© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
12.23 (Fleet Sneaks; preparing journal entries for income tax
expense.) (amounts in millions of US$)
a. 2011
Income Tax Expense
………………………………………….
504.4
Income Tax Payable
………………………………………
495.
4
Deferred Tax
Liability……………………………………
9.0
Assets = Liabilities +
Shareholders’
Equity (Class.)
+495.4 –504.4
IncSt
RE
+9.0
To record income tax expense, income
tax
payable,
and the change in deferred
taxes for
2011.
2012
Income Tax Expense
………………………………………….
648.2
Income Tax Payable
………………………………………
622.
8
Deferred Tax
Liability……………………………………
25.
4
Assets = Liabilities +
Shareholders’
Equity (Class.)
+622.8 –648.2
IncSt
RE
+25.4
To record income tax expense, income
tax
payable,
and the change in deferred
taxes for
2012.
12-11Solutions
Deferred Tax
Liability……………………………………….
26.0
Income Tax Payable
………………………………………
775.
6
Assets = Liabilities +
Shareholders’
Equity (Class.)
–26.0 –749.6
IncSt
RE
+775.6
To record income tax expense, income
tax
payable,
and the change in deferred
taxes for
2013.
b. Fleet Sneaks has overfunded retirement benefit plans,
suggesting that it has contributed more cash to the
pension plan and, thereby, received a tax deduction that it
has expensed for financial reporting. Fleet Sneaks
recognized a deferred tax liability for this temporary
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
diference. The deferred tax liability increased in 2012
due to increased overfunding. The deferred tax liability
decreased in 2013 due to a decrease in the extent of
overfunding.
12.24 (Marytown Energy; preparing journal entries for income tax
expense.) (amounts in millions of US$)
a. 2011
Income Tax Expense
………………………………………….
272
Income Tax
Receivable
………………………………………
96
Deferred Tax Liability……………………………………
368
Assets = Liabilities +
Shareholders’
Equity (Class.)
+96 +368 –272
IncSt
RE
To record income tax expense, a claim for a
refund
in
taxes paid previously, and the
increase in the
deferred
tax liability for
2011.
Solutions12–12Deferred Tax
Liability……………………………………….
74
415
Assets = Liabilities +
Shareholders’
Equity (Class.)
–74 –341
IncSt
RE
+415
To record income tax expense, income tax
payable,
and
the decrease in the deferred
tax liability for
2012.
2013
Income Tax Expense
………………………………………….
390
46
344
Assets = Liabilities +
Shareholders’
Equity (Class.)
+46 –390
IncSt
RE
+344
To record income tax expense, income tax
payable,
and the increase in the deferred
tax liability for
2013.
12-13Solutions
b. Marytown Energy operated at a net taxable loss for 2011
and likely received a refund of taxes paid in previous years
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
due to net operating loss carryforward provisions in the
income tax law. The net taxable loss likely occurred
because Marytown Energy acquired new equipment for
which accelerated depreciation deductions for tax purposes
exceeded straight-line depreciation for financial reporting.
The increase in the deferred tax liability for 2011 supports
this explanation. 2012 was a profitable year for both
financial and tax reporting. The decrease in the deferred
tax liability for temporary depreciation diferences
suggests that Marytown Energy reduced its capital
expenditures suficiently during 2012 to permit
straight-line depreciation for financial reporting to exceed
accelerated depreciation for tax reporting. 2013 was
similar to 2011 except that accelerated depreciation for
tax purposes resulted in low but positive taxable income
and again led to an increase in the deferred tax liability.
Income before taxes for financial reporting increased each
year in line with the increase in income tax expense
because of the stable efective tax rate.
12.25 (Pownall Company; deriving permanent and temporary
diferences from financial statement disclosures.) (amounts in
US$)
Change in
a. Income Tax = Income Taxes +
Deferred
Tax
Expense
$156,000 =
Currently
P
ayab
l
e
$48
,
00
+
Li
ab
ili
ty
x
x = $108,000
Temporary
=
Changes in Deferred Tax
Liability/0.40
Differences
=
$108,000/0.40
=
$270,000
Solutions12–14
b. Because income tax expense exceeds income taxes
payable, book income exceeded taxable income.
Taxable Income: $48,000/0.40
………………………………………
$
120,000
Temporary
Di
fe
r
e
nces
………………………………………………….
27
0
, 00
Book Income Before Taxes Excluding Permanent
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Differences ……………………………………………………….
