Question 1

A company's pension expense includes all of the following items except

Accepted Answer

The company's pension expense includes service cost, amortization of unrecognized prior service cost, and interest cost on the projected benefit obligation. The employer's contribution to the pension fund is not included in the pension expense, as it is an addition to the fund and not an expense incurred by the company.

Question 2

In the computation of pension expense, interest cost is the

Accepted Answer

Interest cost in the context of pension expense refers to the increase in the projected benefit obligation (PBO) due to the passage of time. This reflects the time value of money, as the obligations are expected to grow over time until they are paid out to retirees.

Question 3

The Maggie Company has a defined benefit pension plan for its employees. The following information pertains to the pension plan as of December 31, 2014:

The amount of the December 31, 2014, projected benefit obligation is

Accepted Answer

The projected benefit obligation (PBO) represents the present value of the pension benefits earned by the employees, using the projected future salaries as the basis for calculating the benefits. Based on the information given, the PBO as of December 31, 2014 is calculated as follows:
PBO = ($6,000 × 50) + ($4,500 × 30) + ($3,000 × 20) × 8
PBO = $300,000 + $135,000 + $60,000 × 8
PBO = $2,530,000

Question 4

Amortization of any net gain or loss is included in pension expense of a given year if at the

Accepted Answer

The correct answer is D because according to pension accounting standards, amortization of any net gain or loss is included in the pension expense of a given year if, at the beginning of the year, the cumulative net gain or loss exceeds 10% of the greater of the actual projected benefit obligation or the fair value of the plan assets. This is known as the "corridor" approach to recognizing gains and losses in pension accounting.

Question 5

Which statement is false?

Accepted Answer

The answer of Which statement is false?
...

Question 6

Accounting principles for defined benefit pension plans under IFRS differ from U.S. GAAP in all of the following areas except that under IFRS

Accepted Answer

Under IFRS, all prior service costs are recognized immediately in profit or loss when incurred, not as a component of other comprehensive income. This is a key difference from U.S. GAAP, where prior service costs are amortized over the service period.

Question 7

Which of the following is not a component of pension expense to be reported on a company's income statement?

Accepted Answer

The components of pension expense to be reported on a company's income statement include interest cost, service cost, and expected return on plan assets. Unrecognized past service cost is a component of the pension liability or asset that is reported on the balance sheet, not on the income statement.

Question 8

The Lucas Company offers employees a defined contribution pension plan. In 2014, Lucas contributed $175,000 to the plan, which paid $195,000 to retired employees. Which of the following statements is true?

Accepted Answer

Lucas will report pension expense of $175,000, which represents the contribution made by the company to the pension plan. There is no accrued liability as the full amount of the contributions made by Lucas in 2014 was used to pay benefits. There is no prior service cost or actuarial gains or losses as no changes were made to the plan in 2014.

Question 9

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

Accepted Answer

Deferred compensation is not a component of pension expense. Pension expense is calculated using components such as service cost, interest cost, return on assets, amortization of prior service cost, and gains or losses. Deferred compensation refers to amounts that an employee has deferred from their current compensation to receive in the future, typically through a retirement plan.

Question 10

Code: 
A =amortization of unrecognized prior service cost
B =interest cost
C =gain or loss (to the extent recognized)
D =service cost
E =expected return on plan assets
F =pension expense

Which equation would be correct for the calculation of pension expense?

Accepted Answer

Pension expense is the sum of service cost, interest cost, and expected return on plan assets, less the amortization of unrecognized prior service cost and any gain or loss recognized.

Question 11

Current GAAP regarding employers' accounting for defined benefit pension plans defines an underfunded plan at the end of the period when the

Accepted Answer

Under the current GAAP, an underfunded plan at the end of the period is defined when the projected benefit obligation (PBO) exceeds the fair value of plan assets. This means that the plan does not have enough assets to cover the pension obligations owed to employees. If the fair value of plan assets exceeds the PBO, the plan is considered overfunded.

