Deck 17: Pensions and Other Employee Future Benefits

Question 1

Othello Steel provides a defined benefit pension plan for its employees.One of its employees,Ginger Philips,who just turned 45 years old,expects to retire at age 70.At that time,the pension plan will pay Ginger annual pension payments equal to 10% of her final year's salary for each year of services rendered by Gail.The pension payments will continue until Gail's death,which actuaries expect to be when she turns 95 years old.Ginger is currently earning $75,000 per year,and this rate is not expected to increase due to the poor state of the steel industry.Orion Steel uses a 6 % interest rate for its pension obligations.
Required:
Determine the current service cost for Ginger Philips's pension for the past year (the year just before she turned 45).

Answer 1

Using BAII Plus financial calculator:
25N,6 I/Y,7500 PMT,CPT PV → PV = -95,875
25N,6 I/Y,72,842 FV,CPT PV → PV = -22,339

Question 2

Heidi Jackson has a twin brother,Phil,who works for the Government of Alberta.Phil is covered by a defined benefit pension plan.Phil just turned 45 years old,and expects to retire at age 65.At that time,the pension plan will pay Phil annual pension payments equal to 2% of his final year's salary for each year of services rendered.The pension payments will continue until Phil's death,which actuaries expect to be when he turns 80 years old.For the current year,Phil will earn $55,000,and this rate is expected to increase by 5% per year.Assume that the Alberta Government uses a 10% interest rate for its pension obligations.
Required:
Determine the current service cost for Phil Jackson's pension for the past year (the year just before he turned 45).

Answer 2

Using BAII Plus financial calculator:
19N,5 I/Y,-55000 PV,CPT FV → FV = 138,982
15N,10 I/Y,2779.64 PMT,CPT PV → PV = -21,142
20N,10 I/Y,21,142 FV,CPT PV → PV = -3,143

Question 3

What is the key objective in the accounting for defined benefit plans that is achieved by estimating and recording current service cost?

Answer 3

Estimating and recording current service cost achieves the key objective of matching the employment expense with the services received from employees in the same period.Not doing so results in expenses being recorded much later than the services received.

Question 4

What is true about actuarial gains and losses?

A)These gains and losses are caused by actuarial miscalculations.
B)IFRS requires actuarial gains and losses to be recorded through the income statement.
C)IFRS requires actuarial gains and losses to be recorded through OCI without recycling through the income statement.
D)IFRS requires actuarial gains and losses not to be reported as they will reverse themselves over such a long time horizon.

Question 5

Orion Steel provides a defined benefit pension plan for its employees.One of its employees,Gail Camden,who just turned 45 years old,expects to retire at age 65.At that time,the pension plan will pay Gail annual pension payments equal to 5% of her final year's salary for each year of services rendered by Gail.The pension payments will continue until Gail's death,which actuaries expect to be when she turns 95 years old.Gail is currently earning $35,000 per year,and this rate is not expected to increase due to the poor state of the steel industry.Orion Steel uses an 8 % interest rate for its pension obligations.
Required:
Determine the current service cost for Gail Camden's pension for the past year (the year just before she turned 45).

Question 6

Peter is currently 30 years old and he plans to retire early,in 20 years' time.He would like to have an income of $50,000 per year during his retirement,which he anticipates will last for another 40 years.Assume that Peter receives the retirement income at the end of each of the 40 years.
Required:
Determine the amount of money Peter will need to have accumulated by the time he starts his retirement.Assume a discount rate of 9%.

Question 7

Katherina is currently 30 years old and plans to retire later in life.She would like to have an income of $35,000 per year during her retirement,which she anticipates will last for another 25 years.Assume that she receives the retirement income at the end of each of the 25 years.
Required:
Determine the amount of money Katherina will need to have accumulated by the time she starts her retirement.Assume a discount rate of 5%.

Question 8

Which statement explains the risk involved in "defined benefit plans"?