……….
$
390,000
Permanent Differences (
Plu
g)
………………………………………..
7
2
, 00
Book Income Before Taxes
(Given)………………………………….
$
31
8
, 00
0
Depreciation ……………….. € 427,800 (6) —€ 427,800 (4)
D
ep
r
e
ci
at
ion
………………………
(322,800) (g) Temporary
(358,800) (3) Municipal Bond I
n
t
eres
t ……..
8
5
,
80
0
(5)
Permanent
—
Taxable Income ………………….
—€
6
9
, 00
0 (2) Pretax Book Income …………… €
190,800 (g)
Income Taxes
Payable at
40% …………………………….€
2
7
, 60
0 (g) Income Tax
Expense at 40
of €105,000 = €427,800 –
€322,800, Which Is
Income Excluding
Permanent Differences….
(
4
2
, 00
0
) (g) Net Income
……………………….. €
14
8
, 80
0 (1)
12-15Solutions
Order and derivation of
computations: (g) Given.
(1) €148,800 = €190,800 – €42,000.
(2) €69,000 = €27,600/0.40.
(3) Temporary diference for depreciation is (€42,000 –
€27,600)/0.40
= €36,000. Because income taxes payable are less
than income tax expense, depreciation deducted on tax
return exceeds depreciation expense on financial
statements. Thus, the depreciation deduction on the tax
return is €358,800 = €322,800 + €36,000.
(4) €427,800 = €358,800 + €69,000.
(5) Taxable income on financial statements is
€105,000 =
€42,000/0.40. Total financial statement income before
taxes, including permanent diferences, is €190,800.
Hence, permanent diferences are €190,800 – €105,000
= €85,800.
(6) €190,800 + €322,800 – €85,800 = €427,800. See also
(4), for check.
12.27 (Woodward Corporation; efect of temporary diferences on
income taxes.) (amounts in US$)
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
c. Financial Reporting 2013 2014 2015 2016
Income Before
Depreciation…..
Depreciation Expense
($50,000/4)
…………………..
$60,000
(
1
2
, 50
0
$60,00
0
$60,000
(
1
2
, 50
0
$
60,000
Pretax Income
……………………..
$
4
7
, 50
0
$4
7
, 50
0
$4
7
, 50
0
$
4
7
, 50
0
Income Tax Expense at 0.40
….
$
1
9
, 00
0
$1
9
, 00
0
$1
9
, 00
0
$
1
9
, 00
0
d.
Income Tax Payable (from
2013 2014 2015 2016
Part a
.
)—C
r.
……………………..
$17,400
$
15,200
$ 21,000
$
22,400
Dr. if
N
egat
i
ve
…………………..
1
,
60
0
3
, 80
0
(
2
, 00
0
(
3
, 40
0
)
Income Tax Expe
ns
e—
Dr.
……..
$
1
9
, 00
0 $
1
9
, 00
0
$
1
9
, 00
0
$
1
9
, 00
0
a. 2013 2014 2015 2016
Other Pre-Tax I
nc
ome
…………..
$35,000
$35,00
0
$35,00
0
$35,00
0
Income Before Depreciation
from
Machine
……………………
25,000 25,000 25,000
25,00
0
Depreciation Deduction:
0.33 X
$50,000
………………….. (16,500)
0.44 X
$50,000
………………….. (22,000)
0.15 X
$50,000
………………….. (7,500)
0.08 X
$50,000
…………………..
(
4
,00
0
)
Taxable
Income
……………………
$43,500 $38,
00
0
$52,
50
0
$56,000
Tax Rate
……………………………..
0
.
4
0
0
.
4
0
0
.
4
0
0
.
4
0
Income Taxes Payable
………….
$
1
7
, 40
0
$1
5
, 20
0
$2
1
, 00
0
$
2
2
, 40
0
b. Financial Reporting 2013 2014 2015 2016
Carrying Value, January 1
……
$50,000
$37,50
0
$25,000 $ 12,500
Depreciation Expense
…………..
(
1
2
, 50
0
)
(
1
2
,
50
0
) (
1
2
, 50
0
)
(
1
2
, 50
0
)
Carrying Value, December
31 .
Tax Reporting
Tax Basis, January 1
$
3
7
, 50
0
$50,000
$2
5
,
00
0 $
1
2
,
50
0 $
—
$33,500 $11,500 $
Depreciation
Deduction
………..
