Deck 14: Pensions and Postretirement Benefits

Question 1

The difference between the actual and expected return on plan assets during year two is a component of comprehensive income for year two.

Answer 1

True

Question 2

Recognized prior service cost amortization causes reported pension expense to increase for defined benefit plans.

Answer 2

True

Question 3

The interest cost component of pension expense in year two is determined by multiplying the projected benefit obligation at the beginning of year two by the discount rate.

Answer 3

True

Question 4

The same interest rate is used to compute service cost,interest cost,and return on plan assets.

Question 5

A higher discount rate assumption increases the projected benefit obligation and thereby increases the funded status.

Question 6

The parties involved in a defined benefit plan are the same as those in a defined contribution plan.

Question 7

There is a reduction in pension expense created by expected earnings of a defined benefit pension plan.

Question 8

Companies can influence the calculation of pension expense by choosing a higher or lower discount rate and/or by choosing a higher or lower expected rate of return on plan assets.

Question 9

The interest cost component of a defined benefit pension plan is the portion of expense due to the passage of time.

Question 10

The anticipated life span of the employees after retirement must be taken into consideration in determination of pension expense for a defined contribution pension plan.

Question 11

The return on the pension fund impacts the employer's periodic pension expense for defined contribution pension plans.

Question 12

The payments made by the employer to fund a defined contribution pension plan create a pension fund asset on the balance sheet of the employer.

Question 13

Expected return on pension plan assets causes reported pension expense to increase for defined benefit plans.

Question 14

In a defined contribution plan the employer bears the risk that the ultimate pension payments will be large enough to sustain a comfortable retirement.

Question 15

Service cost and interest cost cause reported pension expense to increase for defined benefit plans.

Question 16

Most of the factors used to determine specific expense accruals for defined benefit pension plans are based upon actuarial assumptions and present values.

Question 17

The projected benefit obligation is the present value of the retirement benefits earned to date by the employees and is based on future salary levels.

Question 18

Defined contribution plans specify the amount of cash that the employer puts into the plan for the benefit of the employee.

Question 19

The difference between the actual and expected return on plan assets during year two is a component of pension expense for year two.

Question 20

Service cost is the increase in the discounted present value of the pension benefits ultimately payable that is attributable to an additional year's employment.

Question 21

ERISA introduced minimum funding requirements and limited pension investments in employer stock to 10% of plan assets.

Question 22

Under current GAAP,volatility in asset returns translates directly into net income volatility because the return on plan assets reduces pension expense.

Question 23

To compute the amortization of the cumulative unrecognized gains and losses in a pension plan,the corridor is computed as 10% of the higher of market-related value of pension plan assets or the projected benefit obligation.

Question 24

A prepaid pension asset will be created during a particular time period when a company reports pension expense of $219,200 and pension funding of $235,000.

Question 25

The accumulated benefit obligation approximates the employer's pension liability if the pension plan were terminated and must be shown as a liability on the year-end balance sheet.

Question 26

A pension liability arises when pension expense exceeds pension funding.

Question 27

The amount of the cumulative gain or loss in excess of the corridor threshold is amortized to the pension expense over the average remaining service period of the employees.

Question 28

Companies are required to disclose their estimate of pension funding for the upcoming year.

Question 29

Higher marginal income tax rates create an incentive for companies to underfund their pension plans.

Question 30

The minimum pension liability that must be shown on the balance sheet of the plan sponsor is the excess of the projected benefit obligation over the plan assets at fair value.

Question 31

A pension plan is underfunded if the projected benefit obligation exceeds the fair value of the pension plan assets.

Question 32

The difference between actuarial assumptions and actual experience for a given year will not impact that year's pension expense.

Question 33

Prior service cost is amortized into pension expense on a straight-line basis over the remaining service lives of the employees who will be receiving benefits from the plan.

Question 34

Companies are required to disclose the dollar amount of pension retirement benefits they expect to pay in each of the next ten years.

Question 35

U.S.tax laws encourage companies to overfund their pension plans.

Question 36

When accounting for funded postretirement benefit plans,actual return on plan assets is deducted from the postretirement benefit expense.

Question 37

The economic status of the pension plan at a given date is the difference between the fair value of the plan assets and the projected benefit obligation.

