Intermediate Accounting III – Online Midterm Exam Name Traci

| October 22, 2018

Intermediate Accounting III – OnlineMidterm ExamNameTraci Miller*You may use book, notes, and homework, but you are NOT allowed to communicate with others about this exam.We are able to track e-mail communication if determined necessary, so please do your own work.*SHOW YOUR WORK! I cannot give you partial credit if you do not provide your calculationsProblem1234567891011TotalTitlePresent Value of Minimum Lease PaymentsLease DeterminationLease EntriesAccounting for LeasesIncome Tax AccountingOperating Loss Carryforward/backCompensated AbsencesPayroll Journal EntriesPension WorksheetWeighted # Shares OutstandingBasic & Diluted EPSPoints55102020101015152020150Earned-1. A lease involves payments of $1,000 per month for two years. The payments are made at the end of each month. Thelease also involves a guaranteed residual value of $10,000 to be paid at the end of the 2-year period. The appropriateinterest rate is 12% compounded monthly. Compute the present value of the minimum lease payments.Show your work:2. The lessor leased equipment to the lessee. The fair value of the equipment is $246,000. Lease payments are $35,000per year, payable at the end of the year, for 10 years. The interest rate implicit in the lease is 9%. At the end of 10 years,the lessor will repossess the equipment. The lease does not include a bargain purchase option, and the equipment has atotal estimated useful life of 15 years. Is the lease an operating lease or a capital lease? Explain.Determination (show your work)Explanation:3. On January 1, the lessee company signed an operating lease contract. The lease contract calls for $3,000 payments atthe end of each year for 10 years. The rate implicit in the lease is 10%. Make the journal entries or memorandumnecessary on the books of the lessee company (1) on the lease-signing date and (2) to record the first payment.1 – Lease signing date2 – Record the first payment4. Pursuit Company leased a machine on July 1, 2014, under a 10-year lease. The economic life of the machine is estimated to be 15 years. Title to the machinepasses to Pursuit at the expiration of the lease, and thus, the lease is a capital lease. The lease payments at $97,000 per year, including executory costs of $3,000per year, all payable in advance annually. The incremental borrowing rate of the company is 9%, and the lessor’s implicit interest rate is unknown. Pursuit Companyuses the straight-line method of amortization and the calendar year for reporting purposes.Required: Give all entries on the books of the lessee relating to the lease for 2008. For your convenience, descriptions are provided.Date7/1/14Account DescriptionDebitCredit12/31/1412/31/14657,549Dr. Lease ExpenseDr. Obligations under Capital LeasesCr.CashTo record first lease payment3,00094,000Dr. Interest ExpenseCr.Capital LeasesTo accrue interest payable on capital lease at end of year25,360Dr. Amortization Expense on Leased EquipmentCr.Leased EquipmentTo record amortization of the leased asset.7/1/14Dr. Leased EquipmentCr.Obligations under Capital LeasesTo record lease21,919Dr. Prepaid Lease ExpenseCr.Lease ExpenseTo record the prepaid executory costs657,54997,00025,36021,9191,500Remember, half of a year (July – December)1,5005. Talbert, Inc. computed pretax financial income of $40,000 for the first year of its operations ended December 31, 2014.Included in financial income was $25,000 of nondeductible expenses, $22,000 gross profit on installment sales that wasdeferred for tax purposes until the installments were collected, and $18,000 in bad debt expense that had been accrued onthe books in 2008.The temporary differences are expected to reverse in the following patterns:Year2015201620172018TotalGross Profit on Collections5,0007,0004,0006,00022,000Bad Debt Write-Offs6,00012,00018,000The enacted tax rates for this year and the next four years are as follows201440%201535%201632%201730%201832%Assume that there will be sufficient income in each future year to realize any deductible amounts. For classificationpurposes, the bad debt write-offs are considered to be associated with a current asset, and the receivable for installmentsales is classified as both current and noncurrent, depending on the expected timing of the receipt.REQUIRED:A) Complete the chart below.B) Prepare the journal entries necessary to record income taxes for 2014.A)2015201620172018EnactedDeductibleRateAmount35%6,00032%12,00030%32%18,000AssetValuation2,1003,8405,940TaxableAmount5,0007,0004,0006,00022,000LiabilityValuation1,7502,2401,2001,9207,110B)Account DescriptionDr.Cr.Income tax expenseincome tax payableTo record income taxes payableDr.Dr.Cr.Cr.Deferred tax asset-currentincome tax expenseDeferred tax liability- currentDeferred tax liability- non currentTo account for deferred itemsDebitCredit24,40024,4005,9401,1701,7505,3606. The following information is taken from the financial statements of Neptune Enterprises:Year20102011201220132014Taxable and PretaxFinancial Income32,00029,30033,10022,500(94,300)IncomeTax RateIncomeTax Paid40%35%40%34%35%12,80010,25513,2407,650-Required:A) Given the information above, compute the amount of income tax refund due as a result ofthe operating loss in 2014. (use the following chart)YearAmount of LossApplied to IncomeIncome Tax RateAmount of Refund Due fromPrior Years Income TaxesB) What is the amount, if any, of the operating loss carryforward?7. Young Fashions, Inc’s employees