(
1
6
, 50
0
)
(
2
2
,
00
0
)
(
7
, 50
0
)
(
4
, 00
0
Tax Basis, December 31
……….
$
3
3
, 50
0
$1
1
,
50
0 $
4
,
00
0 $
—
Solutions12–16
)
Change in Deferred Tax Lia- bility
(Plug): Cr. if Positive,
2013
Income Tax Expense
………………………………………….
19,000
Cash or Income Tax
P
ayab
l
e
…………………………..
17,40
0
Deferred Tax
Liability……………………………………
1,60
0
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Assets = Liabilities +
Shareholders’
Equity (Class.)
–17,400 +1,600 –19,000
IncSt
RE
2014
Income Tax Expense
………………………………………….
19,000
Cash or Income Tax
P
ayab
l
e
…………………………..
15,20
0
Deferred Tax
Liability……………………………………
3,80
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
–15,200 +3,800 –19,000
IncSt
RE
12-1Solutions
12.27 d. continued.
2015
Income Tax Expense
………………………………………….
19,000
Deferred Tax
Liability……………………………………….
2,000
Cash or Income Tax
P
ayab
l
e
…………………………..
21,00
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
–21,000 –2,000 –19,000
IncSt
RE
2016
Income Tax Expense
………………………………………….
19,000
Deferred Tax
Liability……………………………………….
3,400
Cash or Income Tax
P
ayab
l
e
…………………………..
22,40
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
–22,400 –3,400 –19,000
IncSt
RE
12.28 (Federal Stores; interpreting disclosures regarding sales of
receivables.)
a. 1. The credit card accounts and receivables are the
possession and ownership of Community First.
2. Federal has not placed restrictions on the receivables
that
c
o
ns
t
r
a
in
Community First from doing what it pleases with the
r
e
cei
vab
l
e
s.
3. Federal has no interest rate risk or credit risk associated
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
with the receivables. Community First incurs interest
rate risk and credit risk, controls which customers
receive credit, and services the credit accounts.
b. Federal benefits from the increased sales revenue that the
credit cards provide without incurring interest rate risk and
credit risk. Federal also does not incur the administrative
cost of the credit card operation. Federal loses control over
which of its customers can obtain credit cards, perhaps
losing sales it would otherwise obtain if Federal controlled
the granting of credit.
Solutions12–18
12.29 (Lewis Corporation; interpreting note on of-balance-sheet
f
in
a
ncin
g
.
)
1. The receivables are in the possession and ownership of the
special purpose entity (SPE). Lewis has no control over the
actions of the SPE. Neither Lewis nor its creditors have
access to the assets of the SPE and creditors of the SPE have
no access to Lewis’ assets.
2. Lewis has not placed restrictions on the receivables that
constrain the
SPE from doing what it pleases with the
receivables.
3. The SPE incurs interest rate risk and credit.
12.30 (Juicy-Juice; interpreting retirement plans disclosures.)
(amounts in millions of US$)
a. Juicy-Juice increased the discount rate it used to compute
the pension and health care obligations from 5.7% to
5.8%, thereby reducing the present value of these
obligations and resulting in an actuarial gain. Also,
Juicy-Juice reduced the initial health care cost trend rate
from
10% to 9%, which reduced the health care obligation and
resulted in
an actuarial gain. Ofsetting these two factors is a change
in the assumed rate of compensation increases, which
increases the pension obligation and ofsets the actuarial
gains from the preceding two factors. Juicy-Juice
amortized an actuarial loss from previous years in
computing its net pension expense and net health care
expense. The question does not address this
amortization but only the actuarial gain that arose in
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
2013.
b. The actual return on investments (disclosed in the change
in fair value of plan assets) exceeded the expected return
on investments (disclosed in the computation of net
pension expense) each year.
c. Juicy-Juice contributed cash to the health care plan each
year equal to the benefits paid. Thus, the health care plan
has no assets to invest on which to generate a return.
Common terminology refers to such funding arrangements
as pay as you go.
d. Prior Service Cost, End of 2012 ……………………………………..$
5
Plus Increase in Prior Service Cost During 2013
from Plan
Amendments ……………………………………………………………1
1
Less Amortization of Prior Service Cost During 2013………
(
3
) Prior Service Cost, End of 2013 $
1
3
12-19Solutions
e. Net Actuarial Loss, End of 2012 …………………………………..$
2,285
Less Decrease in Actuarial Loss During 2013 from
Actuarial Gain in Pension
Obligation
…………………………
(163) Less Amortization of Actuarial Loss During 2013
………….. (164) Less Excess of Actual Return over
Expected Return on
Pension Investments ($513 – $391) ……………………………
(
12
2
) Prior Service Credit, End of 2013
………………………………….. $
1
, 83
6
f. Prior Service Credit, End of 2012 …………………………………..
