At the end of its first year of operations, Hutton Corporation had a current liability of $300,000 for unearned rent. This was the only difference between pretax accounting income and taxable income. Assume an income tax rate of 40%.
The tax liability from the tax return is $750,000. Prepare the journal entry to record income taxes for Hutton’s first year of operations. Show well-labeled computations.

1. Consider the following:
I. Present value of vested benefits at present pay levels.
II. Present value of nonvested benefits at present pay levels.
III. Present value of additional benefits related to projected pay increases.
Which of the above constitutes the accumulated benefit obligation?

A. I & II.

B. I, II, III.

C. II & III.

D. II only.

2. A company’s defined benefit pension plan had a PBO of $265,000 on January 1, 2013. During 2013, pension benefits paid were $40,000. The discount rate for the plan for this year was 10%. Service cost for 2013 was $80,000. Plan assets (fair value) increased during the year by $45,000. The amount of the PBO at December 31, 2013, was:

A. $225,000.
B. $305,000.
C. $331,500.
D. None of the above is correct.

3. An underfunded pension plan means that the:

A. PBO is less than plan assets.
B. PBO exceeds plan assets.
C. ABO is less than plan assets.
D. ABO exceeds plan assets.

4. Pension gains related to plan assets occur when:

A. The return on plan assets is higher than expected.
B. The vested benefit obligation is less than expected.
C. Retiree benefits paid out are less than expected.
D. The accumulated benefit obligation is more than expected.

5. The amortization of a net gain has what effect on pension expense?

A. Decreases it.
B. Has no effect on it.
C. Increases it (but only by the amount over 10% of the PBO).
D. Increases it (regardless of the amount).

6. Amortizing prior service cost for pension plans will:

A. Decrease assets.
B. Increase liabilities.
C. Increase shareholders’ equity.
D. Decrease retained earnings


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