CPA Exercise Questions | Course Paper

Becker CPA Review, PassMaster Questions

Lecture: Financial 6

1

CPA PassMaster Questions–Financial 6

Export Date: 10/30/08

Becker CPA Review, PassMaster Questions

Lecture: Financial 6

2

Pension Plans

CPA-00679 Type1 M/C A-D Corr Ans: D PM#1 F 6-01

1. CPA-00679 FARE R02 #8 Page 19

Which of the following disclosures is not required of companies with a defined-benefit pension plan?

a. A description of the plan.

b. The amount of pension expense by component.

c. The weighted average discount rate.

d. The estimates of future contributions.

CPA-00679 Explanation

Choice “d” is correct. Although pension accounting has extensive disclosures, projections of future

contributions into a pension plan are not required. “a”, “b”, and “c” are required disclosures.

CPA-00681 Type1 M/C A-D Corr Ans: C PM#2 F 6-01

2. CPA-00681 FARE R99 #13 Page 9

Jan Corp. amended its defined benefit pension plan, granting a total credit of $100,000 to four employees

for services rendered prior to the plan’s adoption. The employees, A, B, C, and D, are expected to retire

from the company as follows:

“A” will retire after three years.

“B” and “C” will retire after five years.

“D” will retire after seven years.

What is the amount of prior service cost amortization in the first year?

a. $0

b. $5,000

c. $20,000

d. $25,000

CPA-00681 Explanation

Choice “c” is correct. Amortization of unrecognized prior service cost is calculated by assigning an equal

amount of the cost to the future periods of service of each employee at the date of amendment to the

plan. The average service life of the four employees is five years.

$100,000 ÷ 5 years = $20,000

CPA-00699 Type1 M/C A-D Corr Ans: C PM#4 F 6-01

3. CPA-00699 Th Nov 93 #30 Page 8

Visor Co. maintains a defined benefit pension plan for its employees. The service cost component of

Visor’s net periodic pension cost is measured using the:

a. Unfunded accumulated benefit obligation.

b. Unfunded vested benefit obligation.

c. Projected benefit obligation.

d. Expected return on plan assets.

CPA-00699 Explanation

Choice “c” is correct. Service cost represents the increase in the projected benefit obligation resulting

from employees’ services rendered during the year. SFAS 87 para. 264

Choice “a” is incorrect. The unfunded accumulated benefit obligation is not related to service cost

calculations.

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Lecture: Financial 6

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Choice “b” is incorrect. The unfunded vested benefit obligation is not related to service cost calculations.

Choice “d” is incorrect. The expected return on plan assets is not related to service cost calculations.

CPA-04698 Type1 M/C A-D Corr Ans: C PM#5 F 6-01

4. CPA-04698 Released 2005 Page 17

Footnote disclosures in the financial statements for pensions do not require inclusion of which of the

following?

a. The components of period pension costs.

b. The amount of unrecognized prior service cost.

c. The differences in executive and non-executive plans.

d. A detailed description of the plan including employee groups covered.

CPA-04698 Explanation

Choice “c” is correct. Per SFAS 132 the difference in executive and non executive plans is not a required

disclosure.

Choice “a” is incorrect. The components of period pension cost “SIRAGE” is a required disclosure.

Choice “b” is incorrect. The amount of unrecognized prior service cost must be disclosed.

Choice “d” is incorrect. Disclosure showing a detailed description of the plan including employee groups

covered is required.

CPA-05236 Type1 M/C A-D Corr Ans: D PM#13 F 6-01

5. CPA-05236 Released 2006 Page 5

What is the present value of all future retirement payments attributed by the pension benefit formula to

employee services rendered prior to that date and based on past and current compensation levels only?

a. Service cost.

b. Interest cost.

c. Projected benefit obligation.

d. Accumulated benefit obligation.

CPA-05236 Explanation

Choice “d” is correct. The accumulated benefit obligation is the present value of future retirement

payments attributed to the pension benefit formula to employee services rendered prior to a date, based

on current and past compensation levels.