$ 114
Less Amortization of Prior Service Cost During 2013………
(
1
3
) Prior Service Credit, End of 2013
…………………………………..$ 10
1
g. Net Actuarial Loss, End of 2012 ……………………………………
$ 419
Less Decrease in Actuarial Loss from Actuarial Gain in
Pension Obligation During 2013 ………………………………..
(34) Less Amortization of Actuarial Loss During 2013
…………..
(
2
1
) Net Actuarial Loss, End of 2013
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
…………………………………… $
36
4
h. 2013
Pension Expe
ns
e ………………………………………………..
340
Pension Liability (Noncurrent Liabilities: $2,753
– $729) ………………………………………………………….
2,024
Other Comprehensive Income (Prior Service Cost:
$13 – $5) ………………………………………………………. 8
Other ($7 – $3) …………………………………………………. 4
Ca
sh
……………………………………………………………..19
Pension Asset (Noncurrent Assets: $2,068 –
$185) …………………………………………………………1,883
Pension Liability (Current Liabilities:
$25 – $0) ……………………………………………………25
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
2013.
Solutions12–20
i. 2013
Health Care Expense
…………………………………………
126
Health Care Liability (Noncurrent Liabilities:
$1,312 – $1
,
270)
42
Other Comprehensive Income (Prior Service Cost:
$114 – $101)
………………………………………………….
13
O
t
h
e
r
…………………………………………………………..
……
49
Ca
sh
…………………………………………………………
75
Health Care Liability (Current Liabilities:
$100 – $0) ………………………………………………….100
Other Comprehensive Income (Actuarial Loss:
$419 – $364)………………………………………………55
Assets = Liabilities +
Shareholders’
Equity (Class.)
+49 –42 –126
IncSt
RE
–75 +100 –13
OCI
AOCI
+55
OCI
AOCI
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
To record health care expense, health care
funding,
and the change in balance sheet
accounts relating
to
the health care plan
for
2013.
12.31 (Treadaway, Inc.; interpreting retirement plan disclosures.)
(amounts in millions of US$)
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 the fair value of the
pension assets and the assumed rate of return on
investments. For Treadaway, the expected rate of return
on investments exceeds the discount rate but the pension
obligation exceeds pension assets. The amounts for
interest cost and expected return on investments are a
mixture of these four factors. The higher pension
obligation exceeds the lower discount rate for 2011 and
2012 and results in interest cost exceeding the expected
return on investments. The net efect of these four factors
results in equal amounts for interest cost and expected
return on investments for 2013, and is simply a
coincidence.
12-21
b. The decline in net health care expense results from
a decline in interest cost, likely the result of
decreases in the health care obligation that more than
ofset the efects of increases in the discount rate.
c. Treadaway contributes suficient cash each year to
fund current benefits but no excess contributions to invest
in assets.
d. Treadaway increased the discount rate it uses to compute
the pension obligation and health care obligation from
5.5% in 2012 to 5.75% in
2013. The increased discount rate reduces the obligations
and results
in an actuarial gain. In addition, Treadaway decreased the
initial health care cost trend rate from 11.5% in 2012 to
11.2% in 2013, which reduces the health care obligation
and results in an actuarial gain.
e. Prior Service Cost, End of 2012
………………………………………….$
314
Plus Increase in Prior Service Cost During 2013
from Plan
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Amendments ……………………………………………………………..
…111
Less Amortization of Prior Service Cost During 2013…………..
(
5
9
) Prior Service Cost, End of 2013
…………………………………………. $
36
6
f. Net Actuarial Loss, End of 2012
……………………………………….. $
1,646
Less Decrease in Actuarial Loss During 2013 from Actuarial
Gain in Pension
Obligation……………………………………………. (120) Less
Amortization of Actuarial Loss During 2013 ……………….
(91) Less Excess of Actual Return over Expected Return on
Pension Investments ($478 – $295)
………………………………..
(
18
3
)
Net Actuarial Loss, End of 2013
……………………………………….. $
1
,25
2
g. Prior Service Cost, End of 2012
………………………………………….$
339
Plus Increase in Prior Service Cost During 2013 from Plan
Amendments ……………………………………………………………..
