Question 1

The interest rate that may be used to compute the interest cost component of pension expense is equal to the

Accepted Answer

The interest rate used to compute the interest cost component of pension expense can either be the rate of return on high-quality fixed-income investments or the rate of interest at which the pension benefits could be effectively settled. This provides flexibility in determining the cost based on prevailing economic conditions and the specific circumstances of the pension plan.

Question 2

Exhibit 20-1 Given the following information:
$\begin{array} { | l | l | l | l | } 
\hline & 2010 & 2011 & 2012 \
\hline \text { Projected benefit obligation } & \$ 600 & \$ 700 & \$ 1,200 \
\hline \text { Plan asset value } & 400 & 800 & 1,100\
\hline
\end{array}$ Average remaining service life = 5 years
An unrecognized net loss existed at the beginning of 2010 in the amount of $100.An additional unrecognized net loss of $20 is reported by actuaries as of the end of 2011.
-
Refer to Exhibit 20-1.What amount of loss should be added to pension expense in 2010?

Accepted Answer

The unrecognized net loss at the beginning of 2010 was $100. The projected benefit obligation increased by $100 ($700 - $600) in 2011, and the plan asset value increased by $400 ($800 - $400) in 2011. The unrecognized net loss at the end of 2011 was $20. Therefore, the loss that should be added to pension expense in 2010 is $100 - $20 = $8.

Question 3

On January 1, 2010, a company had $84, 000 of unrecognized prior service cost.The years-of-future-service method of amortization is used.The company has seven employees, as indicated below: $\begin{array}{ll}
&\text {Expected Years of}\
\text {Employee}&\text {Future Service}\
\mathrm{A} & 3 \
\mathrm{~B} & 5 \
\mathrm{C} & 5 \
\mathrm{D} & 6 \
\mathrm{E} & 6 \
\mathrm{~F} & 8 \
\mathrm{G} & 9
\end{array}$
 What amount of prior service cost should be included in pension expense for 2010?

Accepted Answer

The answer of On January 1, 2010, a company had...

Question 4

O'Brien began a defined benefit pension plan on January 1, 2010.During 2010, the service cost was $450, 000.O'Brien contributed $450, 000 to the pension plan for 2010.The actuary said the projected benefit obligation at December 31, 2010 was $450, 000.As of December 31, 2010, what statements can O'Brien make about the pension plan?

Accepted Answer

Statement I: O'Brien's pension plan is fully funded for the year 2010 as O'Brien contributed the exact same amount as the service cost. This statement is true as the contribution made by O'Brien is equal to the service cost.
Statement II: The projected benefit obligation at December 31, 2010, was $450,000, indicating that the plan was adequately funded at the end of the year. This statement is true as the projected benefit obligation of $450,000 is exactly the same as the contribution made by O'Brien, indicating that the plan was adequately funded.

Question 5

The McMurry Company offers employees a defined contribution pension plan.In 2010, McMurry contributed $75, 000 to the plan, which paid $95, 000 to retired employees.Which of the following statements is true?

Accepted Answer

McMurry will report pension expense of $75,000, which represents the amount of contributions made in the current year. The fact that the plan paid out more than was contributed does not affect the expense recorded in the current year. Accrued liability is not relevant in a defined contribution plan, and prior service cost and actuarial gains and losses are not applicable because the plan design does not involve benefit formulas or projections.

Question 6

Which of the following would not be a component of pension expense?

Accepted Answer

Deferred compensation is a separate expense from pension expense, as it refers to compensation that has been earned but deferred to a later date. The other options (prior service cost amortization, interest cost, and return on assets) are all components of pension expense.

Question 7

Given the following information  What is pension expense for 2011?

Accepted Answer

The answer of Given the following information  What is...

Question 8

Exhibit 20-3 The Grace Company adopted a defined benefit pension plan on January 1, 2010, and prior service credit was granted to employees.The present value of those benefits was calculated to be $1, 351, 800 at that date.The service cost is funded in full at the end of each year, plus an additional amount of $220, 000 is funded each year-end.The unrecognized prior service cost is being amortized by the straight-line method over the remaining 10-year service life of the company's active employees.Additional information relating to the company's pension plan is presented below:
$\begin{array}{lll}
&2010&2011\
\text { Service cost (annual) } & \$ 95,000 & \$ 105,000 \
\text { Unrecogrized prior service cost } & & \
\text { amortization } & 135,180 & 135,180 \
\text { Interest cost } & 10 \% & 10 \% \
\text { Expected (and actual) return on plan assets } & 10 \% & 10 \%
\end{array}$

- Refer to Exhibit 20-3.What is the correct balance in Prepaid/Accrued Pension Cost at December 31, 2010?

