Chapter 14
Pensions and Postretirement Benefits
True-False
1. The return on the pension fund impacts the employer’s periodic pension expense for defined
contribution pension plans.
2. The parties involved in a defined benefit plan are the same as those in a defined contribution
plan.
3. Most of the factors used to determine specific expense accruals for defined benefit pension plans
are based upon actuarial assumptions and present values.
4. 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.
5. 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.
6. The difference between the actual and expected return on plan assets during year two is a
component of pension expense for year two.
7. A pension plan is underfunded if the projected benefit obligation exceeds the fair value of the
pension plan assets.
8. The pension asset/liability reported within the balance sheet must reflect the funded status of
the pension plan.
9. Under current GAAP, volatility in asset returns translates directly into net income volatility
because the actual return on plan assets reduces pension expense.
10. The funded 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.
11. Higher marginal income tax rates create an incentive for companies to underfund their
pension plans.
12. The 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.
13. ERISA created the Pension Benefit Guaranty Corporation to protect employees from losing
their retirement funds if the sponsor goes into bankruptcy.
14. Companies are required to disclose the dollar amount of pension retirement benefits they
expect to pay in each of the next ten years.
15. Pension expense is likely to be both more volatile and lower under IFRS than pension
expense computed under U.S. GAAP.
Multiple-Choice Questions
16. 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.
17. 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.
18. 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
19. 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.
20. 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.
21. Which of the following statements is not correct about defined contribution plans?
a. No explicit promise is made about the size of the periodic benefits the employee will receive
during retirement.
b. The promise is the amount of contributions the employer will make periodically.
c. The size of payments depends on success of investments.
d. The employer controls the investment choices on the employees’ behalf.
22. Which of the following statements is correct with respect to a defined contribution plan?
a. 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.
b. The employer receives a tax deduction for amounts contributed to the pension plan trust, and
subsequent investment returns do not generate tax for the employer.
c. 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.
d. The return on the pension fund impacts the employer’s periodic pension expense for defined
contribution pension plans.
23. Which of the following is not an example of a defined contribution plan?
a. money purchase plan.
b. profit-sharing plan.
c. cash balance plan.
d. 401(k) plan.
24. Defined contribution plans are preferred by companies for all except which of the following
reasons?
a. Defined contribution plans carry less risk for the employee.
b. Defined contribution plans cost less to manage.
c. Defined contribution plans improve job mobility for the employee.
d. Defined contribution plans may not be at risk if the employer declares bankruptcy.
25. 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 expected return on plan assets, plus (or minus) net
amortization.
d. service cost, plus interest cost, minus return on plan assets, minus net amortization.
26. 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.
27. 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.
28. Which of the following does not cause an increase in the pension expense for a defined
benefit plan?
a. service cost.
b. expected return on pension plan assets.
c. recognized prior service cost amortization.
d. interest cost.
29. Which statement below is not correct regarding the Projected Benefit Obligation (PBO)?
a. The PBO represents the present value of the retirement benefits earned to date.
b. The PBO is based on future salary levels.
c. A higher discount rate assumption increases the projected benefit obligation.
d. Benefits paid to retirees do not affect the PBO.
30. Which of the following is not a correct statement with respect to the interest cost component
of pension expense?
a. The same interest rate is used to compute service cost, interest cost, and return on plan assets.
b. The interest cost component of a defined benefit pension plan is the portion of expense due to
the passage of time.
c. 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.
d. The interest cost increases the PBO and also increases the pension expense.
31. 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.
32. 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.
Use the following to answer questions 33 and 34:
REFERENCE: Ref. 14_01
Pona, Inc. has a defined benefit pension plan for its employees. The plan assets and projected
benefit obligation at the beginning of the year were $608,000. The accumulated benefit
obligation at the beginning of the year was $456,000. The expected return on plan assets was
8% while the actual return was 9%. The service cost for the year was $130,841. The actuarially
assumed discount rate was 7% and amortization of prior service costs was $17,750.
[QUESTION]
REFER TO: Ref. 14_01
33. The interest cost for the year is
a. $42,560.
b. $31,920.
c. $36,480.
d. $41,040.
34. The total pension expense for the year is
a. $124,761.
CHAPTER 14 Pensions and Postretirement Benefits
b. $131,451.
c. $136,431.
d. $142,511.
35. The Shasti Corporation reported the following for the year ending December 31, 2018:
• Service cost: $142,610
• Plan assets, January 1, 2018: $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, 2018?
a. $1,500,000
b. $1,425,000
c $1,200,000
d $1,333,333
Use the following to answer questions 36 – 38:
REFERENCE: Ref. 14_02
The Carrasco Company has provided you the following information pertaining to its defined
benefit pension plan that was adopted on January 1, 2018:
• The service cost was $750,000 during 2018 and $1,125,000 during 2019.