…1
Less Amortization of Prior Service Cost During 2013…………..
(
4
1
) Prior Service Cost, End of 2013
………………………………………….$ 29
9
h. Net Actuarial Loss, End of 2012
………………………………………..$
340
Less Decrease in Actuarial Loss During 2013 from Actuarial
Gain in Health Care Obligation
…………………………………….. (110) Less Amortization of
Actuarial Loss During 2013 ……………….
(
9
) Net
Actuarial Loss, End of 2013 ………………………………………..
$
22
1
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
diference. The deferred tax liability increased in 2012
due to increased overfunding. The deferred tax liability
decreased in 2013 due to a decrease in the extent of
overfunding.
12.24 (Marytown Energy; preparing journal entries for income tax
expense.) (amounts in millions of US$)
a. 2011
Income Tax Expense
………………………………………….
272
Income Tax
Receivable
………………………………………
96
Deferred Tax Liability……………………………………
368
Assets = Liabilities +
Shareholders’
Equity (Class.)
+96 +368 –272
IncSt
RE
To record income tax expense, a claim for a
refund
in
taxes paid previously, and the
increase in the
deferred
tax liability for
2011.
Solutions12–12Deferred Tax
Liability……………………………………….
74
415
Assets = Liabilities +
Shareholders’
Equity (Class.)
–74 –341
IncSt
RE
+415
To record income tax expense, income tax
payable,
and
the decrease in the deferred
tax liability for
2012.
2013
Income Tax Expense
………………………………………….
390
46
344
Assets = Liabilities +
Shareholders’
Equity (Class.)
+46 –390
IncSt
RE
+344
To record income tax expense, income tax
payable,
and the increase in the deferred
tax liability for
2013.
12-13Solutions
b. Marytown Energy operated at a net taxable loss for 2011
and likely received a refund of taxes paid in previous years
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
due to net operating loss carryforward provisions in the
income tax law. The net taxable loss likely occurred
because Marytown Energy acquired new equipment for
which accelerated depreciation deductions for tax purposes
exceeded straight-line depreciation for financial reporting.
The increase in the deferred tax liability for 2011 supports
this explanation. 2012 was a profitable year for both
financial and tax reporting. The decrease in the deferred
tax liability for temporary depreciation diferences
suggests that Marytown Energy reduced its capital
expenditures suficiently during 2012 to permit
straight-line depreciation for financial reporting to exceed
accelerated depreciation for tax reporting. 2013 was
similar to 2011 except that accelerated depreciation for
tax purposes resulted in low but positive taxable income
and again led to an increase in the deferred tax liability.
Income before taxes for financial reporting increased each
year in line with the increase in income tax expense
because of the stable efective tax rate.
12.25 (Pownall Company; deriving permanent and temporary
diferences from financial statement disclosures.) (amounts in
US$)
Change in
a. Income Tax = Income Taxes +
Deferred
Tax
Expense
$156,000 =
Currently
P
ayab
l
e
$48
,
00
+
Li
ab
ili
ty
x
x = $108,000
Temporary
=
Changes in Deferred Tax
Liability/0.40
Differences
=
$108,000/0.40
=
$270,000
Solutions12–14
b. Because income tax expense exceeds income taxes
payable, book income exceeded taxable income.
Taxable Income: $48,000/0.40
………………………………………
$
120,000
Temporary
Di
fe
r
e
nces
………………………………………………….
27
0
, 00
Book Income Before Taxes Excluding Permanent
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Differences ……………………………………………………….
……….
$
390,000
Permanent Differences (
Plu
g)
………………………………………..
7
2
, 00
Book Income Before Taxes
(Given)………………………………….
$
31
8
, 00
0
Depreciation ……………….. € 427,800 (6) —€ 427,800 (4)
D
ep
r
e
ci
at
ion
………………………
(322,800) (g) Temporary
(358,800) (3) Municipal Bond I
n
t
eres
t ……..
8
5
,
80
0
(5)
Permanent
—
Taxable Income ………………….
—€
6
9
, 00
0 (2) Pretax Book Income …………… €
190,800 (g)
Income Taxes
Payable at
40% …………………………….€
2
7
, 60
0 (g) Income Tax
Expense at 40
of €105,000 = €427,800 –
€322,800, Which Is
Income Excluding
Permanent Differences….
