Deck 19: Accounting for Post-Retirement Benefits

Question 1

The projected benefit obligation PBO) is equal to the

A) actuarial present value of all benefits earned as of a specified date, both vested and nonvested, by employees using current salary levels in the pension plan formula.
B) difference between the annual pension expense and the amount actually funded during the year.
C) actuarial present value of all benefits earned as of a specified date, both vested and nonvested, by employees using anticipated future salary levels in the pension plan formula.
D) actuarial present value of benefits attributed by the pension plan formula to services rendered by employees during the current year.

Answer 1

C

Question 2

The corridor is defined as 10% of the greater of the beginning of the year projected benefit obligation or the end of the year fair value of the plan.

Answer 2

False

Question 3

GAAP requires that a company accrue the cost of other post-retirement benefits OPRBs) during the periods in which its employees earn the benefits.

Answer 3

True

Question 4

Which of the following statements is true concerning prior service cost?

A) Prior service costs are the costs of retroactive benefits.
B) Prior service cost is reported as a liability at the date of the plan amendment.
C) Prior service cost is reported as a negative element of other comprehensive income at the date of the plan amendment.
D) All of these answer choices are correct.

Question 5

In June of 2011, IASB amended IAS 19, Employee Benefits, changing its method of accounting for pensions in order to make the accounting for pensions similar under U.S. GAAP and IFRS.

Question 6

Which of the following is not one of the pension expense components that a company recognizes?

A) expected return on plan assets
B) service cost
C) amortization of prior service cost
D) administrative cost

Question 7

To improve usefulness of defined pension plans, GAAP requires disclosure of reconciliations of the beginning and ending amounts of the projected benefit obligation, including the amounts of the service cost, interest cost, actuarial gains and losses, benefits paid, and plan amendments.

Question 8

A pension plan provides for future retirement income based on the employee's earnings and length of service with the company. This type of pension plan is termed a

A) contributory plan.
B) defined contribution plan.
C) noncontributory plan.
D) defined benefit plan.

Question 9

Other postretirement benefits are provided to former employees after employment.

Question 10

The vested benefit obligation is the present value of the benefits the employee is entitled to receive even if the employee is no longer employed by the company.

Question 11

GAAP for pension plans requires companies with defined benefit pension plans to

A) recognize pension expense based on accrual-basis concepts.
B) recognize pension expense as an amount equal to the actual cash paid to retired employees for the current year.
C) recognize a pension liability based on the projected benefit obligation concept.
D) disclose annual pension cost in a footnote only; pension cost was not required to be reported on the income statement.

Question 12

The defined benefit plan is a type of plan in which the employer's contribution into the pension fund is based on a formula.

Question 13

The accumulated benefit obligation ABO) is equal to the

A) actuarial present value of all benefits earned as of a specified date, both vested and nonvested, by employees using current salary levels in the pension plan formula.
B) actuarial present value of all benefits earned as of a specified date, both vested and nonvested, by employees using anticipated future salary levels in the pension plan formula.
C) difference between the annual pension expense and the amount actually funded during the year.
D) actuarial present value of benefits attributed by the pension plan formula to services rendered by employees during the current year.

Question 14

Under contributory plans the employees bear the majority of the risks of the plan and contribute towards the plan with deductions from their salaries.

Question 15

Which of the following statements is true regarding a defined benefit pension plan?

A) Defined benefit plans are relatively easy to handle from an accounting perspective.
B) Employers that use defined benefit plans are assuming more risks than employers that use defined contribution plans.
C) Defined benefit plans require an employer to contribute a defined sum each period to a pension fund.
D) A defined benefit plan requires the employer to fund the plan each year for an amount equal to the pension expense.

Question 16

An Internal Revenue Code rule that impacts the design of pension plans is that:

A) employee contributions to the pension fund are not taxable to the employee until pension benefits are actually received.
B) pension fund earnings are taxable.
C) employer contributions to the pension fund are not taxable to the employee at the time pension benefits are actually received.
D) all employer pension expenses are deductible for income tax purposes.

Question 17

Vested benefits are

A) estimated benefits.
B) benefits to be received as a lump-sum payment.
C) benefits that will be lost when employment is terminated.
D) benefits the employee has the right to receive even if the employment is terminated.

Question 18

In deciding how to recognize prior period cost, accounting regulators opted to recognize the liability and reduce other comprehensive income, then amortize the prior service cost as a component of pension expense. The liability is reduced and other comprehensive income is increased as the prior service amount is amortized. This method was chosen in response to constituent arguments even though it violates the matching concept .

