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Finance
Q:
Mandatorily redeemable preferred stock is considered equity because the issuing firm has the option, but not the obligation, to redeem the shares.
Q:
Issuing preferred stock is advantageous to financially weak companies because of the flexibility associated with the timing of the dividend payments.
Q:
Corporations that issue preferred stock do so because preferred stock is less risky than debt.
Q:
Preferred stock is viewed by many to be similar to a debt issue due to the fact that preferred stock dividends are a deductible corporate expense.
Q:
A reason prompting a firm to purchase treasury stock is that management believes the stock is undervalued in the marketplace and therefore represents a good investment opportunity.
Q:
If a company purchases treasury stock its earnings per share will increase.
Q:
A $1,500 loss will be reported in the income statement when a company sells treasury stock for $8,500 if the treasury stock was initially purchased for $10,000.
Q:
A $3,000 increase in total owners' equity occurs if treasury stock costing $11,500 is sold for $14,500.
Q:
Treasury stock is considered to be a deduction from shareholders' equity.
Q:
A stock's par value does not necessarily have any relationship with a stock's market value.
Q:
The par value of common stock is set by the state government.
Q:
Dividends paid by a corporation represent a distribution of earnings to shareholders and are reported as an expense in the income statement.
Q:
The proprietary view of a firm stresses the importance of owners' equity and differentiates between capital provided by owners and creditors.
Q:
There is a reduction in pension expense created by expected earnings of a defined benefit pension plan.
Q:
The interest cost component of a defined benefit pension plan is the portion of expense due to the passage of time.
Q:
Recognized prior service cost amortization causes reported pension expense to increase for defined benefit plans.
Q:
Expected return on pension plan assets causes reported pension expense to increase for defined benefit plans.
Q:
Service cost and interest cost cause reported pension expense to increase for defined benefit plans.
Q:
Most of the factors used to determine specific expense accruals for defined benefit pension plans are based upon actuarial assumptions and present values.
Q:
The parties involved in a defined benefit plan are the same as those in a defined contribution plan.
Q:
The return on the pension fund impacts the employer's periodic pension expense for defined contribution pension plans.
Q:
The anticipated life span of the employees after retirement must be taken into consideration in determination of pension expense for a defined contribution pension plan.
Q:
The payments made by the employer to fund a defined contribution pension plan create a pension fund asset on the balance sheet of the employer.
Q:
In a defined contribution plan the employer bears the risk that the ultimate pension payments will be large enough to sustain a comfortable retirement.
Q:
Defined contribution plans specify the amount of cash that the employer puts into the plan for the benefit of the employee.
Q:
Describe three differences between the accounting for pensions relative to the accounting for postretirement benefits.
Q:
The Boulder Rock Company has provided the following information pertaining to its defined benefit plan:
The projected benefit obligation was $2,100,000 on January 1, 2012.
Recognition of prior service cost during 2012 was $150,000.
Service cost for 2012 was $300,000.
Plan assets on January 1, 2012 totaled $1,500,000.
The expected return on plan assets was 10%.
The actual return on plan assets was 8%.
The settlement/discount rate was 8%.
The December 31, 2012 contribution to the plan asset fund was $450,000.
Benefits paid to retirees during 2012 totaled $225,000.
Required:
1. Determine Boulder's pension expense for 2012.
2. Determine the projected benefit obligation (PBO) as of December 31, 2012.
3. Prepare the journal entry to record pension expense and the funding for the year ended December 31, 2012.
4. Determine the balance of the pension plan assets.
5. What should be reported on the December 31, 2012 balance sheet with respect to the funded status of the defined benefit pension plan?
Q:
Krabby, Inc. had the following reconciliation at December 31, 2011:
The following assumptions are being used for the pension plan in 2012:
You have the following additional information for 2012:
Required:
1. Compute pension expense for 2012.
2. Compute plan assets at December 31, 2012.
3. Compute the projected benefit obligation at December 31, 2012.
4. Compute the Unrecognized Actuarial (Gain) Loss that will appear in Krabby's reconciliation of funded status to prepaid (accrued) pension cost at December 31, 2012.
5. Compute the amount of the prepaid (accrued) pension cost that will appear on Krabby's December 31, 2012 balance sheet.
