Question 1

The employer firm and the pension plan are legally separate entities, each with its own financial reports.

Accepted Answer

The employer firm and the pension plan are legally separate entities, which means that they have their own financial reports. Therefore, it is true that they are separate from each other.

Question 2

Employer contributions to defined benefit pension plans are subject to several forms of government regulation.

Accepted Answer

Employer contributions to defined benefit pension plans are regulated by the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC). The IRS sets limits on the amount of contributions and benefits that can be provided, while the PBGC protects the pensions of workers in case the plan sponsor is unable to meet its obligations.

Question 3

The accounting and reporting of health care, life insurance, and other postretirement plans follow the concepts and procedures for defined benefit pension plans.

Accepted Answer

Health care, life insurance, and other postretirement plans are considered defined benefit plans and therefore follow the same accounting and reporting procedures as pension plans.

Question 4

The accounting for transfers of receivables has come under the scrutiny of standard setters, as has the accounting for transfers involving inventories and research and development

Accepted Answer

This statement is true. The accounting for transfers of receivables, inventory, and research and development has been subject to scrutiny by standard setters.

Question 5

The total amount of cash that the employer contributes to the firm's pension plan over time is the total amount of pension expense that the employer must recognize in measuring net income.

Accepted Answer

The total amount of cash contributed to the firm's pension plan does not necessarily equal the pension expense recognized in measuring net income. Pension expense calculation considers several factors such as service cost, interest on the pension liability, expected return on plan assets, and amortization of prior service costs, which may not directly correlate with the cash contributions made in a given period.

Question 6

The assets in a defined benefit pension plan will usually not equal the liabilities of the plan, resulting in an overfunded or underfunded plan.

Accepted Answer

The value of assets and liabilities in a defined benefit pension plan will rarely be perfectly matched, resulting in either an overfunded or underfunded plan.

Question 7

The balance sheet of a defined benefit pension plan includes the assets in the pension plan measured at fair value and the projected benefit obligation measured using a current interest rate on high-quality fixed-income investments.The difference between the assets and the liabilities indicates the extent to which a pension plan is overfunded or underfunded.

Accepted Answer

This is correct as the balance sheet of a defined benefit pension plan includes the assets measured at fair value and the projected benefit obligation measured using a discount rate based on high-quality fixed-income investments. The difference between the assets and the liabilities shows whether the plan is over- or under-funded.

Question 8

Under both U.S. GAAP and IFRS, the following formula calculates the Net Pension Expense (or Credit) for a defined benefit pension plan:

Interest Cost (the increase in the obligation because of the passage of time) 
 +    Service Cost (the increase in the obligation because of an additional year of employee service) 
 -     Expected Return on Pension Investments 
 +/-  Amortization of Performance and Actuarial Gains and Losses 
 +/-  Amortization of Prior Service Cost

Accepted Answer

This formula is commonly used to calculate the Net Pension Expense (or Credit) under both U.S.GAAP and IFRS. It includes interest cost, service cost, expected return on pension investments, and amortization of performance and actuarial gains and losses, as well as prior service cost.

Question 9

Under current accounting guidance, the employer consolidates the assets and liabilities of the firm's pension plan with its own assets and liabilities.

Accepted Answer

Under current accounting guidance, the assets and liabilities of a firm's pension plan are not consolidated with the firm's own assets and liabilities on its balance sheet. Pension plan assets and liabilities are reported separately.

Question 10

Many off-balance-sheet financings fall into one of two categories that accounting typically does not recognize as liabilities: executory contracts and contingent obligations.

Accepted Answer

This statement is true. Off-balance-sheet financings can include commitments under executory contracts and contingent obligations, which are not recognized as liabilities under traditional accounting standards.

Question 11

U.S.GAAP and IFRS provide guidance for deciding whether a given financing arrangement appears as a liability on the balance sheet or is disclosed in the notes.

Accepted Answer

Both U.S.GAAP and IFRS provide guidance on the recognition and disclosure of financing arrangements. They help determine whether a financing arrangement should be recorded as a liability on the balance sheet or in the notes to the financial statements.

Question 12

U.S.GAAP and IFRS require firms to recognize the cost of pension plans as an expense during the years as the employees receive the retirement benefits.

Accepted Answer

Both U.S. GAAP and IFRS require firms to recognize the cost of pension plans as an expense during the years the employees render the services that will entitle them to future benefits, not when they receive the retirement benefits.

Question 13

Many entries in Other Comprehensive Income represent changes in fair value of the pension plan(s) that receives delayed recognition in net income.

Accepted Answer

Other Comprehensive Income includes items that are not recognized in the net income, such as changes in fair value of the pension plan(s). These changes receive delayed recognition in net income and are reported in Other Comprehensive Income until they are eventually recognized in net income.

Question 14

The pension expense for a particular period for a firm's defined benefit pension plans rarely equals the cash contribution.

Accepted Answer

The pension expense for a period is calculated based on actuarial assumptions and estimates of future events, such as investment returns and employee turnover, which can differ from actual results. Therefore, the pension expense may not match the actual cash contribution made by the firm during the period.

Question 15

U.S.GAAP defines the primary measurement of the pension liability of the pension plan as the projected benefit obligation (PBO)-the future value of the amount the pension plan expects to pay to employees during retirement based on accumulated service but using the level of salary expected to serve as a basis for computing pension benefits.

Accepted Answer

The answer of U.S.GAAP defines the primary measurement of the...

Question 16

Pension expense for a defined contribution plan always exceeds the employer's contribution to the plan.

Accepted Answer

Pension expense for a defined contribution plan is equal to the employer's contribution to the plan, as the employer's obligation is limited to the contributions made to the plan. The expense may be affected by investment returns and administrative expenses, but it should not exceed the employer's contribution.

Question 17

For many firms, the liability for the underfunded health care obligation exceeds the liability for underfunded pensions.

Accepted Answer

This is because the cost of healthcare has been rising at a faster rate than the cost of pensions. Additionally, many companies have been reducing or eliminating pension plans, while still offering health benefits. Therefore, the liability for underfunded healthcare obligations can be larger than the liability for underfunded pensions.

Question 18

In a defined benefit plan, the employer is ultimately responsible for either contributing cash or obtaining a return on pension investments sufficient to pay promised amounts to retired employees.

Accepted Answer

In a defined benefit plan, the employer promises a specific benefit to retired employees and is responsible for ensuring there are sufficient funds to pay those benefits, either through cash contributions or investment returns.

Question 19

The pension expense for a particular period is the amount of the cash contribution for defined contribution pension plans.

Accepted Answer

In defined contribution pension plans, the pension expense for a period is the amount of cash contributed by the employer to the plan for that period.

Question 20

U.S.GAAP and IFRS require firms to report pension plan assets at the estimated future value.

Accepted Answer

U.S. GAAP and IFRS require firms to report pension plan assets at fair value, not at the estimated future value.

Quiz 12: Liabilities: Off-Balance Sheet Financing, Retirement Benefits, and Income Taxes