Deck 17: Pensions and Other Postretirement Benefits

Question 1

There almost always is a balance sheet liability for plans of postretirement benefits other than pensions since very few of these plans are funded.

Answer 1

True

Question 2

Conceptually, the service method provides a better matching of costs and benefits in amortizing prior service cost than does the straight-line method.

Answer 2

True

Question 3

If a pension plan is underfunded, the company has a net loss-OCI.

Answer 3

False

Question 4

Which of the following is not a requirement for a qualified pension plan?

A) It cannot discriminate in favor of highly paid employees.
B) It must cover at least 80% of the employees.
C) It must be funded in advance of retirement.
D) Benefits must vest after a specified period of service, commonly five years.

Question 5

Which of the following is not an uncertainty that complicates determining how much to set aside each year to ensure that sufficient funds are available to provide the benefits promised under a defined benefit plan?

A) Employee turnover.
B) Number of employees who retired last year.
C) Future inflation rates.
D) Future compensation levels.

Question 6

The difference between pension plan assets and the PBO is equal to the funded status of the plan.

Question 7

An upward revision of inflation and compensation trends would likely cause a gain in the pension benefit obligation.

Question 8

Which of the following describes defined benefit pension plans?

A) The investment risk is borne by the employee.
B) The plans are simple and easy to construct.
C) The investment risk is borne by the employer.
D) Retirement benefits depend on the individual's account balance.

Question 9

Prior service cost is recognized as pension expense over a period of several years.

Question 10

The expected postretirement benefit obligation (EPBO) is the discounted present value of the total benefits expected to be paid by the employer to the plan participants.

Question 11

The accounting for defined contribution pension plans is easy because each year:

A) The employer records pension expense equal to the amount paid out to retirees.
B) The employer records pension expense based on an amount provided by the actuary.
C) The employer records pension expense equal to the annual contribution.
D) The employer records pension expense based on the earnings of the plan assets.

Question 12

Pension expense and funding amounts are both accounting decisions.

Question 13

A net pension asset is the excess of the projected benefit obligation over the plan assets.

Question 14

Defined contribution pension plans that link the amount of contributions to company performance are often called:

A) Incentive savings plans.
B) Thrift plans.
C) Savings plans.
D) None of these is correct.

Question 15

The projected benefit obligation may be less reliable than the accumulated benefit obligation.

Question 16

The amount of the vested benefit obligation is less than the projected benefit obligation and more than the accumulated benefit obligation.

Question 17

A net gain or net loss affects pension expense only if it exceeds 10% of the pension benefit obligation or 10% of plan assets, whichever is lower.

Question 18

Which of the following is not usually part of the pension formula under a defined benefit plan?

A) Age at retirement.
B) Number of years of service.
C) Seniority at time of retirement.
D) Compensation level.

Question 19

Which of the following describes defined benefit pension plans?

A) They raise few accounting issues for employers.
B) Retirement benefits depend on how much money has accumulated in an individual's account.
C) They are simple to construct.
D) Retirement benefits are based on the plan benefit formula.

Question 20

Which of the following is not a characteristic of a qualified pension plan?

A) It can be limited to highly compensated salaried employees.
B) It must be funded in advance of retirement.
C) Benefits must vest after a specified period of service.
D) It must cover at least 70% of employees.

Question 21

Payment of retirement benefits:

A) Increases the PBO.
B) Increases the ABO.
C) Reduces the GBO.
D) Reduces the PBO.

Question 22

A company's defined benefit pension plan had a PBO of $265,000 on January 1, 2018. During 2018, pension benefits paid were $40,000. The discount rate for the plan for this year was 10%. Service cost for 2018 was $80,000. Plan assets (fair value) increased during the year by $45,000. The amount of the PBO at December 31, 2018, was:

A) $225,000.
B) $305,000.
C) $331,500.
D) None of these answer choices are correct.

Question 23

Louie Company has a defined benefit pension plan. On December 31 (the end of the fiscal year), the company received the PBO report from the actuary. The following information was included in the report: ending PBO, $110,000; benefits paid to retirees, $10,000; interest cost, $8,000. The discount rate applied by the actuary was 8%. What was the service cost for the year?

