Exam 10: Reporting and Analyzing Leases, Pensions, and Income Taxes

Rosebud Corp. reported the following items in the 2016 pension footnote. How much is the increase in the company's pension obligation during the year?

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Question 1

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The following is the leasing commitment information taken from Wharf Imports, Inc.'s 10-K report for March 31, 2016. Wharf's total liabilities for 2016 are $640,168 thousand. What dollar adjustment(s) might you consider to Wharf's balance sheet for analysis purposes, given this information and assuming that Wharf's intermediate-term borrowing rate is 7%? Explain.

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Question 2

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Your analysis should consider capitalizing the leased asset and recognizing a liability for the present value of the expected operating lease payments.
Using the NPV function in Excel, the present value of the operating lease payments, assuming a discount rate of 7%, is $1,726,542* thousand.
*Answers may vary if tables or financial calculator are used to compute NPV.
The present value of Wharf's operating leases is computed to be $1,726,542 thousand. We should consider adjusting its balance sheet by adding this amount to both assets and liabilities for analysis purposes. Wharf's liabilities are 3.7 times higher following this adjustment (adjusted liabilities are $640,168 thousand + $1,726,542 thousand = $2,366,710 thousand).

The income tax footnote to the financial statements of Cucumber, Inc. for the year ending December 31, 2016 is as follows. A. How much income tax expense is reported in Cucumber, Inc.'s income statement for 2016? B. How much of the income tax expense is payable in cash in 2016? C. Provide an example to explain how the deferred tax expenses could be positive in 2016?

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Question 3

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A. $1,066 million
B. $834 million is payable in 2016 based on the current tax provision ($236 + $598).
C. The positive figure indicates that the income reported for tax purposes (taxable income) is less than that for financial reporting purposes (GAAP income). A typical example is higher depreciation expense for tax purposes that for book purposes.

The following is an excerpt from the Freight Train, Inc. 2016 annual report: A. Calculate the present value of operating lease payments using a discount rate of 7%. B. Freight Train, Inc.'s net operating assets (NOA) were $ $55,230 million in 2016. If the operating leases were capitalized, what would net operating assets have been?

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Question 4

Rosebud Corp. reported the following items in the 2016 pension footnote. How much is the company's pension expense for the year?

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Question 5

M. A. Ivy Company reports the following in its 2016 annual report: For 2015 and 2016, the Company incurred rent expense of $1,486 and $1,758 (in thousands), respectively. A. Calculate the present value of operating lease payments using a discount rate of 4%. B. M. A. Ivy Company's balance sheet reports total assets of $46,640,000 and total liabilities of $11,377,500. Calculate the change in the company's assets and liabilities with the operating leases being capitalized. C. Assume that the leased equipment has a useful life of 12 years and no salvage value. Assume straight-line depreciation. Estimate the effect on net operating profit before tax in 2016, of capitalizing these operating leases. D. Estimate the effect on interest expense of capitalizing these operating leases.

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Question 6

Use the following information to answer questions below Caroline Company began operations in 2015. The company reported $128,000 of depreciation expense on its income statement in 2015 and $84,000 in 2016. On its tax returns, the company deducted $192,000 for depreciation in 2015 and $112,000 in 2016. The 2016 tax return shows a tax obligation (liability) of $132,000 based on a 40% tax rate. -What is the temporary difference between the book value of depreciable assets and the tax basis of these assets at the end of 2015?

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Question 7

What are deferred taxes? When do they arise?

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Question 8

Which one of the following statements is required by IFRS for reporting of leases, but not required for GAAP reporting?

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Question 9

With respect to estimate changes in pension assumptions, an investment return increase will have what probable effect?

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Question 10

Failure to capitalize leases has very little effect on a company's return on equity (ROE) ratio.

(True/False)

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Question 11

Failure to recognize leases as capital leases rather than operating leases results in understated profit for a company in the early year's a lease.