are paid on the 6th and 22nd of each month for the period ending the last day of theprevious moth and the 15rh of the current month, respectively. An analysis of the payroll on Monday, October 6, 2014revealed the following data:Office staff salariesOfficer salariesSales salariesTotalsGrossPay15,45031,00020,00066,450FICA8102868341,930FederalStateIncome Tax Income Tax Insurance2,4004504106,3001,0005004,20069048012,9002,1401,390Net Pay11,38022,91413,79648,090It is determined that for the September 30 pay period, no additional employees exceeded the wage base for FICA purposesthan had done so in prior pay periods. All of the officer salaries, 75% of the office staff salaries, and 40% of the sales salariesfor the payroll period ending September 30 were paid to employees who had exceeded the wage base for unemploymenttaxes. Assume the unemployment tax rates in force are as follows: federal unemployment tax, .08%, state unemploymenttax, 5.4%Prepare the adjusting entries that would be required at September 30, the end of Young Fashion’s fiscal year, to reflect theaccrual of the payroll and any related payroll taxes. Separate salaries and payroll tax expense accounts are used for each ofthe three employee categories: office staff, officer, and sales salaries. The schedule of employer’s payroll taxes can assistyou (complete the shaded cells). Don’t forget the limits for unemployment taxesTotalOffice Staff Salaries:FICA (given)FUTA (calculate)SUTA (calculate)Officer SalariesFICA (given)FUTA (calculate)SUTA (calculate)Sales SalariesFICA (given)FUTA (calculate)SUTA (calculate)Total taxesFICAFUTASUTA—–Record the journal entries:Account DescriptionDebitCredit-8. During Year 1 (the first year of the company’s existence), employees of the company earned vacation days as follows:Employee123Average WageVacations Days Vacation DaysPer DayEarned this Year Taken this Year$1601010$2001510$250205Required:A) Make the journal entry necessary at the end of Year 1 to record the unused vacation days earned during the year.Account DescriptionDebitCreditB) Make the journal entry necessary in Year 2 to record the use of all of these vacation days. Assume that all employeesreceived at 10% pay raise in Year 2.Account DescriptionDebitCredit9. On January 1 of Year 1, the company had a projected benefit obligation (PBO) of $10,000 and a pension fund with a fair value of $9,200. Unrecognized prior service costwas $2,000; it was being amortized on a straight-line basis over the 5-year average remaining life of the affected employees. The balance in the unrecognized (or deferred)pension gain was $700. The following information relates to the pension plan during the year:Service costActual return on the pension fundBenefits paid to retireesContribution to the pension fundDiscount rate for PBOExpected return on pension fund1,2001,5503001,0508%11%Enter all of the pension information, including the beginning balances, in a pension worksheet. Use the worksheet to display the computation of pension expense for the yearas well as the ending balances for all pension related items.CompanyPension Worksheet for 2014Formal AccountsPrepaid/PeriodicNetAccruedPensionPensionPensionCostExpenseCashCostItemsBalance, January 1(a) Service Cost(b) Interest Cost(c) Actual Return on Assets(d) Benefits Paid(e) Deferred Gain(f) Amortization of PSCSummary Journal Entries(1) Annual Pension Expense Accrual(2) Annual Pension ContributionBalance, December 31Memorandum AccountsFairUnrecogProjectedValue ofnized NetBenefitPensionPensionObligationItemsGain/LossUnrecognized PriorServiceCost10. Transactions involving the common stock of Par-More Company during the 2-year period 2008 and 2009 were as follows:2013JanAprJulyOct11112014AprOct1 Declared a 2-for-1 stock split1 Sold 170,000 shares for $30 a shareHad a balance of 200,000 shares of $10 par common stockConverted $2,500,000 of convertible bonds with 50 shares issued for each $1,000 bond.Declared a 10% stock dividendEmployees exercised options to purchase 7,000 shares for $20 a shareFrom the information given, compute the comparative number of weighted-average shares outstanding for 2013 and 2014 to be usedfor basic EPS computations at the end of 2009.Weighted average shares – 2013Weighted average shares – 2014Show your work:11. Marcina Shoes reports long-term liabilities and stockholders’ equity balances at December 31, 2014, as follows:Convertible 5% bonds (par)Common stock, $25 par, 100,000 shares issued and outstanding$$800,0002,500,000$$$199,80043,520243,320Additional information is determined as follows:Conversion term of bonds – 50 shares for each $1,000 bondIncome before extraordinary items – 2014Extraordinary gain (net of tax)Net income – 2014Required:Compute the basic and diluted EPS for the company for 2014 (using the schedule below), assuming thatthe income tax rate is 30%. No changes occurred in the debt and equity balances during 2014.BASIC EPSIncome before extraordinary gainExtraordinary gainNet income$-DILUTED EPS (in dollars)Income before extraordinary gainAdd interest on convertible bonds, net of taxesInterestLess income taxes at 30%Adjusted income before extraordinary gain$$-Actual number of shares outstandingAdditional shares assumed issued on conversionTotal shares for computing diluted EPSDiluted EPS (in PER SHARE)Income before extraordinary gainExtraordinary gainNet IncomeShow per shareShow per shareShow per share-$-Show per shareShow per shareShow per share

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