Question 1

If the Unrecognized Net Gain or Loss account is less than the corridor, the net gains and losses are subject to amortization.

Accepted Answer

If the Unrecognized Net Gain or Loss account is less than the corridor, the net gains and losses are not subject to amortization.

Question 2

The defined benefit obligation is the measure of pension obligation that

Accepted Answer

The answer of The defined benefit obligation is the measure...

Question 3

In all pension plans, the accounting problems include all the following except

Accepted Answer

Determining the level of individual premiums is not an accounting problem related to pension plans. Premiums are typically determined by the plan sponsor or administrator based on various factors such as the plan design, funding status, and actuarial calculations. The other options listed (measuring the amount of pension obligation, disclosing the status and effects of the plan in the financial statements, and allocating the cost of the plan to the proper periods) are all accounting issues that arise when accounting for pension plans.

Question 4

The interest on the defined benefit obligation component of pension expense

Accepted Answer

The interest on the defined benefit obligation component of pension expense reflects the rates at which pension benefits could be effectively settled, which is based on current market rates of return on high-quality fixed income investments that are consistent with the expected duration of the pension obligations. It does not reflect the incremental borrowing rate of the employer or the expected return on plan assets. The rate may be stated implicitly or explicitly when reported, but this does not determine the calculation of the rate itself.

Question 5

The Unrecognized Net Gain or Loss account is amortized only if it exceeds 10 percent of the larger of the beginning balances of the defined benefit obligation or the market-related plan assets value.

Accepted Answer

This is true according to the rules set forth by the Financial Accounting Standards Board (FASB) in Statement of Financial Accounting Standards (SFAS) 87.

Question 6

Companies report any actuarial gains or losses charged or credited to other comprehensive income in the statement of financial position.

Accepted Answer

The answer of Companies report any actuarial gains or losses...

Question 7

In a defined-contribution plan, a formula is used that

Accepted Answer

In a defined-contribution plan, the amount of contribution by the employer is predefined based on the formula. The amount of benefit that the employee receives at the time of retirement depends on the contributions made over the years and the investment returns earned on those contributions. Therefore, the formula used ensures that the employer contributes a certain sum each period based on the formula.

Question 8

Vested benefits

Accepted Answer

Vested benefits are those that an employee has earned and is entitled to receive even if they no longer work for the employer, regardless of the reason for separation. These benefits usually require a certain minimum number of years of service, after which the employee has a non-forfeitable right to them. Therefore, vested benefits are not contingent upon additional service under the plan.

Question 9

Differing measures of the pension obligation can be based on

Accepted Answer

Different measures of the pension obligation can be appropriate for different purposes. Including all years of service, vested and non-vested, using current salary levels (A) provides a comprehensive measure of the total liability. Only including vested benefits using current salary levels (B) gives an accurate picture of the current obligation to employees. Including both vested and non-vested service using future salaries (C) provides a measure of the long-term liability. Therefore, the best choice is to use all three measures to fully understand the extent of the pension obligation.

Question 10

The computation of pension expense includes all the following except

Accepted Answer

Service cost component should be measured using future salary levels, not current salary levels, for the computation of pension expense.

Question 11

The actual return on plan assets

Accepted Answer

The actual return on plan assets includes interest, dividends, and changes in the fair value of the fund assets. Therefore, option B is the correct answer. Option A is not completely correct, as it only considers the change in fair value of plan assets and not the interest and dividends earned. Option C is not correct, as it assumes the actual return is equal to the expected rate of return, which is not always the case. Option D includes all the options, but not all options in it are correct, making it an incorrect answer.

Question 12

The relationship between the amount funded and the amount reported for pension expense is as follows:

Accepted Answer

The amount funded and the amount reported for pension expense may be different based on various factors such as changes in actuarial assumptions, investment returns, and plan amendments. Therefore, pension expense may be greater than, equal to, or less than the amount funded.

Question 13

Acurtailment occurs when a company enters into a transaction that eliminates all further obligations for part or all of the benefits provided under a defined benefit plan.

Accepted Answer

The answer of Acurtailment occurs when a company enters into...

Question 14

In determining the present value of the prospective benefits (often referred to as the defined benefit obligation), the following are considered by the actuary:

Accepted Answer

In order to determine the present value of the prospective benefits, it is necessary to consider various factors including retirement and mortality rates, interest rates, and benefit provisions of the plan. Therefore, all of these factors are considered by the actuary.

Question 15

In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as

Accepted Answer

Any difference between the pension cost charged to expense and the payments into the fund represents either an underfunded or overfunded status of the pension plan. This difference should be reported as a pension asset/liability on the balance sheet.

Question 16

In computing the service cost component of pension expense, the IASB concluded that

Accepted Answer

The IASB concluded that using the defined benefit obligation with future compensation levels provides a realistic measure of the present pension obligation and expense, as it reflects the expected future salary increases and their impact on pension costs.

Question 17

Companies must disclose a reconciliation of how the defined benefit obligation and the fair value of plan assets changed during the year either in their financial statements or in the notes.

Accepted Answer

This statement is true. Companies must disclose a reconciliation of how the defined benefit obligation (DBO) and the fair value of plan assets (FVPA) changed during the year either in their financial statements or in the notes. The reconciliation shows the opening balance of the DBO and FVPA, the current service cost, interest cost, contributions made by the employer and employees, actuarial gains and losses, benefits paid, and closing balances of the DBO and FVPA. This is required under accounting standard IAS 19 (or ASC 715 for US GAAP).

Question 18

One component of pension expense is expected return on plan assets.Plan assets include

Accepted Answer

Plan assets include contributions made by both the employer and the employee in a contributory plan, as these funds are invested to generate returns to meet future pension obligations.

Question 19

In a defined-benefit plan, the process of funding refers to

Accepted Answer

Funding in a defined-benefit plan refers to making periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims. This helps to ensure that the plan remains adequately funded and able to meet its obligations. The other options listed refer to other aspects of the defined-benefit plan, such as determining the benefit obligation or the amount to be reported for pension expense.

Question 20

The accumulated benefit obligation measures

Accepted Answer

The accumulated benefit obligation measures the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels. This means that it calculates the pension obligation as of the current date, using current salary levels, for all years of service completed by the employees. This method is used to determine the minimum funding requirements for the pension plan.

Quiz 20: Accounting for Pensions and Postretirement Benefits