A)The plan places investment risk on employees since the future benefits are pre-specified.
B)The plan sponsor never needs to increase its contributions to the pension trust.
C)The plan may require the employee to pay $200 per month for each year of service.
D)The plan specifies the eventual outflows from the pension trust to future retirees.

Question 9

KitKat Singh is currently 30 years old and he plans to retire early,in 25 years' time.He would like to have an income of $50,000 per year during his retirement,which he anticipates will last for another 30 years.Assume that he receives the retirement income at the end of each of the 30 years.
Required:
Determine the amount of money he will need to have accumulated by the time he starts his retirement.Assume a discount rate of 5%.

Question 10

Which statement is correct?

A)The plan sponsor of a defined benefit plan never needs to increase its contributions to the pension trust.
B)A defined contribution plan is a pension plan that places investment risk on the employers.
C)Inadequate contributions to a defined benefit plan by the plan sponsor or poor investment returns will result in an underfunded pension.
D)A defined contribution plan specifies the fixed benefits that future retirees will receive.

Question 11

Which of the following best describes a "defined contribution plan"?

A)A pension plan where the employer can reduce its contributions if it is overfunded.
B)A pension plan that place investment risk on the employees.
C)A pension plan that place investment risk on the employers.
D)A pension plan where the employee can decrease its contributions if it is overfunded.

Question 12

Which statement explains the risk involved in "defined contribution plans"?

A)Poor returns on the pension investments reduce the benefits for future retirees.
B)High returns on the pension investments increase the benefit payments for the employer.
C)The plan specifies the fixed benefits that future retirees will receive.
D)The plan provides benefits to future retirees depending on their years of service.

Question 13

A pension plan promises to pay $70,000 at the end of each year for 10 years of the retirement period.
Required:
Compute the funds required to fund this pension plan at the start of the retirement period assuming:
a.discount rate of 12%;or
b.discount rate of 9%.

Question 14

Sally is currently 30 years old and is planning for her retirement.She would like to have an income of $55,000 per year during her retirement,which she anticipates will last for another 25 years.Assume that she receives the retirement income at the end of each of the 25 years.
Required:
Determine the amount of money Sally will need to have accumulated by the time she starts her retirement.Assume a discount rate of 4%.

Question 15

Which of the following best describes a "defined benefit plan"?

A)High returns in the pension plan result in higher benefit payments to the employees in the future.
B)A pension plan that specifies how much funds the employee needs to contribute.
C)A plan that requires the employer to contribute $10 per hour worked by an employee.
D)A plan that specifies how much in pension payments employees will receive in their retirement.

Question 16

What is the fundamental difference between a defined contribution and a defined benefit pension plan?

Question 17

If a company provides a non-contributory pension plan,who makes the contributions?

A)Both the employer and employee.
B)Only the employee.
C)Only the employer.
D)No one.

Question 18

Saul is currently 30 years old and he plans to retire early,in 20 years' time.He would like to have an income of $60,000 per year during his retirement,which he anticipates will last for another 40 years.Assume that he receives the retirement income at the end of each of the 40 years.
Required:
Determine the amount of money he will need to have accumulated by the time he starts his retirement.Assume a discount rate of 5%.

Question 19

A pension plan promises to pay $75,000 at the end of each year of the retirement period.
Required:
Compute the funds required to fund this pension plan at the start of the retirement period assuming:
a.discount rate of 9% and a retirement period of 30 years;or
b.discount rate of 9% and a retirement period of 40 years.

Question 20

A pension plan promises to pay $75,000 at the end of each year for 25 years of the retirement period.
Required:
Compute the funds required to fund this pension plan at the start of the retirement period assuming:
a.discount rate of 5%;or
b.discount rate of 4%.

Question 21

What are actuarial losses or gains in a defined benefit plan?

A)Difference arising between the actual and the expected value of plan contributions.
B)Expected income earned on the pension plan assets.
C)Plan amendments that retrospectively improve pension plan benefits.
D)Differences arising between the actual and expected values of the obligation.