Q:
Buffalo Company adopted a defined benefit pension plan as of January 1, 2012. Buffalo has provided the following information pertaining to its pension plan:
The projected benefit obligation as of January 1, 2012 was determined to be $1,050,000.
Service cost for 2012 is $225,000
Amortization of prior service cost will be $52,500 per year.
The projected benefit obligation as of December 31, 2012 was determined to be $1,380,000.
The first contribution of $500,000 to the pension plan asset fund was made on December 31, 2012.
The settlement/discount rate is 10%.
Prepare the necessary journal entries for the year ended December 31, 2012.
Q:
The Hab Company provided the following information pertaining to its defined benefit pension plan for 2012:
The projected benefit obligation as of January 1, 2012 was $6,250,000.
The settlement/discount rate was 8%.
The service cost was $300,000.
The amortization of prior service cost was $100,000.
The expected return on plan assets was 10%.
The actual return on plan assets was $800,000.
The fair value of plan assets on January 1, 2012 was $5,000,000.
Pension payments to retirees during the year totaled $250,000.
Contributions to the pension plan totaled $200,000.
Amortization of unrecognized net actuarial losses totaled $125,000.
Required:
1. Determine the pension expense for 2012.
2. Determine the projected benefit obligation as of December 31, 2012.
3. Determine the fair value of plan assets as of December 31, 2012.
4. Determine the pension liability to be reported on the December 31, 2012 balance sheet.
Q:
The following information pertains to Grumpy Company's defined benefit pension plan:
What amount should Grumpy record as a prepaid pension asset on its December 31, 2011 balance sheet?
Q:
The Shelast Corporation adopted a defined benefit pension plan on January 1, 2011 and has provided the following information:
The projected benefit obligation on January 1, 2011 was $2,160,500.
The 2011 service cost totaled $250,000; the 2012 service cost totaled $275,000.
Annual amortization of prior service costs is $216,050.
The settlement/discount rate is 10%.
The pension plan funding during 2011 was $200,000; the pension plan funding during 2012 was $225,000.
The actual return on plan assets was $19,000 during 2012.
What is the projected benefit obligation balance as of December 31, 2012?
Q:
Swan Company has provided you with the following data pertaining to their pension plan for the year ended December 31, 2011:
The 2011 service cost was $175,500.
The projected benefit obligation as of January 1, 2011 was $1,950,000.
Plan assets as of January 1, 2011 totaled $2,020,000.
The actual return on plan assets during 2011 was 10%.
Amortization of prior service costs during 2011 was $9,750.
The expected return on plan assets was 8%.
The pension plan funding during 2011 totaled $170,000.
The settlement/discount rate was 8%.
Prepare the journal entry to record pension expense for the year ended December 31, 2011.
Q:
The service cost was $950,000 during 2011 and $1,045,000 during 2012.
The prior service cost amortization each year was $290,000.
The contribution to the pension plan was $1,500,000 on December 31, 2011 and $1,800,000 on December 31, 2012.
The actuarially determined discount rate and the expected return on plan assets was 10%.
The actual return on plan assets was 9.5%.
Retirement benefits pertaining to years of service prior to 2011 were granted to the employees. The prior service cost is being amortized over the remaining ten-year life of the employees.
Differences between IFRS and U.S. GAAP in accounting for pensions include:
A. Under U. S. GAAP the balance sheet asset (liability) on the balance sheet differs from the plan's actual funded status, while under IFRS the balance sheet asset (liability) on the balance sheet equals the plan's actual funded status.
B. Under IFRS unamortized past service costs are off-balance-sheet.
C. Under U. S. GAAP there are two methods for recognizing actuarial gains and losses.
D. U. S. GAAP requires that new prior service cost would be recognized immediately as part of service cost, while IFRS accounts for these costs off-balance-sheet.
Q:
The service cost was $750,000 during 2011 and $1,125,000 during 2012.
The contribution to the pension plan was $600,000 on December 31, 2011 and $1,200,000 on December 31, 2012.
The actuarially determined discount rate and the expected return on plan assets was 10%.
The actual return on plan assets was 10.5%.
Retirement benefits pertaining to years of service prior to 2011 were not granted to the employees.
