Financial Accounting
14th Edition
ISBN: 9781305088436
Author: Carl Warren, Jim Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Textbook Question
Chapter 11, Problem 2CP
Recognizing pension expense
The annual examination of Felton Company’s financial statements by its external public accounting firm (auditors) is nearing completion. The following conversation took place between the controller of Felton Company (Francie) and the audit manager from the public accounting firm (Sumana):
Sumana: You know, Francie, we are about to wrap up our audit for this fiscal year. Yet, there is one item still to be resolved.
Francie: What’s that?
Sumana: Well, as you know, at the beginning of the year, Felton began a defined benefit pension plan. This plan promises your employees an annual payment when they retire, using a formula based on their salaries at retirement and their years of service. I believe that a pension expense should be recognized this year, equal to the amount of pension earned by your employees.
Francie: Wait a minute. I think you have it all wrong. The company doesn’t have a pension expense until it actually pays the pension in cash when the employee retires. After all, some of these employees may not reach retirement, and if they don’t, the company doesn’t owe them anything.
Sumana: You’re not really seeing this the right way. The pension is earned by your employees during their working years. You actually make the payment much later—when they retire. It’s like one long accrual—much like incurring wages in one period and paying them in the next. Thus, I think you should recognize the expense in the period the pension is earned by the employees.
Francie: Let me see if I’ve got this straight. I should recognize an expense this period for something that may or may not be paid to the employees in 20 or 30 years, when they finally retire. How am I supposed to determine what the expense is for the current year? The amount of the final retirement depends on many uncertainties: salary levels, employee longevity, mortality rates, and interest earned on investments to fund the pension. I don’t think an amount can be determined even if I accepted your arguments.
Evaluate Sumana’s position. Is she right, or is Francie correct?
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The annual examination of Felton Company’s financial statements by its external public accounting firm (auditors) is nearing completion. The following conversation took place between the controller of Felton Company (Francie) and the audit manager from the public accounting firm (Sumana):Sumana: You know, Francie, we are about to wrap up our audit for this fiscal year. Yet, there is one item still to be resolved.Francie: What’s that?Sumana: Well, as you know, at the beginning of the year, Felton began a defined benefit pension plan. This plan promises your employees an annual payment when they retire, using a formula based on their salaries at retirement and their years of service. I believe that a pension expense should be recognized this year, equal to the amount of pension earned by your employees.Francie: Wait a minute. I think you have it all wrong. The company doesn’t have a pension expense until it actually pays the pension in cash when the employee retires. After all, some of…
You are the audit senior responsible for the audit of Sampson Limited. You are currently planning the audit for the year ended 31 December 2019. During your initial planning meeting held with the financial controller, he told you of the following changes in the company’s operations.
Due to the financial controller’s workload, the company has employed a treasurer. The financial controller is excited about the appointment because in the two months that the treasurer has been with the company, he has realized a small profit for the company through foreign-exchange transactions in dollars.
explain how the components of audit risk (inherent, control or detection risk) are affected.
Ethics Case
Suppose an auditor has been paid $1,000,000 each year for the past several years to perform the audit of a company's annual financial statements. This company is the auditor's largest client. In the current year, the auditor notices that the preliminary income statement excludes certain expenses that typically are shown. When asked, management tells the auditor that these expenses do not reflect the company's true performance, so they will not be shown in this year's income statement. Plus, management informs the auditor it will be paying $1,200,000 for this year's audit, and management commits to using the auditor for at least five more years.
Required:
1. Understand the reporting effect: Does the audit arrangement described above have the potential to jeopardize the auditor's opinion of management's decision not to report certain expenses?
2. Specify the options: Are auditors employees of the company who must accept requests of management?
3. Identify the impact: Do…
Chapter 11 Solutions
Financial Accounting
Ch. 11 - Does a discounted note payable provide credit...Ch. 11 - Employees are subject to taxes withheld from their...Ch. 11 - Prob. 3DQCh. 11 - Prob. 4DQCh. 11 - Prob. 5DQCh. 11 - Prob. 6DQCh. 11 - Prob. 7DQCh. 11 - Prob. 8DQCh. 11 - When should the liability associated with a...Ch. 11 - Prob. 10DQ
Ch. 11 - On October 12, Belleville Co. borrowed cash from...Ch. 11 - Proceeds from notes payable On January 26, Nyree...Ch. 11 - Prob. 2PEACh. 11 - Prob. 2PEBCh. 11 - Prob. 3PEACh. 11 - Prob. 3PEBCh. 11 - The payroll register of Konrath Co. indicates...Ch. 11 - Journalize period payroll The payroll register of...Ch. 11 - Prob. 5PEACh. 11 - Prob. 5PEBCh. 11 - Prob. 6PEACh. 11 - Prob. 6PEBCh. 11 - Prob. 7PEACh. 11 - Prob. 7PEBCh. 11 - Quick ratio Nabors Company reported the following...Ch. 11 - Quick ratio Adieu Company reported the following...Ch. 11 - Bon Nebo Co. sold 25,000 annual subscriptions of...Ch. 11 - Entries for notes payable Cosimo Enterprises...Ch. 11 - Evaluating alternative notes A borrower has two...Ch. 11 - Entries for notes payable A business issued a...Ch. 11 - A business issued a 60-day note for 75,000 to a...Ch. 11 - On June 30, Collins Management Company purchased...Ch. 11 - Prob. 7ECh. 11 - Prob. 8ECh. 11 - Prob. 9ECh. 11 - Summary payroll data In the following summary of...Ch. 11 - Prob. 11ECh. 11 - The payroll register for Proctor Company for the...Ch. 11 - Prob. 13ECh. 11 - Prob. 14ECh. 11 - Prob. 15ECh. 11 - A business provides its employees with varying...Ch. 11 - Prob. 17ECh. 11 - Prob. 18ECh. 11 - Prob. 19ECh. 11 - Accrued product warranty General Motors...Ch. 11 - Prob. 21ECh. 11 - Quick ratio Gmeiner Co. had the following current...Ch. 11 - The current assets and current liabilities for...Ch. 11 - The following items were selected from among the...Ch. 11 - The following information about the payroll for...Ch. 11 - Prob. 3PACh. 11 - Prob. 4PACh. 11 - Payroll accounts and year-end entries The...Ch. 11 - Prob. 1PBCh. 11 - Entries for payroll and payroll taxes The...Ch. 11 - Jocame Inc. began business on January 2, 2015....Ch. 11 - Prob. 4PBCh. 11 - Payroll accounts and year-end entries The...Ch. 11 - Prob. 3CPPCh. 11 - Tonya Latirno is a certified public accountant...Ch. 11 - Recognizing pension expense The annual examination...Ch. 11 - Prob. 3CPCh. 11 - Prob. 5CP
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