Question XXXXXXXXXXmarks)
You are elated to have landed the summer job of your dreams as an accounting intern with Hyre-N-Fyre Corporation, a national executive recruitment firm.Your supervisor and mentor, Rea Tyerz, greets you with a tough assignment on your first day of work.She handed over a sheet containing some hastily scribbled notes and a comment, “I wish to start you off with something light and easy.Here are some notes on our pension fund operations for 2017.Could you please sort this out by the end of the day?And yes, did I tell you our firm is currently with ASPE but considering a switch to IFRS in 2021.”
The note contained the following information:
a.Beginning projected benefit obligation (PBO), $568,000.The plan is underfunded by 60% of this amount and the regulatory agencies consider this to be quite heavily underfunded.
b.Past service costs were recorded on January 1, 2017(?To be determined by the Intern).The current service costs for 2017 amounted to $140,000.
c.The plan uses an interest rate of 8%.We recorded an interest expense of $52,240 for 2017.
d.Our investments of the plan assets did very poorly earning only $13,178 on our plan assets in 2017.
e.The corporate pension committee overseeing the plan operations had decided to fund an amount of $35,000 in addition to our normal annual contributions which we make as per our corporate policy.The company normally contributes 5% of the PBO carried forward from 2016 plus 50% of the current service costs and 60% of any past service costs incurred during the year.
f.Employees funded $20,000 to the plan as it is a contributory pension plan.
g.Benefit payments for the year, $74,000.
h.It was determined by the firm’s actuaries that the ending balance of the plan assets appropriately reflected their fair market values.
i.The projected benefit obligation was revalued at the end of the year and should reflect a $50,000 reduction in the PBO otherwise determined.
REQUIRED:
A little while later, while you were still sorting things out, she arrives at your solid oak wood desk and gave you some more specific instructions.
1.Give me a summary of the activities, showing them on a worksheet per ASPE.
2.And oh yes, prepare the entries that are required for us to record all of these activities.
3.I wonder whether pension expense could have been any different if we had been with IFRS?What would have been the amount?Please give me some brief details of how you came up with that number.
Question 2 – (12.5 marks)
You work for Great Consultants Inc. Right after lunch, the boss, Mr. Spaze Mann, is back.
You now are asked to go to Ummy Syrups Inc. to discuss some tax related issues with a stressed out client.
Your next client, Ummy Syrups, Inc., is an importer of sweet syrups, honey and flavoured sugars.The sign “WeRSoSweet” outside the company head office catches your eye as you walk in to meet Ms.Kandee Koanz, the manager with tax issues.She hands over an agenda sheet which she had prepared in advance listing all the events causing differences between pretax accounting and taxable income for 2020.You note the following:
1.✏Prior to 2019, there were only permanent differences, but no timing differences between accounting and taxable income.
2.✏In 2020, the company purchased bottling equipment costing $440,000 (with a useful life of four years and zero salvage) that it will depreciate on a straight-line basis for financial accounting reporting.For tax purposes, it is allowed to claim CCA of $180,000 in each of the first two years followed by $40,000 in each of the next two years (2022 and 2023).
3.✏On January 1, 2019, the company contracted to future delivery of 50,000 cases ofits Golden Maple Syrup and on that date it received sales proceeds on all 50,000 cases in advance. The contract represents $1,000,000 in profit.It delivered 7,000 cases during 2019, 29,000 cases during 2020 and is scheduled to deliver the remainder in 2021.
4.✏Ummy Syrups invests in the shares of several of its supplier companies.Dividends from these investments are tax free and the company earned $7,200 in 2019, $9,000 in 2020
5.✏Ummy Syrups makes a promise to its customers in 2020: “We will give you a full refund if you become ill after eating our syrups on your pancakes.”The company estimates it might cost them up to 1% of their sales in meeting such refund claims and hence recorded an accrued warranty expense of $10,000.The company paid out $700 in 2020 for such claims.
6.✏Beginning in the current year, the company decided to insure the life of its new President, Mr.Vaunder Avey.The company is the beneficiary and it paid premiums of $5,700 in 2020.It also paid $12,000 for senior executives’ memberships to the Super Dooper Country club.Ms.Koanz was surprised to note that these expenses were disallowed for tax purposes.
7.✏Pension expense amounted to $180,000 for the year and it contributed $125,000 towards the funding of the plan- only tax deductible for actual contributions made.
8.✏The tax rate was 35% in 2019 and prior years.Unfortunately, the rate was raised to 40% for 2020 and future years.The tax rate for any given year is known to the company only in the year the rate is applicable.
9.✏Ms.Koanz informs that the profitability of the company’s operations has been declining in recent years.She attributed this trend to the Uranus’ government policies to combat obesity.High commodity taxes were levied on sweets and desserts.It reported pre-tax income of $82,000 for 2020 based on IFRS requirements. Loss carryforwards are 100% certain of future realization.
10.✏The company reported the following taxable incomes/(losses) for the preceding four years:
2019:($31,000)
2018:$3,800
2017:$18,000
2016:$25,000
The company has always had the practice of first carrying back any given year’s taxable loss against the earliest allowable taxable incomes and then carrying forward the remaining taxable to future expected taxable incomes and this was done wrt the 2019 loss also.
You complimented Ms. Koanz for her efficiency and well organized approach to this meeting.You welcomed a mug of hot chocolate lathered with Ummy’s ultra special chocolate syrup before setting your thoughts to resolving Ms.Koanz’ questions.You are aware that time is running out on you and suspect that your boss, Mr. Spaze Mann maybe calling in another assignment.
Required:
1.Compute the taxable income/(loss) for 2020.
2.Prepare the required journal entries to record any income tax effects for 2020 including for current
taxes or loss carryforward/loss carryback, timing differences and tax rate change impacts.Assume that the company expected to
generate sufficient taxable income in the carryforward periods to realize the benefits of the loss carried forward.
3.Prepare an income statement, in part, showing your computed figures for the income tax sectionbeginning with Income before income tax.
Question 3(4 marks)
LooneyTunes Amusements Inc. has six business lines with the following information:
BusinessTotal RevenueProfit/(Loss)Operating Assets
Line
1$ 90,000$ 18,000$150,000
225,000(7,000)20,000
320,000(4,000)15,000
4140,00030,000266,000
510,0004,00015,000
64,000(3,000)12,000
$289,000$ 38,000$478,000
Required:
If LooneyTunes Inc. follows IFRS, determine which business lines, if any, qualify as a reportable operating segment for purposes of financial
reporting.Show your computational support.