Question 22

Wags Inc Company sponsors a defined contribution pension plan for its employees.The plan specifies that the company will match the amount each employee contributes to the plan.Employees are eligible to contribute up to 4% of their salary to the pension plan.During 2017,employees covered by the pension plan earned salaries totalling $30 million.Employee contributions to the pension totalled $3 million.Wags Inc contributed $2 million to the plan during the year.
Required:
Provide the summary journal entry for Wags Inc's pension plan for 2017.

Question 23

Which statement about "defined contribution plans" is correct?

A)Pension expense equals the contributions made based on the plan formula.
B)Pension expense equals the present value of the future benefits to be paid to the retiree.
C)Pension cost cannot be capitalized to the cost of inventory.
D)Pension cost may not be capitalized to the construction cost of property,plant and equipment.

Question 24

What is the pension expense for the following plan?
"The company must contribute $100/year for each of its 500 employees.The plan hopes to accumulate enough funds so that each retiree receives $10,000 in the future;the plan does not guarantee the investment returns to the employees."

A)$100
B)$10,000
C)$50,000
D)$5,000,000

Question 25

Explain the accounting for defined contribution plans and also discuss why it is straightforward.

Question 26

What is the pension expense for the following plan?
"The plan requires the company to contribute $500 for each of its 1,000 employees.The plan hopes to accumulate enough funds so that each retiree receives $20,000 in the future;the company has no obligation to guarantee the investment returns."

A)$500
B)$20,000
C)$500,000
D)$20,000,000

Question 27

What is the total pension expense for the following plan after 5 years?
"The plan requires the company to contribute $500 for each of its 1,000 employees.The plan hopes to accumulate enough funds so that each retiree receives $20,000 in the future;the company has no obligation to guarantee the investment returns."

A)$2,500
B)$100,000
C)$2,500,000
D)$20,000,000

Question 28

Discuss why accounting for "defined benefit plans" is so complex and the types of estimates required.

Question 29

Which best explains a "curtailment'?

A)A reduction in the number of employees or the amount of benefits they will receive in the future.
B)The employer puts an end to the plan using company lawyers.
C)The employer stops contributing to the plan.
D)The employees stop contributing to the plan.

Question 30

Which statement best explains the meaning of "current service cost"?

A)The present value of pension benefits that employees have earned.
B)The increase in the present value of a defined benefit obligation resulting from employee service in the current period.
C)The amount of funds deposited with the pension trust in the year.
D)The annual contribution required by the employer as specified in the pension plan agreement.

Question 31

What is true of the interest cost component of the pension expense?

A)ASPE specifies that enterprises should use the yields on high-quality corporate bonds.
B)IFRS specifies that enterprises should use the yields on high-quality short-term corporate bonds.
C))It represents the increase in the pension obligation due to the passage of time.
D)IFRS specifies that enterprises should use the yields on medium-quality corporate bonds.

Question 32

What is the key distinction between amounts recorded through income as pension expense versus amounts recorded through OCI?

Question 33

Tener Company sponsors a defined contribution pension plan for its employees.The plan specifies that the company will contribute $2 for every dollar that an employee contributes to the plan.Employees are eligible to contribute up to 7% of their salary to the pension plan.During 2017,employees covered by the pension plan earned salaries totalling $42 million.Employee contributions to the pension totalled $2.1 million.Tener contributed $3 million to the plan during the year.
Required:
Provide the summary journal entry for Tener's pension plan for 2017.

Question 34

What is the pension expense for the following plan after 10 years?
"The company must contribute $100/year for each of its 500 employees.The plan hopes to accumulate enough funds so that each retiree receives $10,000 in the future;the plan does not guarantee the investment returns to the employees."

A)$1,000
B)$100,000
C)$500,000
D)$5,000,000

Question 35

A company reported $430,000 of pension expense in its income statement.The balance sheet showed that the pension liability increased by $29,000 over the year.
Required:
How much cash was paid to the pension trustee during the period?

Question 36

Summarize the three steps in the accounting for defined benefit pension plans.

Question 37

In pension accounting,how are past service costs accounted for under ASPE?