Accepted Answer

The correct balance in Prepaid/Accrued Pension Cost at December 31, 2010, is $1,266,980 credit. This is calculated as follows:Beginning balance (1/1/10): $1,351,800Service cost (2010): $95,000Prior service cost amortization (2010): $135,180Interest cost (2010): $135,180Expected return on plan assets (2010): $135,180Additional funding: $220,000Ending balance (12/31/10): $1,266,980

Question 9

The Susan Company has a defined benefit pension plan for its employees.The following information pertains to the pension plan: $\begin{array}{ll}
\text { Projected benefit obligation, December } 31,2010 & \$ 1,680,000 \
\text { F air value of plan assets, December 31, 2010 } & 1,739,000 \
\text { Accrued/prepaid pension cost (asset), December 31, 2009 } & 51,300
\end{array}$
 The December 31, 2010 adjusting journal entries include a

Accepted Answer

The adjusting journal entries for a defined benefit pension plan typically involve accruing the pension expense and the related liability for the period. Therefore, the correct entry would be a debit to Accrued/Prepaid Pension Cost for the amount of the pension expense. The other choices are not appropriate because a credit to Other Comprehensive Income would suggest that gains or losses on the plan were recognized and a credit to Accrued/Prepaid Pension Cost would suggest that the liability decreased, which is not necessarily the case for a defined benefit plan.

Question 10

The Margie Company has a defined benefit pension plan for its employees.The following information pertains to the pension plan as of December 31, 2010: $\begin{array}{ll}
\text { Projected benefit obligation, January 1, } 2010 & \$ 1,600,000 \
\text { Service cost, } 2010 & 750,000 \
\text { Interest cost, 2010 } & 100,000 \
\text { Payments to retired employees } & 80,000 \
\text { Actual return on plan assets } & 99,600
\end{array}$
 The amount of the December 31, 2010, pension benefit obligation is

Accepted Answer

The pension benefit obligation as of December 31, 2010, is calculated by adding the service cost and interest cost to the beginning projected benefit obligation, then subtracting the payments to retired employees. This gives: $1,600,000 + $750,000 + $100,000 - $80,000 = $2,370,000. The actual return on plan assets does not affect the pension benefit obligation directly.

Question 11

Exhibit 20-2 Minnie Co.has an unfunded prepaid/accrued pension cost of $2, 000 (debit balance)at December 31, 2010.The following information pertains to 2011:
$\begin{array}{ll}
\text { Pension expense } & \$ 320,000 \
\text { Projected benefit obligation, December 31, } 2011 & 840,000 \
\text { Contributions } & 330,000 \
\text { Plan assets (fair value), December 31, 2011 } & 810,000
\end{array}$
 
-Refer to Exhibit 20-2.The balance in Prepaid/Accrued Pension Cost at December 31, 2011, should be

Accepted Answer

The balance in Prepaid/Accrued Pension Cost is calculated as the beginning balance plus contributions minus pension expense. Starting with a $2,000 debit, adding $330,000 contributions, and subtracting $320,000 pension expense results in a $12,000 debit. However, the projected benefit obligation exceeds plan assets by $30,000, resulting in a $30,000 credit balance.

Question 12

Danielle Company adopted a defined benefit pension plan on January 1, 2010, and prior service credit was granted to employees.The present value of that prior service obligation as of January 1, 2010 was $1, 400, 000 and is being amortized by the straight-line method over the remaining 20-year service life of the company's active employees.Additional information relating to the company's pension plan for 2010 is presented below: $\begin{array}{ll}
\text { Annual service cost } & \$ 132,000 \
\text { Contribution to the plan (December } 31,2010) & 390,000 \
\text { Interest cost } & 10 \% \
\text { Expected (and actua) return on plan assets } & 12 \%
\end{array}$
 What amount should be recorded in Prepaid/Accrued Pension Cost when recording the 2010 pension expense and funding at December 31, 2010?