A) $2,000.
B) $12,000.
C) $18,000.
D) $92,000.

Question 24

ERISA made major changes in the requirements for pension plan:

A) Vesting.
B) Reporting.
C) Taxing.
D) Investing.

Question 25

The annual pension expense for what type of pension plan(s) is recorded by a journal entry that includes a debit to pension expense and a credit to a noncurrent liability?

A) A defined benefit plan only.
B) A defined contribution plan only.
C) Both a defined benefit and a defined contribution plan.
D) This is not the correct entry.

Question 26

Which of the following is not a way of measuring the pension obligation?

A) Accumulated benefit obligation.
B) Vested benefit obligation.
C) Retiree benefit obligation.
D) Projected benefit obligation.

Question 27

The portion of the obligation that plan participants are entitled to receive regardless of their continued employment is called the:

A) Vested benefit obligation.
B) Retiree benefit obligation.
C) Actual benefit obligation.
D) True benefit obligation.

Question 28

Which of the following statements typifies defined contribution plans?

A) Investment risk is borne by the corporation sponsoring the plan.
B) The plans are more complex than defined benefit plans.
C) Present value factors are used to determine the annual contributions to the plan.
D) The employer's obligation is satisfied by making the periodic contribution to the plan.

Question 29

The employer has an obligation to provide future benefits for:

A) Defined benefit pension plans.
B) Defined contribution pension plans.
C) Defined benefit and defined contribution plans.
D) None of these answer choices are correct.

Question 30

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 vested benefit obligation?

A) I & II.
B) I, II, III.
C) II.
D) I only.

Question 31

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 projected benefit obligation?

A) III only.
B) I, II.
C) I, II, III.
D) II only.

Question 32

The following information pertains to Havana Corporation's defined benefit pension plan: $\begin{array}{lrr}\$ 111000 \mathrm{~s})&2018 & 2019 \\&\text { Beginning } & \text { Beginning } \\&\text { Beginning } & \text { Beginning } \\\text { Projected benefit obligation } & \$(6,000) & \$(6,504) \\\text { Plan assets } & 5,760 & 6,336 \\\text { Prior service cost-AOCI } & 600 & 552\\\text { Net loss-AOCI }&720,786\end{array}$ At the end of 2018, Havana contributed $696 thousand to the pension fund and benefit payments of $624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the actuary's discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding the PBO.

-What is Havana's 2018 actual return on plan assets?

A) $504 thousand.
B) $618 thousand.
C) $1,128 thousand.
D) None of these answer choices is correct.

Question 33

Compared to the ABO, the PBO usually is:

A) Larger.
B) More reliable.
C) Less relevant.
D) More material.

Question 34

To help assess the uncertainties that surround a defined benefit pension plan, corporations frequently hire a(n):

A) CPA.
B) Attorney.
C) Investment analyst.
D) Actuary.

Question 35

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.

Question 36

Interest cost will:

A) Increase the PBO and increase pension expense.
B) Increase pension expense and reduce plan assets.
C) Increase the PBO and reduce plan assets.
D) Increase pension expense and reduce the return on plan assets.

Question 37

Mars Inc. has a defined benefit pension plan. On December 31 (the end of the fiscal year), the company received the PBO report from the actuary. The following information was included in the report: ending PBO, $110,000; benefits paid to retirees, $10,000; interest cost, $7,200. The discount rate applied by the actuary was 8%. What was the beginning PBO?

A) $90,000.
B) $100,000.
C) $107,200.
D) $112,000.

Question 38

The following information pertains to Havana Corporation's defined benefit pension plan: $\begin{array}{lrr}\$ 111000 \mathrm{~s})&2018 & 2019 \\&\text { Beginning } & \text { Beginning } \\&\text { Beginning } & \text { Beginning } \\\text { Projected benefit obligation } & \$(6,000) & \$(6,504) \\\text { Plan assets } & 5,760 & 6,336 \\\text { Prior service cost-AOCI } & 600 & 552\\\text { Net loss-AOCI }&720,786\end{array}$ At the end of 2018, Havana contributed $696 thousand to the pension fund and benefit payments of $624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the actuary's discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding the PBO.