Question 38

U.S.tax laws limit the deductibility of contributions to pension plans for firms whose plans are underfunded.

Question 39

Prior service cost is the increase in the projected benefit obligation created by pension plan amendments.

Question 40

The pension asset/liability reported within the balance sheet must reflect the funded status of the pension plan.

Question 41

Under IFRS,past service cost is recognized immediately as part of pension expense.

Question 42

The service cost of a defined benefit pension plan is the

A)annual fee charged by the plan administrator.
B)change in the pension liability caused by plan amendments.
C)change in the pension liability caused by one additional year of employee service.
D)the retirement benefit earned by the employees for services provided to date.

Question 43

The components of pension expense are

A)service cost,plus interest cost,plus net amortization.
B)service cost,plus interest cost,plus return on plan assets,plus net amortization.
C)service cost,plus interest cost,minus return on plan assets,plus (or minus)net amortization.
D)service cost,plus interest cost,minus return on plan assets,minus net amortization.

Question 44

IFRS permits two methods for handling actuarial gains and losses,one of which requires immediate recognition of actuarial gains and losses in pension expense.

Question 45

Periodic pension expense computed under IFRS generally consists only of current service cost,past service cost and net interest on the net defined benefit liability or asset.

Question 46

The Shasti Corporation reported the following for the year ending December 31,2014:
• Service cost: $142,610
• Plan assets,January 1,2014: $1,200,000
• Prior service cost amortization: $21,150
• Expected return on plan assets: 9%
• Actual return on plan assets: 8.5%
• Pension expense: $175,760
• Actuarially determined discount rate: 8%
What was the projected benefit obligation on January 1,2014?

A)$1,500,000
B)$1,425,000
C)$1,200,000
D)$1,333,333

Question 47

Which of the following is not a factor in the determination of pension expense when the employer sponsors a defined benefit pension plan?

A)The amount of retirement benefits that will vest.
B)The rate of return on the pension fund investment.
C)The rate that salaries will increase until retirement.
D)The amount of funding during a particular perioD.

Question 48

What is the pension expense for the year ended December 31,2015?

A)$1,140,000
B)$1,065,000
C)$1,200,000
D)$1,137,000

Question 49

The interest cost component of a defined benefit pension plan is computed as the

A)ending accrued pension liability times the discount rate.
B)beginning accrued pension liability times the discount rate.
C)beginning projected benefit obligation times the discount rate.
D)beginning accumulated pension liability times the discount rate.

Question 50

How much is the projected benefit obligation as of December 31,2015?

A)$1,875,000
B)$1,200,000
C)$1,950,000
D)$2,062,500

Question 51

The total pension expense for the year is

A)$124,761.
B)$131,451.
C)$136,431.
D)$142,511.

Question 52

The service cost component of a defined benefit pension plan is computed as the

A)present value of the change in the accrued pension liability.
B)actual value of the change in the accrued pension liability.
C)present value of the change in pension liability from additional employee service.
D)undiscounted change in pension liability from additional employee service.

Question 53

The return on plan assets component of pension expense for a defined benefit pension plan is

A)the reduction in pension expense created by expected earnings of the plan.
B)the reduction in pension expense created by actual earnings of the plan.
C)the change in the plan asset value resulting from the actual return on plan assets.
D)not a factor in the determination of pension expense.

Question 54

A company instituted an IRS approved plan to contribute monies to a plan that would pay each employee a percentage of his or her highest year of salary for each year of service upon termination of services.This plan is a

A)defined benefit pension plan.
B)defined contribution pension plan.
C)government sponsored pension plan.
D)postretirement benefit plan.

Question 55

IFRS requires that the discount rate be used to compute the expected return on plan assets.

Question 56

A company contributes to its defined contribution plan.Which one of the following journal entries properly records this transaction?

A) DR Pension asset
CR Cash
B) DR Projected minimum liability
CR Cash
C) DR Pension expense
CR Cash
D) DR Minimum pension liability CR Cash

Question 57

The interest cost for the year is

A)$42,560.
B)$31,920.
C)$36,480.
D)$41,040.

Question 58

A company instituted an IRS approved plan to fund a percentage of each employee's salary to a plan that would pay benefits to the employee after termination of services.This plan is a

A)defined benefit pension plan.
B)defined contribution pension plan.
C)government sponsored pension plan.
D)postretirement benefit plan.

Question 59

Which of the following statements does not properly describe a defined benefit pension plan?

A)Many assumptions are made in the determination of pension expense.
B)The employee bears little risk with respect to estimating the amount of the annual contributions to the plan.
C)The employer bears little risk with respect to estimating the amount of the annual contributions to the plan.
D)A pension plan asset is not recorded on the employer's balance sheet.

Question 60

Under IFRS,pension expense is likely to be both more volatile and lower compared to pension expense computed under U.S.GAAP.

Question 61

When employers amend pension plans to increase benefits to participants,which one of the following is created?

A)Prior service cost
B)Cumulative obligation gain or loss
C)Transition asset
D)Transition liability

Question 62

TKE Corporation established a defined benefit pension plan in 2012. TKE has provided the following information for the year ended December 31, 2014:
$\begin{array}{lr}\text { Service cost } & \$ 90,000 \\\text { Interest cost } & \$ 120,000 \\\text { Actual return on plan assets } & \$ 70,000 \\\text { Expected return on plan assets } & \$ 80,000 \\\text { Amortization of prior service costs } & \$ 30,000\end{array}$

-The pension expense for 2014 is

A)$90,000.
B)$120,000.
C)$160,000.
D)$170,000.

Question 63

TKE Corporation established a defined benefit pension plan in 2012. TKE has provided the following information for the year ended December 31, 2014:
$\begin{array}{lr}\text { Service cost } & \$ 90,000 \\\text { Interest cost } & \$ 120,000 \\\text { Actual return on plan assets } & \$ 70,000 \\\text { Expected return on plan assets } & \$ 80,000 \\\text { Amortization of prior service costs } & \$ 30,000\end{array}$

-If the company contributes $130,000 cash to the pension plan trustee,which one of the following journal entries properly records the payment?

A) DR Pension expense $~~~~~~~~$$~~~~~~~~$ 90,000
DR Pension asset $~~~~~~~~$$~~~~~~~~~~~~~$ 40,000
$~~~~$ CR Cash $~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$ 130,000
B) DR Pension expense $~~~~~~~~$$~~~~~~~~$$~~~~~~~~$ 120,000
DR Pension asset $~~~~~~~~$$~~~~~~~~$$~~~~~~~~~~~~$ 10,000
$~~~~$ CR Cash $~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$ 130,000
C) DR Pension expense $\quad$ 130,000
CR Cash $\quad$ 130,000
D) DR Pension expense $~~~~~~~~$ 160,000
CR Cash $~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~~~~~~~~$ 130,000
CR Pension liability $~~~~~~~~$$~~~~~~~~$$~~~~~~~~$ 30,000

Question 64

Smith, Inc. has a pension plan with the following data available for 2014 and 2015:
$\begin{array}{lcc}&2014&2015\\\text { Service cost } & \$ 30,000 & \$ 34,000 \\\text { Interest cost } & \$ 18,000 & \$ 20,000 \\\text { Actual return on plan assets } & \$ 15,000 & \$ 21,600 \\\text { Beginning of year plan assets } & \$ 200,000 & \$ 240,000 \\\text { Settlement rate } & 8 \% & 8 \% \\\text { Expected return on plan assets } & 8 \% & 8 \%\end{array}$

-Smith's pension expense for 2014 is

A)$30,000.
B)$32,000.
C)$33,000.
D)$48,000.

Question 65

TKE Corporation established a defined benefit pension plan in 2012. TKE has provided the following information for the year ended December 31, 2014:
$\begin{array}{lr}\text { Service cost } & \$ 90,000 \\\text { Interest cost } & \$ 120,000 \\\text { Actual return on plan assets } & \$ 70,000 \\\text { Expected return on plan assets } & \$ 80,000 \\\text { Amortization of prior service costs } & \$ 30,000\end{array}$

-If the company contributes $160,000 cash to the pension plan trustee,which one of the following journal entries properly records the payment?

