# ACCT 557 ACCT557 Week 4 Midterm Exam Answers (Devry)

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ACCT 557 Week 4 Midterm Exam

1. (TCO A) In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the
• (TCO A) Tim Construction Co. began operations in 2014. Construction activity for 2014 is shown below. Tim uses the completed contract method.
 Contract Contract Price Billings Through 12/31/14 Collections Through 12/31/14 Costs to 12/31/14 Estimated Costs to Complete 1 \$5,200,000 \$3,500,000 \$2,600,000 3,000,000 1,000,000 2 3.600,000 1,500,000 1,000,000 800,000 1,600,000 3 3,600,000 1,900,000 1,800,000 2,250,000 1,200,000

• What amount of Gross Profit should Tim show on the Income Statement of 2014 related to Contract 3?
1. (TCO B) K  Corporation's partial income statement after its first year of operations is as follows:
Income before Income Taxes        \$3,750,000
Income Tax expense
Current                 \$1,035,000
Deferred                      90,000
__________      1,125,000
__________
Net Income                                    \$2,625,000
K uses the straight-line method of depreciation for financial reporting purposes and accelerated depreciation for tax purposes. The amount charged to depreciation expense on its books this year was \$1,200,000. No other differences existed between book income and taxable income except for the amount of depreciation.
Assuming a 30% tax rate, what amount was deducted for depreciation on the corporation's tax return for the current year?
2. (TCO B) Deferred taxes should be presented on the balance sheet
3. (TCO C) On January 1, 2008, Nen Co. has the following balances:
Projected benefit obligation    \$4,200,000
Fair value of plan assets           3,750,000
The settlement rate is 10%. Other data related to the pension plan for 2014 are:
Service cost                                                             \$240,000
Amortization of unrecognized prior service costs    54,000
Contributions                                                              270,000
Benefits paid                                                              225,000
Actual return on plan assets                                      264,000
Amortization of unrecognized net gain                      18,000
The fair value of plan assets at December 31, 2014 is
4. (TCO C) Presented below is pension information related to Woods, Inc. for the year 2013.

Service cost                                                                                \$135,000
Interest on projected benefit obligation                                           \$46,000
Interest on vested benefits                                                            \$30,000
Amortization of prior service cost due to increase in benefits            \$14,000
Expected return on plan assets                                                     \$21,000

The amount of pension expense to be reported for 2013 is
5. (TCO D) Lease methods of accounting are
7. (TCO D) Pirate, Inc. leased equipment from Shoreline Enterprises under a four-year lease requiring equal annual payments of \$320,000, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4-year useful life and no salvage value. Pirate, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by ,Pirate Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Pirate, Inc. in the first year of the asset’s life?
PV Annuity Due PV Ordinary Annuity
8%, 4 periods               3.5771              3.31213
10%, 4 periods             3.48685            3.16986
8. (TCO D) On January 2, 2013, Bentley Co. leases equipment from Harry's Leasing Company with five equal annual payments of \$120,000 each, payable beginning December 31, 2013. Bentley Co. agrees to guarantee the \$20,000 residual value of the asset at the end of the lease term. Bentley’s incremental borrowing rate is 10%; however, the company knows that Harry’s implicit interest rate is 8%. What journal entry would Harry's Leasing Company make at January 2, 2013, assuming this is a direct–financing lease?

PV Annuity Due PV Ordinary Annuity    PV Single Sum
8%, 5 periods                 4.31213                    3.99271                     0.68058
10%, 5 periods               4.16986                    3.79079                     0.62092
9. (TCO D) Lease A does not contain a bargain purchase option, but the lease term is equal to 90% of the estimated economic life of the leased property. Lease B does not transfer ownership of the property to the lessee by the end of the lease term, but the lease term is equal to 75% of the estimated economic life of the leased property. How should the lessee classify these leases?

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