AC311—Marcus Doxey Homework Assignment 3 – Pensions and Income Taxes 30 points DUE Tuesday, October 8th, 2013 AT THE BEGINNING OF CLASS NO LATE ASSIGNMENTS ACCEPTED Required: Complete the three problems on the following pages. Notes and instructions: Complete all questions by writing the answers in the spaces provided. You may work with other people, but I recommend doing this on your own to make sure that you understand what you are doing—these concepts are very important. It is important that you try to figure this out on your own; therefore, I will not answer any questions that give away an answer, but I am more than happy to help clarify concepts or answer other questions about the topic and assignment. 1. 3 points On December 31, Year 1, Cohen Company established a noncontributory defined-benefit pension plan covering all of its employees. On that date, Cohen contributed $45,000 to the plan. No benefits were earned in Year 1. At December 31, Year 2, Cohen determined that the present value of all benefits earned in Year 2 was $63,000. The expected and actual return on plan assets for Year 2 was 8%. Cohen’s pension expense has no other components other than those implied by the information above. What amount should Cohen report in its December 31, Year 2, income statement as pension expense? Work: 2. 3 points The following information pertains to Wareham Company’s pension plan: Actuarial estimate of projected benefit obligation (PBO) at 1/1/Year 1 $10,000 Assumed discount rate 4% Service cost for Year 1 $2,400 Pension benefits paid during Year 1 $2,100 If no change in actuarial estimates occurred during Year 1, Wareham’s PBO at December 31, Year 1, is: Work: 3. On December 31, Year 1 and Year 2, Cliff Garcia Company had the following defined benefit pension plan balances: 12/31/Y1 12/31/Y2 Fair value of plan assets 2,100,000 2,065,000 Projected benefit obligation 2,250,000 2,503,500 Unrecognized prior service cost 190,000 140,000 Unrecognized net loss 250,500 308,400 At December 31, Year 1, the employees participating in the plan had an average remaining service period of 5 years. No new prior service cost arose in Year 2. The Year 2 service cost was $310,000. The company uses an expected return on plan assets of 7% when calculating net periodic pension cost, but had an actual return on plan assets in Year 2 of 4%. The company’s discount rate is 5%. Contributions to the plan totaled $50,000 in year 2. There were no changes in actuarial assumptions during the year. Part 1. 15 points Calculate net periodic pension cost for Year 2. Enter the amounts in the spaces below, making sure to put a plus sign (+) in front of numbers that increase pension cost and a negative sign (-) in front of numbers that decrease pension cost: Service cost (3 pts) Interest cost (3 pts) Return on plan assets (3 pts) Amortization of prior service cost (3 pts) Loss amortization (3 pts).

1. AC311—Marcus Doxey
Homework Assignment 3 – Pensions and Income Taxes
30 points
DUE Tuesday, October 8th, 2013 AT THE BEGINNING OF
CLASS
NO LATE ASSIGNMENTS ACCEPTED
Required:
Complete the three problems on the following pages.
Notes and instructions:
Complete all questions by writing the answers in the spaces
provided.
You may work with other people, but I recommend doing this
on your own to make sure that you understand what you are
doing—these concepts are very important.
It is important that you try to figure this out on your own;
therefore, I will not answer any questions that give away an
answer, but I am more than happy to help clarify concepts or
answer other questions about the topic and assignment.
1. 3 points
On December 31, Year 1, Cohen Company established a
noncontributory defined-benefit pension plan covering all of its
employees. On that date, Cohen contributed $45,000 to the plan.
No benefits were earned in Year 1. At December 31, Year 2,
Cohen determined that the present value of all benefits earned
in Year 2 was $63,000. The expected and actual return on plan
assets for Year 2 was 8%. Cohen’s pension expense has no other

2. components other than those implied by the information above.
What amount should Cohen report in its December 31, Year 2,
income statement as pension expense?
Work:
2. 3 points
The following information pertains to Wareham Company’s
pension plan:
Actuarial estimate of projected benefit obligation (PBO) at
1/1/Year 1 $10,000
Assumed discount rate
4%
Service cost for Year 1
$2,400
Pension benefits paid during Year 1
$2,100
If no change in actuarial estimates occurred during Year 1,
Wareham’s PBO at December 31, Year 1, is:
Work:

3. 3. On December 31, Year 1 and Year 2, Cliff Garcia Company
had the following defined benefit pension plan balances:
12/31/Y1
12/31/Y2
Fair value of plan assets
2,100,000
2,065,000
Projected benefit obligation
2,250,000
2,503,500
Unrecognized prior service cost
190,000
140,000
Unrecognized net loss
250,500
308,400
At December 31, Year 1, the employees participating in the plan
had an average remaining service period of 5 years. No new
prior service cost arose in Year 2.
The Year 2 service cost was $310,000. The company uses an
expected return on plan assets of 7% when calculating net
periodic pension cost, but had an actual return on plan assets in
Year 2 of 4%. The company’s discount rate is 5%.