Question 19

Accounting for prior service cost prospectively would violate the matching concept because all the services performed by the employees were completed in previous periods.

Question 20

Which of the following statements is true regarding a defined contribution pension plan?

A) The pension benefits to be received by the employee during retirement are defined in the plan.
B) Defined contribution plans have the more complex accounting issues than defined benefit plans.
C) Defined contribution plans do not define the benefits that the pension plan must pay to retired employees.
D) Employers that use defined contribution plans are assuming more risks than employers that use defined benefit plans.

Question 21

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

A) accumulated benefit cost.
B) service cost benefits.
C) prior service cost.
D) vested benefits.

Question 22

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

A) I, II, III, IV
B) I, III, V, VI
C) II, III, V, VI
D) III, IV, V, VI

Question 23

The corridor is defined as

A) 1% of the greater of the actual projected benefit obligation or the fair value of the plan assets.
B) 5% of the greater of the actual projected benefit obligation or the fair value of the plan assets.
C) 10% of the greater of the actual projected benefit obligation or the fair value of the plan assets.
D) 15% of the greater of the actual projected benefit obligation or the fair value of the plan assets.

Question 24

The Maggie Company has a defined benefit pension plan for its employees. The following information pertains to the pension plan as of December 31, 2015: The amount of the December 31, 2015, projected benefit obligation is

A) $2,515,400.
B) $2,270,400.
C) $2,530,000.
D) $2,420,400.

Question 25

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

A) Vested benefits are payments that are not contingent on the employee's continuing in the service of the employer.
B) Present value is the current worth of an amount or amounts payable or receivable in the future.
C) Actuarial assumptions are those made by actuaries concerning future events affecting pension costs.
D) Service cost is the amount paid annually to a funding agency under an unfunded pension plan.

Question 26

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

A) end 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.
B) beginning of the year, the cumulative net gain or loss exceeds 10% of the greater of the actual accumulated benefit obligation or the fair value of the plan assets.
C) end of the year, the cumulative gain or loss exceeds 10% of the greater of the actual accumulated benefit obligation or the fair value of the plan assets.
D) beginning of the year, the cumulative gain or loss exceeds 10% of the greater of the actual projected benefit obligation or the fair value of the plan assets.

Question 27

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

A) prior service cost amortization
B) interest cost
C) deferred compensation
D) return on assets

Question 28

Which statement is false?

A) In the computation of pension expense, a negative return on plan assets can be added.
B) The amount of prior service cost is not included as an asset or a liability.
C) Interest cost is equal to the projected benefit obligation at the end of the period multiplied by the discount rate used by the company.
D) A lower-than-expected mortality rate creates a pension loss to a company.

Question 29

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

A) fair value of plan assets exceeds the projected benefit obligation.
B) projected benefit obligation exceeds the fair value of plan assets.
C) accumulated benefit obligation exceeds the fair value of the plan assets.
D) fair value of the plan assets exceed the accumulated benefit obligation.

Question 30

Gage began a defined benefit pension plan on January 1, 2015. During 2015, the service cost was $450,000. Gage contributed $450,000 to the pension plan for 2015. The actuary said the projected benefit obligation at December 31, 2015 was $450,000. As of December 31, 2015, 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, 2015.

A) I
B) II
C) both I and II
D) neither I nor II

Question 31

In the computation of pension expense, interest cost is the

A) expected increase in the plan assets due to investing activities.
B) increase in the projected benefit obligation due to the passage of time.
C) actuarial present value of benefits.
D) expected return on plan assets.

Question 32

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

A) as an intangible asset and liability that are recognized on the plan amendment date.
B) as a prior period adjustment for the total amount of the prior service cost that is reported on the statement of retained earnings.
C) as the total amount of the prior service cost that is recognized as an expense on the current period's income statement.
D) initially as an unamortized amount to be included in the computation of pension expense over future periods.

Question 33

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

A) vested benefits.
B) accumulated benefits.
C) periodic benefits.
D) prior service benefits.

Question 34

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

A) going-concern assumption.
B) accrual concept.
C) separate entity concept.
D) historical accounting.

Question 35

The Lucas Company offers employees a defined contribution pension plan. In 2015, Lucas contributed $175,000 to the plan, which paid $195,000 to retired employees. Which of the following statements is true?

