Question 1

Actuarial gains and losses are reported as OCI as they occur using:

Accepted Answer

Both U.S. GAAP and IFRS require actuarial gains and losses to be reported as Other Comprehensive Income (OCI) as they occur, rather than being immediately recognized in the income statement. This approach is intended to smooth out the impact of volatile pension plan performance on a company's reported earnings.

Question 2

When the service method is used for amortizing prior service costs, the amount recognized each year is:

Accepted Answer

When the service method is used for amortizing prior service costs, the amount recognized each year is in proportion to the fraction of the total remaining service years worked during the year. This means that the annual cost recognized will vary depending on how long the employee is expected to continue working, and will decrease over time as the employee approaches retirement.

Question 3

In a defined benefit pension plan, gains and losses (either from changing assumptions regarding the PBO or from the return on assets being higher or lower than expected) are:

Accepted Answer

Gains and losses (either from changing assumptions regarding the PBO or from the return on assets being higher or lower than expected) are deferred and not immediately included in pension expense and net income. They are, instead, reported in the statement of comprehensive income.

Question 4

Recording the expense for postretirement benefits will not:

Accepted Answer

The answer of Recording the expense for postretirement benefits will...

Question 5

The following data are for Guava Company's retiree health care plan for the current calendar year. 
- What is the correct entry to record postretirement benefit expense for the current year?

Accepted Answer

Service cost: $ \$ 63,600 \times 1 / 20 $$\quad$$\quad$$\quad$$\quad$$\quad$$3,180
Interest cost: $ \$ 60,000 \times 4 / 20 \times 6 \% $$\quad$$\quad$$\quad$=720
Postretirement benefit expense$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$43,900

Question 6

Under IFRS, components of other comprehensive income:

Accepted Answer

Under IFRS, components of other comprehensive income can be reported as part of a single statement of comprehensive income or in a separate statement of comprehensive income immediately following the income statement.

Question 7

Generic Company sponsors an unfunded postretirement plan providing healthcare benefits. The following information relates to the current year's activity of Generic's postretirement benefit plan: $$\begin{array} { l c } 
\text { Postretirenent benefit expense } & 150 \text { mullion } \
\text { Service cost } & 120 \text { million } \
\text { Amortization of net gain-AOCI } & 10 \text { millior } \
\text { Prior service cost-AOCI } & \text { none } \
\text { Retiree benefits paid (end of year) } & 30 \text { milliory }
\end{array}$$ The interest cost for the year is:

Accepted Answer

The postretirement benefit expense ($150) = service cost ($120) + interest cost ($x) - amortization of net gain ($10). Solving for x gives $40 [in millions]

Question 8

On January 1, 2017, WOW amended its defined benefit pension plan. The amount of prior service costs caused by this action was $720,000. WOW uses the service method for amortizing prior service costs. The following service years were provided by the company actuary: 2017, 20; 2018, 15;2019, 12;2020, 8; and 2021, 5. Twenty employees benefit from this amendment. In 2018, the amortization amount would be:

Accepted Answer

Total service years = 20 + 15 + 12 + 8 + 5 = 60
Amortization in 2018 = 15/60 × $720,000 = $180,000

Question 9

Prior service cost is expensed immediately using:

Accepted Answer

The answer of Prior service cost is expensed immediately using:
...

Question 10

Revenue and expense items and components of other comprehensive income can be reported in the statement of shareholders' equity using:

Accepted Answer

The answer of Revenue and expense items and components of...

Question 11

The following data are for Guava Company's retiree health care plan for the current calendar year. 
- What is the service cost to be included in the current year's postretirement benefit expense?

Accepted Answer

$63,600 × 1/20 = $3,180

Question 12

In a defined benefit pension plan, the journal entry to record the employer's annual cash contribution to plan assets:

Accepted Answer

Pension expense is reduced by the expected return on plan assets. The expected return on plan assets is the expected rate of return times plan assets. If plan assets increases, the expected return on plan assets increases, and pension expense is reduced.

Question 13

In a postretirement health care plan, prior service cost is attributed to the service of active employees from the date of the amendment to:

Accepted Answer

Prior service cost in a postretirement health care plan is attributed to the service of active employees from the date of the amendment to the full eligibility date, which is when employees become fully eligible for the benefits.

Question 14

The following data are for Guava Company's retiree health care plan for the current calendar year.  
-What is the interest cost to be included in the current year's postretirement benefit expense?

Accepted Answer

APBO at 1/1 = $60,000 × 4/20 = $12,000
Interest cost = $12,000 × 6% = $720

Question 15

In a defined benefit pension plan, the journal entry to record benefits paid to retired employees will include:

Accepted Answer

When benefits are paid to retired employees, the projected benefit obligation is reduced, which is recorded as a debit.

Question 16

Persoff Industries International has a defined benefit pension plan. The company revised its estimate of future salary levels causing its defined benefit obligation to increase by $16 million. Also, Persoff's $25 million actual return on plan assets exceeded the 5% high-grade corporate bond rate times the $440 million plan assets. Persoff prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). The company will:

Accepted Answer

$\begin{array}{|l|r|r|}
\hline\text { Plan assets } & 3 & \
\hline \text { Remeasurement gain-OCI } & & 3 \
\hline \
\hline \text { Loss-OCI } &16 & \
\hline \text { DBO } && 16  \
\hline
\end{array}$ Using IFRS, the gain and the loss become part of AOCI in the equity section of the balance sheet. We do not subsequently amortize that amount.

Question 17

Prior service cost is included among OCI items in the statement of comprehensive income and thus subsequently becomes part of AOCI where it is amortized over the average remaining service period using

Accepted Answer

Under U.S. GAAP, prior service cost is recognized in other comprehensive income (OCI) when incurred and is then amortized to pension expense over the service lives of the employees. IFRS does not recognize prior service cost in OCI but recognizes it immediately in profit or loss.

Question 18

Which of the following is not true with regard to pension plans?

Accepted Answer

A defined contribution pension plan creates a retirement savings account for the employee and does not create a liability for the employer. Instead, the employer contributes a set amount to the employee's account.

Question 19

In a defined benefit pension plan, the journal entry to record pension expense will not include:

Accepted Answer

The answer of In a defined benefit pension plan, the...

Question 20

Revenue and expense items and components of other comprehensive income can be reported in a single statement of comprehensive income using:

Accepted Answer

Both U.S. GAAP and IFRS allow for the reporting of revenue, expenses, and components of other comprehensive income in a single statement of comprehensive income. This statement includes all changes in equity during a period, including those resulting from non-owner sources such as revenue, expenses, gains, and losses. Both U.S. GAAP and IFRS require the inclusion of certain items in this statement, such as net income, other comprehensive income, and total comprehensive income.

Quiz 17: Pensions and Other Postretirement Benefits