A)Recognized in the balance sheet as a liability for the full amount.
B)Recognized in the income statement as an expense for the full amount.
C)Not recognized,but disclosed in a note.
D)Included as part of pension expense and may be amortized over a specified period.

Question 38

A company reported $350,000 of pension expense in its income statement.The balance sheet showed that the pension liability increased by $20,000 over the year.The company was hoping to contribute $30,000.How much cash was paid to the pension trustee during the period?

A)$320,000
B)$330,000
C)$350,000
D)$370,000

Question 39

Gander Products has a defined contribution pension plan for its employees.The plan requires the company to contribute 6% of these employees' salaries to the pension.In 2016,total salary for employees covered by the pension plan totalled $40 million,of which 75% is attributable to employees involved in manufacturing while the remaining 25% of salaries relate to administrative staff.The company contributed $500,000 to the pension during the year.
Required:
Provide the summary journal entry for Gander's pension plan for 2016.

Question 40

Dunder Mae Products has a defined contribution pension plan for its employees.The plan requires the company to contribute 8% of these employees' salaries to the pension.In 2016,total salary for employees covered by the pension plan totalled $70 million,of which 85% is attributable to employees involved in manufacturing while the remaining 15% of salaries relate to administrative staff.The company contributed $3 million to the pension during the year.
Required:
Provide the summary journal entry for Dunder Mae's pension plan for 2016.

Question 41

A company has a defined benefit pension liability of $3,750,000 at the end of the year.The company contributes $5,500,000 to the pension during the year and records a pension expense of $8,200,000.
Required:
Determine the value of the defined benefit pension liability at the beginning of the year.

Question 42

At the beginning of the current year,a pension has assets of $46,600,000 and accrued benefit obligation of $58,500,000.During the year,the sponsor recorded $3,100,000 in pension expense and contributed $5,000,000 to the pension plan.At the end of the year,the plan assets had fair value of $50,400,000 while the plan obligations had a present value of $60,000,000.
Required:
Compute the amount of other comprehensive income relating to the pension plan for the year.

Question 43

A company has a defined benefit pension liability of $1,650,000 at the end of the year.The company contributes $5,500,000 to the pension during the year and records a pension expense of $8,200,000.
Required:
Determine the value of the defined benefit pension liability at beginning of the year.

Question 44

Which of the following component does NOT relate to the assets/liabilities held in the pension trust for a defined benefit plan?

A)Interest cost on pension obligations.
B)Current service cost.
C)Income from plan assets.
D)Amortization of actuarial gains and losses.

Question 45

Prepare the Summarized Pension Actuary's Report on Pension Plan Obligations (without numbers)in good form.

Question 46

What are the components of the pension expense in a defined benefit plan? Briefly explain the meaning of each component.

Question 47

A company has a defined benefit pension asset of $750,000 at the beginning of the year.The company contributes $2,500,000 to the pension during the year and records a pension expense of $2,200,000.
Required:
Determine the value of the defined benefit pension liability at year-end.

Question 48

A company has a defined benefit pension asset of $1,050,000 at the beginning of the year.The company contributes $5,500,000 to the pension during the year and records a pension expense of $8,200,000.
Required:
Determine the value of the defined benefit pension liability at year-end.

Question 49

Which of the following component refers to the services provided by the employees in the current period in a defined benefit plan?

A)Current service cost.
B)Interest cost on pension obligations.
C)Income from plan assets.
D)Amortization of actuarial gains and losses.

Question 50

What are actuarial losses or gains in a defined benefit plan?

A)Plan amendments that retrospectively improve pension plan benefits.
B)Expected income earned on the pension plan assets.
C)Difference arising between the actual and the expected value of plan obligations.
D)Differences arising between the actual and expected values of the pension contributions.

Question 51

A company's defined benefit pension plan incurs current service cost of $2,000,000.Expected income on the pension plan's assets amounted to $8,500,000,while actual income was $8,800,000.The interest on the pension obligation was $10,000,000,which matched the actuarial estimates.No past service costs arose during the year.
Required:
Compute the amount of pension expense for the year.