Question 12

Benefits for which the employee's right to receive a present or future pension benefit is no longer contingent on remaining in the service of the employer are called

Accepted Answer

Vested benefits are those that the employee has earned and acquired a right to, regardless of whether they continue working for the employer. The employee becomes fully vested after a certain amount of time spent working for the employer, after which they are entitled to the benefits. This ensures that the employee receives the promised benefits even if they leave the company before retirement. Accumulated benefits refer to the total amount of benefits accrued over a certain period of time. Periodic benefits are payments made at regular intervals, such as monthly pension payments. Prior service benefits are benefits based on work done before the employee joined the plan.

Question 13

Gage began a defined benefit pension plan on January 1, 2014. During 2014, the service cost was $450,000. Gage contributed $450,000 to the pension plan for 2014. The actuary said the projected benefit obligation at December 31, 2014 was $450,000. As of December 31, 2014, what statements can Gage make about the pension plan? 
I.The pension plan is fully funded.
II.Gage does not need to report a liability regarding the pension plan at December 31, 2014.

Accepted Answer

I. The pension plan is fully funded because the contributions made by Gage ($450,000) are equal to the service cost ($450,000) and the projected benefit obligation ($450,000).

II. Gage does not need to report a liability regarding the pension plan at December 31, 2014, because the pension plan is fully funded and there is no unfunded liability.

Question 14

In 2014, the Rachel 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, Rachel will report

Accepted Answer

Rachel Company paid $280,000 but only recorded $240,000 as pension expense, resulting in a prepaid pension cost of $40,000 ($280,000 - $240,000).

Question 15

If a pension plan amendment is adopted and retroactive benefits are granted to employees, the amount of the prior service cost at the date of grant is accounted for

Accepted Answer

The retroactive benefits granted to employees are considered prior service costs. These costs are initially recognized as an unamortized amount in the pension plan's balance sheet and are amortized over the future periods as a component of periodic pension expense. Therefore, option D is the correct choice. Options A, B, and C are incorrect because they do not represent the correct accounting treatment of prior service costs.

Question 16

The corridor is defined as

Accepted Answer

The corridor is defined as 10% of the greater of the actual projected benefit obligation or the fair value of the plan assets. This is a method used in accounting for pension plans to limit the amount of actuarial gains and losses to be recognized in a given period.

Question 17

If an employer were to account for a defined benefit pension plan on the cash basis, it would be a violation of the

Accepted Answer

Accounting for a defined benefit pension plan on the cash basis would violate the accrual concept, as it requires recognizing expenses and liabilities when they are incurred, rather than when cash is received or paid.

Question 18

The cost of retroactive benefits granted in a plan amendment or at the initial adoption of a pension plan is called

Accepted Answer

Prior service cost refers to the cost of retroactive benefits granted in a plan amendment or at the initial adoption of a pension plan. Accumulated benefit cost refers to the present value of all benefits earned by plan participants, service cost benefits refer to the cost of benefits earned by employees during the current period, and vested benefits refer to benefits that cannot be forfeited even if an employee leaves the company.

Question 19

Disclosures for a defined benefit pension plan should include which of the following? 
I.number of beneficiaries
II.reconciliation of the ending value of the projected benefit obligation
III.reconciliation of the ending fair value of the plan assets
IV.the composition of plan assets
V.the discount rate used
VI.expected long-term rate of return on plan assets

Accepted Answer

The disclosures for a defined benefit pension plan should include the reconciliation of the ending value of the projected benefit obligation and the ending fair value of the plan assets (options II and III). This is because the plan's financial health is dependent on the plan assets being able to cover the projected benefit obligation.

The discount rate used and the expected long-term rate of return on plan assets are also important disclosures (options V and VI). The discount rate used affects the reported benefit obligation, while the expected rate of return on plan assets affects the amount of investment income recorded.

The number of beneficiaries (option I) and the composition of plan assets (option IV) may be relevant information but are not crucial disclosures for understanding the plan's financial health.

Question 20

Which of the following pension-related definitions is not correct?

Accepted Answer

Service cost is not the amount paid annually to a funding agency under an unfunded pension plan. Service cost refers to the portion of the total present value of benefits earned by employees in the current period.

Quiz 19: Accounting for Postretirement Benefits