A) $\begin{array}{lll}\text { DR } & \text { Pension expense } & 90,000 \\\text { DR } & \text { Pension asset } & 70,000\\\text { CR Cash }&160,000\end{array}$
B) $\begin{array}{lll}\text { DR } & \text { Pension expense } & 120,000 \\\text { DR } & \text { Pension asset } & 40,000\\\text { CR Cash }&160,000\end{array}$
C) DR Pension expense $\quad$ 160,000
CR Cash $\quad$ 160,000
D) $\begin{array}{l}\text { DR Pension expense }&170,000 \\~~~\text { CR Cash}& &160,000 \\~~~\text { CR Pension liability}&&10,000\end{array}$

Question 66

Smith, Inc. has a pension plan with the following data available for 2014 and 2015:
$\begin{array}{lcc}&2014&2015\\\text { Service cost } & \$ 30,000 & \$ 34,000 \\\text { Interest cost } & \$ 18,000 & \$ 20,000 \\\text { Actual return on plan assets } & \$ 15,000 & \$ 21,600 \\\text { Beginning of year plan assets } & \$ 200,000 & \$ 240,000 \\\text { Settlement rate } & 8 \% & 8 \% \\\text { Expected return on plan assets } & 8 \% & 8 \%\end{array}$

-Smith's pension expense for 2015 is

A)$32,400.
B)$34,000.
C)$34,800.
D)$54,000.

Question 67

To compute the amortization on the cumulative unrecognized gains and losses for a pension plan,the corridor is computed as 10% of the

A)average of the beginning balances of the plan assets and the projected benefit obligation.
B)higher of the beginning balances of the plan assets or the accumulated benefit obligation.
C)higher of the beginning market-related value of the plan assets or the projected benefit obligation.
D)lower of the beginning market-related value of the plan assets or the projected benefit obligation.

Question 68

the beginning of 2014, Moony, Inc. has a cumulative unrecognized loss of $50,000 in its pension plan. The estimated remaining service period of active employees is 12 years for both years.
$\begin{array}{llr}&2014&2015\\\text { Beginning plan asset value } & \$ 335,000 & \$ 350,000 \\\text { Beginning projected benefit obligation } & 325,000 & 385,000 \\\text { Current year gain or (loss) } & (37,500) & 25,000\end{array}$

-The amortization of accumulated unrecognized losses for 2014 is

A)$0.
B)$1,375.
C)$3,350.
D)$4,500.

Question 69

Changes in the discount rate on pension plans cause material differences in

A)pension expense and pension obligations.
B)interest expense and pension expense.
C)pension expense and trust fund recorded on the sponsor's balance sheet.
D)interest expense and the plan assets.

Question 70

U.S.tax law limits the deductibility of contributions to pension plans for firms whose plans

A)are underfunded.
B)are overfunded.
C)have no current benefit recipients.
D)are part of a benefits package.

Question 71

For income tax purposes,pension plan sponsors deduct the amount of the

A)pension expense.
B)service cost.
C)plan contribution.
D)service cost plus net amortization and deferral.

Question 72

What is the pension plan fund balance as of December 31,2015?

A)$1,863,000
B)$1,800,000
C)$1,953,750
D)$1,860,000

Question 73

the beginning of 2014, Moony, Inc. has a cumulative unrecognized loss of $50,000 in its pension plan. The estimated remaining service period of active employees is 12 years for both years.
$\begin{array}{llr}&2014&2015\\\text { Beginning plan asset value } & \$ 335,000 & \$ 350,000 \\\text { Beginning projected benefit obligation } & 325,000 & 385,000 \\\text { Current year gain or (loss) } & (37,500) & 25,000\end{array}$

-At the beginning of 2014,Moony,Inc.has a cumulative unrecognized loss of $50,000 in its pension plan.The estimated remaining service period of active employees is 12 years for both years. $\begin{array}{llr}&2014&2015\\\text { Beginning plan asset value } & \$ 335,000 & \$ 350,000 \\\text { Beginning projected benefit obligation } & 325,000 & 385,000 \\\text { Current year gain or (loss) } & (37,500) & 25,000\end{array}$
The corridor for amortization for 2015 is

A)$0.
B)$25,000.
C)$35,000.
D)$38,500.

Question 74

Current accounting standards require that the discount rate used for pension plans be

A)current market rate for the year.
B)the average market rate since the beginning of the plan.
C)the rates at which the pension benefits could effectively be settled.
D)estimated future average market rates.

