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Becker CPA Review, PassMaster Questions
Lecture: Financial 6
1
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
CPA PassMaster Questions–Financial 6
Export Date: 10/30/08
Becker CPA Review, PassMaster Questions
Lecture: Financial 6
2
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
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%
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Lecture: Financial 6
5
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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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© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
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)
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Lecture: Financial 6
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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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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
Becker CPA Review, PassMaster Questions
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