4. Contributions to the plan totaled $50,000 in year 2. There were
no changes in actuarial assumptions during the year.
Part 1. 15 points
Calculate net periodic pension cost for Year 2. Enter the
amounts in the spaces below, making sure to put a plus sign (+)
in front of numbers that increase pension cost and a negative
sign (-) in front of numbers that decrease pension cost:
Service cost (3 pts)
Interest cost (3 pts)
Return on plan assets (3 pts)
Amortization of prior service cost (3 pts)
Loss amortization (3 pts)
=Total net periodic pension cost

5. Part 2. 9 points
On the next page, complete the t-accounts for both the Fair
Value of Plan Assets and the Projected Benefit Obligation to
summarize all of the activity that occurred during the year. You
should also include beginning and ending balances in the t-
accounts. Make sure that you include in the t-accounts the
appropriate numbers as well as labeling what the numbers are
(see the notes for an example to follow). You will have to
determine the amount of benefits paid.
Fair Value of Plan Assets

6. PBO
4. 15 points
On December 31, 2011, Munson Company completed its first
year of operations. It has a number of differences between its
pretax financial income and its taxable income. It knows that its
pretax financial income is 220,000, but does not yet know its
taxable income. Munson is subject to a tax rate of 25 percent in
2011, and a recent tax law change resulted in an enacted tax rate
of 32 percent for future years. The differences between pretax
financial income and taxable income are described below.
Munson invested in tax-exempt bonds issued by the State of
Alabama. Munson received and recorded as income for
accounting purposes $7,000 of interest income in 2011.
Depreciation on machinery in 2011 was $28,000 for accounting

7. purposes. Munson’s tax accountant correctly recorded $36,000
of depreciation on Munson’s 2011 tax return.
Munson agreed to rent space to Cerone Co. Munson received
$12,000 of rent, all of which is subject to tax in 2011. However,
Munson earned only half of the rent in 2011 (it will earn the
other half in 2012), so just half of the payment received is
income in the financial statements.
For 2011, Munson accrued $10,000 of bad debt expense on its
income statement based on the allowance method. However,
Munson must use the direct write-off method for tax purposes
and it did not write off any accounts receivable in 2011.
Required:
i. What is Munson’s taxable income for 2011?
ii. What is current income tax expense for the year ended
12/31/11?
iii. List any deferred tax assets and/or liabilities as of 12/31/11,
clearly indicating for each a dollar amount, whether it is an
asset or liability, and whether it is current or long-term.

8. 5. 15points
In 2012, Cornog Company reports a loss of $120,000 (this is
both its taxable loss and pretax financial loss). Prior to 2012,
Cornog had been successful and had reported and paid taxes on
the following taxable income (pretax financial income was the
same as taxable income in each of the three years):
2009: $37,000
2010: 50,000
2011: 54,000
Cornog had been subject to tax rates of 20% in 2009 through
2011. Its tax rate in 2012 is 35% and its enacted tax rate will be
40% in years after 2012.
Required:
a. When Cornog completes its 2012 financial statements, it will
include both its 2010 and 2011 income statements along with
the 2012 income statement (for comparative purposes). What
will it report as pretax financial income and tax expense
(benefit) for 2011 if it chooses the carryforward or carryback
option for the 2012 net operating loss? Fill in the blanks below
(enter tax expense, if non-zero, as a positive number for
expense or negative number for benefit):
2011 Tax expense (benefit) if carryback option taken
_______________
2011 Tax expense if (benefit) carryforward option taken
_______________

9. b. If Cornog choose the carryback option, what is tax expense
(benefit) for 2012? In addition, two assets will be created in the
journal entry to record tax expense (benefit). Fill in the blanks
below accordingly.
2012 Tax expense (benefit) $____________; and Circle one:
Expense (Benefit)
Related assets as of 12/31/12:
Name of Asset __________________________; and
$______________
Name of Asset __________________________; and
$______________
12. 2 points
a. For the year ended December 31, 1994, its first year in
existence, Tyre Co. reported pretax financial statement income
of $750,000. Its taxable income was $650,000. The difference is
due to a temporary difference. Tyre’s current tax rate is 30%,
and its future enacted tax rate is 35%. Tyre made estimated tax
payments during 1994 of $90,000. What amount should Tyre
report as totaldeferred tax assets or liabilities as of 12/31/1994
(you must indicate a dollar amount and, if non-zero, state
whether it is an asset or a liability)?

10. b. In its 1993 income statement, Cere Co. reported pretax
financial income of $300,000. Cere determined that, because of
temporary differences, taxable income for 1993 is $280,000.
During 1993 Cere made estimated tax payments of $50,000,
which were debited to income tax expense. Cere is subject to a
30% tax rate. What amount should Cere report as total income
tax expense for 1993?