accrual basis for accounting and cash basis for income tax
Interest received on investments in municipal bonds is not taxable
Problem 2 (12 points):
A. On December 31, 2020, for GAAP purposes, Clubs Inc. reported a balance of $40,000 in a wa
anty liability for anticipated costs to satisfy future wa
anty claims. No claims were paid in XXXXXXXXXXPretax GAAP income is $300,000 and the tax rate is 25%. Assume no other differences between the tax bases and GAAP bases of assets and liabilities, or any beginning balances in defe
ed tax accounts.
Required:
a. Record the income tax journal entry on December 31, 2020.
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. Assume that there was a December 31, 2019, balance of $4,000 in the DTA account. Record the income tax journal entry on December 31, 2020.
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B. In 2020, Cardinals Company operated at a tax loss, totaling $88,000 during its first year of business. Assuming a tax rate of 25%, and that income is expected in 2021, record the entry to reflect the tax benefit of the net operating loss on December 31, XXXXXXXXXXCardinals Company determined that it was more likely than not that 75% of the defe
ed tax asset would not be realized.
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Problem 3 (12 points):
Aim Inc. had the following activity for the years XXXXXXXXXX.
· Prepaid maintenance contract: $30,000 on January 1, 2020, for a three-year period beginning January 1, 2020
· Defe
ed rental revenue: $45,000 on January 1, 2020, for a three-year period beginning January 1, 2020
· Pretax GAAP income is $500,000, $388,000, and $425,000 for the years 2020, 2021, and 2022, respectively.
· Enacted tax rates are 25% for years 2020 and 30% for the year 2021 and 2022.
· There were no balances in the defe
ed tax accounts on January 1, 2020
A. Compute taxable income for 2020.
B. Prepare the 2020 Journal Entry to record defe
ed taxes.
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C. Prepare the Journal Entry to record defe
ed taxes for 2021.
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Problem 4 (25 points):
a. Complete the pension worksheet using the information provided below:
Lexxus Company
Pension Worksheet—2020
Items
General Journal Entries
Memo Record
Annual Pension Expense
Cash
OCI - Prior
Service
Cost
OCI-
Gains
Losses
Pension Asset
Liability
Projected Benefit Obligation
Plan
Assets
Balance, Jan. 1, 2020
(a) Service cost
(b) Interest cost
(c) Actual return
(d) Unexpected gain/loss
(e) Amortization of PSC
(f) Contributions
(g) Benefits
________
________
Journal entry for 2020
2020 records of Lexxus Company provided the following data related to its noncontributory defined benefit pension plan.
ACCOUNT BALANCES (‘000s) Jan. 1, 2020 Activity (‘000s) 2020
Projected Benefit Obligation $300 cr Service cost $ 50
Plan Assets 170 dr Contributions 110
Accumulated OCI – PSC 40 dr Actual return on plan assets 8
Accumulated OCI - G/L 25 dr Amortization of PSC XXXXXXXXXXRemaining Service Life 10 years Pension benefits paid to retirees 124
OTHER
Expected rate of return on plan assets 6%
Discount/Settlement rate 8%
. Perform the co
idor test of OCI-Gains/Losses. Show your work here:
c. Provide the end of year journal entry based on worksheet amounts.
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d. Explain the difference between a defined contribution pension plan and a defined benefit pension plan. Explain how the employer’s obligation differs between the two types of plans.
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Problem 5 (12 points):
Jefferson Inc. is in the process of negotiating a lease of equipment with a fair value of $200,000 and must determine the proper lease classification. The following table describes four scenarios under negotiation.
1
2
3
4
Ownership Transfe
No
No
No
No
Lease term (years)
8
10
8
8
Asset’s useful life (years)
12
12
12
12
Asset’s fair value
$200,000
$200,000
$200,000
$200,000
Purchase option that is reasonably certain to be exercised?
No
No
$40,000
No
Alternative use of equipment at lease end
Yes
Yes
Yes
Yes
Payment Type
BOY
BOY
BOY
EOY
Annual lease payment
$25,000
$25,000
$25,000
$25,000
Lessor’s implicit rate (known by lessee)
Unknown
Unknown
5.4544%
Unknown
Lessee’s incremental bo
owing rate
6%
6%
6%
6%
Guaranteed residual value
No
No
$50,000
No
Solution:
1
2
3
4
Transfer of Ownership
Purchase option to be exercised?
Lease term > economic life
PV of lease payments > fair value
Specialized asset
Financing Lease (F) or Operating (O)
Determine the proper classification for each of the four scenarios using the solution grid above assuming that Jefferson Inc. is the lessee.
Problem 6 (19 points):
The following data are available regarding a noncancelable lease.
· Lease term is 5 years, beginning January 1, 2020
· The leased property cost the lessor $400,000, its fair value, on January 1, 2020
· Estimated useful life of the asset is 6 years; residual value at the end of the 5-year useful life is $20,000, unguaranteed.
· No purchase option is available to the lessee. Ownership is retained by lessor at the end of the lease term.
· Five annual lease payments are payable on January 1 of each year (starting January 1, 2020) to yield the lessor a 6% return (implicit interest rate). Lessee does not know and cannot reliably estimate the lessor’s yield rate. Lessee’s incremental bo
owing rate is 7%.
· Lessee’s credit rating is excellent. The accounting year-end for the lessee is December 31.
Required:
a. Compute the annual lease payment.
. What type of lease is this to the lessee?
c. Prepare all journal entries associated with this lease for the lessee for the year ended December 31, 2020.
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d. What balances (account titles, amounts) appear on the lessee’s balance sheet on December 31, 2020 related to the lease?
Assets: Liabilities:
Cu
ent: Cu
ent:
_______________________$_________ _______________________$____________
Noncu
ent: Noncu
ent:
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e. What balances (account titles, amounts) appear on the lessee’s income statement for 2020, related to the lease?
Income Statement:
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f. How would the lessee’s balance sheet and income statement change for 2020 if this were classified as an operating lease?
Assets: Liabilities:
Cu
ent: Cu
ent:
_______________________$_________ _______________________$____________
Noncu
ent: Noncu
ent:
_______________________$_________ _______________________$____________
Income Statement:
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Problem 7 (10 pts)
Rex Corporation (lessor) and Lee Company (lessee) agreed to a lease with the following information:
· Rex’s ca
ying value of the underlying asset (inventory item) was $400,000
· Lease term is four years, beginning January 1, XXXXXXXXXXLease payments are made each January 1, beginning January 1, 2020.
· Estimated useful life of the underlying asset is four years. Estimated residual value at the end of the lease is zero.
· Sales price of the underlying asset on January 1, 2020, was $460,000.
· Rex’s implicit interest rate is 8% on retail price (known to Lee)
· Rex paid commission and legal fees in securing the lease of $5,000 on January 1, 2020.
· Rex expects to collect all payments from Lee.
Required:
a. Compute the lease payment for the lessor and the lease receivable to be capitalized by the lessor.
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. Provide the entries for the lessor during 2020.
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