Midterm Exam Review
1.The revenue recognition principle provides that revenue is recognized when? Pages 907-8
Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded when?
An alternative available when the seller is exposed to continued risks of ownership through return of the product is what? Page 910
2. In selecting an accounting method for a newly-contracted long-term construction project, the principal factor to be considered should be what? Page 933
The percentage-of-completion method must be used when certain conditions exist. Review the necessary conditions? Page 912
In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year is what? Page 914 (and Interactive example included in lecture)

3. Melton Construction Co. began operations in 2010. Construction activity for 2010 is shown below. Melton uses the completed-contract method.
Contract Contract Price Billings
Through
12/31/10 Collections
Through
12/31/10 Costs to
12/31/10 Estimated
Costs to
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 income statement for 2010 related to Contract 1? Melton Construction Co. began operations in 2010. Construction activity for 2010 is shown below. Melton uses the completed-contract method.
Contract Contract Price Billings
Through
12/31/10 Collections
Through
12/31/10 Costs to
12/31/10 Estimated
Costs to
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?
(TCO A) During 2010, Steele Corporation sold merchandise costing $1,500,000 on an installment basis for $2,000,000. The cash receipts related to these sales were collected as follows:
2010, $800,000;
2011, $700,000;
2012, $500,000.
What is the rate of gross profit on the installment sales made by Steele Corporation during 2010?
4. Smiley Corporation purchased a machine on January 2, 2009, for $2,000,000. The machine has an estimated 5-year life with no salvage value. The straight-line method of depreciation is being used for financial statement purposes and the following MACRS amounts will be deducted for tax purposes:
2009 $400,000 2012 $230,000
2010 $640,000 2013 $230,000
2011 $384,000 2014 $116,000
Assuming an income tax rate of 30% for all years, the net deferred tax liability that should be reflected on Smiley's balance sheet at December 31, 2010, should be
Larsen Corporation reported $100,000 in revenues in its 2010 financial statements, of which $44,000 will not be included in the tax return until 2011. The enacted tax rate is 40% for 2010 and 35% for 2011. What amount should Larsen report for deferred income tax liability in its balance sheet at December 31, 2010?
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. [page 984])
Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation's tax return for the current year?
5. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in (Page 1002)

Future Future Taxable Amounts Deductible Amounts
a. Yes Yes
b. Yes No
c. No Yes
d. No No

Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the balance sheet if
A temporary difference arises when a revenue item is reported for tax purposes in a period After it is reported Before it is reported in financial income in financial income
a. Yes Yes
b. Yes No
c. No Yes
d. No No

6. Deferred taxes should be presented on the balance sheet (Page 984)
Deferred tax amounts that are related to specific assets or liabilities should be classified as current or noncurrent based on
A deferred tax liability is classified on the balance sheet as either a current or a noncurrent liability. The current amount of a deferred tax liability should generally be what?
Short Answer Essay (Review Questions)
1.Recognition of deferred tax asset. a. Describe a deferred tax asset.
b. When should a deferred tax asset be reduced by a valuation allowance?
Define temporary differences, future taxable amounts, and future deductible amounts.
There are four types of temporary differences. Indicate a minimum of two types and for each:indicate the cause of the difference, (2) give an example, and (3) indicate whether it will create a taxable or deductible amount in the future.
Essay Review Questions:
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(entries) to record pension expense for 2011.

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%
Instructions
(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.
Measuring, recording, and reporting pension expense and liability.
Tucker, Inc. 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%
Instructions
(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.

Chapter 21
1.A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?
Which of the following statements is correct?
For a sales-type lease
2. In computing the present value of the minimum lease payments, the lessee should what? Review the earlier years of a lease from the lessee's perspective.
3. 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?
Risen Company, a dealer in machinery and equipment, leased equipment to Foran, Inc., on July 1, 2008. The lease is appropriately accounted for as a sale by Risen and as a purchase by Foran. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2018. The first of 10 equal annual payments of $621,000 was made on July 1, 2008. Risen had purchased the equipment for $3,900,000 on January 1, 2008, and established a list selling price of $5,400,000 on the equipment. Assume that the present value at July 1, 2008, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4,500,000. What is the amount of profit on the sale and the amount of interest income that Risen should record for the year ended December 31, 2008?
Mayer Company leased equipment from Lennon Company on July 1, 2010, for an eight-year period expiring June 30, 2018. Equal annual payments under the lease are $300,000 and are due on July 1 of each year. The first payment was made on July 1, 2010.
The rate of interest contemplated by Mayer and Lennon is 8%. The cash selling price of the equipment is $1,861,875 and the cost of the equipment on Lennon's accounting records was $1,650,000. Assuming that the lease is appropriately recorded as a sale for accounting purposes by Lennon, what is the amount of profit on the sale and the interest income that Lennon would record for the year ended December 31, 2010?

Chapter 20

The accumulated benefit obligation measures what? 1054
A pension fund gain or loss that is caused by a plant closing should be what? Page 141 (prior knowledge - AC550)