Choice “a” is incorrect. Service cost is the present value of all pension benefits earned by company

employees in the current year.

Choice “b” is incorrect. Interest cost is the interest on the projected benefit obligation.

Choice “c” is incorrect. The projected benefit obligation is the present value of future retirement payments

attributed to the pension benefit formula to employee services rendered prior to a date, based on current

and past and (an assumption about) future compensation levels. The only difference between the

accumulated benefit obligation and the projected benefit obligation is the assumption of future

compensation levels. The projected benefit obligation is used for most pension calculations.

CPA-05400 Type1 M/C A-D Corr Ans: C PM#16 F 6-01

6. CPA-05400 Page 7

Big Books, Inc. has the following information related to its defined benefit pension plan:

December 31, 20X6:

Projected benefit obligation $1,500,000

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Lecture: Financial 6

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Fair value of plan assets 1,400,000

Unrecognized prior service cost 200,000

Unrecognized net transition asset 60,000

December 31, 20X7:

Projected benefit obligation $1,740,000

Fair value of plan assets 1,800,000

Service cost 220,000

Assumptions:

Discount rate 6%

Expected return on plan assets 8%

Big Books makes an annual pension plan contribution of $200,000. The company’s employees had an

average remaining service life of 20 years on 12/31/X6 and the company expects to pay benefits totaling

$170,000 to retired employees in 20X8. Big Books has an effective tax rate of 30%. What would Big

Books report as net periodic pension cost on its December 31, 20X7, income statement?

a. $187,400

b. $193,400

c. $205,000

d. $211,000

CPA-05400 Explanation

Choice “c” is correct. The 20X7 net periodic pension cost should be calculated as follows:

S Service cost $220,000

I Interest cost 90,000 = $1,500,000 x 6% = Beg PBO x discount rate

R Expected return on plan assets (112,000) = $1,400,000 x 8% = Beg FV x expected rate

A Amortization of prior service cost 10,000 = $200,000 / 20 years

G Amortization of (gains)/losses 0

E Amortization of transition asset (3,000) = $60,000 / 20 years

Net periodic pension cost $205,000

Choice “a” is incorrect. This amount includes interest cost incorrectly calculated using the 20X7 PBO

instead of the beginning PBO and return on plan assets incorrectly calculated using the 20X7 fair value of

plan assets instead of the beginning fair value.

Choice “b” is incorrect. This amount includes interest cost incorrectly calculated using the 20X7 PBO

instead of the beginning PBO and return on plan assets incorrectly calculated using the 20X7 fair value of

plan assets instead of the beginning fair value. This amount also incorrectly adds the amortization of the

net transition asset.

Choice “d” is incorrect. This amount incorrectly adds the amortization of the net transition asset. It is

important to note that the amortization of a net transition obligation increases net periodic pension cost,

while the amortization of a net transition asset decreases net periodic pension cost.

CPA-05401 Type1 M/C A-D Corr Ans: B PM#17 F 6-01

7. CPA-05401 Page 9

At December 31, 20X8, High Horse Company has the following pension plan information:

Fair value of plan assets, beginning of year $1,100,000

Fair value of plan assets, ending of year 1,135,000

Contributions 275,000

Benefits paid 340,000

Expected rate of return on plan assets 7%

Becker CPA Review, PassMaster Questions

Lecture: Financial 6

5

The expected return on plan assets was used to calculate net periodic pension cost. No actuarial gains

or losses were incurred during 20X8. High Horse’s effective tax rate is 30%. What is the net gain to be

reported in 20X8 other comprehensive income?

a. $0

b. $16,100

c. $23,000

d. $77,000

CPA-05401 Explanation

Choice “b” is correct. Absent any actuarial gains or losses, the net pension gain or loss incurred during

an accounting period is the difference between the expected return on plan assets recorded in net

periodic pension cost and the actual return on plan assets earned during the accounting period. This

amount is reported in other comprehensive, after-tax, in the period incurred.