A) Lucas will record an accrued liability of $20,000.
B) Lucas will report pension expense of $175,000.
C) Lucas will recognize prior service cost of $20,000.
D) Lucas will recognize actuarial gains and losses on the plan over current and future periods.

Question 36

In June 2011, the IASB amended IAS 19, Employee Benefits, and significantly changed the method of accounting for defined benefit plan pensions. Regarding these changes, which of the following statements is false?

A) Prior to this amendment, the basic principles of accounting for defined benefit plans under IFRS were the same as U.S. GAAP.
B) Under IAS 19, prior service cost is immediately recognized on the income statement as an expense, while under U.S. GAAP prior service cost is recognized in other comprehensive income and reported as a component of accumulated other comprehensive income on the balance sheet.
C) The changes in the amendment to IAS 19 make it less likely that GAAP will change to converge with IFRS for pension accounting.
D) The major result of the IASB amendments was to remove many of the smoothing devices in pension accounting.

Question 37

In 2015, 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

A) pension assets of $280,000 and pension liabilities of $240,000.
B) an accrued liability of $50,000.
C) service cost of $280,000 and unfunded prior service cost of $40,000.
D) prepaid pension cost of $40,000.

Question 38

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

A) interest cost
B) unrecognized past service cost
C) service cost
D) expected return on plan assets

Question 39

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?

A) F = D + B − E + A ± C
B) F = B + D ± A ± C + E
C) F = D − B ± C − E ± A
D) F = B ± C − E − D ± A

Question 40

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

A) service cost.
B) employer's contribution to the pension fund.
C) amortization of unrecognized prior service cost.
D) interest cost on the projected benefit obligation.

Question 41

Given the following information What is pension expense for 2016?

A) $17,950
B) $30,050
C) $16,850
D) $24,000

Question 42

Disclosures for vested benefits

A) are not required.
B) are related to the projected benefit obligation.
C) are related to the accumulated benefit obligation.
D) are related to the plan assets.

Question 43

Vested benefits are

A) estimated benefits.
B) not contingent on future service to a company.
C) to be received as a lump sum payment.
D) lost when employment is terminated.

Question 44

The Pension Benefit Guaranty Corporation's purpose is to

A) allow companies to exit bankruptcy.
B) insure defined contribution pension plans.
C) insure defined benefit pension plans.
D) guarantee taxpayers that the federal government will pay pension benefits.

Question 45

John Company adopted a defined benefit pension plan on January 1, 2015, and prior service credit was granted to employees. The present value of that prior service obligation as of January 1, 2015 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 2015 is presented below: What amount should be recorded in Prepaid/Accrued Pension Cost when recording the 2015 pension expense and funding at December 31, 2015?

A) $1,200
B) $48,000
C) $87,000
D) $94,800

Question 46

If a company uses the indirect method to report cash flows, it

A) subtracts any increase in its accrued pension cost from net income.
B) subtracts any increase in accrued pension cost as an investing activity.
C) adds any increase in its accrued pension cost to net income.
D) adds any increase in accrued pension cost as a financing activity.

Question 47

Exhibit 19-02
The Sophia Company adopted a defined benefit pension plan on January 1, 2015, and prior service credit was granted to employees. The present value of those benefits was calculated to be $1,245,300 at that date. The service cost is funded in full at the end of each year, plus an additional amount of $225,000 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:
Refer to Exhibit 19-02. What is the pension expense for 2015?

A) $105,000
B) $229,530
C) $315,000
D) $354,060

Question 48

The Peanut Company has a defined benefit pension plan for its employees. The following information pertains to the pension plan: The December 31, 2015 adjusting journal entries include a

A) debit to Accrued/Prepaid Pension Cost for $7,700.
B) debit to Other Comprehensive Income for $7,700.
C) credit to Other Comprehensive Income for $110,300.
D) credit to Accrued/Prepaid Pension Cost for $110,300.

Question 49

Current GAAP requires that the net gain or loss from a settlement or curtailment be included in the

A) statement of retained earnings.
B) income statement.
C) balance sheet.
D) statement of cash flows.

Question 50

A company must fund its pension plan each year at an amount that at least equals service cost for the year plus the amount needed to amortize any underfunding over a

A) maximum of three years.
B) maximum of five years.
C) minimum of three years but not more than six years.
D) maximum of seven years.