- What is the 2018 service cost for Havana's plan?

A) $276 thousand.
B) $528 thousand.
C) $648 thousand.
D) Cannot be determined from the given information.

Question 39

Compared to the ABO, the PBO usually is:

A) Less material.
B) Less representationally faithful.
C) Less relevant.
D) Less reliable.

Question 40

The PBO is increased by:

A) An increase in the average life expectancy of employees.
B) Amortization of prior service cost.
C) An increase in the actuary's assumed discount rate.
D) A return on plan assets that is lower than expected.

Question 41

Pension expense is decreased by:

A) Amortization of prior service cost.
B) Amortization of net gain.
C) Benefits paid to retired employees.
D) Prior service cost.

Question 42

A net gain or loss affects the pension expense only if it exceeds an amount equal to what percentage of the PBO or plan assets, whichever is higher?

A) 5%.
B) 10%.
C) 15%.
D) 20%.

Question 43

Which of the following is true?

A) A projected benefits approach is used to determine the periodic pension expense.
B) An accumulated benefits approach is used to determine the periodic pension expense.
C) A vested benefits approach is used to determine the periodic pension expense.
D) The pension expense is unrelated to the pension obligation.

Question 44

Assume that at the beginning of the current year, a company has a net gain-AOCI of $25,000,000. At the same time, assume the PBO and the plan assets are $200,000,000 and $150,000,000, respectively. The average remaining service period for the employees expected to receive benefits is 10 years. What is the amount of amortization to pension expense for the year?

A) $3,000,000.
B) $500,000.
C) $2,500,000.
D) $1,500,000.

Question 45

Data for 2018 were as follows: PBO, January 1, $240,000 and December 31, $270,000; pension plan assets (fair value) January 1, $180,000, and December 31, $230,000. The projected benefit obligation was underfunded at the end of 2018 by:

A) $30,000.
B) $60,000.
C) $20,000.
D) $40,000.

Question 46

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).

Question 47

Scallion Company received the following reports of its defined benefit pension plan for the current calendar year: $\begin{array}{lrlr}\text { PBO } & & \text { Plan assets } \\\text { Balance, January 1 } & \$ 400,000 & \text { Balance, January 1 } & \$ 250,000 \\\text { Service cost } & 195,000 & \text { Actual return } & 30,000 \\\text { Interest cost } & 32,000 & \text { Annual contribution } & 110,000 \\\text { Benefits paid } & (80,000) & \text { Benefits paid } & (80,000) \\\text { Balance, December 31 } & \$ 547,000 & \text { Balance, December 31 } & \$ 310,000 \\\hline\end{array}$

- The long-term expected rate of return on plan assets is 10%. Assuming no other data are relevant, what is the pension expense for the year?

A) $197,000.
B) $227,000.
C) $172,000.
D) $202,000.

Question 48

The following information pertains to Havana Corporation's defined benefit pension plan: $\begin{array}{lrr}\$ 111000 \mathrm{~s})&2018 & 2019 \\&\text { Beginning } & \text { Beginning } \\&\text { Beginning } & \text { Beginning } \\\text { Projected benefit obligation } & \$(6,000) & \$(6,504) \\\text { Plan assets } & 5,760 & 6,336 \\\text { Prior service cost-AOCI } & 600 & 552\\\text { Net loss-AOCI }&720,786\end{array}$ At the end of 2018, Havana contributed $696 thousand to the pension fund and benefit payments of $624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the actuary's discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding the PBO.

-What is the 2018 pension expense for Havana's plan?

A) $594 thousand.
B) $606 thousand.
C) $678 thousand.
D) None of these answer choices is correct.

Question 49

Assume that at the beginning of the current year, a company has a net gain-AOCI of $60,000,000. At the same time, assume the PBO and the plan assets are $300,000,000 and $450,000,000, respectively. The average remaining service period for the employees expected to receive benefits is 10 years. What is the amount of amortization to pension expense for the year?