The expected return on plan assets is calculated as:

Beginning fair value of plan assets x Expected rate of return = $1,100,000 x 7% = $77,000

The actual return on plan assets is calculated as:

Beginning fair value of plan assets $1,100,000

+ Contributions 275,000

– Benefits paid (340,000)

+ Actual return on plan assets 100,000 Squeeze

Ending fair value of plan assets $1,135,000

Therefore, the difference between the actual return on plan assets and expected return on plan assets is

$23,000 ($100,000 actual – $77,000 expected), which on an after-tax basis is $16,100 [$23,000 x (1-

30%)].

This gain is recorded with the following journal entry:

Dr. Pension benefit asset/liability 23,000

Dr. Deferred tax expense – OCI 6,900

Cr. Deferred tax liability 6,900

Cr. Other comprehensive income 23,000

Choice “a” is incorrect. As explained above, there is a net pension gain equal to the after-tax difference

between actual and expected return on plan assets.

Choice “c” is incorrect. This is the net gain before tax. SFAS No. 158 requires that the difference

between actual and expected return on plan assets be reported in other comprehensive income net of

tax.

Choice “d” is incorrect. This is the expected return on plan assets, not the net pension gain to be

reported in 20X8 other comprehensive income.

CPA-05402 Type1 M/C A-D Corr Ans: C PM#18 F 6-01

8. CPA-05402 Page 9

In 20X9, Rhino Robots Inc. has the following information related to its defined benefit pension plan:

Fair value of plan assets, 1/1/X9 $2,130,000

Fair value of plan assets, 12/31/X9 2,525,000

Projected benefit obligation, 1/1/X9 3,500,000

Projected benefit obligation, 12/31/X9 3,850,000

Unrecognized net losses 420,000

The average remaining service period of Rhino’s employees is 20 years. What is the net loss

amortization that Rhino will include in its 20X9 net periodic pension cost?

a. $0

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Lecture: Financial 6

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b. $1,750

c. $3,500

d. $21,000

CPA-05402 Explanation

Choice “c” is correct. Unrecognized pension gains or losses are amortized over the average remaining

service period if, at the beginning of the year, the gain or loss exceeds 10% of the greater of the

beginning of the year PBO or the beginning of the year market related value of plan assets (we will use

the fair value of the plan assets in this example as the market related value is not given and these

amounts are approximately equal).

At 1/1/X9, Rhino’s PBO exceeds the fair value of the plan assets, so the 20X9 net loss amortization is

calculated as:

Unrecognized net loss $420,000

Less: 10% of Greater of Beg. PBO/Plan Assets – 350,000 = $3,500,000 PBO x 10%

Excess $ 70,000

Excess / Average Remaining Service Life = $70,000 / 20 = $3,500

Choice “a” is incorrect. Because the unrecognized net loss exceeds 10% of the greater of the beginning

PBO/Plan assets, the excess must be amortized over the average remaining service period.

Choice “b” is incorrect. This amortization is calculated using the 12/31/X9 PBO. The greater of the

beginning PBO/Plan assets must be used to determine the amount to amortize.

Choice “d” is incorrect. This is the total unrecognized net loss amortized over 20 years. GAAP allows

companies to amortize only the portion of net gain or loss in excess of 10% of the greater of PBO/Plan

assets.

CPA-05403 Type1 M/C A-D Corr Ans: D PM#19 F 6-01

9. CPA-05403 Page 12

Big Sports Inc. and its subsidiaries, Batter Up, Slam Dunk and Touchdown, had the following defined

benefit pension plans at December 31, 20X8:

Big Sports Batter Up Slam Dunk Touchdown

Fair Value – Plan Assets $1,000,000 $1,275,000 $900,000 $200,000

PBO $1,600,000 $ 850,000 $700,000 $800,000

Benefits Payable – 20X9 $ 425,000 $ 360,000 $150,000 $245,000

How would these pension plans be reported on Big Sports’ December 31, 20X8 consolidated balance

sheet?

Noncurrent asset Current liability Noncurrent liability

a. $0 $0 $575,000

b. $0 $45,000 $530,000

c. $625,000 $0 $1,200,000

d. $625,000 $45,000 $1,155,000

CPA-05403 Explanation

Choice “d” is correct. SFAS No. 158 requires that all overfunded (FV plan assets > PBO) pension plans

be aggregated and reported as a noncurrent asset, and that all underfunded (FV plan assets < PBO)

pension plans be aggregated and reported as a current liability (to the extent that the benefits payable in

the next year exceed the fair value of the pension plan assets), a noncurrent liability, or both. Big Sports

and subsidiaries would report their pension plans as follows:

Big Sports Batter Up Slam Dunk Touchdown Total

FV Plan Assets $ 1,000,000 $ 1,275,000 $ 900,000 $ 200,000

Less: PBO 1,600,000 850,000 700,000 800,000

Funded Status $ (600,000) $ 425,000 $ 200,000 $ (600,000)

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Lecture: Financial 6

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Noncurrent Asset – $ 425,000 $ 200,000 – $ 625,000

Current liability – – – $ 45,000 $ 45,000

Noncurrent liability $ 600,000 – – $ 555,000 $1,155,000

Note that Touchdown’s pension plan must be reported as a current and noncurrent liability because it is

underfunded and the benefits payable in 20X9 exceed the fair value of the plan assets by $45,000

($245,000 benefits payable – $200,000 plan assets).

Choice “a” is incorrect. SFAS No. 158 does not permit the netting of all pension plans. Overfunded

pension plans must be aggregated separately from underfunded pension plans.

Choice “b” is incorrect. This presentation is not supported by SFAS No. 158.

Choice “c” is incorrect. SFAS No. 158 requires that Touchdown’s underfunded pension plan be reported

as a current liability of $45,000 and noncurrent liability of $555,000 because it is underfunded and the

benefits payable in 20X9 exceed the fair value of the plan assets by $45,000 ($245,000 benefits payable –

$200,000 plan assets).

CPA-05404 Type1 M/C A-D Corr Ans: A PM#20 F 6-01

10. CPA-05404 Page 13

Zen Transportation Inc.’s pension trustee provided the company with the following information for its

defined benefit pension plan at December 31, 20X7:

Projected benefit obligation $2,500,000

Fair value of pension plan assets 1,950,000

Unrecognized prior service cost 375,000

Unrecognized net gain 50,000

Unrecognized transition obligation 135,000

Net periodic pension cost 440,000

Zen has an effective tax rate of 40%. What amount would Zen report in accumulated other

comprehensive income related to its pensions plan on its December 31, 20X7 balance sheet?

a. $276,000

b. $336,000

c. $460,000

d. $560,000

CPA-05404 Explanation

Choice “a” is correct. Unrecognized prior service cost, unrecognized transition obligations and

unrecognized net gains or losses must be reported in accumulated other comprehensive income, net of

tax, until recognized as a component of net periodic pension cost through amortization. Unrecognized

prior service cost, transition obligations and net losses all increase pension expense when recognized

and are therefore recorded as a debit to accumulated OCI. Unrecognized transition assets and net gains

decrease pension expense when recognized and are therefore recorded as a credit to accumulated OCI.

For Zen, the total pension related amount to be reported in accumulated OCI (before tax) is:

Unrecognized prior service cost $375,000

Unrecognized transition obligation 135,000

Unrecognized net gain (50,000)

$460,000

SFAS No. 158 requires that this amount be reported on an after-tax basis: $460,000 x (1 – 40%) =

$276,000. Note that this would be a $276,000 offset (debit) to accumulated OCI.

Choice “b” is incorrect. This amount is calculated by adding the unrecognized net gain to the

unrecognized prior service cost and transition obligation. The unrecognized net gain should be

subtracted.

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Lecture: Financial 6

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Choice “c” is incorrect. This is the total of the unrecognized amounts that must be reported in

accumulated other comprehensive income on a pre-tax basis. SFAS No. 158 requires that these

amounts be reported in accumulated OCI after-tax.

Choice “d” is incorrect. This amount is calculated by adding the unrecognized net gain to the

unrecognized prior service cost and transition obligation. The unrecognized net gain should be

subtracted. Additionally, this is a pre-tax amount. SFAS No. 158 requires that these amounts be

reported in accumulated OCI after-tax.

CPA-05405 Type1 M/C A-D Corr Ans: C PM#21 F 6-01

11. CPA-05405 Page 13

AmeriGene Inc. reported net periodic pension cost of $400,000 in 20X9, calculated as follows:

Service cost $300,000

Interest cost 175,000

Expected return on plan assets (100,000)

Amortization of prior service cost 40,000

Amortization of net gain (15,000)

Net periodic pension cost $400,000

AmeriGene has an overfunded pension plan. The company’s effective tax rate is 30%. How will the

service cost component of the 20X9 net periodic pension cost affect the 20X9 balance sheet?

a. $300,000 increase in noncurrent pension benefit asset.

b. $300,000 decrease in retained earnings.

c. $90,000 increase in deferred tax asset.

d. $90,000 increase in accumulated other comprehensive income.

CPA-05405 Explanation

Choice “c” is correct. SFAS No. 158 requires that SFAS No. 109 – Accounting for Income Taxes be

considered when recording net periodic pension cost and changes in pension plan funded status due to

prior service cost, net gains and losses, and net transition assets and obligations. Therefore, the service

cost component of AmeriGene’s net periodic pension cost would be recorded with the following JE:

Dr. Net periodic pension cost 300,000

Dr. Deferred tax asset 90,000

Cr. Deferred tax benefit – income statement 90,000

Cr. Pension benefit asset 300,000

Choice “a” is incorrect. As demonstrated in the journal entry above, service cost decreases the pension

benefit asset.

Choice “b” is incorrect. Net periodic pension cost affects retained earnings on an after-tax basis.

Therefore, the service component will decrease retained earnings by $210,000 [$300,000 x (1-30%)].

Choice “d” is incorrect. Service cost does not affect accumulated other comprehensive income. The

pension component of accumulated other comprehensive income reflects changes in the funded status of

a pension plan due to prior service cost, net gains and losses, and net transition assets or obligations.

CPA-05406 Type1 M/C A-D Corr Ans: B PM#22 F 6-01

12. CPA-05406 Page 13

AmeriGene Inc. reported net periodic pension cost of $400,000 in 20X9, calculated as follows:

Service cost $300,000

Interest cost 175,000

Expected return on plan assets (100,000)

Amortization of prior service cost 40,000

Amortization of net gain (15,000)

Becker CPA Review, PassMaster Questions

Lecture: Financial 6

9

Net periodic pension cost $400,000

AmeriGene has an overfunded pension plan. The company’s effective tax rate is 30%. How will the

amortization of the net gain affect the 20X9 balance sheet?

a. No effect.

b. $10,500 increase in retained earnings.

c. $15,000 increase in net pension asset.

d. $15,000 decrease in accumulated other comprehensive income.

CPA-05406 Explanation

Choice “b” is correct. SFAS No. 158 requires that net gains and losses be reported as a component of

accumulated other comprehensive income until recognized in net periodic pension cost through

amortization. The 20X9 amortization of the net gain would be recorded as a reclassification adjustment

from accumulated other comprehensive income with the following journal entry:

Dr. Other comprehensive income 15,000

Dr. Deferred tax expense – net income 4,500

Cr. Deferred tax expense – OCI 4,500

Cr. Net periodic pension cost 15,000

The reclassification adjustment affects net income and retained earnings on an after-tax basis.

Choice “a” is incorrect. As demonstrated by the journal entry above, the amortization of the net gain

increases retained earnings and decreases accumulated other comprehensive income by $10,500.