Question 51

Exhibit 19-01
Marley Co. has an underfunded prepaid/accrued pension cost of $2,000 debit balance) at December 31, 2015. The following information pertains to 2016:

-Refer to Exhibit 19-1. The December 31, 2016, adjusting entry should be

Question 52

Exhibit 19-01
Marley Co. has an underfunded prepaid/accrued pension cost of $2,000 debit balance) at December 31, 2015. The following information pertains to 2016:
Refer to Exhibit 19-1. The balance in Prepaid/Accrued Pension Cost at December 31, 2016, should be

A) $30,000 debit.
B) $30,000 credit.
C) $8,000 credit.
D) $10,000 credit.

Question 53

Which of the following statements is true?

A) Funding for postretirement health care benefits is legally required, and contributions are tax deductible.
B) Funding for postretirement health care benefits is legally required, but contributions are not tax deductible.
C) Funding for postretirement health care benefits is not legally required, and contributions are not tax deductible.
D) Funding for postretirement health care benefits is not legally required, but contributions are tax deductible.

Question 54

ERISA Pension Reform Act of 1974) provides guidance for

A) accumulated benefit obligation.
B) actual return on plan assets.
C) minimum funding during the year.
D) projected benefit obligations.

Question 55

On January 1, 2015, 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: What amount of prior service cost should be included in pension expense for 2015?

A) $2,000
B) $9,333
C) $12,000
D) $14,000

Question 56

GAAP requires that a company record a loss and liability for termination benefits when

A) the amount can be reasonably estimated.
B)
B) the employee accepts the offer.
C) the corporation extends the offer.
D) both a and

Question 57

The expense for other postretirement benefits, such as health care benefits, dental benefits, and eye care benefits, currently is accounted for

A) on an accrual basis.
B) on a cash basis.
C) on either a cash basis or an accrual basis; both methods are acceptable.
D) by footnote disclosure only.

Question 58

Which of the following statements regarding postretirement benefits other than pensions is true?

A) A liability for postretirement benefits other than pensions is not required to be reported on the balance sheet.
B) The interest component of the net postretirement benefit expense is based on the accumulated postretirement benefit obligation APBO).
C) The interest component of the net postretirement benefit expense is based on the expected postretirement benefit obligation EPBO).
D) An intangible asset for other postemployment benefits OPEB) is required to be reported on a company's balance sheet.

Question 59

ACE has a defined benefit pension plan. ACE is preparing the December 31, 2015 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

A) I
B) II
C) both I and II
D) neither I nor II

Question 60

Which of the following items attributable to a defined benefit pension plan would be recognized on a company's balance sheet?

A) I
B) II
C) III
D) IV

Question 61

Which of the following is typically the most significant OPEB other postemployment benefits)?

A) life insurance
B) health care
C) legal service
D) tuition assistance

Question 62

With respect to the process of assigning the cost of postretirement benefits to periods of employee service, the attribution period starts on the

A) hiring date.
B) vesting date.
C) termination date.
D) retirement date.

Question 63

What are the advantages of qualified pension plans?

Question 64

In 2016, the Ballaster Company decided to amend its defined benefit pension plan. The amendment gave 7 employees the right to receive future benefits based upon their prior service. Ballaster's actuary determined that the prior service cost for this amendment amounts to $550,000. One employee will retire in 1 year, 2 expect to retire in 2 years,1 in three years, 1 in 4 years, and 2 in five years.
Required:
Using the straight line method
1)compute the remaining service life round to 5 decimals)
2) prepare an amortization schedule to amortize the prior service cost

Question 65

During 2015, the Electric Company experienced a difference between its expected and actual projected benefit obligation. At the beginning of 2016, Electric's actuary notified them of the following accumulated information related to their plan: On December 31, 2016, Electric is in the process of calculating the net gain or loss to include in its pension expense for 2016. The average remaining service life of its employees is 10 years and there are no differences between the company's expected and annual rate of return on plan assets in 2016.
Required:
Compute the amount of the net gain or loss to include in the pension expense for 2016. Note whether it is an addition or subtraction to the pension expense.

Question 66

Martha Co. has a defined benefit pension plan for its employees. The plan was amended at the beginning of 2016 which increased benefits based on services rendered by certain employees in prior periods. The actuary has reported that unrecognized prior service cost resulting from the amendment is $385,000. Five employees expect to receive the increased benefits. Shown below is a schedule of the employees and their expected years of future service:
Required:
Using the straight-line method:
a. Compute the average remaining service life.
b. Determine the amount of unrecognized prior service cost to be included in the 2016 pension expense calculation.

