Name: ________________________________Exam 2 Acct 414 – Corporate Accounting & Reporting II Spring 2006SOLUTION 4.Solution 5 – note that the first schedule is “sideways” as compared to the one we did in class.Name: ________________________________Exam 2Acct 414 – Corporate Accounting & Reporting II Spring 2006Show any necessary computations if you want to be eligible for partial credit. Present your workin a neat, well-organized manner. If you are using a PV calculator, spell out what you put in for n, i, PMT, FV, PV, etc. Draw a time-line if that would explain your thinking to me.Follow the instructions and answer all parts of the question as directed.1-2. Time Value of Money (10 points each, max = 20)3-4. Deferred Income Taxes (50 points)5. Years of Service Method (15 points)6. Minimum Pension Liability (15 points)7. Pension Worksheet (50 points)Total points earned (max = 150)If you tear off the Pension Work Paper, be sure your name is on the top AND that you staple the exam back together in page number order.Exam 2 – Acct 414 – Spring 2006 Page 2Time Value of Money – problems 1 through 2 (10 points each = 20 points total)1. Boise’s Best Inc. is establishing a pension plan for its sole employee. She will receive credit for 10 years ofprior service and is expected to work 20 years until retirement. After retirement, she should collect pensionpayments for another 20 years. Her current salary is $80,000 with estimated future pay increases to average 5% per year. What will be the initial amount of projected benefit obligation (i.e., prior service cost) at the inception of the plan if the benefit formula is final year’s annual salary times years of service times 1.5%? You may assume ordinary annuities and end-of-year annual payments upon retirement and a 10% per annum discount rate.2. Using the facts provided above for Boise’s Best pension plan, what is the service cost that will be incurred in the first year after the plan is adopted?Exam 2 – Acct 414 – Spring 2006 Page 33. Income Tax Expense & Deferred Income Taxes (40 points)The records for Flint Co. show this data for 2005:- Gross profit on installment sales recognized at point of sale per GAAP was $300,000. Gross profit from collections of installment receivables was $220,000 for tax purposes. - Life insurance on officers was $3,800.- Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year life (no salvage value) is used. For tax purposes, MACRS depreciation is used and Flint may deduct 14% for 2004.- Interest received on tax exempt Iowa State bonds was $9,000.- The estimated warranty expense related to 2005 sales was $19,600. Repair costs under warranties during 2005 were $13,600. The remainder will be incurred in 2006.- Pretax financial income is $450,000. The tax rate is 30%. You may assume that there is no balance forward in net deferred taxes.Instructions(a) Prepare a schedule starting with pretax financial income to compute taxable income.(b) Prepare the journal entry to record income taxes for 2004.(c) Indicate account titles and section of balance sheet where deferred taxes will be reported (with amounts).Exam 2 – Acct 414 – Spring 2006 Page 4This page left blank intentionally for extra room for answer to problem 3Exam 2 – Acct 414 – Spring 2006 Page 54. Recognition of deferred tax asset. (10 points)(a) Briefly describe a deferred tax asset. (If you can’t think of a definition, at least provide an example)(b) When should a deferred tax asset be reduced by a valuation allowance?Exam 2 – Acct 414 – Spring 2006 Page 64. Amortization of prior service cost using years-of-service method. (15 points)On January 1, 2003, Lawson Incorporated amended its pension plan which caused an increase of $4,800,000 in its projected benefit obligation. The company has 400 employees who are expectedto receive benefits under the company's defined benefit pension plan. The personnel department provided the following information regarding expected employee retirements:Number of Expected RetirementsEmployees On December 31 _40 2003120 200460 2005160 2006 20 2007400The company plans to use the years-of-service method in calculating the amortization of unrecognized prior service cost as a component of pension expense.InstructionsPrepare a schedule which shows the amount of annual prior service cost amortization that the company will recognize as a component of pension expense for 2003 and 2004 (to save time, youdo not need to produce the complete amortization schedule).Exam 2 – Acct 414 – Spring 2006 Page 75. Pension (Minimum Liability) (5 points per year for 15 points total)Information about the Tami’s Tambourines Inc. pension plan is provided in the table below. Prepare any necessary journal entries for 2005, 2006 and 2007 to record a minimum liability related to pensions. You may assume that the company was not required to record a minimum liability adjustment at the end of 2005. (Accrued)/PrepaidPension CostProjectedBenefitObligationPlanAssetsPriorServiceCostsUnrecognized(gains)/lossesAccumulatedBenefitOblation12/31/2006 17,000 (968,000) 885,000 185,000 (85,000) 920,000 12/31/2007 (18,000) (1,025,000) 975,000 155,000 (123,000) 998,000 12/30/2008 45,000 (1,184,000) 1,025,000 125,000 79,000 1,111,500Exam 2 – Acct 414 – Spring 2006 Page 86. Pension Work Paper (50 points)The Panlatch Corporation initiated a noncontributory defined benefit pension plan on January 1, 1980 and applied the provisions of FASB Statement 87 as of January 1, 1987. Tree uses the straight-line method, based on average remaining service period of employees, to amortize prior service costs.2005BALANCES AS OF JANUARY 1, 2005Projected Benefit Obligation $1,300,000Plan Assets at market $895,000Prepaid/(accrued) pension cost $190,000Additional Liability (there will also be a related intangible asset and/or deferred pension costaccount in accumulated other comprehensive income) 0Unrecognized transition cost (gain) 0Unrecognized Prior Service Cost $220,000 Amortization amount $31,000 per yearUnrecognized (gains)/losses $375,000OTHER INFORMATION: Service cost for year $155,000 Discount rate for year 6.00% Expected rate of return on plan assets 7.00% Actual return on plan assets: gain/(loss) $53,000 Pension plan contribution $200,000 Retirement benefits paid during year $59,000 Accumulated Benefit Obligation, Dec. 31, 2002 $1,085,000 Average remaining