(
4
2
, 00
0
) (g) Net Income
……………………….. €
14
8
, 80
0 (1)
12-15Solutions
Order and derivation of
computations: (g) Given.
(1) €148,800 = €190,800 – €42,000.
(2) €69,000 = €27,600/0.40.
(3) Temporary diference for depreciation is (€42,000 –
€27,600)/0.40
= €36,000. Because income taxes payable are less
than income tax expense, depreciation deducted on tax
return exceeds depreciation expense on financial
statements. Thus, the depreciation deduction on the tax
return is €358,800 = €322,800 + €36,000.
(4) €427,800 = €358,800 + €69,000.
(5) Taxable income on financial statements is
€105,000 =
€42,000/0.40. Total financial statement income before
taxes, including permanent diferences, is €190,800.
Hence, permanent diferences are €190,800 – €105,000
= €85,800.
(6) €190,800 + €322,800 – €85,800 = €427,800. See also
(4), for check.
12.27 (Woodward Corporation; efect of temporary diferences on
income taxes.) (amounts in US$)
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
c. Financial Reporting 2013 2014 2015 2016
Income Before
Depreciation…..
Depreciation Expense
($50,000/4)
…………………..
$60,000
(
1
2
, 50
0
$60,00
0
$60,000
(
1
2
, 50
0
$
60,000
Pretax Income
……………………..
$
4
7
, 50
0
$4
7
, 50
0
$4
7
, 50
0
$
4
7
, 50
0
Income Tax Expense at 0.40
….
$
1
9
, 00
0
$1
9
, 00
0
$1
9
, 00
0
$
1
9
, 00
0
d.
Income Tax Payable (from
2013 2014 2015 2016
Part a
.
)—C
r.
……………………..
$17,400
$
15,200
$ 21,000
$
22,400
Dr. if
N
egat
i
ve
…………………..
1
,
60
0
3
, 80
0
(
2
, 00
0
(
3
, 40
0
)
Income Tax Expe
ns
e—
Dr.
……..
$
1
9
, 00
0 $
1
9
, 00
0
$
1
9
, 00
0
$
1
9
, 00
0
a. 2013 2014 2015 2016
Other Pre-Tax I
nc
ome
…………..
$35,000
$35,00
0
$35,00
0
$35,00
0
Income Before Depreciation
from
Machine
……………………
25,000 25,000 25,000
25,00
0
Depreciation Deduction:
0.33 X
$50,000
………………….. (16,500)
0.44 X
$50,000
………………….. (22,000)
0.15 X
$50,000
………………….. (7,500)
0.08 X
$50,000
…………………..
(
4
,00
0
)
Taxable
Income
……………………
$43,500 $38,
00
0
$52,
50
0
$56,000
Tax Rate
……………………………..
0
.
4
0
0
.
4
0
0
.
4
0
0
.
4
0
Income Taxes Payable
………….
$
1
7
, 40
0
$1
5
, 20
0
$2
1
, 00
0
$
2
2
, 40
0
b. Financial Reporting 2013 2014 2015 2016
Carrying Value, January 1
……
$50,000
$37,50
0
$25,000 $ 12,500
Depreciation Expense
…………..
(
1
2
, 50
0
)
(
1
2
,
50
0
) (
1
2
, 50
0
)
(
1
2
, 50
0
)
Carrying Value, December
31 .
Tax Reporting
Tax Basis, January 1
$
3
7
, 50
0
$50,000
$2
5
,
00
0 $
1
2
,
50
0 $
—
$33,500 $11,500 $
Depreciation
Deduction
………..
(
1
6
, 50
0
)
(
2
2
,
00
0
)
(
7
, 50
0
)
(
4
, 00
0
Tax Basis, December 31
……….
$
3
3
, 50
0
$1
1
,
50
0 $
4
,
00
0 $
—
Solutions12–16
)
Change in Deferred Tax Lia- bility
(Plug): Cr. if Positive,
2013
Income Tax Expense
………………………………………….
19,000
Cash or Income Tax
P
ayab
l
e
…………………………..
17,40
0
Deferred Tax
Liability……………………………………
1,60
0
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Assets = Liabilities +
Shareholders’
Equity (Class.)
–17,400 +1,600 –19,000
IncSt
RE
2014
Income Tax Expense
………………………………………….
19,000
Cash or Income Tax
P
ayab
l
e
…………………………..
