Question & Answer

Explain how cash-basis accounting for pension plans differs from accrual-basis accounting for pension plans. Why is cash-basis accounting generally considered unacceptable for pension plan accounting?

Name three approaches to measuring benefit obligations from a pension plan and explain how they differ.

What factors must be considered by the actuary in measuring the amount of pension benefits under a defined benefit plan?

What is the role of an actuary relative to pension plans? What are actuarial assumptions?

The meaning of the term “fund” depends on the context in which it is used. Explain its meaning when used as a noun. Explain its meaning when it is used as a verb.

Differentiate between “accounting for the employer” and “accounting for the pension fund.”

Differentiate between a defined contribution pension plan and a defined benefit pension plan. Explain how the employer’s obligation differs between the two types of plans.

What is a private pension plan? How does a contributory pension plan differ from a noncontributory plan?

Homestake Mining Company is a 120-year-old international gold mining company with substantial gold mining operations and exploration in the United States, Canada, and Australia. At year-end, Homestake reported the following items related to income taxes (thousands of dollars).

Total current taxes $ 26,349

Total deferred taxes (39,436)

Total income and mining taxes (the provision for taxes per its income statement) (13,087)

Deferred tax liabilities $303,050

Deferred tax assets, net of valuation allowance of $207,175 95,275

Net deferred tax liability $207,775

Note 6: The classifi cation of deferred tax assets and liabilities is based on the related asset or liability creating the deferred tax. Deferred taxes not related to a specifi c asset or liability are classifi ed based on the estimated period of reversal.

Tax loss carryforwards (U.S., Canada, Australia, and Chile) $71,151

Tax credit carryforwards $12,007

Instructions

(a) What is the significance of Homestake’s disclosure of “Current taxes” of $26,349 and “Deferred taxes” of $(39,436)?

(b) Explain the concept behind Homestake’s disclosure of gross deferred tax liabilities (future taxable amounts) and gross deferred tax assets (future deductible amounts).

(c) Homestake reported tax loss carryforwards of $71,151 and tax credit carryforwards of $12,007. How do the carryback and carryforward provisions affect the reporting of deferred tax assets and deferred tax liabilities?

Instructions

Go to the book’s companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc.

(a) What are the amounts of Coca-Cola’s and PepsiCo’s provision for income taxes for the year 2011? Of each company’s 2011 provision for income taxes, what portion is current expense and what portion is deferred expense?

(b) What amount of cash was paid in 2011 for income taxes by Coca-Cola and by PepsiCo?

(c) What was the U.S. federal statutory tax rate in 2011? What was the effective tax rate in 2011 for Coca Cola and PepsiCo? Why might their effective tax rates differ?

(d) For year-end 2011, what amounts were reported by Coca-Cola and PepsiCo as (1) gross deferred tax assets and (2) gross deferred tax liabilities?

(e) Do either Coca-Cola or PepsiCo disclose any net operating loss carrybacks and/or carryforwards at year-end 2011? What are the amounts, and when do the carryforwards expire?

Kleckner Company started operations in 2010. Although it has grown steadily, the company reported accumulated operating losses of $450,000 in its first four years in business. In the most recent year

(2014), Kleckner appears to have turned the corner and reported modest taxable income of $30,000. In addition to a deferred tax asset related to its net operating loss, Kleckner has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerated depreciation. Given its past operating results, Kleckner has determined that it is not probable that it will realize any of the deferred tax assets. However, given its improved performance, Kleckner management wonders whether there are any accounting consequences for its deferred tax assets. They would like you to conduct some research on the accounting for recognition of its deferred tax asset.

Instructions

Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you  canuse the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)

(a) Briefly explain to Kleckner management the importance of future taxable income as it relates to the recognition of deferred tax assets.

(b) What are the sources of income that may be relied upon in assessing realization of a deferred tax asset?

(c) What are tax-planning strategies? From the information provided, does it appear that Kleckner could employ a tax-planning strategy in evaluating its deferred tax asset?