Accepted Answer

The pension expense for 2010 is calculated as follows: Annual service cost ($132,000) + Interest on the obligation (10% of $1,400,000 = $140,000) + Amortization of prior service cost ($1,400,000 / 20 years = $70,000) - Expected return on plan assets (since no plan assets are mentioned, this is assumed to be $0), totaling $342,000. The contribution to the plan was $390,000. Therefore, the Prepaid/Accrued Pension Cost is the difference between the contribution and the pension expense: $390,000 - $342,000 = $48,000 credit.

Question 13

Exhibit 20-3 The Grace Company adopted a defined benefit pension plan on January 1, 2010, and prior service credit was granted to employees.The present value of those benefits was calculated to be $1, 351, 800 at that date.The service cost is funded in full at the end of each year, plus an additional amount of $220, 000 is funded each year-end.The unrecognized prior service cost is being amortized by the straight-line method over the remaining 10-year service life of the company's active employees.Additional information relating to the company's pension plan is presented below:
$\begin{array}{lll}
&2010&2011\
\text { Service cost (annual) } & \$ 95,000 & \$ 105,000 \
\text { Unrecogrized prior service cost } & & \
\text { amortization } & 135,180 & 135,180 \
\text { Interest cost } & 10 \% & 10 \% \
\text { Expected (and actual) return on plan assets } & 10 \% & 10 \%
\end{array}$
- Refer to Exhibit 20-3.What is the pension expense for 2010?

Accepted Answer

The answer of Exhibit 20-3 The Grace Company adopted a...

Question 14

In 2010, the Barbara Company initiated a defined benefit pension plan.It recorded $240, 000 as pension expense and paid $280, 000 to a funding agency.As a result, Barbara will report

Accepted Answer

The difference between the pension expense ($240,000) and the amount paid to the funding agency ($280,000) is $40,000. This excess payment results in a prepaid pension cost, as the company has paid more into the pension fund than the expense recognized for the period.

Question 15

Exhibit 20-3 The Grace Company adopted a defined benefit pension plan on January 1, 2010, and prior service credit was granted to employees.The present value of those benefits was calculated to be $1, 351, 800 at that date.The service cost is funded in full at the end of each year, plus an additional amount of $220, 000 is funded each year-end.The unrecognized prior service cost is being amortized by the straight-line method over the remaining 10-year service life of the company's active employees.Additional information relating to the company's pension plan is presented below:
$\begin{array}{lll}
&2010&2011\
\text { Service cost (annual) } & \$ 95,000 & \$ 105,000 \
\text { Unrecogrized prior service cost } & & \
\text { amortization } & 135,180 & 135,180 \
\text { Interest cost } & 10 \% & 10 \% \
\text { Expected (and actual) return on plan assets } & 10 \% & 10 \%
\end{array}$
 
-Refer to Exhibit 20-3.What is the pension expense for 2011?

Accepted Answer

To calculate the pension expense for 2011, we need to calculate several components such as service cost, interest cost, expected return on plan assets, amortization of prior service cost, and gain/loss.
 
Calculations:
 
Service cost = Funding amount = $220,000
Interest cost = Beginning PBO * Discount rate = $1,351,800 * 8% = $108,144
Expected return on plan assets = Beginning plan assets * Expected return on assets = $1,000,000 * 10% = $100,000
Amortization of prior service cost = Unrecognized prior service cost / Remaining service life = $1,351,800 / 10 years = $135,180
Gain/loss: No information is given, so we assume it to be zero.

Total pension expense = Service cost + Interest cost - Expected return on plan assets + Amortization of prior service cost + Gain/loss
Total pension expense = $220,000 + $108,144 - $100,000 + $135,180 + 0
Total pension expense = $363,324
 
Therefore, the answer is (C) $398,378. (Note: We need to add the past service cost amortization to the total pension expense).

Question 16

Exhibit 20-1 Given the following information:
$\begin{array} { | l | l | l | l | } 
\hline & 2010 & 2011 & 2012 \
\hline \text { Projected benefit obligation } & \$ 600 & \$ 700 & \$ 1,200 \
\hline \text { Plan asset value } & 400 & 800 & 1,100\
\hline
\end{array}$ Average remaining service life = 5 years
An unrecognized net loss existed at the beginning of 2010 in the amount of $100.An additional unrecognized net loss of $20 is reported by actuaries as of the end of 2011.
- 
Refer to Exhibit 20-1.What amount of loss should be added to pension expense in 2012?

