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1. Hutton Corp maintains a defined benefit pension plan for employees. The service cost component of Hutton's net periodic pension cost is measured using the a. b. c. d. Projected benefit obligation Unfunded vested benefit obligation Unfunded accumulated benefit obligation Expected return on plan assets 2. Richard Inc. implemented a defined benefit pension plan for its employees on January 2, 20x3. The following data is provided for 20x6 and as of December 31, 2016: Projected benefit obligation Accumulated benefit obligation Plan assets at fair value Pension cost for 20x6 Pension contribution for 20x6 $750,000 700,000 600,000 180,000 175,000 Assume that as of January 1, 20x6, Richard's pension plan was fully funded, and there were no recorded pension assets or liabilities on the balance sheet. Assuming a tax rate of 40%, what is the net effect of the required adjustment on accumulated other comprehensive income on December 31, 20x6? a. b. c. d. $50,000 decrease $105,000 decrease $175,000 decrease $150,000 decrease 3. Which actuarial technique is used in IFRS to account for defined benefit plans? a. Vested years of service method b. Projected-unit-credit method. c. Accumulated benefits method. d. Benefit-years-of-service method 4. The following information pertains to Carney Co's defined benefit pension plan: Accrued pension costs, January 1, 20x5 Service cost Interest cost Expected and actual return on plan assets Amortization of unrecognized prior service cost Employer contributions $5,000 12,000 23,000 15,000 38,000 25,000 The ending fair value of plan assets is $ 600,000, and the ending projected benefit obligation is $675,000. Ignoring income taxes, in its December 31, 20x5 balance sheet, what is the required adjustment to accrued pension cost? a. b. c. d. $35,000 $37,000 $38,000 $25,000 5. Interest costs included in net pension cost recognized by an employer sponsoring a defined benefit pension plan represent the a. b. c. d. Increase in the fair value of plan assets due to passage of time Shortage between the expected and actual returns on the plan assets Amortization of the discount on unrecognized prior service costs Increase in the projected benefit obligation due to the passage of time 6. For a capital lease, the amount recorded initially by the lessee as a liability should normally a. Be equal to the total of the minimum lease payments b. Exceed the total of minimum lease payments c. Be equal to the present value of minimum lease payments at the beginning of the lease d. Exceed the present value of the minimum lease payments at the beginning of the lease 7. Robert Inc. leased equipment for its entire 10 year useful life, agreeing to pay $100,000 at the start of the lease term on December 31, 20x5, and $100,000 annually on each December 31 for the next 9 years. The present value on December 31, 20x5, of the ten lease payment over the lease term, using the rate implicit in the lese, which Roberts knows to be 10%, was $675,000. The December 31, 20x5 present value for the lease payments using Robert's incremental borrowing rate of 12% was $632,000. Oak made a timely second lease payment. What amount should Oak report as the capital lease liability on its December 31, 20x6 balance sheet a. b. c. d. $532,500 $575,000 $502,000 $548,000 8. A ten year capital lease specifies equal minimum annual lease payments that expire December 31st. Payments made represent reduction in the net lease liability and interest. The portion of the minimum lease payment in the 8th year applicable to the reduction of the net lease liability should be: a. b. c. d. More than the 9th year The same as the 9th year More than the 7th year Less than the 7th year 9. Gains and losses can occur with pension plans when: a. Either the PBO or the ABO turns out to be different than expected. b. Either the PBO, the ABO, or the return on plan assets turns out to be different than expected c. Either the PBO or return on plan assets turns out to be different than expected d. Either the ABO or the return on plan assets turns out to be different than expected 10. An underfunded pension plan means that the: a. PBO is less than the plan assets b. PBO exceeds plan assets c. ABO is less than plan assets d. ABO exceeds plan assets 11. At December 31, Lemon Company has the following pension plan information: Fair value of plan assets, beginning of year $1,100,000 Fair value of plan assets, ending of year 1,135,000 Contributions 275,000 Benefits paid 340,000 Expected rate of return on plan assets 7% The expected return on plan assets was