Deck 14: Pensions and Other Postretirement Benefits

Question 1

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

A) An offset to the liability for prior service cost.
B) Accumulated other comprehensive income
C) A pension asset or liability.
D) Other comprehensive income

Answer 1

C

Question 2

Benefits under a pension plan that are not contingent upon an employee's continuing service are

A) Granted under a plan of defined contribution
B) Based upon terminal funding
C) Actuarially unsound
D) Vested

Answer 2

D

Question 3

According to SFAS No. 87, prior service costs should be

A) Charged to retained earnings as a cost relating to the past
B) Amortized over the service period of each employee expected to receive benefits
C) Taken into consideration only by expensing interest on the unfunded amount
D) Recorded in full as a liability at their discounted present value

Answer 3

B

Question 4

The funded status of a defined benefit pension plan is equal to the

A) Vested benefit obligation minus the fair value of the pension plan assets.
B) Accumulated benefit obligation minus the fair value of the pension plan assets.
C) Projected benefit obligation minus the fair value of the pension plan assets.
D) Projected benefits plus the fair value of the pension plan assets minus employer contributions to the pension plan.

Question 5

Whenever a defined-benefit pension plan is amended, and credit is given to employees for their years of service provided before the date of amendment

A) Both the pension expense and the projected benefit obligation are usually relatively more than the previous amount
B) Both the pension expense and the projected benefit obligation are usually relatively smaller than the previous amount
C) Both the pension expense and the projected benefit obligation are usually the same as previous amount
D) The expected change cannot be determined

Question 6

In accounting for a defined-benefit pension plan

A) The employer's responsibility is simply to make a contribution each year based on the formula established in the plan.
B) The expense recognized each period is equal to the cash contribution.
C) The liability is determined based upon known variables that reflect future salary levels promised to employees.
D) An appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised

Question 7

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

A) Determining the projected benefit obligation.
B) Determining the amount that might be reported for pension expense.
C) Determining the accumulated benefit obligation.
D) Making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.

Question 8

In a defined benefit plan, the amount of annual funding depends on

A) Compensation levels.
B) Interest earnings.
C) Turnover
D) All of the above

Question 9

According to SFAS No. 87, which of the following is never recorded as a component of annual pension cost?

A) Amortization of the intangible asset recorded as the offset to the minimum pension liability
B) Amortization of prior service cost
C) Amortization of gains and losses
D) Amortization of the transition amount

Question 10

A pension liability is reported when

A) Accumulated other comprehensive income exceeds the fair value of pension plan assets.
B) The projected benefit obligation exceeds the fair value of pension plan assets.
C) The accumulated benefit obligation is less than the fair value of pension plan assets.
D) The pension expense reported for the period is greater than the funding amount for the same period

Question 11

If the projected benefit obligation of a defined benefit pension plan exceeds the fair value of the pension plan assets, the employer must report

A) The difference as a liability in the balance sheet and a corresponding adjustment to the amount of pension expense reported in earnings.
B) The difference as a liability in the balance sheet and a corresponding adjustment to other comprehensive income, net of deferred income taxes.
C) The difference as an asset in the balance sheet and a corresponding adjustment to the amount of pension expense reported in earnings.
D) The difference as an asset in the balance sheet and a corresponding adjustment to other comprehensive income, net of deferred income taxes.

Question 12

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

A) An offset to the liability for prior service cost
B) Accrued or prepaid pension cost
C) An operating expense in this period
D) An accrued actuarial liability

Question 13

APB Opinion No. 8 set minimum and maximum limits on the annual provision for pension cost. An amount that was always included in the calculation of both the minimum and the maximum limit is

A) Normal cost
B) Amortization of past service cost
C) Interest on unfunded past and prior service costs
D) Retirement benefits paid

Question 14

According to SFAS No. 87, "Employer's Accounting for Pensions," gains and losses should be

A) Fully allocated to current and future periods
B) Offset against pension expense in the year of occurrence
C) Allocated if any unrecognized gain or loss at the beginning of the year is in excess of 10 percent of the greater of the projected benefit obligation or the market value of the plan assets
D) Disclosed in a note to the financial statements using separate schedules for both gains and losses

Question 15

Gains and losses that relate to the computation of pension expense should be

A) Recorded only if a loss is determined.
B) Recorded currently as an adjustment to pension expense in the period incurred.
C) Amortized over a 15-year period an amount in excess of the accumulated benefit obligation.
D) Recorded currently and in the future by applying the corridor method which provides the amount to be amortized

Question 16

Which of the following components of pension expense could result in a decrease to the annual pension expense amount?

A) Service Cost.
B) Actual return on plan assets.
C) Interest on the liability.
D) Amortization of prior service cost

Question 17

The interest on the projected benefit obligation component of pension expense

A) May be stated implicitly or explicitly when reported.
B) Reflects the incremental borrowing rate of the employer.
C) Reflects the rates at which pension benefits could be effectively settled.
D) Is the same as the expected return on plan assets

Question 18

A corporation has a defined-benefit plan. A pension liability will result at the end of the year if

A) The projected benefit obligation exceeds the fair value of the plan assets.
B) The fair value of the plan assets exceeds the projected benefit obligation.
C) The amount of employer contributions exceeds the pension expense.
D) The amount of pension expense exceeds the amount of employer contributions

Question 19

The accumulated benefit obligation measures

A) The pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
B) The level cost that will be sufficient, together with interest to provide the total benefits at retirement.
C) The shortest possible period for funding to maximize the tax deduction.
D) The pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels

Question 20

The actual return on plan assets

A) Is equal to interest expenses accrued each year on the projected benefit obligation, just as it does on any discounted debt.
B) Is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period.
C) Is equal to the change in the fair value of the plan assets during the year.
D) Includes interest, dividends, and changes in the fair value of the fund assets

Question 21

A company that maintains a defined-benefit pension plan for its employees should report a pension asset or liability on each balance sheet date equal to the

A) Funded status relative to the projected benefit obligation.
B) Projected benefit obligation.
C) Accumulated benefit obligation.
D) Plan's vested benefits

Question 22

The funded status of a defined benefit pension plan is reported in the balance sheet.