Question 67

On December 31, 2015, Clemson Company determined that the 2015 service cost on its defined benefit pension plan was $245,000. At the beginning of 2015, Clemson had pension plan assets totaling $990,000 and a projected benefit obligation of $750,000. Its discount rate and expected long-term rate of return on plan assets for 2015 were both 12%.
Required:
1) Compute the amount of Clemson's pension expense for 2015.
2) Record the journal entries for Clemson's 2015 pension expense if it funds the pension plan in the amount of a)
$225,000 and b) $210,000.

Question 68

The following information is related to a company's pension plan:
Required:
a. Prepare the adjusting journal entry to update the pension liability.
b. Assume that instead of Accrued/Prepaid Pension Cost having a credit balance of $800, it had a $600 debit balance. Prepare the adjusting journal entry to record the pension liability.

Question 69

With respect to the process of assigning the cost of postretirement benefits to periods of employee service, attribution period ends at

A) the expected retirement date.
B)
B) the actual retirement date.
C) the full eligibility date.
D) either a or

Question 70

In 2016, the Electrician Company decided to amend its defined benefit pension plan. The amendment gave 7 employees the right to receive future benefits based upon their prior service. Electrician's actuary determined that the prior service cost for this amendment amounts to $550,000. Employee A will retire in 1 year, employee's B & C expect to retire in 2 years, employee D in three years, employee E in 4 years, and employee's F & G in five years.
Required:
Using the years-of-future service method, prepare the schedules to determine:
1) the amortization fraction for each year
2) the amortization of the prior service cost

Question 71

Teresa Company had the following information related to its pension plan: An additional net loss of $1,990 was reported as of January 1, 2017 see table). This amount has been included in the
January 1, 2017, projected benefit obligation balance.
Required:
Compute the amount of loss that should be included in pension expense in:
a. 2017
b. 2018

Question 72

Postemployment benefits are provided to former employees

A) after employment.
B) after retirement.
C) before retirement.
D) after employment but before retirement.

Question 73

Which of the following disclosures are required by GAAP for OPEBs?

A) the assumed healthcare cost trend rates
B) the amounts of securities included in the plan assets
C) the types of securities included in the plan assets
D) All of these answer choices are required

Question 74

On January 1, 2016, Jackson Hole Company decided to provide a healthcare plan for retired employees. In order for benefits to be determined for each employee, the company gives credit to the date of hire for each employee. This is a retroactive benefit. The following information regarding the plan is as follows:
Accumulated postretirement benefit obligation for employees fully
Required:
1) Compute the OPRB expense for 2016 using the average remaining service life to amortize the prior service cost.
2) Prepare all the required journal entries for 2016 if the plan is not funded.
3) Compute the accumulated postretirement benefit obligation.

Question 75

Robin Co. has a defined benefit pension plan that has experienced differences between its expected and actual projected benefit obligation. Data on the plan as of January 1, 2016, follow: There was no difference between the company's expected and actual return on plan assets during 2016. The average remaining service life of the company's employees is 12 years.
Required:
Determine the amount of the net gain or loss to be included in pension expense for 2016 and indicate whether it is an increase or decrease in the pension expense calculation.

Question 76

Two were expected to retire at the end of 2020, two more at the end of 2022, and four at the end of 2024.
Required:
Using the years-of-future-service method, compute the amount of prior service cost to be amortized in the first year.

Question 77

Karen Company began a defined benefit pension plan on January 1, 2016. No prior service credit was granted to employees. Service costs amounted to $34,000 in 2016 and $37,000 in 2017. All contributions to the fund were made at the end of the year. A 10% discount rate was used. The expected and actual) rate of return of plan assets was
12%.
Required:
Prepare journal entries for December 31, 2016 and 2017, assuming:
a. Funding equaled expense.
b. $31,000 was funded each year.
c. $38,000 was funded each year.

Question 78

Joan, Inc. started a pension plan on January 1, 2016. At that date, prior service cost of $1,100,000 was recognized as a result of prior service credit granted to existing employees. At December 31, 2016, the following information was available: Required:
a. Compute the pension expense for 2016.
b. Prepare appropriate journal entries for 2016.

Question 79

The following information is provided regarding a company's pension plan:
Required:
a. Prepare the December 31 journal entry to record pension expense.
b. Explain the difference between "interest cost" and the "expected return on plan assets."

Question 80

Marjorie, Inc.'s records contained the following data as of December 31, 2016, on its OPEB plan: Required:
a. Compute the OPEB expense for 2016.
b. Prepare the journal entry to record the 2016 OPEB expense.