Question 75

The smoothing of pension expense is

A)unethical and not allowed by GAAP.
B)allowed through amortization and deferral to prevent volatility in earnings.
C)not allowed by GAAP if the sole purpose is to prevent earnings volatility.
D)illegal and prohibited by SEC.

Question 76

Smith, Inc. has a pension plan with the following data available for 2014 and 2015:
$\begin{array}{lcc}&2014&2015\\\text { Service cost } & \$ 30,000 & \$ 34,000 \\\text { Interest cost } & \$ 18,000 & \$ 20,000 \\\text { Actual return on plan assets } & \$ 15,000 & \$ 21,600 \\\text { Beginning of year plan assets } & \$ 200,000 & \$ 240,000 \\\text { Settlement rate } & 8 \% & 8 \% \\\text { Expected return on plan assets } & 8 \% & 8 \%\end{array}$

-The deferred gain or loss from the return on plan assets for 2015 is

A)$0.
B)$2,400 deferred gain.
C)$2,400 deferred loss.
D)unknown from information provideD. $\begin{array}{lr}\text { Expected return on plan assets } & \$ 19,200 \\\text { Actual return on plan assets } & \underline{21,600} \\\text { Deferred gain } & \$ 2,400\end{array}$

Question 77

Smith, Inc. has a pension plan with the following data available for 2014 and 2015:
$\begin{array}{lcc}&2014&2015\\\text { Service cost } & \$ 30,000 & \$ 34,000 \\\text { Interest cost } & \$ 18,000 & \$ 20,000 \\\text { Actual return on plan assets } & \$ 15,000 & \$ 21,600 \\\text { Beginning of year plan assets } & \$ 200,000 & \$ 240,000 \\\text { Settlement rate } & 8 \% & 8 \% \\\text { Expected return on plan assets } & 8 \% & 8 \%\end{array}$

-The deferred gain or loss from the return on plan assets for 2014 is

A)$0.
B)$1,000 deferred gain.
C)$1,000 deferred loss.
D)unknown from information provideD. $\begin{array}{ll}\text { Expected return on plan assets } & \$ 16,000 \\\text { Actual retum on plan assets } & 15,000 \\\text { Deferred loss } & \$ 1,000\end{array}$

Question 78

TKE Corporation established a defined benefit pension plan in 2012. TKE has provided the following information for the year ended December 31, 2014:
$\begin{array}{lr}\text { Service cost } & \$ 90,000 \\\text { Interest cost } & \$ 120,000 \\\text { Actual return on plan assets } & \$ 70,000 \\\text { Expected return on plan assets } & \$ 80,000 \\\text { Amortization of prior service costs } & \$ 30,000\end{array}$

-If the company contributes $170,000 cash to the pension plan trustee,which one of the following journal entries properly records the payment?

A) DR Pension expense $~~~~~~~~$$~~~~~~~~$$~~~~~~~~$ 90,000
DR Pension asset $~~~~~~~~$$~~~~~~~~$$~~~~~~~~~~~~$ 80,000
$~~~~~~~~$ CR Cash $~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~~~~$ 170,000

B) DR Pension expense $~~~~~~~~$$~~~~~~~~$$~~~~~~~~$ 120,000
DR Pension asset $~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$ 50,000
$~~~~~~~~$ CR Cash $~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$$~~~~~~~~$ 170,000
C) DR Pension expense $\quad$$\quad$ 160,000
DR Pension asset $\quad$$\quad$ 10,000
CR Cash $\quad$$\quad$ 170,000
D) DR Pension expense $\quad$ 170,000
CR Cash $\quad$ 170,000

Question 79

If the fair value of the plan assets is $260,000 at the beginning of 2015,the beginning of the year projected benefit obligation is $250,000,the cumulative unrecognized gains are $30,000 at the beginning of 2014 and $28,250 at the beginning of 2015,and the average remaining service period of active employees is 10 years,then the amortization of accumulated unrecognized gains for 2015 is

A)$0.
B)$200.
C)$225.
D)$2,600.

Question 80

If the beginning unrecognized gains are $30,000,the fair value of the plan assets is $200,000 at the beginning of 2014,and the average remaining service period of active employees is 10 years,the amortization of accumulated unrecognized gains for 2014 is

A)$0.
B)$750.
C)$1,000.
D)$2,000.