A) As an asset, if the pension plan is underfunded.
B) As a liability, if the pension plan is underfunded.
C) Because it measures the minimum pension plan liability.
D) When it exceeds the projected benefit obligation.

Question 23

Discuss the cost approach and benefits approach actuarial funding methods.

Question 24

Some theorists argue that the best measure of the employer's defined benefit pension plan obligation is the accumulated benefit obligation.

A) Since the accumulated benefit obligation is measured using current salaries, it represents the conservative floor for a company's pension obligation to its employees.
B) It is consistent with the measurement of pension expense.
C) Since the accumulated benefit obligation is measured using future salaries, it represents the conservative floor for a company's pension obligation to its employees.
D) The accumulated benefit obligation measures the present value of the amounts that employees will receive from the pension plan once they retire.

Question 25

The expected postretirement benefit obligation (EPBO) is

A) Similar to the defined benefit pension plan's projected benefit obligation because it is the obligation attributable to employee service rendered to date.
B) Used to calculate the interest component of OPBs expense before full eligibility is achieved.
C) Recognized over the life expectancy of the employees when most participants are fully eligible to receive benefits.
D) The actuarial present value of the total benefits expected to be paid assuming full eligibility is achieved.

Question 26

What is the minimum liability as it relates to reporting pensions on corporate financial statements?

Question 27

The main purpose of the Pension Benefit Guaranty Corporation is to

A) Pay pension to participants of failed pension plans
B) Require a voluntary termination of a pension plan whenever the risks related to nonpayment of the pension obligation seem high.
C) Require plan administrators to publish a comprehensive description and summary of their plans.
D) Require minimum funding of pensions

Question 28

Which of the following is not a difference between defined benefit pension plans and other postretirement benefits (OPBs)?

A) Unlike defined benefit pension plan payments, there is no cap on the amount of OPBs benefit to be paid to participants.
B) Unlike defined benefit pension plans, management promises OPBs payments in exchange for current services.
C) Unlike defined benefit pension plans, employees do not accumulate additional OPBs benefits with each year of service.
D) Unlike defined benefit pension plans, OPBs do not vest.

Question 29

Define the following components of pension cost: under SFAS No. 87 (FASB ASC 715):
a. Service cost
The service cost component of pension cost is the actuarial present value of the benefits attributed by the pension formula to employee service for that period.
b. Interest cost
The interest cost component is the increase in the projected benefit obligation due to the passage of time. Recall that the pension liability is calculated on a discounted basis and accrues interest each year. The interest cost component is determined by accruing interest on the previous year's pension liability at the settlement-basis discount rate.
c. Return on plan assets
The return on plan assets component is the difference between the fair value of these assets from the beginning to the end of the period, adjusted for contributions, benefits, and payments. That is, the interest and dividends earned on the funds actually contributed to the pension fund, combined with changes in the market value of invested assets, will reduce the amount of net pension cost for the period. SFAS No. 87 allows the use of either the actual return or the expected return on plan assets when calculating this component of pension expense.
d. Prior service cost
Prior service cost is the total cost of retroactive benefits at the date the pension plan is initiated or amended. Prior service cost is amortized over the expected remaining service period of each employee expected to receive benefits.
e. Amortization of gains and losses
Gains and losses include actuarial gains and losses or experience gains and losses. At a minimum, the amount of gain or loss to be amortized in a given period is the amount by which the cumulative unamortized gains and losses exceed what the pronouncement termed the corridor. The corridor is defined as 10 percent of the greater of the projected benefit obligation or market value of the plan assets. The excess, if any, is divided by the average remaining service period of employees expected to receive benefits.

Question 30

Discuss the Employee Retirement Income Security Act.

Question 31

What four categories of information are required to be disclosed under the provisions of SFAS No. 35 (FASB ASC 960)?

Question 32

Discuss the difference between defined benefit and defined contribution pension plans.

Question 33

The corridor approach

A) Is used to determine how much interest to add to the service cost and amortization of prior service in order to calculate pension expense for the period.
B) Is used to determine the minimum amount of accumulated unamortized net gains or losses that must be amortized during the accounting period.
C) Is used to determine the amount of prior service cost to expense each accounting period.
D) Is use to determine the pension plan's funded status.

Question 34

Discuss the characteristics that make accounting for other postretirement benefits more difficult than accounting for pensions.

Question 35

What changes in accounting for pensions were required by SFAS No. 158 (FASB ASC 715)?

Question 36

What factors must be considered by actuaries in measuring the amount of pension benefits under a defined benefit plan?

Question 37

Benefits that are not contingent on the employee continuing in the service of the company are

A) Accumulated benefits.
B) Projected benefits.
C) Benefits earned to date.
D) Vested benefits.