Choice “c” is incorrect. The amortization of the net gain does not change the net pension asset. The net

pension asset was increased when the net gain was incurred.

Choice “d” is incorrect. SFAS No. 158 requires that pensions be accounted for on an after-tax basis. As

a result, the amortization of the net gain decreases accumulated other comprehensive income by $10,500

($15,000 debit to other comprehensive income – $4,500 credit to deferred tax expense – OCI).

CPA-05424 Type1 M/C A-D Corr Ans: C PM#23 F 6-01

13. CPA-05424 Released 2007 Page 9

Parker Co. amended its pension plan on January 2 of the current year. It also granted $600,000 of

unrecognized prior service costs to its employees. The employees are all active and expect to provide

2,000 service years in the future, with 350 service years this year. What is Parker’s unrecognized prior

service cost amortization for the year?

a. $0

b. $2,000

c. $105,000

d. $600,000

CPA-05424 Explanation

Choice “c” is correct. Unrecognized prior service cost is amortized by assigning an equal amount to each

future period of service of each employee who is active at the date of the amendment. In this problem,

prior service cost will be assigned equally to each service year provided by the company’s employees as

follows:

$600,000 x (350/2000) = $105,000

Choice “a” is incorrect. Unrecognized prior service cost must be amortized by assigning an equal amount

to each future period of service of each employee who is active at the date of the amendment.

Choice “b” is incorrect. The current period amortization of Parker’s prior service cost is not equal to the

expected future service hours. Unrecognized prior service cost must be amortized by assigning an equal

amount to each future period of service of each employee who is active at the date of the amendment, as

described above.

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Lecture: Financial 6

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Choice “d” is incorrect. The company would not recognized the entire prior service cost in the current

period, but would instead amortize the prior service cost by assigning an equal amount to each future

period of service of each employee who is active at the date of the amendment.

Estimated Liability (vs. Accrued Liability)

CPA-00706 Type1 M/C A-D Corr Ans: A PM#1 F 6-04

14. CPA-00706 FARE R01 #6 Page 28

For the week ended June 30, 1995, Free Co. paid gross wages of $20,000, from which federal income

taxes of $2,500 and FICA were withheld. All wages paid were subject to FICA tax rates of 7% each for

employer and employee. Free makes all payroll-related disbursements from a special payroll checking

account. What amount should Free have deposited in the payroll checking account to cover net payroll

and related payroll taxes for the week ended June 30, 1995?

a. $21,400

b. $22,800

c. $23,900

d. $25,300

CPA-00706 Explanation

Choice “a” is correct. $21,400 is the net payroll and related employer FICA payroll taxes. The amount is

calculated as follows:

Gross wages $20,000

Employer FICA tax

Wages $20,000

FICA rate x 7%

Employer 1,400

Net payroll & employer FICA $21,400

CPA-00709 Type1 M/C A-D Corr Ans: D PM#2 F 6-04

15. CPA-00709 FARE Nov 95 #13 Page 28

Lime Co.’s payroll for the month ended January 31, 1995, is summarized as follows:

Total wages $10,000

Federal income tax withheld 1,200

All wages paid were subject to FICA. FICA tax rates were 7% each for employee and employer. Lime

remits payroll taxes on the 15th of the following month. In its financial statements for the month ended

January 31, 1995, what amounts should Lime report as total payroll tax liability and as payroll tax

expense?

Liability Expense

a. $1,200 $1,400

b. $1,900 $1,400

c. $1,900 $700

d. $2,600 $700

CPA-00709 Explanation

Choice “d” is correct. Amounts withheld from employees are payable to the government and thus are

liabilities.

Federal income tax withheld $1,200

Employee FICA, 7% × $10,000 700

Employer matching FICA 700

Total payroll liability $2,600

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Lecture: Financial 6

11

Of this total payroll liability, only the employer matching FICA is a payroll tax expense for the employer.

Choice “a” is incorrect. A $1,200 liability includes only the federal income tax withheld; it does not include

the employee’s FICA liability or the employer’s matching FICA liability. Only the employer’s matching

FICA represents an expense to the employer.

