Deck 14: Pensions and Other Postretirement Benefits

Question 1

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

Answer 1

A defined contribution plan sets forth a certain amount that the employer is to contribute to the plan each period.For example,the plan may require the employer to contribute 8 percent of the employee's salary each year.However,the plan makes no promises concerning the ultimate benefits to be paid.The retirement benefits actually received by the recipients are determined by the return earned on the invested pension funds during the investment period.The terms of a defined benefit plan specify the amount of pension benefits to be paid out to plan recipients in the future.For example,the retirement plan of a company may promise that an employee retiring at age 65 will receive 2 percent of the average of the highest five years' salary for every year of service.An employee working for this company for thirty years will receive a pension for life equal to 60 percent of the average of his or her highest five salary years.Companies that provide defined benefit pension plans must make sufficient contributions to the funding agency in order to meet benefit requirements when they come due.Although no specific amount is required to be funded each period,the Employee Retirement Income Security Act ERISA)does impose minimum funding requirements on these plans.

Question 2

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 OORB 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.

Answer 2

D

Question 3

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

Answer 3

B

Question 4

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 only

Question 5

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 6

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

Question 7

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 8

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

Question 9

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

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

Question 10

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 11

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 12

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 13

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 14

In determining whether to accrue employee's compensation for future absences,among the conditions that must be met are that the obligation relates to rights that Accumulate Vest

A) No No
B) No Yes
C) Yes No
D) Yes Yes

Question 15

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 16

What effect did the requirement to replace the minimum liability requirement with the funded status of a pension plan have for underfunded pension plans?

A)Return on assets decreased.
B)There was no effect on return on assets.
C)The debt-to-Equity ratios increased.
D)Working capital increased.

Question 17

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.

Question 18

What effect did the requirement to replace the minimum liability requirement with the funded status of a pension plan have for overfunded pension plans?.
A)Return on assets decreased.

A)Return on common stockholders' equity increased.
B)There was no effect on return on assets.
C)The debt-to-Equity ratios increased.

Question 19

Discuss the cost approach and benefits approach actuarial funding methods.