ACC 306 Week 4 E 19-2 VKI Corporation – Restricted stock award plan – On January 1, 2011, VKI Corporation awarded 12 million of its $1 par common shares to key personnel

E 19–2 – VKI Corporation – Restricted stock award plan ● LO1

On January 1, 2011, VKI Corporation awarded 12 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. On the grant date, the shares have a market price of $2.50 per share.

Required:

1. Determine the total compensation cost pertaining to the restricted shares.

2. Prepare the appropriate journal entry to record the award of restricted shares on January 1, 2011.

3. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.

4. Prepare the appropriate journal entry to record compensation expense on December 31, 2012.

5. Prepare the appropriate journal entry to record compensation expense on December 31, 2013.

6. Prepare the appropriate journal entry to record the lifting of restrictions on the shares at December 31, 2013.

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ACC 306 Week 4 E 18-24 Softech Canvas Goods – Comparative balance sheets for Softech Canvas Goods for 2011 and 2010 are shown below

E 18–24 – Softech Canvas Goods – Profitability ratio ● LO1

Comparative balance sheets for Softech Canvas Goods for 2011 and 2010 are shown below. Softech pays no dividends, and instead reinvests all earnings for future growth.

Required:

1. Determine the return on shareholders’ equity for 2011.

2. What does the ratio measure?

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ACC 306 Week 4 E 18-18 Brenner-Jude Corporation – Shown below in T-account format are the changes affecting the retained earnings of Brenner-Jude Corporation during 2011

E 18–18 – Brenner-Jude Corporation -Transactions affecting retained earnings ● LO6 LO7

Shown below in T-account format are the changes affecting the retained earnings of Brenner-Jude Corporation during 2011. At January 1, 2011, the corporation had outstanding 105 million common shares, $1 par per share.

Required:

1. From the information provided by the account changes you should be able to recreate the transactions that affected Brenner-Jude’s retained earnings during 2011. Prepare the journal entries that Brenner-Jude must have recorded during the year for these transactions.

2. Prepare a statement of retained earnings for Brenner-Jude for the year ended 2011.

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ACC 306 Week 4 Communication Case 18-10 The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity, with equity defined as a residual amount

Communication Case 18–10 Should the present two-category distinction between liabilities and equity be retained? Group interaction. ● LO1

The current conceptual distinction between liabilities and equity defines liabilities independently of assets and equity, with equity defined as a residual amount. The present proliferation of financial instruments that combine features of both debt and equity and the difficulty of drawing a distinction have led many to conclude that the present two-category distinction between liabilities and equity should be eliminated. Two opposing viewpoints are:

View 1: The distinction should be maintained.

View 2: The distinction should be eliminated and financial instruments should instead be reported in accordance with the priority of their claims to enterprise assets.

One type of security that often is mentioned in the debate is convertible bonds. Although stock in many ways, such a security also obligates the issuer to transfer assets at a specified price and redemption date. Thus it also has features of debt. In considering this question, focus on conceptual issues regarding the practicable and theoretically appropriate treatment, unconstrained by GAAP.

Required:

1. Which view do you favor? Develop a list of arguments in support of your view prior to the class session for which the case is assigned.

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ACC 306 Week 3 P 17-16 Lakeside Cable – Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011

P 17–16 – Lakeside Cable – Comprehensive— reporting a pension plan; pension spreadsheet; determine changes in balances; two years ● LO3 through LO8

Actuary and trustee reports indicate the following changes in the PBO and plan assets of Lakeside Cable during 2011:

Required:

1. Determine Lakeside’s pension expense for 2011 and prepare the appropriate journal entries to record the expense as well as the cash contribution to plan assets and payment of benefits to retirees.

2. Determine the new gains and/or losses in 2011 and prepare the appropriate journal entry(s) to record them.

3. Prepare a pension spreadsheet to assist you in determining end of 2011 balances in the PBO, plan assets, prior service cost—AOCI, the net loss—AOCI, and the pension liability.

4. Assume the following actuary and trustee reports indicating changes in the PBO and plan assets of Lakeside Cable during 2012: Determine Lakeside’s pension expense for 2012 and prepare the appropriate journal entries to record the expense, the cash funding of plan assets, and payment of benefits to retirees.

5. Determine the new gains and/or losses in 2012 and prepare the appropriate journal entry(s) to record them.

6. Using T-accounts, determine the balances at December 31, 2012, in the net loss–AOCI and prior service cost–AOCI.

7. Confirm the balances determined in Requirement 6 by preparing a pension spreadsheet.

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ACC 306 Week 3 P 16-7 – Sherrod, Inc., reported pretax accounting income of $76 million for 2011

P 16–7 – Sherrod, Inc. – Multiple differences; a. calculate taxable income; balance sheet classification ● LO4 LO6 LO8

Sherrod, Inc., reported pretax accounting income of $76 million for 2011. The following information relates to differences between pretax accounting income and taxable income:

a. Income from installment sales of properties included in pretax accounting income in 2011 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end had a balance of $4 million (representing portions of 2010 and 2011 installment sales), expected to be collected equally in 2012 and 2013.

b. Sherrod was assessed a penalty of $2 million by the Environmental Protection Agency for violation of a federal law in 2011. The fine is to be paid in equal amounts in 2011 and 2012.

