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mid1wk02s - Econ 136C Midterm #1 Spring 2002 Problem I (45...

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Unformatted text preview: Econ 136C Midterm #1 Spring 2002 Problem I (45 mins.) ‘ Beltramini Corporation introduced a noncontributory, defined-benefit pension plan on January 1, I 1991. Information available for 1991 and 1992 is shown. Accumulated benefit obligation, 12/31/92 ~ $118,000 Accumulated benefit obligation, 1/1/92 $80,000 Projected benefit obligation, 12/31/92 $148,000 Projected benefit obligation, 1/1/92 $100,000 Service cost, 1992 $40,000 Settlement rate (discount) 10% Projected benefit obligation (at 1/1/91) $70,000 Accumulated benefit obligation, 1/1/91 $50,000 Pension benefits paid, 1992 ' $22,000 Employer pension contributions, 1992 $50,000 "' Actuarial gain or loss on PBO-1992 $20,000 Actual return on plan assets, 1992 $15,000 Vested benefit obligation, 1/1/92 x $70,000 Actual return on plan assets, 1991 , $16,000 Expected return on plan assets, 1991 4% Market related asset value, 12/31/92 $117,000 Plan assets, 12/31/92 '4 $113,000 Plan assets, 12/31/91 f , $50,000 Average remaining service life at 1/1/91 ' 12 yrs Average remaining service life at 1/1/92 & thereafter 10 yrs ~Market related asset value 1/1/92 $52,000 Employer pension contribution - 1991 (at beginning of year) $34,000 > Service cost - 1991 $21,000 Actuarial loss on the PEG in 1991 $2,000 " Benefits paid 1991 0 ' (Hint: You must calculate actuarial gains & losses on plan assets yourself.) Reguired WWWOW? Compute net periodic pension expense for 1991 & 1992. (Show all work.) Provide an entry to record the 1991 & 1992 pension expense and pension fiinding. Provide an entry to record any minimum liability requirements for 1991 & 1992. Present the balance sheet at 12/31/91 & 12/31/92. Determine the amount of actuarial gains and losses that need to be amortized in 1993. Theoretically justify Why pension expense does not equal pension contributions in 1992. Problem II (20 mins.) In 1995 Bossey Builders agreed to construct an apartment house for $720,000. Information. relating to costs, billings, and collections for this contact is as follows: 1995 1996 1997 Costs incurred to date $180,000 v $351,000 $740,000 Estimated costs yet to be incurred 420,000 429,000 -0- . Customer billings to date 75,000 270,000 720,000 Customer collections to date 60,000 225,000 700,000 Bossey uses the percentage—of-completion method of accounting for long—term construction contracts. Reguired 1. Calculate the amount of income (loss) to be recognized each year. 2. Prepare all necessary journal entries for ’96. 3. Prepare partial balance sheets at the end of ’96. 4. Repeat 1-3 for the completed contract method. 5. Which method is best considering the results of the contract? Why? Problem III (20 mins.) C Company sells software which is highly technical and includes in the sale price free support in using the software for 2 years after purchase. The amount of support at this time is not certain but in similar situations in the past average $200 per package. 500 of the $1,000 software packages were sold and $50,000 of software support was given in Year 1. A few of the customers that purchased the software have asked for a refund due to incompetent support. C Company has refused to return the sale price and 2 cases are currently being heard in court. Discuss the best method of revenue and support cost recognition and show your B/ S & I/ S results for Year 1 assuming that all sales were made on January 1. Include all relevant issues to your decision and show your 3/ S and US results for the next best method. Problem IV (20 mins.) Short Answers 1. Theoretically justify the accountant’s treatment of a large actuarial loss incurred early in a pension plan’s life. What basic principle(s) of accounting may be broken by this treatment? 2. Explain whether actual or expected return on assets are used to determine pension expenses and why this is so. Which # is used to determine the minimum liability requirement and why is this so? 3. Why is the installment sale method of accounting seldom used in financial accounting but commonly on tax returns? Explain how the gross profit % is calculated and how it can be used _ to determine the income statement and balance sheet results when this method is used. ,4. Explain what the funding status of a company’s pension plan is useful for and indicate where it may be found in a financial statement package. Does this amount impact the liability balance of the company? Why or why not? Problem I A) 91 1. Service Cost $21,000 2. Interest Cost 7,000 (70,000x10%) 3. Expected Return 4. Act G/L 0 5. Adoption Diff (70,000/12) 5,833 6‘ N/A 0 7. N/A 0 Pension Expense $32473 *Act G/L — 92 Beg Cum Unrecog G/L 91 G/L m Assets Expected - Actual = Gain - 91 Act G/L PBO = Net Gain 91 — Prior Year - Amortization - Corridor (Beg of Yr PBO or MRV) (7 of 100,000 or 52,000 ‘9 100,000 x 10%) Excess /Average Service Life Amortization B) 91 Pension Expenses 21,473 Prepaid/Accrual 1,527 Case 92 Pension Expenses Prepaid/Accrual Cash 53,489 (1,360) (34,000x4%) 92 1,360 16,000 14,640G 2 OOOL 12,64OG 34,000 3,489 50,000 92 $40,000 10,000 (100,000x10%) (2,080) (52,000x4%) (264)* 5,833 O 0 $53,489 $512. (3-! C) End 91 End 92 ABO 80,000 1 18,000 - FV PA 50,000 1 13,000 Min Liab 30,000 50,000 - Existing Prepaid/Accural -( 1,527) -19,621 Additional Liab Req 31,527 3,038 — Existing Additional Liab — 0 - 31,527 Entry 3 1,527 (28,489) 91 Intangible Asset 3 1,527 Additional Liabilities 3 1,527 92 Additional Liabilities 28,489 Intangible Asset 28,489 D) 91 Liab Under PP (Prepaid/Accural + Addl) 30,000 1,527 + 31,527 Intangible Asset 31,527 92 Liab Under PP (Prepaid/Accural + Addl) 5,000 1,962 + 3,038 Intangible Asset 3,038 B) See Part A) F) Pension Expense is about matching benefits with expenses and since benefits are smooth then pension expenses should be smooth and therefore its components