A) $6,000,000.
B) $15,000,000.
C) $1,500,000.
D) $7,500,000.

Question 50

When accounting for pensions, delayed recognition of gains and losses in earnings achieves:

A) Income averaging.
B) Expense averaging.
C) Income optimization.
D) Income smoothing.

Question 51

The following information pertains to Havana Corporation's defined benefit pension plan: $\begin{array}{lrr}\$ 111000 \mathrm{~s})&2018 & 2019 \\&\text { Beginning } & \text { Beginning } \\&\text { Beginning } & \text { Beginning } \\\text { Projected benefit obligation } & \$(6,000) & \$(6,504) \\\text { Plan assets } & 5,760 & 6,336 \\\text { Prior service cost-AOCI } & 600 & 552\\\text { Net loss-AOCI }&720,786\end{array}$ At the end of 2018, Havana contributed $696 thousand to the pension fund and benefit payments of $624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the actuary's discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding the PBO.

-What is Havana's 2018 gain or loss on plan assets?

A) $115.2 thousand.
B) $160.8 thousand.
C) $276 thousand.
D) None of these answer choices is correct.

Question 52

The component of pension expense that results from amending a pension plan to give recognition to previous service of currently enrolled employees is the amortization of:

A) Prior service costs.
B) Amendment costs.
C) Retiree service costs.
D) Transition costs.

Question 53

Interest cost is calculated by multiplying the:

A) ABO by the expected return on the plan assets.
B) ABO by the discount rate.
C) PBO by the expected return on plan assets.
D) PBO by the discount rate.

Question 54

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.

Question 55

An overfunded 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.

Question 56

The pension expense includes periodic changes that occur:

A) In the PBO.
B) In the PBO and the plan assets.
C) In the plan assets.
D) In the PBO and the ABO.

Question 57

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.

Question 58

The three components of pension expense that are present most often are:

A) Service cost, prior service cost, and gain on plan assets.
B) Service cost, interest cost, and gain from revisions in pension liability.
C) Service cost, contribution cost, and prior service cost.
D) Service cost, interest cost, and expected return on plan assets.

Question 59

Which of the following is not a potential component of pension expense?

A) Return on plan assets.
B) Prior service cost.
C) Retiree benefits paid.
D) Gains and losses.

Question 60

Amortizing prior service cost for pension plans will:

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

Question 61

The following information is related to the defined benefit pension plan of Dreamworld Company for the year:

-Assuming no other relevant data exist, what is the pension expense for the year?

A) $190,000.
B) $92,400.
C) $60,000.
D) $170,000.

Question 62

Amortizing prior service cost for pension plans will:

A) Increase retained earnings and increase accumulated other comprehensive income.
B) Decrease retained earnings and decrease accumulated other comprehensive income.
C) Increase retained earnings and decrease accumulated other comprehensive income.
D) Decrease retained earnings and increase accumulated other comprehensive income.

Question 63

The following incomplete (columns have missing amounts) pension spreadsheet is for the current year for First Republic Corporation (FRC).

- What was the actuary's interest (discount) rate?

A) 7%.
B) 8%.
C) 9%.
D) 10%.

Question 64

At December 31, 2017, Mongo, Inc., reported in its balance sheet a net loss of $3 million related to its pension plan. The actuary for Mongo at the end of 2018 increased her estimate of future salary levels. Mongo's entry to record the effect of this change will include:

A) A debit to loss-OCI and a credit to PBO.
B) A debit to PBO and a credit to loss-OCI.
C) A debit to pension expense and a credit to PBO.
D) A debit to pension expense and a credit to loss-OCI.

Question 65

Gains and losses can occur with pension plans when:

A) Either the PBO or the return on plan assets turns out to be different than expected.
B) Either the ABO or the return on plan assets turns out to be different than expected.
C) Either the PBO, the ABO, or the return on plan assets turns out to be different than expected.
D) Either the PBO or the ABO turns out to be different than expected.