• The contribution to the pension plan was $600,000 on December 31, 2018 and
$1,200,000 on December 31, 2019.
• The actuarially determined discount rate and the expected return on plan assets are both
10%.
• The actual return on plan assets was 10.5%.
• Retirement benefits pertaining to years of service prior to 2018 were not granted to the
employees.
[QUESTION]
REFER TO: Ref. 14_02
36. What is the pension expense for the year ended December 31, 2019?
a. $1,140,000
b. $1,065,000
c. $1,200,000
d. $1,137,000
37. What is the balance of the projected benefit obligation as of December 31, 2019?
a. $1,875,000
b. $1,200,000
c. $1,950,000
d. $2,062,500
38. What is the balance of the pension plan assets as of December 31, 2019?
a. $1,863,000
b. $1,800,000
c. $1,953,750
d. $1,860,000
39. 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.
40. Changes in the discount rate on pension plans cause material differences in
CHAPTER 14 Pensions and Postretirement Benefits
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.
41. 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.
Use the following to answer questions 42 – 47:
REFERENCE: Ref. 14_03
Smith, Inc. has a pension plan with the following data available for 2018 and 2019:
2018 2019
Service cost
$ 30,000
$ 34,000
Interest cost
$ 18,000
$ 20,000
Actual return on plan assets
$ 15,000
$ 21,600
Beginning of year plan assets
$200,000
$240,000
Discount rate
8%
8%
Expected return on plan assets
8 %
8 %
[QUESTION]
REFER TO: Ref. 14_03
42. Smith’s pension expense for 2018 is
a. $30,000.
b. $32,000.
c. $33,000.
d. $48,000.
43. Smith’s pension expense for 2019 is
a. $32,400.
b. $34,000.
c. $34,800.
d. $54,000.
44. The adjustment to OCI for gain or loss from the return on plan assets for 2018 is
a. $0.
b. $1,000 gain.
c. $1,000 loss.
d. unknown from information provided.
45. The adjustment to OCI for gain or loss from the return on plan assets for 2019 is
a. $0.
b. $2,400 gain.
c. $2,400 loss.
d. unknown from information provided.
46. If the beginning cumulative net actuarial gains are $30,000, the fair value of the plan assets is
$200,000 at the beginning of 2018, and the average remaining service period of active employees
is 10 years, the amortization of actuarial gains for 2018 is
a. $ 0.
b. $ 750.
c. $1,000.
d. $2,000.
47. If the market-related value of the plan assets is $260,000 at the beginning of 2019, the
beginning of the year projected benefit obligation is $250,000, the cumulative net actuarial gains
in AOCI are $30,000 at the beginning of 2018 and $28,250 at the beginning of 2019, and the
average remaining service period of active employees is 10 years, then the amortization of
actuarial gains for 2019 is
a. $ 0.
b. $ 200.
c. $ 225.
d. $2,600.
48. To compute the amortization on the cumulative net actuarial gains and losses in AOCI 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.
Use the following to answer questions 49 and 50:
REFERENCE: Ref. 14_04
At the beginning of 2018, Moony, Inc. has a cumulative net actuarial loss in AOCI of $50,000 in
its pension plan. The estimated remaining service period of active employees is 12 years for both
years.
2018 2019
Beginning plan asset value $ 335,000 $ 350,000
Beginning projected benefit obligation 325,000 385,000
Current year gain or (loss) (37,500) 25,000
[QUESTION]
REFER TO: Ref. 14_04
49. The amortization of the cumulative net actuarial loss for 2018 is
a. $ 0.
b. $ 1,375.
c. $ 3,350.
d. $ 4,500.
50. The corridor for amortization for 2019 is
a. $ 0.
b. $25,000.
c. $35,000.
d. $38,500.
51. 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
Use the following to answer questions 52 – 55:
REFERENCE: Ref. 14_05
TKE Corporation established a defined benefit pension plan in 2016. TKE has provided the
following information for the year ended December 31, 2018:
Service cost
$90,000
Interest cost
$120,000
Actual return on plan assets
$70,000
Expected return on plan assets
$80,000
Amortization of prior service costs
$30,000
[QUESTION]
REFER TO: Ref. 14_05
52. The pension expense for 2018 is
a. $ 90,000.
b. $120,000.
c. $160,000.
d. $170,000.
53. If the company contributes $160,000 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 (liability) 70,000
CR Cash 160,000
b. DR Pension expense 120,000
DR Pension asset 40,000
CR Cash 160,000
c. DR Pension expense 160,000
CR Cash 160,000
d. DR Pension expense 170,000
CR Cash 160,000
CR Pension asset (liability) 10,000
54. 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 (liability) 40,000
CR Cash 130,000
b. DR Pension expense 120,000