Portland Pens - SCF with After-Tax AOCI & FAS158 Pension

Portland Pens Corporation Statement of Cash Flows Example With After-tax AOCI Accounts

Portland Pens Corporation Income Statement For year ending December 31, 2006

Sales 10,000,000 Realized gain/(loss) on investments (20,000) Total revenues 9,980,000

Cost of goods sold 6,000,000 Salaries and wages 1,200,000 Pension expense 54,000 Other operating expenses 250,000 Bad debt expense 21,000 Depreciation & amortization expense 557,000 Interest expense 171,000 Income taxes expense 629,000 8,882,000 Net income 1,098,000

Other comprehensive income Net holding gain/(loss) on marketable securities (net of 20% tax) 48,000 Prior service cost (net of 40% tax) 12,000 Actuarial gain/(loss) net of 40% tax (15,000) Total other comprehensive income 45,000 Comprehensive income 1,143,000 Additional information: a. Portland Pens Corporation sold marketable securities that had cost $120,000 for $100,000. b. Portland Pens purchased marketable securities during the year which resulted in a year-end fair value of $740,000. c. The holding gains and losses in accumulated other comprehensive income will be taxed at the capital gains rate of 20%. d. During the year, Portland Pens Corporation paid quarterly dividends in the total amount of $110,000. e. Portland Pens acquired a patent on a revolutionary new type of ink for its pens in exchange for 1,000 shares of common stock. At the date of the transaction, the common stock was trading at $58. f. Portland Pens Corporation acquired new processing equipment for a total cost of $1,000,000. g. Portland Pens Corporation wrote off $5,000 in bad debts during the year. h. Half of the 1,000 shares of treasury stock were sold for $66 per share. Portland Pens Corporation uses the cost method. The treasury stock on hand at the beginning of the year was carried at $52 per share. i. Portland Pens has a pension plan. The contribution to the plan for 2006 was $30,000. The tax rate related to deferred taxes on accumulated other comprehensive income items related to the pension plan was 40%.

1 Pension Worksheet 1 2 4 5 6 7 8 SFAS NO. 158 Accounts on Employer's Books Not on Books Portland Pens Corporation Incom e Stm t BS AOCI BS Mem orandum Am ounts Net Prior Projected Pension actuarial Service Funded Benefit Plan 2006 Expense Cash (gain)/loss Cost Status Obligation Assets BALANCE FORWARD -110,000 -200,000 90,000 Service Cost 24,000 -24,000 7% Interest Cost 14,000 -14,000 10% Expected return on plan assets-9,000 9,000 20,000 Corridor Amount 90,000 AOCI Actuarial (BoY) 70,000 Excess AMORTIZATIONS: 14 Unrecognized gain/loss 5,000 -5,000 Prior Service Cost 20,000 -20,000 Transition Amount 0 Contributions to Pension Plan -30,000 30,000 Retirement Benefits Paid by Plan 39,000 -39,000 Actual Return on Plan Assets -8,000 8,000 Actuarial Adjustments to PBO 29,000 -29,000 Amounts for journal entry: 54,000 -30,000 25,000 -20,000 -29,000 AOCI balance forward 90,000 100,000 BALANCES AT YEAR END 115,000 80,000 -139,000 -228,000 89,000 Tips for handling AOCI – holding gain/loss and post-retirement items 1. The before-tax change is more clearly related to the other balance sheet accounts involved with the items. For example, the allowance account change for available for sale securities is presented before tax. For the pension obligation (or asset), the change is related to the before tax figures for amortizations of transition amounts, prior service cost or actuarial gain/loss as well as other gains and losses due to changes in actuarial assumptions. a. Accordingly, your first step is to REMOVE the deferred taxes for the year from each AOCI account with the opposite side of the entry in the regular deferred tax account (either an asset or a liability). b. At this point you will have the pre-tax changes left. The pre-tax change related to available for sale securities will perfectly offset the change in the related allowance account. c. The pre-tax changes in AOCI accounts related to pensions and other postretirement benefit accounts can then be offset against the pension liability (or asset) account. d. Once you’ve dealt with all the deferred taxes in AOCI, the remaining change in the deferred income taxes account is related to income tax expense in the income statement section (for the direct method). For the indirect method, you will have two reconciling amounts (that can be combined). They will be the entire change in the deferred tax account (from the target column) less the taxes reported on the statement of comprehensive income (SCI). If the SCI is shown net of tax, you will need to refer to the notes of the financial statement to determine the tax effects or estimate it from given tax rate information. e. After you’ve offset all the pre-tax changes in AOCI items related to pensions to the respective pension or OPEB asset or liability account, the remaining change during the year will be the difference between what was expensed and what was contributed to the pension plan. Take this remaining change to pension expense in the income statement section (direct method). For the indirect reconciliation, you will have a line for the difference between pension expense and the amount contributed to plan assets (or used to pay retirees if there are no plan assets).

2 Portland Pens Corporation Balance Sheet As of 12/31/06 12/31/05

Current Assets Cash 955,000 100,000 Securities Available for Sale (at cost) 700,000 370,000 Allowance to adjust to market value 40,000 (20,000) Net accounts receivable 917,000 1,238,000 Merchandise Inventory 480,000 540,000 3,092,000 2,228,000

Noncurrent Assets Plant, property & equipment 8,500,000 7,500,000 Accumulated Depreciation (2,033,000) (1,500,000) Intangible Assets 634,000 600,000 TOTAL ASSETS 10,193,000 8,828,000

Current Liabilities Accounts Payable 930,000 750,000 Income Taxes Payable 7,000 20,000 937,000 770,000 Noncurrent Liabilities Bonds Payable 2,000,000 2,000,000 Discount on Bonds Payable (60,000) (70,000) Deferred Income Taxes 74,000 39,000 Net pension obligation 139,000 110,000

2,153,000 2,079,000

Stockholder's Equity Common stock, $10 par 1,610,000 1,600,000 Additional paid in capital 1,455,000 1,400,000 AOCI - holding gain/loss 32,000 (16,000) AOCI - prior service (48,000) (60,000) AOCI - actuaral gain/loss (69,000) (54,000) Treasury stock (at cost) (26,000) (52,000) Retained Earnings 4,149,000 3,161,000 7,103,000 5,979,000 Total liabilities and equity 10,193,000 8,828,000 An Excel working paper is available to solve this problem (includes a “print version” if you prefer to do it by hand)