(True/False)

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Question 12

The following pension information was disclosed by Starbright International (000's): Employee Benefit Plans The company sponsors defined contribution retirement plans covering substantially all of its domestic employees and certain employees of its foreign subsidiaries. Contributions are determined at the discretion of the Board of Directors. Aggregate amounts charged to operations under the plans in 2016, 2015, and 2014 were $55,740, $58,400, and $46,576, respectively. In addition, certain foreign subsidiaries are required to provide benefits pursuant to government regulations. A. How does Starbright account for its contributions to its retirement plan? B. How is Starbright's obligation to its retirement plan reported on its balance sheet?

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Question 13

Both IFRS and U.S. GAAP require companies to report the funded status of defined benefit pension plans on the balance sheet.

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Question 14

DuPage Company is interested in leasing a machine and has identified the following possible lease that it may acquire. Prior to making this decision and without the lease information, DuPage Company has the following amounts: ●Assets: $5,500,000 ●Liabilities: $4,500,000 ●Income before lease expenses: $750,000 ●Income tax rate 35% Prepare an independent analysis for the lease that includes the assets and liabilities sections of the balance sheet and an income statement, as well as a comparison of debt-to-equity ratios and return on asset ratios. Assume equity is $1,000,000 before considering the leases and $958,829 when considering the leases. Briefly summarize the effect on the two ratios.

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Question 15

Use the following information to answer questions below Caroline Company began operations in 2015. The company reported $128,000 of depreciation expense on its income statement in 2015 and $84,000 in 2016. On its tax returns, the company deducted $192,000 for depreciation in 2015 and $112,000 in 2016. The 2016 tax return shows a tax obligation (liability) of $132,000 based on a 40% tax rate. -What is Caroline's income tax expense for 2016?

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Question 16

Operating leases appear as assets on the lessee's balance sheet.

(True/False)

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Question 17

Which of the following is a significant item that is not recognized in the accounts and the financial statements? I. Expected postretirement benefit obligation II. Accumulated postretirement benefit obligation III. Postretirement benefit plan assets

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Question 18

Which of the following is not a benefit of utilizing operating leases for the lessee?

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Question 19

The defined contribution plan and the defined benefit plan both recognize pension expense at the accrual of the liability.

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Question 20

Showing 1 - 20 of 54

Rosebud Corp. reported the following items in the 2016 pension footnote. How much is the increase in the company's pension obligation during the year?

Rosebud Corp. reported the following items in the 2016 pension footnote. How much is the company's pension expense for the year?

What are deferred taxes? When do they arise?

Which one of the following statements is required by IFRS for reporting of leases, but not required for GAAP reporting?

With respect to estimate changes in pension assumptions, an investment return increase will have what probable effect?

Failure to capitalize leases has very little effect on a company's return on equity (ROE) ratio.

Failure to recognize leases as capital leases rather than operating leases results in understated profit for a company in the early year's a lease.

Both IFRS and U.S. GAAP require companies to report the funded status of defined benefit pension plans on the balance sheet.

Operating leases appear as assets on the lessee's balance sheet.

Which of the following is a significant item that is not recognized in the accounts and the financial statements? I. Expected postretirement benefit obligation II. Accumulated postretirement benefit obligation III. Postretirement benefit plan assets

Which of the following is not a benefit of utilizing operating leases for the lessee?

The defined contribution plan and the defined benefit plan both recognize pension expense at the accrual of the liability.

Introducing Financial Accounting

Constructing Financial Statements

Adjusting Accounts for Financial Statements

Reporting and Analyzing Cash Flows

Analyzing and Interpreting Financial Statements

Reporting and Analyzing Revenues and Receivables

Reporting and Analyzing Inventory

Reporting and Analyzing Long-Term Operating Assets

Reporting and Analyzing Liabilities

Reporting and Analyzing Stockholders Equity

Reporting and Analyzing Financial Investments

Appendix : Compound Interest and the Time-Value of Money

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