Question 52

At the beginning of the current year,a pension has assets of $58,600,000 and accrued benefit obligation of $69,500,000.During the year,the sponsor recorded $3,100,000 in pension expense and contributed $4,000,000 to the pension plan.At the end of the year,the plan assets had fair value of $55,400,000 while the plan obligations had a present value of $64,000,000.
Required:
Compute the amount of other comprehensive income relating to the pension plan for the year.

Question 53

A company reported $430,000 of pension expense in its income statement.The company fully paid the amount of pension expense owed to the trustee.The balance sheet showed that the pension asset increased by $29,000 over the year.
Required:
How much cash was paid to the pension trustee during the period?

Question 54

A company has a defined benefit pension asset of $1,050,000 at the end of the year.The company contributes $2,500,000 to the pension during the year and records a pension expense of $2,200,000.
Required:
Determine the value of the defined benefit pension liability at the beginning of the year.

Question 55

Which of the following component does NOT relate to the assets/liabilities held in the pension trust for a defined benefit plan?

A)Interest cost on pension obligations.
B)Income from plan assets.
C)Amortization of actuarial gains and losses.
D)Amortization of past service cost.

Question 56

Which of the following component refers to the benefits earned by employees in a defined benefit plan?

A)Interest cost on pension obligations.
B)Income from plan assets.
C)Amortization of past service cost.
D)Amortization of actuarial gains and losses.

Question 57

A company has a defined benefit pension liability of $1,050,000 at the beginning of the year.The company contributes $5,500,000 to the pension during the year and records a pension expense of $8,200,000.
Required:
Determine the value of the defined benefit pension liability at year-end.

Question 58

What are past service costs in a defined benefit plan?

A)Plan amendments that retrospectively improve pension plan benefits.
B)Difference arising between the actual and the expected value of plan assets.
C)Expected interest,dividend or income earned on the pension plan assets.
D)Differences arising between the actual and expected values of the pension obligations.

Question 59

Prepare the Summarized Pension Trustee's Report on Pension Plan Assets (without numbers)in good form.

Question 60

Current service cost for a defined benefit pension plan amounted to $6,000,000.This pension plan's assets generated $5,500,000 of income,which exceeded expectations by $1,000,000.Pension obligations incurred interest cost of $4,500,000,which were above expectations by $200,000.During the year,the company increased benefits in the pension plan and incurred $400,000 for past service cost.
Required:
Compute the amount of pension expense for the year.

Question 61

Humming Furnishings produces quality household furniture.The company has only one defined benefit pension plan,which covers its 30 carpenters.The company has completed its accounting for the year and closed its books.The draft financial statements show a defined benefit liability of $90,000.Your review of the company's records shows that the pension plan has a deficit of $250,000.The company's working papers show that $80,000 of actuarial losses remain unamortized at year-end,and $16,000 of past service cost was amortized during the year.
Required:
Determine the number of years that remain until employees are entitled to receive the additional benefits related to the past service cost.

Question 62

Bram Masons' balance sheet shows a defined benefit liability of $740,000.Records show that there are $89,000 of past service costs and $610,000 of actuarial gains that remain unamortized.
Required:
Using the pension reconciliation required in Bram's note disclosures,determine the pension plan's surplus or deficit.

Question 63

A company has a defined benefit pension liability of $750,000 at the beginning of the year.The company contributes $2,500,000 to the pension during the year and records a pension expense of $2,200,000.
Required:
Determine the value of the defined benefit pension liability at year-end.

Question 64

What amount is included in the pension reconciliation for the balance sheet?

A)Current service cost.
B)Unamortized actuarial gains.
C)Benefit paid.
D)Contributions paid.

Question 65

What is the key distinction between amounts recorded through income as pension expense versus amounts recorded through OCI?

Question 66

Feldman has a defined benefit pension plan.The company's balance sheet shows a defined benefit liability of $770,000 at year-end.The company's records show that the company had amended the pension plan two years ago,giving rise to $600,000 of additional benefits to employees.These additional benefits vest 10 years after the plan amendment.The balance of unamortized actuarial gains at year-end is $340,000.The pension plan has $35,000,000 of assets at market value.
Required:
Determine the value of the accrued benefit obligation for Feldman's pension plan.

