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mid1wk00s - :30 H Sander fl Smd Spring 2000 Economics 136C...

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Unformatted text preview: ' , :30 H. Sander fl Smd? Spring 2000 Economics 136C \ Midterm #1 ‘ ‘6? 7 ~ Q7, ' -/ /w PROB I (40 minutes) @ L) The following information has been obtained relating to D Company's defined benefit pension plan. The plan was adopted in {flawith a BBQ. and ABC. of SILZIO‘O and $790, respectively. Actuary's Report 98 99 */ Projected Benefit Obligation (1/ 1) 1,600 ' 1,900 Accumulated Benefit Obligation (1/ 1) 925 1,141 JService Cost 150 185 v Increase in RED. due to Amendment (6/30) ' 100 ~— ActuarialiGainton/BBaQ; Q_alglllation ~ 25 (x 9 h BenefitsBaid 53 7O Jlnterest Cost ~ 128 142 P.B.O. (12/31) ' 1,900 2,143 21% - ABC). (12/31) 1,141 1,304 WM The actuary's report indicates that the average service life of employees at the inception of the Plan was i1’1U‘jyears, and/‘1"? ears in all/succeeding years. It also indicates that in 1997 the total actuanhl gains and‘lo/sies are $25 5 loss’and that the discount rate in all years was he actuary advised the company that the average rate of return the company can energies it's investment policies is \ Company Records 77 7 _ , ~ ------------- V The balance pf the «mepaidja'ccniedi account 7 and the» minimum liability“ accounts at 1[Qirme/SZOOMfiELand}3‘25“CR, respectively. No stoQgholder’s equity account exists andiiassume that market relatéd asset values are 19% higher'than the fair value of plan assets. " " Investor's Report 98 9 Fair value ofplan assets (1/1) 3 700 $ 917 Actual return on assets 45 5 5 Funding received from company 225 230 Benefits paid out (53) (70) Fair value of plan assets (12/31) v L211. 3.1412 Spa 4535 col I‘r Reguired l. Analyze the actuary‘s and investor's report and identify any error(s) that exist and adjust appropriate totals to reflect the correct data. Determine pension expense in 1998 and 1999 showing all details related to your results. Record journal entries necessary for the plan and include all calculations related to your entries for 1998 and 1999. Present your balance sheet results at 12/31/98 and 12/31/99. PROB 11 (15 minutes) Accounting for Long-Term Construction Contracts Bulman Construction Company has consistently used the percentag’e;9f3c9mpletion method of recognizing income. During 1987 Bulman started work on afilgpgootlfixed- price contract, which was complete in 1990. The accounting records disclosed the following data: gfiufiifilative Estimated c6iitié¢tcosts costs for incurred entire contract At 12/31/87 $ 600,000 $6,000,000 At 12/31/88 2,900,000 5,800,000 At 12/31/89 4,200,000 6,300,000 Reguired 1. How much income or loss should Bulman have recognized on this contract for each year ended through December 31, 1989? Assuming that the cumulative billings to the customer were $5,400,000 at December 31, 1989, prepare the balance sheet related to this contract. Assume that $4,200,000 of these billings were paid at 12/31/89. What alternative methods of accounting does Bulman have? Briefly describe what would be difi‘erent in (1) and (2) under this alternative and which method you would recommend and 2.1111. PROB III (20 minutes) FashioniOOcom, Inc. has asked you to discuss how it should recognize revenue related to it's new fashion web page. The company is receiving money in 3 forms. ' l. Subscriptions: Retail stores pay $100 per month for the right to view pages to decide what they should carry in their store. Annual subscriptions must be paid in full by February 1 of each year, and are cancelabie upon 30 day notice being given to Fashion100.com. Manufacturing companies pay to have their wares shown on your 3D web page. They sign up for one year at a time. They must prepay for one year and it is not refimdable. The manufacturing company is responsible for the quality of the page. A royalty kickback from the manufacturers for 1% of the sales cenducted as a result of the web page. Operating costs have averaged $10,000 per month and the company's financial statement is for 6/30/ 1. Determine the appropriate method of recognizing revenue for each type of revenue and discuss the reasons why you chose that method. Also indicate what alternative (pick one) exists and what would the primary reason for picking the alternative. Assume each revenue is $10,000 for all of year one, and indicate revenue amounts for 6/30/1 income statement. PROB IV short answers (25 minutes) 1. 