15,20
0
Deferred Tax
Liability……………………………………
3,80
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
–15,200 +3,800 –19,000
IncSt
RE
12-1Solutions
12.27 d. continued.
2015
Income Tax Expense
………………………………………….
19,000
Deferred Tax
Liability……………………………………….
2,000
Cash or Income Tax
P
ayab
l
e
…………………………..
21,00
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
–21,000 –2,000 –19,000
IncSt
RE
2016
Income Tax Expense
………………………………………….
19,000
Deferred Tax
Liability……………………………………….
3,400
Cash or Income Tax
P
ayab
l
e
…………………………..
22,40
0
Assets = Liabilities +
Shareholders’
Equity (Class.)
–22,400 –3,400 –19,000
IncSt
RE
12.28 (Federal Stores; interpreting disclosures regarding sales of
receivables.)
a. 1. The credit card accounts and receivables are the
possession and ownership of Community First.
2. Federal has not placed restrictions on the receivables
that
c
o
ns
t
r
a
in
Community First from doing what it pleases with the
r
e
cei
vab
l
e
s.
3. Federal has no interest rate risk or credit risk associated
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
with the receivables. Community First incurs interest
rate risk and credit risk, controls which customers
receive credit, and services the credit accounts.
b. Federal benefits from the increased sales revenue that the
credit cards provide without incurring interest rate risk and
credit risk. Federal also does not incur the administrative
cost of the credit card operation. Federal loses control over
which of its customers can obtain credit cards, perhaps
losing sales it would otherwise obtain if Federal controlled
the granting of credit.
Solutions12–18
12.29 (Lewis Corporation; interpreting note on of-balance-sheet
f
in
a
ncin
g
.
)
1. The receivables are in the possession and ownership of the
special purpose entity (SPE). Lewis has no control over the
actions of the SPE. Neither Lewis nor its creditors have
access to the assets of the SPE and creditors of the SPE have
no access to Lewis’ assets.
2. Lewis has not placed restrictions on the receivables that
constrain the
SPE from doing what it pleases with the
receivables.
3. The SPE incurs interest rate risk and credit.
12.30 (Juicy-Juice; interpreting retirement plans disclosures.)
(amounts in millions of US$)
a. Juicy-Juice increased the discount rate it used to compute
the pension and health care obligations from 5.7% to
5.8%, thereby reducing the present value of these
obligations and resulting in an actuarial gain. Also,
Juicy-Juice reduced the initial health care cost trend rate
from
10% to 9%, which reduced the health care obligation and
resulted in
an actuarial gain. Ofsetting these two factors is a change
in the assumed rate of compensation increases, which
increases the pension obligation and ofsets the actuarial
gains from the preceding two factors. Juicy-Juice
amortized an actuarial loss from previous years in
computing its net pension expense and net health care
expense. The question does not address this
amortization but only the actuarial gain that arose in
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
2013.
b. The actual return on investments (disclosed in the change
in fair value of plan assets) exceeded the expected return
on investments (disclosed in the computation of net
pension expense) each year.
c. Juicy-Juice contributed cash to the health care plan each
year equal to the benefits paid. Thus, the health care plan
has no assets to invest on which to generate a return.
Common terminology refers to such funding arrangements
as pay as you go.
d. Prior Service Cost, End of 2012 ……………………………………..$
5
Plus Increase in Prior Service Cost During 2013
from Plan
Amendments ……………………………………………………………1
1
Less Amortization of Prior Service Cost During 2013………
(
3
) Prior Service Cost, End of 2013 $
1
3
12-19Solutions
e. Net Actuarial Loss, End of 2012 …………………………………..$
2,285
Less Decrease in Actuarial Loss During 2013 from
Actuarial Gain in Pension
Obligation
…………………………
(163) Less Amortization of Actuarial Loss During 2013
………….. (164) Less Excess of Actual Return over
Expected Return on
Pension Investments ($513 – $391) ……………………………
(
12
2
) Prior Service Credit, End of 2013
………………………………….. $
1
, 83
6
f. Prior Service Credit, End of 2012 …………………………………..
$ 114
Less Amortization of Prior Service Cost During 2013………
(
1
3
) Prior Service Credit, End of 2013
…………………………………..$ 10
1
g. Net Actuarial Loss, End of 2012 ……………………………………
$ 419
Less Decrease in Actuarial Loss from Actuarial Gain in
Pension Obligation During 2013 ………………………………..
(34) Less Amortization of Actuarial Loss During 2013
…………..
(
2
1
) Net Actuarial Loss, End of 2013
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
…………………………………… $
36
4
h. 2013
Pension Expe
ns
e ………………………………………………..
340
Pension Liability (Noncurrent Liabilities: $2,753
– $729) ………………………………………………………….
2,024
Other Comprehensive Income (Prior Service Cost:
$13 – $5) ………………………………………………………. 8
Other ($7 – $3) …………………………………………………. 4
Ca
sh
……………………………………………………………..19
Pension Asset (Noncurrent Assets: $2,068 –
$185) …………………………………………………………1,883
Pension Liability (Current Liabilities:
$25 – $0) ……………………………………………………25
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
2013.
Solutions12–20
i. 2013
Health Care Expense
…………………………………………
126
Health Care Liability (Noncurrent Liabilities:
$1,312 – $1
,
270)
42
Other Comprehensive Income (Prior Service Cost:
$114 – $101)
………………………………………………….
13
O
t
h
e
r
…………………………………………………………..
……
49
Ca
sh
…………………………………………………………
75
Health Care Liability (Current Liabilities:
$100 – $0) ………………………………………………….100
Other Comprehensive Income (Actuarial Loss:
$419 – $364)………………………………………………55
Assets = Liabilities +
Shareholders’
Equity (Class.)
+49 –42 –126
IncSt
RE
–75 +100 –13
OCI
AOCI
+55
OCI
AOCI
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
To record health care expense, health care
funding,
and the change in balance sheet
accounts relating
to
the health care plan
for
2013.
12.31 (Treadaway, Inc.; interpreting retirement plan disclosures.)
(amounts in millions of US$)
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 the fair value of the
pension assets and the assumed rate of return on
investments. For Treadaway, the expected rate of return
on investments exceeds the discount rate but the pension
obligation exceeds pension assets. The amounts for
interest cost and expected return on investments are a
mixture of these four factors. The higher pension
obligation exceeds the lower discount rate for 2011 and
2012 and results in interest cost exceeding the expected
return on investments. The net efect of these four factors
results in equal amounts for interest cost and expected
return on investments for 2013, and is simply a
coincidence.
12-21
b. The decline in net health care expense results from
a decline in interest cost, likely the result of
decreases in the health care obligation that more than
ofset the efects of increases in the discount rate.
c. Treadaway contributes suficient cash each year to
fund current benefits but no excess contributions to invest
in assets.
d. Treadaway increased the discount rate it uses to compute
the pension obligation and health care obligation from
5.5% in 2012 to 5.75% in
2013. The increased discount rate reduces the obligations
and results
in an actuarial gain. In addition, Treadaway decreased the
initial health care cost trend rate from 11.5% in 2012 to
11.2% in 2013, which reduces the health care obligation
and results in an actuarial gain.
e. Prior Service Cost, End of 2012
………………………………………….$
314
Plus Increase in Prior Service Cost During 2013
from Plan
© 2013 Cengage Learning. All
r
ights reserved. No
d
is
t
r
ibution allowed without express
a
u
t
hor
ization.
Amendments ……………………………………………………………..
…111
Less Amortization of Prior Service Cost During 2013…………..
(
5
9
) Prior Service Cost, End of 2013
…………………………………………. $
36
6
f. Net Actuarial Loss, End of 2012
……………………………………….. $
1,646
Less Decrease in Actuarial Loss During 2013 from Actuarial
Gain in Pension
Obligation……………………………………………. (120) Less
Amortization of Actuarial Loss During 2013 ……………….
(91) Less Excess of Actual Return over Expected Return on
Pension Investments ($478 – $295)
………………………………..
(
18
3
)
Net Actuarial Loss, End of 2013
……………………………………….. $
1
,25
2
g. Prior Service Cost, End of 2012
………………………………………….$
339
Plus Increase in Prior Service Cost During 2013 from Plan
Amendments ……………………………………………………………..
…1
Less Amortization of Prior Service Cost During 2013…………..
(
4
1
) Prior Service Cost, End of 2013
………………………………………….$ 29
9
h. Net Actuarial Loss, End of 2012
………………………………………..$
340
Less Decrease in Actuarial Loss During 2013 from Actuarial
Gain in Health Care Obligation
…………………………………….. (110) Less Amortization of
Actuarial Loss During 2013 ……………….
(
9
) Net
Actuarial Loss, End of 2013 ………………………………………..
$
22
1