Name: ____________________________________Exam 2 Acct 414 – Corporate Accounting & Reporting II Spring 2007Exam #_______Start time: _________Stop time: _________Name: ____________________________________Exam 2Acct 414 – Corporate Accounting & Reporting II Spring 2007Show 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. Follow the instructions and answer all parts of the question as directed.1-2. Short Pension Problems (30 points total)3. Pension Work Paper {FASB No. 158} (50 points) 4. Deferred Income Taxes (60 points)5. Earnings per share (60 points)6. Extra credit – deferred taxes matching (10 points max)Other extra credit from Total points earned (max = 200)If you tear off the working papers, be sure your name is on the top AND that you staple the exam back together in page number order.Do not attempt extra credit section until all other sections of the exam have been completed.After Exam 2 - Course GradeTotal Points = __________/__________ = _________%Quiz and HW percentage = ___________%Projects percentage = ___________%Exam 2 – Acct 414 – Spring 2007 Page 2 1. Time Value of Money (15 points)Vancouver’s Best Inc. is establishing a pension plan for its sole employee. He will receive creditfor 10 years of prior service and is expected to work 25 years until retirement. After retirement, he should collect pension payments for another 20 years. His current salary is $60,000 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 2%? You may assume ordinary annuities and end-of-year annual payments upon retirement and a 10% per annum discount rate.Exam 2 – Acct 414 – Spring 2007 Page 32. Amortization of prior service cost using years-of-service method. (15 points)On January 1, 2007, Portland’s Porcelain Inc. amended its pension plan which caused an increase of $8,440,000 in its projected benefit obligation. The company has 500 employees who are expected to receive benefits under the company's defined benefit pension plan. The personnel department provided the following information regarding expected employee retirements:Number of Expected Retirements Remaining YearsEmployees On December 31 _ of Employment40 2008 2 years120 2010 4 years60 2012 6 years160 2015 9 years60 2020 14 years 60 2023 17 years500Instructions(a) What is the average remaining service life?(b) Using years of service method, what would amortization of prior service costs be for 2007?(c) Using the straight-line method, what would amortization of prior services costs be for 2007?Exam 2 – Acct 414 – Spring 2007 Page 43. Pension Accounting (50 points). The Portland Pens Corporation initiated a noncontributorydefined benefit pension plan on January 1, 1980 and applied the provisions of FASB Statement 87 as of January 1, 1987. FASB Statement No. 158 was implemented as of January 1, 2006. Mountain Bikes uses the straight-line method, based on average remaining service period of employees, to amortize prior service costs.2006BALANCES AS OF JANUARY 1, 2002Projected Benefit Obligation200,000 Plan Assets at market90,000 Funded status(110,000)Unrecognized transition cost/(gain)0 Straight-line amortization at $0 per year Unrecognized Prior Service Cost100,000 Straight-line amortization at $20,000 per year Unrecognized (gains)/losses90,000 OTHER INFORMATION: Service cost for year24,000 Discount rate for year7.00% Expected rate of return on plan assets10.00% Actual return on plan assets: gain/(loss) 8,000 Pension plan contribution30,000 Retirement benefits paid during year39,000 Accumulated Benefit Obligation, Dec. 31, 2005179,000 Average remaining service years related to active employees14 Increase/(decrease) in PBO during year due to revised actuarial assumptions29,000REQUIRED:a. Compute net periodic pension expense for 2006. (Be sure to show all of the components of pension expense.) Prepare the journal entry needed to record pension expense and funding of pension plan. b. Compute the balances in accumulated other comprehensive income, projected benefit obligation, and plan assets at 1/1/07c. Explain (or show) how the net pension obligation or net pension asset will be displayed on the balance sheet at 12/31/06. Will there be other pension related accounts on the balance sheet? If so, explain where and how they are presented.Note: Completing the worksheet provided will be an acceptable answer for a and b.Exam 2 – Acct 414 – Spring 2007 Page 54. Income Taxes and Deferred Income Taxes. (60 points)The following information is available for the first three years of operations for Harkins Company. The tax rate in 2007 was 30%. In early 2008, a new tax act was passed that increased the tax rate to 35% for 2009 and future years.1. Year Pre-tax Accounting Income2007 $600,0002008 530,0002009 650,0002. On January 2, 2007, heavy equipment costing $800,000 was purchased. The equipment had a life of 5 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below:2007 2008 2009 2010 2011 TotalFor tax $180,000 $320,000 $230,000 $70,000 0 $800,000For accounting 160,000 160,000 160,000 160,000 160,000 800,0003. Harkins collected first and last year’s rent from a tenant. In pre-tax accounting income is the $50,000 related to the first year. The final $50,000 rent payment will be recognized during the last year of the lease, 2011.4. Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2011.5. Life insurance premiums on officers was $10,000 for 2007 and is expected to be the same through 2009.6. Harkins provides a one-year warranty on its products. 2007 2008 2009Included in pre-tax accounting income 25,000 26,000 35,000Deductible on tax return 10,000 20,000 28,000Instructions(a) Compute taxable income and income tax payable/receivable for the 2007 and 2008.(b) Prepare an inventory of the deferred tax (asset) and liability and determine the net deferredtax asset or liability as of 12/31/07 and 12/31/08. Harkins began operations in 2007