(TCO A) The percentage-of-completion method must be used when certain conditions exist. Which of the following

ACCT 557 Intermediate Accounting III Week 4 Midterm Answers


    1.  (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 : 5)
  • TCO A) Tim Construction Co. began operations in 2014. Construction activity for 2014 is shown below. Tim uses the percentage of completion method.
  • Contract
  • Contract Price
  • Billings
  • Collections
  • Costs to
  • Estimated
    Costs to
  • 1
  • $5,200,000
  • $3,500,000
  • $2,600,000
  • 3,000,000
  • 1,000,000
  • 2
  • 3.600,000
  • 1,500,000
  • 1,000,000
  • 800,000
  • 1,600,000
  • 3
  • 3,300,000
  • 1,900,000
  • 1,800,000
  • 2,250,000
  • 1,200,000

  • What amount of Gross Profit should Tim show on the Income Statement of 2014 related to Contract 2? (Points : 5)
  1. TCO B) K  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                      60,000
                                  __________      1,095,000
    Net Income                                  $2,655,000
    K 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 $1,000,000. 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 : 5)
  2. (TCO B) Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on (Points : 5)
  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 2014 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, 2014 is (Points : 5)
  4. (TCO C) Presented below is pension information related to Woods, Inc. for the year 2013.

    Service cost                                                                                $135,000 
    Interest on projected benefit obligation                                           $46,000 
    Interest on vested benefits                                                            $30,000 
    Amortization of prior service cost due to increase in benefits            $14,000 
    Expected return on plan assets                                                     $21,000 

    The amount of pension expense to be reported for 2013 is (Points : 5)
  5. (TCO D) Lease methods of accounting are (Points : 5)
  6. (TCO D) Current GAAP requires (Points : 5)
  7. (TCO D) Pirate, Inc. leased equipment from Shoreline Enterprises under a four-year lease requiring equal annual payments of $180,000, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pirate, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by  Pirate, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pirate, Inc. in the first year of the asset’s life?
  8. (TCO D) On January 2, 2013, Bentley Co. leases equipment from Harry's Leasing Company with five equal annual payments of $120,000 each, payable beginning December 31, 2013. Bentley Co. agrees to guarantee the $20,000 residual value of the asset at the end of the lease term. Bentley’s incremental borrowing rate is 10%; however, the company knows that Harry’s implicit interest rate is 8%. What journal entry would Harry's Leasing Company make at January 2, 2013, assuming this is a direct–financing lease? 

(TCO D) Lease A 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% of the estimated economic life of the leased property. Lease B does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. How should the lessee classify these leases? (Points : 5)

Question 1.1 (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 : 10)

Question 2.2. (TCO C) Measuring, recording, and reporting pension expense and liability. 
Feeble Co. on January 1, 2011 initiated a noncontributory, defined-benefit pension plan that grants benefits to its 100 employees for services rendered in years prior to the adoption of the pension plan. The total expected service-years of the 100 employees who are expected to receive benefits under the plan is 1,200. An actuarial consulting firm has indicated that the present value of the projected benefit obligation on January 1, 2011 was $5,040,000. On December 31, 2011 the following information was provided concerning the pension plan's operations for its first year.

 Employer's contribution at end of year $1,600,000
 Service cost 600,000
 Projected benefit obligation 6,043,200
 Plan assets (at fair value) 1,600,000
 Expected return on plan assets 9%
 Settlement rate 8%


(a) Compute the pension expense recognized in 2011. Assume the prior service cost is amortized over the average remaining service life of the employees.
(b) Prepare the journal entries to reflect accounting for the company's pension plan for the year ended December 31, 2011.
(c) Indicate the amounts that are reported on the income statement and the balance sheet for 2011. (Points : 35)

Question 3.3. (TCO A)  Chicago contractors got  $5,400,000 contract to construct a school building for the City of Chicago. Work on this contract began in 2013 and the financial data pertaining to this contract is available here.

Cost incurred till Dec.31, 2013                      $1,080,000
Billings made to City                                      $1,000,000
Amount collected from City                            $  750,000

The estimated future cost to complete this contract is $3,240,000. 
(a) Prepare Chicago contractors 2013 journal entries using completed contract method.

(b) Show how the contract accounts will appear in the Balance Sheet of Chicago Contractors on 12/31/2013.
(Points : 35)

Question 4.4. (TCO B) Hertz Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, 2013, its first year of operations:

Pretax financial income                                                                            $300,000
Nontaxable interest received on municipal securities                       (15,000)
Estimated warranties not deductible for tax purpose in 2013              30,000
Depreciation in excess of financial statement amount                    (50 ,000)
Taxable income                                                                                        $265,000

Hertz’s tax rate for Year 2013 and for future years is 40%.

(a) In its Year 1 income statement, what amount should Hertz report as income tax expense-current portion?
(b) In its December 31, 2013  balance sheet, what amount  should Hertz report as deferred income tax liability/asset?
(Points : 30)