FINANCE

7. Scallion Company received the following reports of its defined benefit pension plan for the current calendar year:

The long-term expected rate of return on plan assets is 10%. Assuming no other data are relevant, what is the pension expense for the year?
A. $197,000.
B. $227,000.
C. $172,000.
D. $202,000.

8. Colombo Enterprises has a defined benefit pension plan. At the end of the reporting year, the following data were available: beginning PBO, $75,000; service cost, $14,000; interest cost, $6,000; benefits paid for the year, $9,000; ending PBO, $89,000; and the expected return on plan assets, $10,000. There were no other pension-related costs. The journal entry to record the annual pension costs will include a debit to pension expense for:

A. $20,000.
B. $15,000.
C. $12,000.
D. $10,000.

9. A statement of comprehensive income does not include:

A. Net income.
B. Losses from the return on assets exceeding expectations.
C. Losses from changes in estimates regarding the PBO.
D. Prior service cost.

10. Gains and losses can occur with pension plans when:

A. Either the PBO or the return on plan assets turns out to be different than expected.
B. Either the ABO or the return on plan assets turns out to be different than expected.
C. Either the PBO, the ABO, or the return on plan assets turns out to be different than expected.
D. Either the PBO or the ABO turns out to be different than expected.

11. Castillo Company has a defined benefit pension plan. At the end of the reporting year, the following data were available: beginning PBO, $75,000; service cost, $18,000; interest cost, $5,000; benefits paid for the year, $9,000; ending PBO, $89,000; the expected return on plan assets, $10,000; and cash deposited with pension trustee, $17,000. There were no other pension-related costs. The journal entry to record the annual pension costs will include a credit to the PBO for:

A. $13,000.
B. $17,000.
C. $18,000.
D. $23,000.

12. At December 31, 2012, Mongo, Inc., reported in its balance sheet a net loss of $3 million related to its pension plan. The actuary for Mongo at the end of 2013 increased her estimate of future salary levels. Mongo’s entry to record the effect of this change will include:

A. A debit to loss-OCI and a credit to PBO.
B. A debit to PBO and a credit to loss-OCI.
C. A debit to pension expense and a credit to PBO.
D. A debit to pension expense and a credit to loss-OCI.

13. A result of inter-period tax allocation is that:

A. Large fluctuations in a company’s tax liability are eliminated.
B. The income tax expense is allocated among the income statement items that caused the expense.
C. The income tax expense in the income statement is the sum of the income taxes payable for the year and the changes in deferred tax asset or liability balances for the year.
D. The income tax expense shown in the income statement is equal to the deferred taxes for the year.

14. Which of the following circumstances creates a future taxable amount?

A. Service fees collected in advance from customers: taxable when received, recognized for financial reporting when earned.
B. Accrued compensation costs for future payments.
C. Straight-line depreciation for financial reporting and accelerated depreciation for tax reporting.
D. Investment expenses incurred to obtain tax-exempt income (not tax deductible).

15. Which of the following usually results in an increase in a deferred tax liability?

A. Accrual of estimated operating expenses.
B. Revenue collected in advance.
C. Prepaid operating expenses, currently deductible.
D. All of the above are correct.

16. For its first year of operations, Tringali Corporation’s reconciliation of pretax accounting income to taxable income is as follows:

Tringali’s tax rate is 40%.
What should Tringali report as its income tax expense for its first year of operations?

A. $120,000.
B. $114,000.
C. $106,000.
D. $8,000.

17 – 18. Isaac Inc. began operations in January 2013. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer’s installment payments.
In 2013, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows:

Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes.

17. Ignoring operating expenses and additional sales in 2014, what deferred tax liability would Isaac report in its year-end 2014 balance sheet?

A. $54 million
B. $144 million
C. $126 million
D. $180 million.

18. Suppose that, in 2014, legislation revised the income tax rates so that Isaac would be taxed in 2015 and beyond at 40%, rather than 30%. Assume that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses and additional sales in 2014, what deferred tax liability would Isaac report in its year-end 2014 balance sheet?

A. $168 million
B. $144 million
C. $126 million
D. $240 million.

19. Alamo Inc. had $300 million in taxable income for the current year. Alamo also had a decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities of $60 million. The company is subject to a tax rate of 40%. The total income tax expense for the year was:

A. $390 million.
B. $210 million.
C. $150 million.
D. $180 million.

20. During the current year, Stern Company had pretax accounting income of $45 million. Stern’s only temporary difference for the year was rent received for the following year in the amount of $15 million. Stern’s taxable income for the year would be:

A. $30 million.
B. $60 million.
C. $50 million.
D. $45 million.

21 – 22. Information for Kent Corp. for the year 2013:

Reconciliation of pretax accounting income and taxable income:

Cumulative future taxable amounts all from depreciation temporary differences:

The enacted tax rate was 30% for 2012 and thereafter.
21. What should be the balance in Kent’s deferred tax liability account as of December 31, 2013?

A. $5,200.
B. $7,500.
C. $25,000.
D. None of the above is correct.

22. What should Kent report as the current portion of its income tax expense in the year 2013?

A. $45,900.
B. $49,500.

C. $54,000.

D. None of the above is correct.

23. Of the following temporary differences, which one ordinarily creates a deferred tax asset?

A. Completed-contract method for long-term construction contracts for tax reporting.
B. Installment sales for tax reporting.
C. Accrued warranty expense.
D. Accelerated depreciation for tax reporting.

24. Estimated employee compensation expenses earned during the current period but expected to be paid in the next period causes:

A. An increase in a deferred tax asset.
B. A decrease in a deferred tax asset.
C. An increase in a deferred tax liability.
D. A decrease in a deferred tax liability.

25. At the end of the current year, Newsmax Inc. has $400,000 of subscriptions received in advance included in its balance sheet. A disclosure note reveals that the entire $400,000 will be earned in the next year. In the absence of other temporary differences, in the balance sheet one would also expect to find a:

A. Noncurrent deferred tax liability.
B. Noncurrent deferred tax asset.
C. Current deferred tax liability.
D. Current deferred tax asset.

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