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11-21 Solutions
11.28 (Woodward Corporation; effect of temporary differences on income taxes.)
a. 2008 2009 2010 2011
Other Pre-Tax Income .............. $ 35,000 $ 35,000 $ 35,000 $ 35,000
Income before Depreciation
from Machine ......................... 25,000 25,000 25,000 25,000
b. Financial Reporting 2008 2009 2010 2011
Carrying Value, January 1 ...... $ 50,000 $ 37,500 $ 25,000 $ 12,500
c. Financial Reporting 2008 2009 2010 2011
Income before Depreciation ..... $ 60,000 $ 60,000 $ 60,000 $ 60,000
Depreciation Expense
d. 2008 2009 2010 2011
Income Tax Payable (from
Solutions 11-22
11.28 d. continued.
2008
Income Tax Expense ................................................ 19,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–17,400
+1,600
–19,000
IncSt → RE
2009
Income Tax Expense ................................................ 19,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–15,200
+3,800
–19,000
IncSt → RE
2010
Income Tax Expense ................................................ 19,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–21,000
–2,000
–19,000
IncSt → RE
2011
Income Tax Expense ................................................ 19,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–22,400
–3,400
–19,000
IncSt → RE
11.29 (Federated Department Stores; interpreting disclosures regarding sales of
receivables.)
a. Exhibit 11.2 in the text contains the GAAP criteria to qualify a
transfer of receivables as a sale.
11-23 Solutions
Solutions 11-24
11.29 a. continued.
2. The receivables are transferred to an entity that has the right to
pledge or exchange the receivables: Federated Department Stores
b. Federated benefits from the increased sales revenue that the credit
cards provide without incurring interest rate, credit, and bankruptcy
c. These special purpose entities likely enhanced Federated’s ability to
isolate the receivables that it sold to GE Capital Consumer Co. and,
11.30 (Louisiana-Pacific Corporation; interpreting note on off-balance sheet
financing.)
Exhibit 11.2 in the text contains the GAAP criteria to qualify a transfer of
receivables as a sale.
1. The receivables are isolated from the transferor: the receivables are in
11-25 Solutions
2. The receivables are transferred to an entity that has the right to pledge
Solutions 11-26
11.30 continued.
3. The transferor does not maintain control over the receivables: The
11.31 (Interpreting retirement plans disclosures.) (Amounts in Millions)
a. The firm increased the discount rate it used to compute the pension
and health care obligations from 5.7% to 5.8%, thereby reducing the
b. The actual return on investments (disclosed in the change in fair
c. The firm contributed cash to the health care plan each year equal to
d. Prior Service Cost, End of 2007 ........................................... $ 5
Plus Increase in Prior Service Cost during 2008 from Plan
e. Net Actuarial Loss, End of 2007 .......................................... $ 2,285
Less Decrease in Actuarial Loss during 2008 from Actu-
arial Gain in Pension Obligation ..................................... (163)
11-27 Solutions
Solutions 11-28
11.31 continued.
g. Net Actuarial Loss, End of 2007 .......................................... $ 419
h. 2008
Pension Expense ....................................................... 340
Pension Liability (Noncurrent Liabilities: $2,753 –
$729) ...................................................................... 2,024
Other Comprehensive Income (Actuarial Loss:
$2,285 – $1,836) ................................................ 449
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+4
–2,024
–340
IncSt → RE
–19
+25
–8
OCI →
AOCI
–1,883
+449
OCI →
AOCI
To record pension expense, pension funding, and the
change in balance sheet accounts relating to the pen-
sion plan for 2008.
i. 2008
Health Care Expense ................................................ 126
Health Care Liability (Noncurrent Liabilities:
$1,312 – $1,270) .................................................... 42
11-29 Solutions
Solutions 11-30
11.31 i. continued.
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+49
–42
–126
IncSt → RE
–75
+100
–13
OCI →
AOCI
+55
OCI →
AOCI
To record health care expense, health care funding,
and the change in balance sheet accounts relating to
the health care plan for 2008.
11.32 (Interpreting retirement plan disclosures.) (Amounts in Millions)
a. Pension plans measure the amount of interest cost using the present
value of the pension obligation and the related discount rate. Pension
plans measure the amount of the expected return on plan assets using
b. The decline in net health care expense results from a decline in
c. The firm contributes sufficient cash each year to fund current benefits
d. The firm increased the discount rate it uses to compute the pension
11-31 Solutions
11.32 continued.
e. Prior Service Cost, End of 2007 ................................................. $ 314
f. Net Actuarial Loss, End of 2007 ................................................ $ 1,646
g. Prior Service Cost, End of 2007 ................................................. $ 339
h. Net Actuarial Loss, End of 2007 ................................................ $ 340
i. 2008
Pension Expense ....................................................... 253
Solutions 11-32
11.32 i. continued.
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+20
–717
–253
IncSt → RE
–567
+81
–52
OCI →
AOCI
+394
OCI →
AOCI
To record pension expense, pension funding, and the.
change in balance sheet accounts relating to the pen-
sion plan for 2008.
j. 2008
Health Care Expense ................................................ 210
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+27
–23
–210
IncSt → RE
–233
–132
+40
OCI →
AOCI
+119
OCI →
AOCI
To record health care expense, health care funding,
and the change in balance sheet accounts relating to
the health care plan for 2008.
11-33 Solutions
11.33 (Interpreting income tax disclosures.) (Amounts in Millions)
a. 2007
Income Tax Expense ................................................ 699
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+39
or
–39
–699
IncSt → RE
+738
b. 2008
Income Tax Expense ................................................ 742
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+736
–742
IncSt → RE
–6
or
+6
c. The first line of the tax reconciliation assumes that governmental
d. Nondeductible items increase the effective tax rate, despite their
appearing with other reconciling items with a negative sign in this