Callaway Corp. has a deferred tax asset account with a balance of $150,000 at the end of 2014 due to a single cumulative temporary difference of $375,000. At the end of 2015, this same temporary difference has increased to a cumulative amount of $500,000. Taxable income for 2015 is $850,000. The tax rate is 40% for all years.

Instructions

(a) Record income tax expense, deferred income taxes, and income taxes payable for 2015, assuming that it is probable that the deferred tax asset will be realized.

(b) Assuming that it is probable that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2015 to recognize this probability.

At December 31, 2014, Cascade Company had a net deferred tax liability of $450,000. An explanation of the items that compose this balance is as follows.

Temporary Differences in Deferred Taxes Resulting Balances

1. Excess of tax depreciation over book depreciation. $200,000

2. Accrual, for book purposes, of estimated loss contingency from pending lawsuit that is expected to be settled in 2015. The loss will be deducted on the tax return when paid. $ (50,000)

3. Accrual method used for book purposes and installment method used for tax purposes for an isolated installment sale of an investment. $300,000

In analyzing the temporary differences, you find that $30,000 of the depreciation temporary difference will reverse in 2015, and $120,000 of the temporary difference due to the installment sale will reverse in 2015. The tax rate for all years is 40%.

Instructions

Indicate the manner in which deferred taxes should be presented on Cascade Company’s December 31, 2014, statement of financial position.

Youngman Corporation has temporary differences at December 31, 2014, that result in the following deferred taxes.

Deferred tax asset $24,000

Deferred tax liability $69,000

Indicate how these balances would be presented in Youngman’s December 31, 2014, statement of financial position.

Use the information for Rode Inc. given in IFRS19-7. Assume that it is probable that the entire net operating loss carryforward will not be realized in future years. Prepare the journal entry(ies) necessary at the end of 2014.

Rode Inc. incurred a net operating loss of $500,000 in 2014. Combined income for 2012 and 2013 was $350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward.

At December 31, 2014, Hillyard Corporation has a deferred tax asset of $200,000. After a careful review of all available evidence, it is determined that it is probable that $60,000 of this deferred tax asset will not be realized. Prepare the necessary journal entry.

Describe the procedure(s) involved in classifying deferred tax amounts on the statement of financial position under IFRS.

How are deferred tax assets and deferred tax liabilities reported on the statement of financial position under IFRS?

Describe the current convergence efforts of the FASB and IASB in the area of accounting for taxes.

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to income tax accounting.

Where can authoritative IFRS related to the accounting for taxes be found?

Kleckner Company started operations in 2010. Although it has grown steadily, the company reported accumulated operating losses of $450,000 in its first four years in business. In the most recent year (2014), Kleckner appears to have turned the corner and reported modest taxable income of $30,000. In addition to a deferred tax asset related to its net operating loss, Kleckner has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerated depreciation. Given its past operating results, Kleckner has established a full valuation allowance for its deferred tax assets. However, given its improved performance, Kleckner management wonders whether the company can now reduce or eliminate the valuation allowance. They would like you to conduct some research on the accounting for its valuation allowance.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

(a) Briefly explain to Kleckner management the importance of future taxable income as it relates to the valuation allowance for deferred tax assets.

(b) What are the sources of income that may be relied upon to remove the need for a valuation allowance?

(c) What are tax-planning strategies? From the information provided, does it appear that Kleckner could employ a tax-planning strategy to support reducing its valuation allowance?

The financial statements of P&G are presented in Appendix 5B. The company’s complete annual report, including the notes to the financial statements, can be accessed at the book’s companion website, www.

wiley.com/college/kieso.

Instructions

Refer to P&G’s financial statements and the accompanying notes to answer the following questions.

(a) What amounts relative to income taxes does P&G report in its:

(1) 2011 income statement?

(2) June 30, 2011, balance sheet?

(3) 2011 statement of cash flows?

(b) P&G’s income taxes in 2009, 2010, and 2011 were computed at what effective tax rates? (See the notes to the financial statements.)

(c) How much of P&G’s 2011 total income taxes was current tax expense, and how much was deferred tax expense?

(d) What did P&G report as the significant components (the details) of its June 30, 2011, deferred tax assets and liabilities?