Choice “b” is incorrect. A $1,900 liability does not include the employer’s matching FICA liability. Only

the employer’s matching FICA represents an expense to the employer.

Choice “c” is incorrect. A $1,900 liability does not include the employer’s matching FICA liability.

CPA-00713 Type1 M/C A-D Corr Ans: B PM#3 F 6-04

16. CPA-00713 FARE May 95 #14 Page 28

Roro, Inc. paid $7,200 to renew its only insurance policy for three years on March 1, 1995, the effective

date of the policy. At March 31, 1995, Roro’s unadjusted trial balance showed a balance of $300 for

prepaid insurance and $7,200 for insurance expense. What amounts should be reported for prepaid

insurance and insurance expense in Roro’s financial statements for the three months ended March 31,

1995?

Prepaid Insurance

insurance expense

a. $7,000 $300

b. $7,000 $500

c. $7,200 $300

d. $7,300 $200

CPA-00713 Explanation

Choice “b” is correct. The prepaid insurance reflected in the unadjusted trial balance would be fully

expensed and one month (March 1 through March 31) of the renewed policy cost would be expensed.

Insurance expense equals $500 ($300 plus $7,200/36 months). Prepaid insurance equals $7,000

($7,200 x 35/36).

Choice “a” is incorrect. Insurance expense should include a portion of the renewed policy cost.

Choice “c” is incorrect. Prepaid insurance should be adjusted for the month which has expired on the

renewed policy.

Choice “d” is incorrect. The previous balance in prepaid insurance should be expensed.

CPA-00727 Type1 M/C A-D Corr Ans: B PM#4 F 6-04

17. CPA-00727 FARE May 95 #15 Page 28

Ivy Co. operates a retail store. All items are sold subject to a 6% state sales tax, which Ivy collects and

records as sales revenue. Ivy files quarterly sales tax returns when due, by the 20th day following the

end of the sales quarter. However, in accordance with state requirements, Ivy remits sales tax collected

by the 20th day of the month following any month such collections exceed $500. Ivy takes these

payments as credits on the quarterly sales tax return. The sales taxes paid by Ivy are charged against

sales revenue.

Following is a monthly summary appearing in Ivy’s first quarter 1995 sales revenue account:

Debit Credit

January $ — $10,600

February 600 7,420

March — 8,480

$600 $26,500

In its March 31, 1995, balance sheet, what amount should Ivy report as sales taxes payable?

a. $600

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Lecture: Financial 6

b. $900

c. $1,500

d. $1,590

CPA-00727 Explanation

Choice “b” is correct. Actual sales revenue equals $25,000 ($26,500/1.06) and total sales tax collected

equals $1,500 (6% x $25,000). Sales taxes payable equals $900 ($1,500 taxes collected less $600 taxes

remitted).

Choice “a” is incorrect. $600 is the amount of sales taxes previously remitted, not the amount owed.

Choice “c” is incorrect. $1,500 is the total amount collected rather than the amount owed.

Choice “d” is incorrect. The total amount collected ($26,500) includes sales tax. Thus, the amount of

sales tax plus the sales amount equals the total amount collected ($26,500).

CPA-00728 Type1 M/C A-D Corr Ans: B PM#5 F 6-04

18. CPA-00728 FARE Nov 94 #19 Page 28

On July 1, 1993, Ran County issued realty tax assessments for its fiscal year ended June 30, 1994. On

September 1, 1993, Day Co. purchased a warehouse in Ran County. The purchase price was reduced

by a credit for accrued realty taxes. Day did not record the entire year’s real estate tax obligation, but

instead records tax expenses at the end of each month by adjusting prepaid real estate taxes or real

estate taxes payable, as appropriate. On November 1, 1993, Day paid the first of two equal installments

of $12,000 for realty taxes. What amount of this payment should Day record as a debit to real estate

taxes payable?

a. $4,000

b. $8,000