At the end of the year, the pension plan is
A. underfunded by $20,000.
B. overfunded by $20,000.
C. underfunded by $24,000.
D. overfunded by $24,000.
Q:
The Shasti Corporation reported the following for the year ending December 31, 2011:
Service cost: $142,610
Plan assets, January 1, 2011: $1,200,000
Prior service cost amortization: $21,150
Expected return on plan assets: 9%
Actual return on plan assets: 8.5%
Pension expense: $175,760
Actuarially determined discount rate: 8%
What was the projected benefit obligation on January 1, 2011?
A. $1,500,000
B. $1,425,000
C. $1,200,000
D. $1,333,333
Q:
The total pension expense for the year is
A. $124,761.
B. $131,451.
C. $136,431.
D. $142,511.
Q:
The interest cost for the year is
A. $42,560.
B. $31,920.
C. $36,480.
D. $41,040.
Q:
The return on plan assets component of pension expense for a defined benefit pension plan is
A. the reduction in pension expense created by expected earnings of the plan.
B. the reduction in pension expense created by actual earnings of the plan.
C. the change in the plan asset value resulting from the actual return on plan assets.
D. not a factor in the determination of pension expense.
Q:
The interest cost component of a defined benefit pension plan is computed as the
A. ending accrued pension liability times the discount rate.
B. beginning accrued pension liability times the discount rate.
C. beginning projected benefit obligation times the discount rate.
D. beginning accumulated pension liability times the discount rate.
Q:
The service cost component of a defined benefit pension plan is computed as the
A. present value of the change in the accrued pension liability.
B. actual value of the change in the accrued pension liability.
C. present value of the change in pension liability from additional employee service.
D. undiscounted change in pension liability from additional employee service.
Q:
The service cost of a defined benefit pension plan is the
A. annual fee charged by the plan administrator.
B. change in the pension liability caused by plan amendments.
C. change in the pension liability caused by one additional year of employee service.
D. the retirement benefit earned by the employees for services provided to date.
Q:
The components of pension expense are
A. service cost, plus interest cost, plus net amortization.
B. service cost, plus interest cost, plus return on plan assets, plus net amortization.
C. service cost, plus interest cost, minus return on plan assets, plus (or minus) net amortization.
D. service cost, plus interest cost, minus return on plan assets, minus net amortization.
Q:
Which of the following is not a factor in the determination of pension expense when the employer sponsors a defined benefit pension plan?
A. The amount of retirement benefits that will vest.
B. The rate of return on the pension fund investment.
C. The rate that salaries will increase until retirement.
D. The amount of funding during a particular period.
Q:
Which of the following statements does not properly describe a defined benefit pension plan?
A. Many assumptions are made in the determination of pension expense.
B. The employee bears little risk with respect to estimating the amount of the annual contributions to the plan.
C. The employer bears little risk with respect to estimating the amount of the annual contributions to the plan.
D. A pension plan asset is not recorded on the employer's balance sheet.
Q:
A company contributes to its defined contribution plan. Which one of the following journal entries properly records this transaction?
A. Option a
B. Option b
C. Option c
D. Option d
Q:
A company instituted an IRS approved plan to contribute monies to a plan that would pay each employee a percentage of his or her highest year of salary for each year of service upon termination of services. This plan is a
A. defined benefit pension plan.
B. defined contribution pension plan.
C. government sponsored pension plan.
D. postretirement benefit plan.
Q:
A company instituted an IRS approved plan to fund a percentage of each employee's salary to a plan that would pay benefits to the employee after termination of services. This plan is a
A. defined benefit pension plan.
B. defined contribution pension plan.
C. government sponsored pension plan.
D. postretirement benefit plan.
Q:
The IASB's Exposure Draft for Defined Benefit plans would require companies to recognize past service costs as part of service cost in the year of plan amendments.
Q:
IFRS permits two methods for handling actuarial gains and losses, one of which requires actuarial gains and losses to be recognized on the balance sheet and in OCI but which does not require that the actuarial gains and losses be subsequently amortized.
Q:
Under IFRS, sensitivity analysis for assumption changes is a required disclosure only for OPEB plans.
Q:
Under IFRS, past service cost related to vested employees is recognized immediately as part of pension expense.
Q:
When accounting for funded postretirement benefit plans, actual return on plan assets is deducted from the postretirement benefit expense.
Q:
Companies are required to disclose the dollar amount of pension retirement benefits they expect to pay in each of the next ten years.