2. 3. 4. Explain why accountants attempt to smooth out pension expense and why this may cause the need for a second journal entry related to defined benefit pension plans. Give 3 examples of how accountants execute the smoothing efi‘ect and where in a financial statement package (besides 1/8 and B/S) a reader can learn more about this smoothing effect and how it relates to the true funding needs of the plan. Describe the method of amortizing prior service cost used in class and why is this method appropriate in many cases. Describe any alternative "methods available and indicate why those methods may be better at accomplishing the goals of the amortization process. Explain how the installment method of accounting determines the amount of profit to recognize on the income statement each year and why it does this. Also indicate how this technique efi'ects the balance sheet results. Show the relationship between the two factors that appear on the balance sheet. List 3 items that are difi'erent about accounting for other post retirement benefit costs compared to regular pension plan costs and explain why they are difi'erent. Also indicate how they might afi‘ect the results of the calculation of other post retirement expense. Spring 2000 Econ 136C Midterm #1 Key Problem I 1) The error is that interest cost for each year should be Beginning PBO x Discount Rate ’98 16 ° = K».— ' (TA ’99 1900 x 8% = $152 They have $142 H 5P1 bonus - ~ v m 5 91 bonus Therefore PBO + interest cost at end of year should be T by 10 and ABC at the end of the ‘ year should be T by [(1304/2148) = 60.7% x 10 = 6.1] 2) PENSIQN EXPENSE 9§ fl (1) SERVICE COST 150 © 185 ® BEG PBO x DISC (2) INT COST 98: 1603’x 8%® 128(5) 152 (5) ‘ 99: 1900 x 8% MRV EXP RETURN (3) INT OFFSET 9'8: (73% x fl. 0) x 7°?) (53.9)@ (70.5)® 99: (917x 1.10) x 7% ACT G/L BELOW 7.9L @ 3.4L ® (5) ADOPTION 1200/10 120 © 120 ® (6) AMENDMENT (100/12) )1 (112) 4.2 @ 8.4 © (7) TRANSITION PLAN STARTED AFTER '87 N/A N/A TOTAL 356.2 398.2 35 L12— ACT G+L g§ @ (3) @ fl @ AMORT PBo ACT EXP BEG BAL OF ACT G+L 255L 7.9 256 (45-539) 231L \ / ® 16.1G — CORRIDOR (10%x1600) 16.0 190 @ EXCESS 95L 41 L 1 AVG S/L \ ® 12 12 C?) AMORT 7.9L 3.4L 4? 3) «0‘ ' 2, ENTRIES (53 a @ “\\"\ 98 99 Pension Expense 356.2 Pension Expense 398.2 Prep/Accr 131.2 Prep/Accr 168.2 Cash 225 Cash 230 .. 0W" -2 W.“ (D PREP/Acca ‘9 131.2, END '98 END '99 12/31/98 168.2 ABC 1141 G) 1304+6.1"’ 1310.1 (39 99.4 12/31/99 - FV PA 917 ® 1132 1132 C8) ‘ MIN LIAB 224 172 178.1 — PREP/ACCR (88.8) (5) 99.4 9914 @ ADD‘L LIAB ADD'L LIAB REQ 292.8 72.6 78.7 — ADD‘L LIAB BAL 425 C239 292.8 292.8 6) 292.8 12131198 ENTRY (132.2) (220.2) (214.1) 78.7 12/31/99 4 - 4 ENTRIES .98 ® a , (‘9 Add'l Liab 132.2 Add'l Liab 214.1 Intangible Asset 132.2 Intangible Asset 214.1 _B_/§ P/A + ADD'L 98 ® P/A+ADD'L _9_9 Liab under PP ((68.8)+292.8) 224 CR (99.4+78.7) 178.1 CR @ Intangible Asset 292.8 DB® 78.7 DB (9 68.8 DB 99.4 CR Problem 11 (1) % of completion —) Profit Analysis E Q .89. CUMUL COSTS 600000 10% 2900000 50% 4200000 66.7% TOTAL COSTS EXP 6000000 5800000 6300000 PROFIT To RECOG: CONTR PRICE 7000000 7000000 7000000 — TOTAL EXP COSTS 6000000 5800000 6300000 TOTAL PROFIT 1000000 1200000 700000 x % COMPL 10% 50% 66.67% [171 TOTAL PROFIT RECOG 100000 [55 600000 Z9 466667 (9 / PROFIT ALREADY RECOG 0 100000 600000 100000 500000 [23 (133333) @ pp ' REVENUE 700000 2800000 1166667 002801” - CONST EXP 600000 2300000 1300000 V“ PROFIT 100000 500000 (133333) (2) COST TO DATE+PROFIT TO DATE CIP (4200000 + 466667) 4666667 (9 BILLINGS @ 6) @ 5400000 4 NET CIP - LIABILITY 733333 F} ‘ NR (5400000 — 4200000) 1200000 5) CASH 4200000 ('9 A a I 9%) Alternative Method is Completed Contract, which for conservatism reasons waits to \ , recogpige revenues until we are sure