ACC 423 Week 5 final Exam (Part-3)

The effective tax rate is the ratio of income tax expense to pre-tax accounting income. income tax expense equals income tax liability in this case, because there are no temporary differences. Both the interest revenue and life-insurance premiums are permanent differences. The income tax liability is the product of the income tax rate and taxable income. Taxable income is $190,000 ($200,000 - $20,000 non-taxable interest included in the $200,000 + $10,000 non-deductible insurance premiums subtracted from $200,000). The income tax liability (and income tax expense) equal $57,000 (.30 x $190,000). The effective tax rate is .285 ($57,000/$200,000).

Projected benefit obligation

$2,621,000

Plan assets at fair value

2,047,000

Accumulated OCI (PSC)

1,031,000

Actual and expected return on plan assets

$ 14,300

Benefits paid to retirees

41,000

Contributions (funding)

85,700

Interest/discount rate

11

%

Prior service cost amortization

8,200

Projected benefit obligation, January 1, 2017

482,000

Service cost

58,800

Employee

Future Years of Service

Jim

3

Paul

4

Nancy

5

Dave

6

Kathy

6

January 1, 2017

December 31, 2017

Projected benefit obligation

$1,483,000

$1,508,000

Market-related and fair value of plan assets

786,000

1,116,600

Accumulated benefit obligation

1,617,000

1,735,200

Accumulated OCI (G/L)—Net gain

0

(198,300

)

$6,000 is the cumulative pre-tax income difference between the two methods as of January 1, 2017. 

The after-tax difference is .70($6,000) or $4,200. Accounting changes are measured as of the beginning of the year of change. The $6,000 represents the total difference in cost of goods sold between the two methods for the entire life of the firm, because under weighted-average, the firm has $6,000 more in inventory than under FIFO at January 1, 2017. This is the "ending" inventory for that firm, as of that date, for the firm's entire existence.

The $6,000 difference completely explains the pre-tax difference in income under the two methods for years up to January 1, 2017; the $4,200 is the after-tax difference.

Cumulative effects are reported net of tax as an adjustment to the beginning balance of retained earnings in the year of the change.

Dr.

Cr.

Supplies

$2,900

Salaries and wages payable

$1,500

Interest Receivable

5,400

Prepaid Insurance

97,100

Unearned Rent

0

Interest Payable

16,500

1.

A physical count of supplies on hand on December 31, 2018, totaled $1,200.

2.

Through oversight, the Salaries and Wages Payable account was not changed during 2018. Accrued salaries and wages on December 31, 2018, amounted to $4,300.

3.

The Interest Receivable account was also left unchanged during 2018. Accrued interest on investments amounts to $4,400 on December 31, 2018.

4.

The unexpired portions of the insurance policies totaled $66,000 as of December 31, 2018.

5.

$28,200 was received on January 1, 2018, for the rent of a building for both 2018 and 2019. The entire amount was credited to rent revenue.

6.

Depreciation on equipment for the year was erroneously recorded as $5,200 rather than the correct figure of $52,000.

7.

A further review of depreciation calculations of prior years revealed that equipment depreciation of $7,400 was not recorded. It was decided that this oversight should be corrected by a prior period adjustment.

Exercise 22-18

Concord Tool Company’s December 31 year-end financial statements contained the following errors.

An insurance premium of $67,200 was prepaid in 2017 covering the years 2017, 2018, and 2019. The entire amount was charged to expense in 2017. In addition, on December 31, 2018, fully depreciated machinery was sold for $13,700 cash, but the entry was not recorded until 2019. There were no other errors during 2017 or 2018, and no corrections have been made for any of the errors. (Ignore income tax considerations.) (Enter negative amounts using either a negative sign preceding the number e.g. -15,000 or parentheses e.g. (15,000).) 

Exercise 22-5 

Presented below are income statements prepared on a LIFO and FIFO basis for Waterway Company, which started operations on January 1, 2016. The company presently uses the LIFO method of pricing its inventory and has decided to switch to the FIFO method in 2017. The FIFO income statement is computed in accordance with the requirements of GAAP. Waterway’s profit-sharing agreement with its employees indicates that the company will pay employees 10% of income before profit-sharing. Income taxes are ignored.

Answer the following questions.

Question 18

In January 2017, installation costs of $5,900 on new machinery were charged to Maintenance and Repairs Expense. Other costs of this machinery of $29,500 were correctly recorded and have been depreciated using the straight-line method with an estimated life of 10 years and no salvage value. At December 31, 2018, it is decided that the machinery has a remaining useful life of 20 years, starting with January 1, 2018. What entries should be made in 2018 to correctly record transactions related to machinery, assuming the machinery has no salvage value? The books have not been closed for 2018 and depreciation expense has not yet been recorded for 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)