Q:
Companies are required to disclose their estimate of pension funding for the upcoming year.
Q:
The accumulated benefit obligation approximates the employer's pension liability if the pension plan were terminated and must be shown as a liability on the year-end balance sheet.
Q:
The minimum pension liability that must be shown on the balance sheet of the plan sponsor is the excess of the projected benefit obligation over the plan assets at fair value.
Q:
Higher marginal income tax rates create an incentive for companies to underfund their pension plans.
Q:
A pension liability arises when pension expense exceeds pension funding.
Q:
The economic status of the pension plan at a given date is the difference between the fair value of the plan assets and the projected benefit obligation.
Q:
U.S. tax laws encourage companies to overfund their pension plans.
Q:
U. S. tax laws limit the deductibility of contributions to pension plans for firms whose plans are underfunded.
Q:
ERISA introduced minimum funding requirements and limited pension investments in employer stock to 10% of plan assets.
Q:
The prepaid/accrued pension cost reported within the balance sheet must reflect the funded status of the pension plan.
Q:
A pension plan is underfunded if the projected benefit obligation exceeds the fair value of the pension plan assets.
Q:
A prepaid pension asset will be created during a particular time period when a company reports pension expense of $219,200 and pension funding of $235,000.
Q:
Prior service cost is amortized into pension expense on a straight-line basis over the remaining service lives of the employees who will be receiving benefits from the plan.
Q:
Prior service cost is the increase in the projected benefit obligation created by pension plan amendments.
Q:
The amount of the cumulative gain or loss in excess of the corridor threshold is amortized to the pension expense over the average remaining service period of the employees.
Q:
To compute the amortization of the cumulative unrecognized gains and losses in a pension plan, the corridor is computed as 10% of the higher of market-related value of pension plan assets or the projected benefit obligation.
Q:
The difference between actuarial assumptions and actual experience for a given year will not impact that year's pension expense.
Q:
The volatility associated with pension plan accounting has been smoothed out with respect to the determination of pension expense, other comprehensive income, and balance sheet accounts.
Q:
The difference between the actual and expected return on plan assets during year two is a component of comprehensive income for year two.
Q:
Companies can influence the calculation of pension expense by choosing a higher or lower discount rate and/or by choosing a higher or lower expected rate of return on plan assets.
Q:
Changes in the discount rate for pension plans cause material differences in interest expense and the plan assets.
Q:
The same interest rate is used to compute service cost, interest cost, and return on plan assets.
Q:
The interest cost component of pension expense in year two is determined by multiplying the projected benefit obligation at the beginning of year two by the discount rate.
Q:
The projected benefit obligation is the present value of the retirement benefits earned to date by the employees and is based on future salary levels.
Q:
Service cost is the increase in the discounted present value of the pension benefits ultimately payable that is attributable to an additional year's employment.
Q:
The enacted tax rates are 30% for 2011 and 2012; and 40% for subsequent years.
K. Shuman purchased a landscape maintenance firm on 1/2/2011 and renamed the firm Shuman Enterprises. Information regarding the firm for the first two years of operation is shown below:
a. Pretax GAAP income was $100,000 in 2011 and $150,000 in 2012.
b. Heavy equipment acquired in the purchase was valued at $120,000. The equipment had a life of 4 years and no salvage value. Depreciation for tax purposes was $48,000 in 2011 and $36,000 in 2012. Depreciation for GAAP purposes was $30,000 in each year.
c. In 2012, Pretax GAAP income included $12,500 of interest on State of Indiana Bonds. This interest is not taxable for U.S. federal purposes.
d. During 2011, $40,000 was collected in advance for landscape maintenance to be performed in 2012. This amount was included in 2011 taxable income but was not included in GAAP income until 2012. In 2012, $25,000 was collected in advanced for work to be performed in 2013. This amount was recognized as income for tax purposes in 2012 but will not be recognized as income for GAAP purposes until 2013.
e. The enacted tax rate for 2011 was 30%. The newly enacted tax rate for 2012 and subsequent years is 38%.
f. At December 31, 2011, the Deferred Tax Asset account had a $12,000 debit balance, and the Deferred Tax Liability account had a $5,400 credit balance.
Required:
1. Compute Shuman's GAAP income tax expense for the year ended December 31, 2012.