Problem 1:
Mount Co. has the following defined benefit pension plan balances on January 1, 2006
Project benefit obligation 4,500,000
Fair value of plan assets 4,500,000
The interest (settlement) rate applicable to the plan is 10%. On January 1, 2007, the company amends its pension agreement so that prior service costs of $600,000 are created. Other data related to the pension plan are:
|
|
|
|
|
2007 |
2008 |
| Service cost |
|
|
|
$150,000 |
$170,000 |
| Unrecognized prior serevice costs amortization |
0 |
90,000 |
| Contribution(funding) to the plan |
|
|
150,000 |
184,658 |
| Benefits paid |
|
|
|
220,000 |
280,000 |
| Actual return on plan assets |
|
|
252,000 |
250,000 |
| Expected rate of return on assets |
|
6% |
8% |
a) Prepare a pension plan worksheet for the pension plan in 2008
b) Prepare any journal entries related to the pension plan that would be need at December 31, 2006
c) Preapre a pension plan worksheet for 2007 and any journal entries related to the pension plan as of December 31, 2007
d) As of December 31, 2007, prepare a schedule reconciling the funded status with the reported lliability(accrued penson cost)
Problem 2: Larry Kingston Inc. was organized in late 2005 to manufacture and sell hosiery. At the end of its forth year of operation, the company has been fairly successful, as indicated by the following reported net income.
| 2005 |
$140,000 |
|
2007 |
$205,000 |
| 2006 |
160,000 |
|
2008 |
$276,000 |
Includes a $12,000 increase because of change in bad debt experience rate
Includes extraordinary of $40,000
The company has decided to expand operations and has applied for a sizabale blank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Larry Kingston Inc. therefore hired the auditing firm of check & Doublecheck Co. and has provided the following additional information.
1) In early 2006, Larry Kinston Inc. charged its estimate from 2% to 1% on the amount of bad debt expense to be changed to operations. Bad debt expense for 2005, if a 1% rate had been used, would have been $12,000. The company therefore restated its net income for 2005.
2) In 2008, the auditor discovered that the company had changed its method of inventory pricing from LIFO to FIFO. The effect on the income statements for the previous years is as follows.
|
|
|
|
2005 |
2006 |
2007 |
2008 |
| Net income unadjusted LIFO basis |
140,000 |
160,000 |
205,000 |
276,000 |
| Net income unadjusted FIFO basis |
155,000 |
165,000 |
215,000 |
260,000 |
|
|
|
|
$15,000 |
$5,000 |
$10,000 |
($16,000) |
3) In 2008 the auditor discovered that
a) the company incorrectly overstated the ending inventory by $11,000 in 2007
b) a dispute develop in 2006 with the IRS over the deductibility of entertainmetn expenses.
In 2005, the company was not premitted these deductions, but a tax settlement was reached in 2008 that allowed these expenses. As a result of the courts finding, tax expenses in 2008 were reduced by $60,000
Instructions:
a) Indicate how each of these changes or corrections should be handled in the accounting records. Ignore income tax consideration
b) Present comparative income statements for the years 2005 to 2008, starting with income before extraordinary items. Ignore income tax considerations.