used to calculate net periodic pension cost. No actuarial gains or losses were incurred during the year. Lemon's effective tax rate is 30%. What is the net gain to be reported in other comprehensive income under U.S. GAAP? a. b. c. d. $13,000 $18,200 $0 $16,100 12. The following information pertains to Salmon Co.'s pension plan: Actuarial estimate of projected benefit obligation at beginning of year Assumed discount rate Service costs Pension benefits paid during the year $72,000 10% 18,000 15,000 If no change in actuarial estimates occurred during the year, Salmon's projected benefit obligation at December 31 was: a. b. c. d. $82,200 $76,000 $79,400 $81,900 13. On June 1, Year 1, Shelia Corp. established a defined benefit pension plan for its employees. The following information was available at May 31, Year 3: Projected benefit obligation Accumulated benefit obligation Unfunded accrued pension cost Plan assets at fair market value Unrecognized prior service cost $14,500,000 12,000,000 200,000 7,000,000 2,550,000 What is the funded status of Shelia's pension plan at May 31, Year 3? a. b. c. d. $7,500,000 underfunded. $5,000,000 underfunded. $5,000,000 overfunded. $7,500,000 overfunded 14. Mark Co. installed new assembly line production equipment at a cost of $125,000. Mark had to rearrange the assembly line and remove a wall to install the equipment. The rearrangement cost $10,000 and the wall removal cost $5,000. The rearrangement did not increase the life of the assembly line but it did make it more efficient. What amount of these costs should be capitalized by Mark? a. b. c. d. $125,000 $135,000 $140,000 $130,000 15. In Year 6, Charlotte, Inc. determined that the 12-year estimated useful life of a machine purchased for $48,000 in January Year 1 should be extended by three years. The machine is being depreciated using the straight-line method and has no salvage value. What amount of depreciation expense should Spirit report in its financial statements for the year ending December 31, Year 6? a. b. c. d. $2,800 $3,200 $4,200 $4,800 16. Under U.S. GAAP, what is the present value of all future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date and based on past and current compensation levels only? a. b. c. d. Service cost. Accumulated benefit obligation. Interest cost. Projected benefit obligation. 17. American Chair Inc. reported net periodic pension cost of $400,000 in the current year, calculated as follows: Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of net gain Net periodic pension cost $300,000 175,000 (100,000) 40,000 (15,000) $400,000 American Char has an overfunded pension plan. The company's effective tax rate is 30%. How will the amortization of the net gain affect the current year balance sheet under U.S. GAAP? a. b. c. d. $10,500 increase in retained earnings. $15,000 increase in net pension asset. No effect. $15,000 decrease in accumulated other comprehensive income. 18. Lease A has a term equal to 60% of the estimated economic life of the leased property and does not contain a bargain purchase or transfer of title at the end of the lease term. Lease B transfers ownership of the property to the lessee at the end of the lease term and the lease term is equal to 85% of the estimated economic life of the leased property. How should the lessee classify these leases? a. b. c. d. Lease A as a capital lease and Lease B as an operating lease Lease A as an operating lease and Lease B as a capital lease They are both capital leases They are both operating leases 19. Anchorage Inc. leased land and a building, which has a remaining useful life of 40 years, from Brooks Company for 35 years. At the inception of the lease, the land had a carrying value of $40,000 and a fair value of $50,000. The building had a carrying value of $40,000 and a fair value of $250,000. How will Anchorage Inc. record the lease? a. b. c. d. The land as an operating lease and the building as a capital lease The land as a capital lease and the building as an operating lease The land and building as a single operating lease The land and building as a single capital lease 20. Green co. has entered into a sales-leaseback agreement which is classified as a capital leaseback. The present value of the rental payments is greater than 90% of the fair value of the property at inception. How should Green co. treat gain under this agreement? a. b. c. d. Defer gain up to the present value of the leaseback payments Defer all gains and offset against depreciation expense Recognize gains up to the present value of the leaseback payments Recognize all gain immediately