attempt to smooth out costs. Contributions to the plan are based on plan needs (if investments are good need is less or vise versa) and companies’ ability to fund money and this will vary according to company operating cash flows. Thus they will not be the same in amount under most circumstances. Problem II 1) 95 96 97 Contact price $720,000 $720,000 $720,000 Expected Cost Totals 600,000 (180+420) 780,000 (351+429) 740,000 (740+0) Expected Profit 120,000 (60,000) (20,000) % Completed 30% 18 /600 100% oss 100% oss Rev to recognize 36,000 (60,000) (20,000) - Previous recognized 0 36,000 (60,000) Rev Rec this year 36,000 (96,000) 40,000 2) Contact in progress $171,000 (351 - 180) A/R or Cash $171,000 A/R 195,000 (270 — 75) Billing on CIP 195,000 Cash 165,000 (225 ~ 60) AIR 165,000 Gross Loss on Contact in progress 96,000 CIP 96,000 3) Cash $225,000 (225 - 0) AIR 45,000 (270 — 225) Net CIP CIP 291,000 (351 + (60)) - Billing (270,000) Net CIP 21,000 4) 95 $0 96 $(60,000) 97 $40,000 Contact in progress $171,000 (351 -— 180) A/R or Cash $171,000 A/R 195,000 (270 ~ 75) Billing on CIP 195,000 Cash 165,000 (225 —- 60) A/R 165,000 Gross Loss on Contact in progress 60,000 CIP 60,000 Cash $225,000 (225 —— 0) AIR 45,000 (270 —— 225) Net CIP CIP 291,000 (351 + (60)) - Billing (270,000) Net CIP 21,000 5) The completed contract method was best because the company obviously cannot make reasonable predictions of costs and profit is all over the map as a result. Therefore, no profit information until it looks like your losing is best. Problem III Choice I is recognize all revenue upon sale Issue which support this method 1) They have paid for the package and refundability seems limited 2) Future services are minor and estirnateable and seem to be accomplished because only 2 of 500 are fighting it 3) Contract seems strong because we have taken on 2 of 500 problem sales and are fighting it Issue which refute this method 1) 2 customers are fighting for a refund and refundability is questionable 2) Future services are questionable as to whether they are easy to accomplish 3) Revenue recognition rule promote conservatism B/S I/S Cash $500,000 Sales $500,000 Support expense payable or 50,000 support expense (200x500) $100,000) unearned support revenue Gross profit 400,000 Choice 11 is % of completion Issues which supmrt this method 1) The services to perform are substantial enough to allocate over 2 years 2) Services performed to are 1/2 over or 1/2 complete at least —- earning process 3) Contract seems strong enough to not have to refund or you can at least estimate refunds Issues which refute this method 1) Most of the work was creating the package 2) Got the money they have to sue to get it back BIS I/S Cash $500,000 Sales $250,000 Unearned support revenue 250,000 support expense 50,000 Gross profit 200,000 Choice III is no recognition until year 2 is done Issues which support this method 1) Revenue recognition rule demands virtual completion 2) Refundability is questionable -) 2 lawsuits 9 unable to estimate amount will give out 3) Conservatism exceeds knowledge of earnings process 4) Substantial services remain ,M “Wm...”W~_.w.~m._m»«W—_.m~ . _. _. . Issues which refute this method 1) Got the money hard to get them back 2) Most of the work are done at this point 3) Contract is strong '9 fighting in court because believe contract can be enforced B/S I/S Case $500,000 None Deferred Expenses 50,000 Uneamed Revenue 500,000 Problem IV 1) They are not expensed or only minor expense is recorded for them because we feel in the long run gains will happen to offset them (let it ride). This also helps supports a basic feature of pension accounting and that is matching. Thus if benefits of pension are smooth and unrelated to these gains or losses then pension expenses should also be smooth. However, this does violate the basic element of conservatism and full disclosure because losses should not in general go unrecognized or undisclosed. 2) Expected return is used for pension expense because it again keeps the results of our investment out of pension expense to match them with benefits obtain by employees which is smooth over time. The differable between them is not ignores they are monitored for extreme tendailities in [1 direction or another expected benefits. Do not affect minimum liabilities requirement because actual plan assets is used to determine this requirement. This actual asset should impact liability requirement more because liabilities are trying to address our ability to meet obligations which may take place due to the plan ending. 3) Installment sale accounting is only uses when collectibility of contracted payments is uncertain and rarely do companies agree to a contract where collectibility is uncertain. However, the results of this method do defer profits until collected and this attractive when doing tax return. The gross profit percentage is profit/sales and this percentage times collection determines I/S results and this percentage times A/R (uncollected amounts) determines deferred gross profit which is a contra asset to the receivable on the B/ S. 4) Funding status is the relationship between the PEG. The long term goal set by the actuary for assets necessary to pay for the plan and the actual asset set aside in the plan. It is helpfiil for the treasurer of finance people in a company to help them make funding decisions to the plan. It is found in the footnotes not on the B/S or 1/8. Accountants do not consider it part of their liabilities because this amount includes future salary levels of employer which have not been obtained any are technically not a liability at this date since the employee has not attains that salary level. ...
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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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mid1wk02s - Econ 136C Midterm #1 Spring 2002 Problem I (45...

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