Problem

E-I
E-II
E-III
E-IV
E-V

COMPREHENSIVE EXAMINATION E
PART 5
(Chapters 18-21)
Approximate
Topic
Time
Long-Term Contracts.
15 min.
Installment Sales Method.
20 min.
Deferred Income Taxes.
25 min.
Pensions.
15 min.
Leases.
25 min.
100 min.

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-ofcompletion 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:

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Test Bank for Intermediate Accounting, Thirteenth Edition

Cash
$ 89,200
Installment Accounts Receivable2012170,000
Installment Accounts Receivable2013400,000
Installment Accounts Receivable2014750,000
Inventory, 1/1/14
78,000
Repossessed Merchandise
22,000
Accounts Payable
$ 136,000
Deferred Gross Profit2012
84,000
Deferred Gross Profit2013
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 Profit2013 ...... 14,000
Repossessed Merchandise........... 22,000
Loss on Repossession ................ 4,000
Installment Accounts Receivable2013
40,000
Problem E-II (cont.)
Instructions
(a) Determine collections during 2014 on Installment A/R for each of the years
2012, 2013, and 2014.

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Comprehensive Examination

(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

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Test Bank for Intermediate Accounting, Thirteenth Edition

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.
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.

E - 5E
Comprehensive Examination

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 employers
contribution for 2013.
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.

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Test Bank for Intermediate Accounting, Thirteenth Edition

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?

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Comprehensive Examination

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:

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Test Bank for Intermediate Accounting, Thirteenth Edition

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%

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 Profit2014 (33.5%)
335,000
Deferred Gross Profit2012 (32% $220,000)
70,400
Deferred Gross Profit2013 (35% $300,000)
105,000
Deferred Gross Profit2014 (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

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Comprehensive Examination

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
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)

Problem E-III Solution (cont.).

(c)
Future Taxable
(Deductible)
Tax
Temporary Differences Amounts

Total

Deferred Tax
Rate (Asset)
Liability

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Installment Sales $500,000

Depreciation
60,000
Rent
(360,000)
Totals
$200,000

40%
$200,000
40
24,000
40 $(144,000)
$(144,000)$224,000

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

Deferred tax asset at beginning of 2013
-0Deferred tax (benefit)
$(144,000)
Deferred tax liability at end of 2013 $224,000
Deferred tax liability at beginning of 2013 -0Deferred tax expense
$224,000
Deferred tax expense
Deferred tax (benefit)
Net deferred tax expense for 2013

$224,000
(144,000)
$ 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
Income tax expense:
Current
Deferred
Net income

$1,200,000
$400,800
80,000

480,800
$719,200

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

E - 11E
Comprehensive Examination

Long-term liabilities:
Deferred tax liability
$24,000
Problem E-IV Solution.
(a) Service cost
$520,000
Interest on projected benefit obligation ($540,000 10%)
Expected return on plan assets ($360,000 9%)(32,400)
Amortization of PSC
90,000
Amortization of net gains
(48,000)
Pension expense2013
$583,600

54,000

(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
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

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($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 ...........................................................
Lease Receivable ...............................

852,000
852,000