Accepted Answer

The answer of Exhibit 20-1 Given the following information:
\(\begin{array} {...

Question 17

Exhibit 20-3 The Grace Company adopted a defined benefit pension plan on January 1, 2010, and prior service credit was granted to employees.The present value of those benefits was calculated to be $1, 351, 800 at that date.The service cost is funded in full at the end of each year, plus an additional amount of $220, 000 is funded each year-end.The unrecognized prior service cost is being amortized by the straight-line method over the remaining 10-year service life of the company's active employees.Additional information relating to the company's pension plan is presented below:
$\begin{array}{lll}
&2010&2011\
\text { Service cost (annual) } & \$ 95,000 & \$ 105,000 \
\text { Unrecogrized prior service cost } & & \
\text { amortization } & 135,180 & 135,180 \
\text { Interest cost } & 10 \% & 10 \% \
\text { Expected (and actual) return on plan assets } & 10 \% & 10 \%
\end{array}$

- Refer to Exhibit 20-3.What is the correct amount of the projected benefit obligation as of December 31, 2011?

Accepted Answer

The projected benefit obligation (PBO) as of December 31, 2011, can be calculated by considering the initial PBO, service costs, interest costs, and amortization of the unrecognized prior service cost. The initial PBO is $1,351,800. For 2010, add the service cost of $95,000 and interest (10% of $1,351,800 = $135,180), and subtract the amortization of the unrecognized prior service cost ($135,180). For 2011, add the service cost of $105,000, interest (10% of the adjusted PBO from 2010), and subtract the amortization of the unrecognized prior service cost again. The calculation shows the PBO growing each year due to these additions and subtractions, leading to the correct answer of $1,845,178.

Question 18

In 2011, the Marsha Company closed a manufacturing plant.The resulting actuarial loss should be

Accepted Answer

The actuarial loss from closing a manufacturing plant should be recognized in income for the year it occurs, which is 2011 in this case.

Question 19

Exhibit 20-2 Minnie Co.has an unfunded prepaid/accrued pension cost of $2, 000 (debit balance)at December 31, 2010.The following information pertains to 2011:
$\begin{array}{ll}
\text { Pension expense } & \$ 320,000 \
\text { Projected benefit obligation, December 31, } 2011 & 840,000 \
\text { Contributions } & 330,000 \
\text { Plan assets (fair value), December 31, 2011 } & 810,000
\end{array}$

- Refer to Exhibit 20-2.The December 31, 2011, adjusting entry should be

Accepted Answer

The answer of Exhibit 20-2 Minnie Co.has an unfunded prepaid/accrued...

Question 20

ACME has a defined benefit pension plan.ACME is preparing the December 31, 2010 financial statement disclosures related to the plan assets.It should disclose which of the following? I.Expected Return on Plan Assets 
II.Actual Return on Plan Assets

Accepted Answer

I. The fair value of the plan assets at the beginning and end of the year, as well as any gains or losses recognized during the year, should be disclosed.

II. A reconciliation of changes in the fair value of the plan assets should also be disclosed. This reconciliation should include contributions by the employer and employees, benefits paid, and any other significant factors affecting the plan assets during the year.

Therefore, both I and II should be disclosed in the financial statement disclosures related to the plan assets.

Quiz 20: Accounting for Postemployment Benefits

The interest rate that may be used to compute the interest cost component of pension expense is equal to the

The McMurry Company offers employees a defined contribution pension plan.In 2010, McMurry contributed $75, 000 to the plan, which paid $95, 000 to retired employees.Which of the following statements is true?

Which of the following would not be a component of pension expense?

Given the following information What is pension expense for 2011?

In 2010, the Barbara Company initiated a defined benefit pension plan.It recorded $240, 000 as pension expense and paid $280, 000 to a funding agency.As a result, Barbara will report

In 2011, the Marsha Company closed a manufacturing plant.The resulting actuarial loss should be

ACME has a defined benefit pension plan.ACME is preparing the December 31, 2010 financial statement disclosures related to the plan assets.It should disclose which of the following? I.Expected Return on Plan Assets II.Actual Return on Plan Assets