Question 1

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

Accepted Answer

The cost of retroactive benefits granted in a plan amendment or at the initial adoption of a pension plan is called prior service cost. This cost represents the additional liability that a company incurs when it retroactively increases benefits for past service. It is calculated by determining the present value of the additional benefits and then allocating that cost over the remaining service lives of the affected employees.

Question 2

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

Accepted Answer

II, III, V, VI are correct because they are essential elements for understanding a defined benefit pension plan's obligations, assets, and assumptions. The reconciliation of the projected benefit obligation and plan assets provides insight into the plan's status and changes over time. The discount rate and expected rate of return are critical assumptions that affect the plan's financial health.

Question 3

The corridor is defined as

Accepted Answer

The corridor is defined as 10% of the greater of the actual projected benefit obligation or the fair value of the plan assets. This is a method used in accounting for pension plans to limit the amount of actuarial gains and losses to be recognized in a given period.

Question 4

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

Accepted Answer

The answer of The Maggie Company has a defined benefit...

Question 5

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

Accepted Answer

Service cost is not the amount paid annually to a funding agency under an unfunded pension plan. Service cost is the portion of the present value of benefits earned by an employee during the current period.

Question 6

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

Accepted Answer

The correct answer is D because according to pension accounting standards, amortization of any net gain or loss is included in the pension expense of a given year if, at the beginning 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. This is known as the "corridor" approach to recognizing gains and losses in pension accounting.

Question 7

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

Accepted Answer

Deferred compensation is not a component of pension expense. Pension expense includes items such as interest cost, return on assets, and prior service cost amortization. Deferred compensation refers to compensation earned in one period but paid out in a future period, and is not directly related to the calculation of pension expense.

Question 8

Which statement is false?

Accepted Answer

Interest cost is calculated by multiplying the projected benefit obligation at the beginning of the period by the discount rate, not at the end of the period.

Question 9

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

Accepted Answer

Under current GAAP, a defined benefit pension plan is considered underfunded when the projected benefit obligation (PBO) exceeds the fair value of the plan assets. This means the resources set aside are not sufficient to cover the estimated future obligations to employees.

Question 10

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.

Accepted Answer

The pension plan is considered fully funded when the employer's contribution matches the projected benefit obligation, which is the case here ($450,000 contributed against a projected benefit obligation of $450,000). Therefore, Gage does not need to report a liability for the pension plan as of December 31, 2015, because the plan's funding status is balanced.

Question 11

In the computation of pension expense, interest cost is the

Accepted Answer

Interest cost in the context of pension expense refers to the increase in the projected benefit obligation (PBO) due to the passage of time. This reflects the time value of money, as the obligations are expected to grow over time until they are paid out to retirees.

Question 12

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

Accepted Answer

When retroactive benefits are granted to employees through a pension plan amendment, the prior service cost is initially recognized as an unamortized amount. This unamortized amount is then included in the calculation of pension expense over future periods, known as the amortization period. The amount of the prior service cost is not recognized as an intangible asset or liability, nor is it reported as a prior period adjustment or recognized as an expense on the current period's income statement.

Question 13

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

Accepted Answer

Vested benefits are those pension benefits to which an employee has a nonforfeitable right, meaning they are entitled to the benefits even if they leave the employer. This contrasts with benefits that are contingent on the employee continuing to work for the employer.

Question 14

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

Accepted Answer

The accrual concept requires that expenses and revenues be recognized when they are incurred or earned, not when cash is exchanged. Accounting for a defined benefit pension plan on a cash basis would violate this principle because it would only recognize pension expenses when payments are made, rather than accruing them over the period the employee earns the benefit.

Question 15

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?

Accepted Answer

Lucas Company's pension expense for the year will equal the amount it contributed to the plan, which is $175,000. The difference between what was paid out to retirees and what was contributed does not affect the pension expense directly. Choices A, C, and D refer to elements that are not directly related to the defined contribution plan's operations as described.

Question 16

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?

Accepted Answer

The amendment to IAS 19 aimed to improve transparency and comparability in pension accounting, which could potentially facilitate convergence between IFRS and U.S. GAAP by making the accounting treatment more similar, not less likely.

Question 17

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

Accepted Answer

The difference between the pension expense ($240,000) and the amount paid to the funding agency ($280,000) is $40,000. This excess payment creates a prepaid pension cost, as the company has paid more into the plan than the expense recognized for the period.

Question 18

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

Accepted Answer

Unrecognized past service cost is not a component of pension expense reported on the income statement; it is recognized in other comprehensive income and amortized over time.

Question 19

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?

Accepted Answer

Pension expense (F) is calculated as the sum of service cost (D), interest cost (B), and amortization of unrecognized prior service cost (A), adjusted for the expected return on plan assets (E) and any recognized gains or losses (C). Therefore, the correct equation is F = D + B − E + A ± C.

Question 20

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

Accepted Answer

Employer's contribution to the pension fund is not included in the pension expense calculation. Instead, pension expense includes components such as service cost, interest cost, and amortization of certain costs, but the actual contributions made by the employer to fund the pension are separate from the expense recognized in the financial statements.

Quiz 19: Accounting for Post-Retirement Benefits