c. Sherrod rents its operating facilities but owns one asset acquired in 2010 at a cost of $80 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return, deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):

d. Bad debt expense of $3 million is reported using the allowance method in 2011. For tax purposes, the expense is deducted when accounts prove uncollectible (the direct write-off method): $2 million in 2011. At December 31, 2011, the allowance for uncollectible accounts was $2 million (after adjusting entries). The balance was $1 million at the end of 2010.

e. In 2011, Sherrod accrued an expense and related liability for estimated paid future absences of $7 million relating to the company’s new paid vacation program. Future compensation will be deductible on the tax return when actually paid during the next two years ($4 million in 2012; $3 million in 2013).

f. During 2010, accounting income included an estimated loss of $2 million from having accrued a loss contingency. The loss is paid in 2011 at which time it is tax deductible.

Balances in the deferred tax asset and deferred tax liability accounts at January 1, 2011, were $1.2 million and $2.8 million, respectively. The enacted tax rate is 40% each year.

Required:

1. Determine the amounts necessary to record income taxes for 2011 and prepare the appropriate journal entry.

2. What is the 2011 net income?

3. Show how any deferred tax amounts should be classified and reported in the 2011 balance sheet.

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ACC 306 Week 3 Integrating Case 16-5 Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997

Integrating Case 16–5 – Williams-Santana, Inc. – Tax effects of accounting changes and error correction; six situations ● LO1 LO2 LO8

Williams-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training. In 2011, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2011 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.

a. A five-year casualty insurance policy was purchased at the beginning of 2009 for $35,000. The full amount was debited to insurance expense at the time.

b. On December 31, 2010, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system.

c. The company changed inventory cost methods to FIFO from LIFO at the end of 2011 for both financial statement and income tax purposes. The change will cause a $960,000 increase in the beginning inventory at January 1, 2010.

d. At the end of 2010, the company failed to accrue $15,500 of sales commissions earned by employees during 2010. The expense was recorded when the commissions were paid in early 2011.

e. At the beginning of 2009, the company purchased a machine at a cost of $720,000. Its useful life was estimated to be 10 years with no salvage value. The machine has been depreciated by the double declining- balance method. Its carrying amount on December 31, 2010, was $460,800. On January 1, 2011, the company changed to the straight-line method.

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ACC 306 Week 3 Ethics Case 17-6 You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet air- craft

Ethics Case 17–6 – VXI International – 401(k) plan contributions ● LO1

You are in your third year as internal auditor with VXI International, manufacturer of parts and supplies for jet air- craft. VXI began a defined contribution pension plan three years ago. The plan is a so-called 401(k) plan (named after the Tax Code section that specifies the conditions for the favorable tax treatment of these plans) that permits voluntary contributions by employees. Employees’ contributions are matched with one dollar of employer contribution for every two dollars of employee contribution. Approximately $500,000 of contributions is deducted from employee paychecks each month for investment in one of three employer-sponsored mutual funds.

While performing some preliminary audit tests, you happen to notice that employee contributions to these plans usually do not show up on mutual fund statements for up to two months following the end of pay periods from which the deductions are drawn. On further investigation, you discover that when the plan was first begun, contributions were invested within one week of receipt of the funds. When you question the firm’s investment manager about the apparent change in the timing of investments, you are told, “Last year Mr. Maxwell (the CFO) directed me to initially deposit the contributions in the corporate investment account. At the close of each quarter, we add the employer matching contribution and deposit the combined amount in specific employee mutual funds.”

Required:

1. What is Mr. Maxwell’s apparent motivation for the change in the way contributions are handled?

2. Do you perceive an ethical dilemma?

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ACC 306 Week 3 E 17-19 Record pension expense, funding, and gains and losses – Beale Management has a noncontributory, defined benefit pension plan

E 17–19 Record pension expense, funding, and gains and losses; determine account balances ● LO6 LO7 LO8

Beale Management has a noncontributory, defined benefit pension plan. On December 31, 2011 (the end of Beale’s fiscal year), the following pension-related data were available:

Required:

1. Prepare the 2011 journal entry to record pension expense.

2. Prepare the journal entry(s) to record any 2011 gains and losses.

3. Prepare the 2011 journal entries to record the contribution to plan assets and benefit payments to retirees.

4. Determine the balances at December 31, 2011, in the PBO, plan assets, the net gain–AOCI, and prior service cost–AOCI and show how the balances changed during 2011. [Hint: You might find T-accounts useful.]

5. What amount will Beale report in its 2011 balance sheet as a net pension asset or net pension liability for the funded status of the plan?

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ACC 306 Week 3 E 17-10 – Abbott and Abbott has a noncontributory, defined benefit pension plan

E 17–10 – Abbott and Abbott – Determine pension expense ● LO6 LO7

Abbott and Abbott has a noncontributory, defined benefit pension plan. At December 31, 2011, Abbott and Abbott received the following information:

The expected long-term rate of return on plan assets was 10%. There was no prior service cost and a negligible net loss–AOCI on January 1, 2011.

Required:

1. Determine Abbott and Abbott’s pension expense for 2011.

2. Prepare the journal entries to record Abbott and Abbott’s pension expense, funding, and payment for 2011.

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