Question 67

What is an actuarial loss?

A)An unfavourable difference between actual and expected amounts for pension plan obligations.
B)A favourable difference between actual and expected amounts for pension assets.
C)An unfavourable difference between actual and expected amounts for pension contributions.
D)A favourable difference between actual and expected amounts for pension obligations.

Question 68

Which statement is correct?

A)An unexpected gain on plan assets represents an unfavourable difference between actual and expected amounts of income from pension assets.
B)Actuarial gains and losses arising from the obligations of a pension plan derive from differences between the actual and expected values of the obligation.
C)IFRS requires actuarial gains and losses to be recorded the income statement.
D)An unexpected loss on plan assets represents a favourable difference between actual and expected amounts of income from pension assets.

Question 69

Five Star Hotels provides a defined benefit pension for its employees.At the end of fiscal year 2016,which ended on December 31,the pension plan supplied Five Star Hotels with information about the pension,which is summarized in the following tables:

Required:
Provide the journal entries for Five Star's pension plan for 2016

Question 70

What amount is included in the pension reconciliation for the income statement?

A)Fair value of plan assets.
B)Pension expense.
C)Benefit paid.
D)Contributions paid.

Question 71

What four accounts are affected by the accounting for a defined benefit pension plan?

A)Cash,pension expense,OCI,and the defined benefit asset or liability
B)Expected gains and losses,cash,income,pension expense
C)Pension liability,pension expense,cash,income
D)Pension expense,pension assets,pension liability,cash

Question 72

Feldman has a defined benefit pension plan.The company's balance sheet shows a defined benefit asset of $770,000 at year-end.The company's records show that the company had amended the pension plan two years ago,giving rise to $600,000 of additional benefits to employees.These additional benefits vest 10 years after the plan amendment.The balance of unamortized actuarial losses at year-end is $340,000.The pension plan has $35,000,000 of assets at market value.
Required:
Determine the value of the accrued benefit obligation for Feldman's pension plan.

Question 73

Carmichael Corporation has had a defined benefit pension plan for three decades.Two years ago,the company improved the benefits at a cost of $2,800,000.Pension plan assets were $84,000,000 while pension obligations were $76,000,000 at the beginning of the year.For the current year,Carmichael's pension plan incurred current service cost of $6,400,000 and interest of $8,600,000.The pension's assets earned $9,000,000,which is $400,000 below expectations.There were no actuarial gains or losses for the year.
Required:
a)Compute the pension expense for the year.
b)Record the journal entries for Carmichael's pension plan.

Question 74

What are the two components of OCI related to pensions? What is the conceptual reason for recognizing these two components through OCI rather than net income?

Question 75

The following table provides information for a defined benefit pension plan:

Required:
Compute the amount of other comprehensive income for 2016 to 2018.

Question 76

Why does IAS 19 require Recognizing changes in the fair value of pension assets and liabilities to flow through OCI and not through the income statement?

Question 77

What amount will be presented on the balance sheet for fiscal 2017?

A)$3,000,000 surplus
B)$3,000,000 deficit
C)$5,000,000
D)$8,000,000

Question 78

Masons' balance sheet shows a defined benefit asset of $740,000.Records show that there are $89,000 of past service costs and $610,000 of actuarial losses that remain unamortized.
Required:
Using the pension reconciliation required in the company's note disclosures,determine the pension plan's surplus or deficit.

Question 79

What is an actuarial gain?

A)An unfavourable difference between actual and expected amounts for pension obligations.
B)A favourable difference between actual and expected amounts for pension plan obligations.
C)An unfavourable difference between actual and expected amounts for pension contributions.
D)A favourable difference between actual and expected amounts for pension contributions.

Question 80

Compute the pension expense and the amount of OCI for the two years with the following Pension Trustee Report and Pension Actuary Report: