To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.

com

COMPREHENSIVE EXAMINATION E

PART 5

(Chapters 18-21)

Approximate
Problem Topic Time
E-I Long-Term Contracts. 15 min.
E-II Installment Sales Method. 20 min.
E-III Deferred Income Taxes. 25 min.
E-IV Pensions. 15 min.
E-V Leases. 25 min.
100 min.
 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

E-2 Test Bank for Intermediate Accounting, Thirteenth Edition

Problem E-I — Long-Term Contracts.

Edwards Company contracted on 4/1/12 to construct a building for $2,300,000. The project was
completed in 2014. Additional data follow:

2012 2013 2014

Costs incurred to date $ 560,000 $1,350,000 $1,900,000
Estimated cost to complete 1,040,000 450,000 —
Billings to date 500,000 1,800,000 2,300,000
Collections to date 400,000 1,300,000 2,200,000

Instructions
(a) Calculate the income recognized by Edwards under the percentage-of-completion method of
accounting in each of the years 2012, 2013, and 2014.
(b) Prepare all necessary entries for the year 2013.
(c) Present the balance sheet disclosures at December 31, 2013. Proper headings or
subheadings must be indicated.

Problem E-II — Installment Sales Method.

Garber, Inc. accounts for all sales of its merchandise on the installment basis. Following is the
unadjusted trial balance at 12/31/14:

Cash $ 89,200
Installment Accounts Receivable—2012 170,000
Installment Accounts Receivable—2013 400,000
Installment Accounts Receivable—2014 750,000
Inventory, 1/1/14 78,000
Repossessed Merchandise 22,000
Accounts Payable $ 136,000
Deferred Gross Profit—2012 84,000
Deferred Gross Profit—2013 175,000
Common Stock 600,000
Retained Earnings 406,200
Installment Sales 1,000,000
Purchases 738,000
Loss on Repossession 4,000
Operating Expenses 150,000
$2,401,200 $2,401,200

Additional Data: 2012 Gross Profit Rate = 32%; Inventory 12/31/14 = $159,000;
Repossessed merchandise 12/31/14 = $14,000;
Merchandise sold in 2013 was repossessed in 2014 and the following
entry was prepared (assume correctly):
Deferred Gross Profit—2013 ................................ 14,000
Repossessed Merchandise ................................... 22,000
Loss on Repossession ......................................... 4,000
Installment Accounts Receivable—2013 ... 40,000
 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

Comprehensive Examination E E-3

Problem E-II (cont.)

Instructions
(a) Determine collections during 2014 on Installment A/R for each of the years 2012, 2013, and
2014.
(b) Without prejudice to your answer in Part (a), assume that total collections on Installment
Accounts Receivable during 2014 were $1,060,000; $220,000 from 2012, $300,000 from
2013, and $540,000 from 2014. Prepare all necessary adjusting and closing entries at
12/31/14.

Problem E-III — Deferred Income Taxes.

In 2013, the initial year of its existence, Dexter Company's accountant, in preparing both the
income statement and the tax return, developed the following list of items causing differences
between accounting and taxable income:
1. The company sells its merchandise on an installment contract basis. In 2013, Dexter elected,
for tax purposes, to report the gross profit from these sales in the years the receivables are
collected. However, for financial statement purposes, the company recognized all the gross
profit in 2013. These procedures created a $500,000 difference between book and taxable
incomes. The future collection of the installment contracts receivables are expected to result
in taxable amounts of $250,000 in each of the next two years. (Note: the company treats
installment contracts receivable as a current asset on its balance sheet.)
2. The company has also chosen to depreciate all of its depreciable assets on an accelerated
basis for tax purposes but on a straight-line basis for accounting purposes. These procedures
resulted in $60,000 excess depreciation for tax purposes over accounting depreciation. The
temporary difference due to excess tax depreciation will reverse equally over the three year
period from 2014-2016.
3. Dexter leased some of its property to Baker Company on July 1, 2013. The lease was to
expire on July 1, 2015 and the monthly rentals were to be $60,000. Baker, however, paid the
first year's rent in advance and Dexter reported this entire amount on its tax return. These
procedures resulted in a $360,000 difference between book and taxable incomes. (Note: this
lease was an operating lease and Dexter classified the unearned rent as a current liability on
its balance sheet.)
4. Dexter owns $200,000 of bonds issued by the State of Oregon upon which 5% interest is paid
annually. In 2013, Dexter showed $10,000 of income from the bonds on its income statement
but did not show any of this amount on its tax return. (Note: these bonds are classified as
long-term investments on Dexter's balance sheet.)
5. In 2013, Dexter insured the lives of its chief executives. The premiums paid amounted to
$12,000 and this amount was shown as an expense on the income statement. However, this
amount was not deducted on the tax return. The company is the beneficiary.
 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

E-4 Test Bank for Intermediate Accounting, Thirteenth Edition

Problem E-III (cont.)

Instructions
Assuming that the income statement of Dexter Company showed "Income before income taxes"
of $1,200,000; that the enacted tax rates are 40% for all years; and that no other differences
between book and taxable incomes existed, except for those mentioned above:
(a) Compute the income tax payable.
(b) Prepare a schedule of future taxable and (deductible) amounts at the end of 2013.
(c) Prepare a schedule of deferred tax (asset) and liability at the end of 2013.
(d) Compute the net deferred tax expense (benefit) for 2013.
(e) Make the journal entry recording income tax expense, income tax payable, and deferred
income taxes for 2013.
(f) Indicate how income tax expense and any deferred income taxes should be disclosed on
the financial statements under generally accepted accounting principles. Show the amounts
for these items and indicate specifically where they would be disclosed.

Problem E-IV — Pensions.

Presented below is information related to Stage Department Stores, Inc. pension plan for 2013.

Service cost $520,000

Funding contribution for 2013 500,000
Settlement rate used in actuarial computation 10%
Expected return on plan assets 9%
Amortization of PSC (due to benefit increase) 90,000
Amortization of unrecognized net gains 48,000
Projected benefit obligation (at beginning of period) 540,000
Fair value of plan assts (at beginning of period) 360,000

Instructions
(a) Compute the amount of pension expense to be reported for 2013. (Show computations.)
(b) Prepare the journal entry to record pension expense and the employer’s contribution for
2013.
 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

Comprehensive Examination E E-5

Problem E-V — Leases.

On January 1, 2013, Foley Company (as lessor) entered into a noncancelable lease agreement
with Pinkley Company for machinery which was carried on the accounting records of Foley at
$5,436,000 and had a market value of $5,760,000. Minimum lease payments under the lease
agreement which expires on December 31, 2022, total $8,520,000. Payments of $852,000 are
due each January 1. The first payment was made on January 1, 2013 when the lease agreement
was finalized. The interest rate of 10% which was stipulated in the lease agreement is the implicit
rate set by the lessor. The effective interest method of amortization is being used. Pinkley
expects the machine to have a ten-year life with no salvage value, and be depreciated on a
straight-line basis. Collectibility of the rentals is reasonably predictable, and there are no
important uncertainties surrounding the costs yet to be incurred by the lessor.

Instructions
(a) From the lessee's viewpoint, what kind of lease is the above agreement? From the lessor's
viewpoint, what kind of lease is the above agreement?
(b) What should be the income before income taxes derived by Foley from the lease for the
year ended December 31, 2013?
(c) Ignoring income taxes, what should be the expenses incurred by Pinkley from this lease for
the year ended December 31, 2013?
(d) What journal entries should be recorded by Pinkley Company on January 1, 2013?
(e) What journal entries should be recorded by Foley Company on January 1, 2013?
 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

E-6 Test Bank for Intermediate Accounting, Thirteenth Edition

Solutions — Comprehensive Examination E

Problem E-I — Solution.
(a) 2012 income = ($560,000 ÷ $1,600,000) × $700,000 = $245,000

2013 income = ($1,350,000 ÷ $1,800,000) × $500,000 = $375,000 – $245,000 = $130,000

2014 income = $400,000 – $375,000 = $25,000

(b) Construction in Process ............................................................... 790,000

Accounts Payable, Cash, Inventory, etc. ......................... 790,000

Accounts Receivable ................................................................... 1,300,000

Billings on Construction in Process ................................. 1,300,000

Cash ............................................................................................ 900,000

Accounts Receivable ....................................................... 900,000

Construction Expenses ................................................................ 790,000

Construction in Process ............................................................... 130,000
Revenue from Long-Term Contracts ............................... 920,000

(c) Current assets:

Accounts receivable $1,000,000

Current liabilities:
Billings ($1,800,000) in excess of costs and
recognized profit ($1,725,000) $75,000

Problem E-II — Solution.

(a) Collections in 2014 on installment accounts receivable:

2012 $84,000 ÷ ($170,000 + collections) = 32%

Collections equal $92,500

2013 $175,000 ÷ ($400,000 + collections) = 35% *

Collections equal $100,000

2014 Installment Sales – Installment Accounts Receivable = Collections

$1,000,000 – $750,000 = $250,000

*14,000 ÷ 40,000 = 35%

 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

Comprehensive Examination E E-7

Problem E-II — Solution (cont.).

(b) Inventory 12/31/14 ........................................................................ 159,000
Repossessed Merchandise 12/31/14 ............................................ 14,000
Cost of Goods Sold ...................................................................... 665,000
Purchases ........................................................................ 738,000
Inventory 1/1/14................................................................. 78,000
Repossessed Merchandise .............................................. 22,000

Installment Sales ........................................................................... 1,000,000

Cost of Goods Sold .......................................................... 665,000
Deferred Gross Profit—2014 (33.5%) .............................. 335,000

Deferred Gross Profit—2012 (32% × $220,000) .......................... 70,400

Deferred Gross Profit—2013 (35% × $300,000) ........................... 105,000
Deferred Gross Profit—2014 (33.5% × $540,000) ....................... 180,900
Realized Gross Profit ....................................................... 356,300

Realized Gross Profit ................................................................... 356,300

Loss on Repossession ..................................................... 4,000
Operating Expenses ......................................................... 150,000
Income Summary ............................................................. 202,300

Income Summary ......................................................................... 202,300

Retained Earnings ............................................................ 202,300

Problem E-III — Solution.

(a) The computation of income tax payable is as follows:
Pretax financial income $1,200,000
Permanent differences:
State of Oregon bonds (10,000)
Executive insurance premiums 12,000
Temporary differences:
Installment contracts (500,000)
Excess tax depreciation (60,000)
Lease rental 360,000
Taxable income 1,002,000
Tax rate 40%
Income tax payable $400,800

(b) 2014 2015 2016 Total

Future taxable (deductible) amounts:
Installment sales $250,000 $250,000 $500,000
Depreciation 20,000 20,000 $20,000 60,000
Unearned rent (360,000) (360,000)
 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

E-8 Test Bank for Intermediate Accounting, Thirteenth Edition

Problem E-III — Solution (cont.).

(c) Future Taxable
(Deductible) Tax Deferred Tax
Temporary Differences Amounts Rate (Asset) Liability
Installment Sales $500,000 40% $200,000
Depreciation 60,000 40 24,000
Rent (360,000) 40 $(144,000)
Totals $200,000 $(144,000) $224,000

(d) Deferred tax asset at end of 2013 $(144,000)

Deferred tax asset at beginning of 2013 -0-
Deferred tax (benefit) $(144,000)

Deferred tax liability at end of 2013 $224,000

Deferred tax liability at beginning of 2013 -0-
Deferred tax expense $224,000

Deferred tax expense $224,000

Deferred tax (benefit) (144,000)
Net deferred tax expense for 2013 $ 80,000

(e) Income Tax Expense ($400,800 + $80,000) ............................... 480,800

Deferred Tax Asset....................................................................... 144,000
Deferred Tax Liability ....................................................... 224,000
Income Tax Payable ........................................................ 400,800

(f) Income statement

Income before income taxes $1,200,000
Income tax expense:
Current $400,800
Deferred 80,000 480,800
Net income $719,200

Balance sheet
Current liabilities:
Deferred tax liability ($200,000 – $144,000) $56,000

Long-term liabilities:
Deferred tax liability $24,000
 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

Comprehensive Examination E E-9

Problem E-IV — Solution.

(a) Service cost $520,000
Interest on projected benefit obligation ($540,000 × 10%) 54,000
Expected return on plan assets ($360,000 × 9%) (32,400)
Amortization of PSC 90,000
Amortization of net gains (48,000)
Pension expense—2013 $583,600

(b) Pension Expense ........................................................ 583,600

Other Comprehensive Income (G/L) ........................... 48,000
Cash ................................................................. 500,000
Other Comprehensive Income (PSC) ............... 90,000
Pension Asset/Liability ....................................... 41,600
 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

E - 10 Test Bank for Intermediate Accounting, Thirteenth Edition

Problem E-V — Solution.

(a) From the viewpoint of the lessee (Pinkley Company), the lease is a capital lease because
the present value of the minimum lease payments ($5,760,000) exceeds 90% of the fair
market value of the leased property. The lease term also is in excess of 75% of the
property's estimated economic life. For those same reasons and because of the predictable
collectibility, absence of uncertainties surrounding costs yet to be incurred by the lessor, and
presence of a dealer's profit, the lease is a sales-type lease to the lessor, Foley Company.

(b) Profit on sale $564,000

Interest on outstanding balance
($5,760,000 – $852,000) × .10 490,800
Income of lessor in 2012 $1,054,800

(c) Interest on outstanding balance

($5,760,000 – $852,000) × .10 $490,000
Depreciation ($5,760,000 ÷ 10) 576,000
Expenses incurred by lessee in 2012 $1,066,800

(d) Leased Equipment ...................................................................... 5,760,000

Lease Liability .................................................................. 5,760,000

Lease Liability .............................................................................. 852,000

Cash ................................................................................ 852,000

(e) Lease Receivable ....................................................................... 5,760,000

Cost of Goods Sold .................................................................... 5,436,000
Sales Revenue ............................................................... 5,760,000
Inventory ......................................................................... 5,436,000

Cash ............................................................................................ 852,000

Lease Receivable ............................................................ 852,000