or complete. This follows the Rev Rec. Rule, which 315 requires virtual completion of the earnings process. If estimate bility is the problem then this method is appropriate. The primary Changes are no income re rted‘iin an of 87-89 of US (not H complete) and the liability for CIP will go up by the profit to date ill/321011 year. 50 ’El ‘L “3 100.0130 bounce 5166,0017 Problem III (1) Subscriptions —> Since they are cancelable, the earnings process is not ogrplete until the time pasEbut we have earned 6 months worth of revenue and we have been paid for them W —> refim ’ility for 1st 6 months is highly unlikely —) recognize $5,000 —> % of completion Recogpize 1/2 —> % of completion (9 \ @ (71%} @ Alternative ——> Follow Rev Rec. Rule (Virtually complete, conservative) and don’t recognize fly until Dec is complete. , (3 . .e (2) Web Page Display —) Since $ are paid + not refundable and little serv1ces remain (earning nearly complete) for us to do recognize $10,00 We completed majority of earnings process @ + contract seems strong on return of $ (nonre dable) Alternative —> Recognize on 3/2 of 10,000 = $5,000 with % of completion because on f/g of time of the contract done on substantial serviceQremain. (3) Royalties —> It is a sale that Ceagerates a royalty (legal right to collect, must pay) so these $ should be recognized agales take place (point of sale). Thus assuming 1/2 of 10,000 in royalties generated during first 6 months, show $5,000 of royalty income. [If 1/2 of sales took 1:11 place in 1st 6 months] 3 Alternative —) Installment sale accounting —) not assured of collectibility. or none 4% Problem IV (1) The benefits coming from a pension plan e relatively smooth (happy employees) and to @match costs with benefits we must smooth r 5 read ex enses (according to benefits). 3 Because we m always receive those benefits as expected 'ability. Ma be owed soone r more than predicted. A 2fld calculation surrounding potenti add’l liabilim problems is necessary to satisfy B/S needs for conservatism. 3 examples of smoothing are: (1) Discount rate rarely A’s / Q (2) Use expected rate of return 5+7 (3) Arnortize PSC S/L (4) Amortize Act G/L S/L (5) Only amortize Act G/L a corridor (6) Tak at 1/30 of total costs The reconcfllation schedule (1n footnotes) helps us to see the llablllty issues related 0 fundingstatus or true fimdin‘g needs. Unrecognized PSC are the primary cause of any differences between funding status + Prepaid/Accrued Balance. , GD. . ED (2) We use S/ amortlzatio ' class because it is easy and allocates smooth] matchin our benefit patterns. A SY' e of method may be more appropriate because out benefits on W rior service' costs dfininish (smaller over time) because some @5110 were eligible for those PSC ha 6 left the company. The SYD does allocate more expens to the earlier periods matching this benefit pattern. El (3) It recogni profit as the $ are collected because assurance of collecting all we are entitled to is in doub . This is applied only when a high degree of certainty & esti te ability exist. [Collection part of earnings process gross profit % on sales X 33 collgted = profit recognized. The B/ S result is an A_ uncollected amounts — a deferred gross profit, which is the GP % X the amounts at to be collected. Therefore the two balance sheet results are always related at that GP %.@ (4) Name 3 and describe it: (1) Transition — choice of 1 time hit as cumulative effect (2) Transition — can amortize over Mrs not fl (3) No Tax Deduction ~ no min funding 3 v. 3 NW) (4) No Tax Deduction — component #3 maybe not be significant (return on asset) commonly underfimded (5) No Min Liab Requirement -— employee can’t quit + get benefit -—no add’l liab or intangible asset (6) Salary level insignificant —- S/C same for everybody 7 4 ...
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This note was uploaded on 01/31/2010 for the course ECON 136C taught by Professor Anderson during the Fall '08 term at UCSB.

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mid1wk00s - :30 H Sander fl Smd Spring 2000 Economics 136C...

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