Question 66

Colombo Enterprises has a defined benefit pension plan. At the end of the reporting year, the following data were available: beginning PBO, $75,000; service cost, $14,000; interest cost, $6,000; benefits paid for the year, $9,000; ending PBO, $89,000; and the expected return on plan assets, $10,000. There were no other pension-related costs. The journal entry to record the annual pension costs will include a debit to pension expense for:

A) $20,000.
B) $15,000.
C) $12,000.
D) $10,000.

Question 67

Fox Company received the following reports of its defined benefit pension plan for the current calendar year:

-The long-term expected rate of return on plan assets is 8%. Assuming no other data are relevant, what is the pension expense for the year?

A) $360,000.
B) $424,000.
C) $374,000.
D) $384,000.

Question 68

Recording pension expense would usually:

A) Increase the PBO.
B) Increase current assets.
C) Increase the prior service cost-AOCI.
D) Increase the net loss-AOCI.

Question 69

The following incomplete (columns have missing amounts) pension spreadsheet is for the current year for First Republic Corporation (FRC).

- What was FRC's pension expense for the year?

A) $44.
B) $47.
C) $49.
D) $107.

Question 70

The following refers to the pension spreadsheet (columns have missing amounts) for the current year for Pancho Villa Enterprises (PVE).

-What were the retiree benefits paid?

A) $45.
B) $50.
C) $55.
D) $60.

Question 71

A gain from changing an estimate regarding the obligation for pension plans will:

A) Increase assets.
B) Increase liabilities.
C) Decrease shareholders' equity.
D) Increase shareholders' equity.

Question 72

The following refers to the pension spreadsheet (columns have missing amounts) for the current year for Pancho Villa Enterprises (PVE).

- What was the PBO at the beginning of the year?

A) $160.
B) $400.
C) $500.
D) $610.

Question 73

The following incomplete (columns have missing amounts) pension spreadsheet is for the current year for First Republic Corporation (FRC).

- What was the net pension asset/liability reported in the balance sheet at the end of the year?

A) Net pension asset of $50.
B) Net pension asset of $24.
C) Net pension liability of $50.
D) Net pension liability of $24.

Question 74

A statement of comprehensive income does not include:

A) Gains from the return on pension assets exceeding expectations.
B) Gains and losses on unsold held-to-maturity securities.
C) Losses from the return on pension assets falling short of expectations.
D) Prior service cost.

Question 75

A statement of comprehensive income does not include:

A) Net income.
B) Losses from the return on assets exceeding expectations.
C) Losses from changes in estimates regarding the PBO.
D) Prior service cost.

Question 76

The following information is related to the defined benefit pension plan of Simpson Company for the year:

-Assuming no other relevant data exist, what is the pension expense for the year?

A) $90,000.
B) $230,600.
C) $121,400.
D) $154,000.

Question 77

Accumulated other comprehensive income:

A) Is a liability.
B) Might include prior service cost.
C) Includes accumulated pension expense.
D) Is reported in the income statement.

Question 78

The following refers to the pension spreadsheet (columns have missing amounts) for the current year for Pancho Villa Enterprises (PVE).

- What was PVE's pension expense for the year?

A) $250.
B) $50.
C) $68.
D) $62.

Question 79

Castillo Company has a defined benefit pension plan. At the end of the reporting year, the following data were available: beginning PBO, $75,000; service cost, $18,000; interest cost, $5,000; benefits paid for the year, $9,000; ending PBO, $89,000; the expected return on plan assets, $10,000; and cash deposited with pension trustee, $17,000. There were no other pension-related costs. The journal entry to record the annual pension costs will include a credit to the PBO for:

A) $13,000.
B) $17,000.
C) $18,000.
D) $23,000.

Question 80

Which of the following is a correct statement concerning the reporting of the pension plan on the face of the employer's balance sheet?

A) Only the plan assets are separately reported.
B) Only the PBO is separately reported.
C) Both the PBO and the plan assets are separately reported.
D) Neither the PBO nor the plan assets is separately reported.