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mid1wk99s - 1 I in" ”In SDR" filming 99 Econ...

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Unformatted text preview: 1 I; in", ”In: , SDR .. " filming 99 Econ 1360 Midterm #1 Sander C. \ t’robleml (50 Minutes) ‘ - , . ylo Miller established a defined benefit pension plan for its employees on 1/1/1988. At this time it had unrecognized prior service costs and a projected benefit obligation of $50, 000. . At 1/1/1988 Miller estimated an average remaining service life of 12 Midway through 1998, however, Miller estimated the average service life to be 13 On 1/1/1994, Miller amended its plan providing employees with an increased salary when they retire. The amendment caused the P80 and A80 to‘ Increase by $40, 000 (present valued to 1994 dollars). The cost of the amendment In 1998 dollars' Is $55 000 The average remaining service life for 1994 was 13 On 1I1/1999 Miller established a plan to provide its employees with other post»retirement benefits. At this time Miller had an Accumulated Other Post Retirement Obligation of $25, 000, and an Expected Other Post Retirement Obligation of $45, 000. They ’é‘lected to amortize any transition amount over the maximum allowable time period. An actuary' 5 report provides you with the following information concerning 1998, 1999, and 2000 ‘5 1993 l 1999 2000 Accumulated Other Post Retirement Benefit Obligation 12/31 - 35,500 47,405 Expected Other Post Retirement Benefit Obligation 12/31 — 56,310 70,050 Accumulated Benefit Obligation 12/31 101,465 . 139,500 192,010 , Projected Benefit Obligation 12/31 182,000 1 198,200 216,002 Vested Benefit Obligation 12/31 , i ‘ 146,000 158,000 171,500 Other Post Retirement Plan Service Cost . . — 8,000 8,000 Pension Plan Service Cost 10,000 ,-1:0,000 10,000 "Discount/Settlement Rate ~Both Plans 9% J 10% 11% Expected Rate of Return ~Both Plans ' 6% 7% 8% Actual Return on Assets during the year ' 9,500 ,nrr 11,100' 12,250 Fair Value of Plan Assets 12/31 ' 94,000 121,100 150,350 Market Related Asset Value 12/31 , ' . , 102,000 $123,495 163,094 Contribution to Pension Plan during year .' . 15,000 16000 17,000 4 Contributions to Other Post Retirement Plan during year .. — , — - i Actuarial Losses/<Gains> during period g .— (12,000) (14,000) Prepaid/Accrued pension cost account balance 12/31 —Regular Plan , ' ' 15,690cr ‘? ’2 Additional Liability and intangible asset balance 12/31 5,250 ? ? Average Remaining Service Life 14 " 13 13 Assume during 1998 there were no actuarial gains and losses of any type At the beginning of 1998, Miller had a total unrecognized actuarial gain of $22 300. During 1998 they amortized $700 of this amount Assume no Other Post Retirement actuarial gains and losses occurred. Required: A Provide the necessary regular pension plan journal entries for 1999 and 2000. Show your calculations for all work B. Show Balance sheet results for 1999 and 2000 for the regular pension plan. 0. Prepare the necessary entries associated with Harris' Other Post Retirement Benefit plan for 1999, and 2000. 0. Assume instead for part C that Harris uses the shortest amortization period possible. Present the income statement and balance sheet results for the two different choices of amortizing the transition amount. 'w ' Problem il (15 Mins) You are the auditor of Prestige, a company in the business of computer software. The installation of these packages is very involved, and it takes the customers several years to fully implement and utilize the software. Prestige usually includes multi year training and implementation packages, which offers the customers on-site support until the software is fully operational. Most customers pay for the softiNare on an installment basis over the next few years. Some customers pay for the software completely once they receive it. As long as Prestige executes making the package operational, the contract is enforceable. Prestige has been able to complete making the contract operational in every case that the client has allowed them to. Prestige estimates that 30% of their costs are incurred in writing the software package and 40% of their costs are incurred in installing the package and 30% of their costs are administrative. You understand that Prestige has come under scrutiny by the SEC in recent years. A. As an auditor, what issues should be considered in how to recognize revenues and costs? B. What, if any, suggestions would you make regarding their revenue recognition policy. Theoretically justify your response. C. Assume 1 package is sold for $1,000,000 and at this time Prestige has conducted 50% of the installation activities. Total installation cost of this package is estimated to be $200,000. What would your balance sheet and income statement look like for the sale of this package this year. Theoretically justify your results for this package. Problem ill (15 Mins) Blackman Construction Company has consistently used the percentage—of-compietion method of recognizing income. During 1990 Blackman started work on a $7,200,000 fixed—price contract, which was scheduled to be completed in 1993. The accounting records disclosed the following data: Cumulative Estimated at I Contract Costs Completion 12/31/90 $ 600,000 $6,000,000 12/31/91 3,000,000 7,300,000 12/31/92 5,700,000 7,600,000 Required 1. Prepare the necessary journal entries to record the profit or loss associated with this contract for the years ended 12!31l90~12l31/92. 2. Assuming the cumulative billings to the customer were $5,600,000 at December 31, 1992, prepare the balance sheet and income statement disclosure of construction in progress, with the related billings. Be sure to make clear where the disclosUre goes in the balance sheet. 3. indicate the changes in (2) above that would exist if the company used completed contract accounting. Problem IV (15 Mine) 1. Explain how the profit is recognized on a sale of a building for $1,000,000 which originally cost the company $500,000 and has $100,000 of accumulated depreciation in the past. Assume the company used the installment sales method and payments are received in the form of $100,000 in principle each year for 10 years plus the appropriate interest each year. (You don't have to indicate interest profit) Also justify the conditions which should exist to use this method. Theoretically justify the technique used to calculate pension expense of a defined benefit pension plan in the following 2 areas. You don't have to execute the technique, just indicate the elements of the calculation that support the theory: a. Actuarial gains and losses 0. Interest earnings on assets contributed to the pension plan. Straight line amortization of prior service cost is commonly employed. Are their any other ' techniques that can be used? Which is more theoretically sound? Explain. ”I1 I 1 o IIJEINSIIIMI {if}? [by 7 ,1. ’1 26300 .' Maw @2133 i ' 4/1 D , (2 CD CD 3/5, I /0000 / 000v 'i‘aa», - 3195 Pa, x Disc M ("M mum /a% W Wm Q3 5° 19.97/35: ”'2 2/501 IflEam/w k" ng’m Ed 'L . 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