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CHAPTER 14 Pensions and Postretirement Benefits
DR Pension asset 10,000
CR Cash 130,000
c. DR Pension expense 130,000
CR Cash 130,000
d. DR Pension expense 160,000
CR Cash 130,000
CR Pension asset (liability) 30,000
55. If the company contributes $170,000 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 80,000
CR Cash 170,000
b. DR Pension expense 120,000
DR Pension asset (liability) 50,000
CR Cash 170,000
c. DR Pension expense 160,000
DR Pension asset (liability) 10,000
CR Cash 170,000
d. DR Pension expense 170,000
CR Cash 170,000
56. For income tax purposes, pension plan sponsors deduct the amount of the
a. pension expense.
b. service cost.
c. plan contribution.
d. service cost plus net amortization and deferral.
57. U. S. tax law limits the deductibility of contributions to pension plans for firms whose plans
a. are underfunded.
b. are overfunded.
c. have no current benefit recipients.
d. are part of a benefits package.
Use the following to answer questions 58 – 61:
REFERENCE: Ref. 14_06
The trustee for the Bronson Corporation pension sent a report to the CEO with the following
information for the fiscal year:
Beginning balance of plan assets at fair value $1,560,000
Actual return on plan assets $210,000
Employer’s contribution $150,000
Distributions to retirees $75,000
Service cost $125,000
Interest cost $156,000
Loss from changes in benefits or assumptions $35,000
Beginning balance of the PBO $1,580,000
[QUESTION]
REFER TO: Ref. 14_06
58. The ending balance of plan assets is
a. $1,770,000.
b. $1,845,000.
c. $1,920,000.
d. $1,955,000.
59. The ending balance of the projected benefit obligation (PBO) is
a. $1,730,000.
b. $1,821,000.
c. $1,896,000.
d. $1,971,000.
60. At the beginning of the year, the pension plan is
a. underfunded by $20,000.
b. overfunded by $20,000.
c. underfunded by $35,000.
d. overfunded by $35,000.
61. At the end of the year, the pension plan is
a. underfunded by $20,000.
b. overfunded by $20,000.
c. underfunded by $24,000.
d. overfunded by $24,000.
Use the following to answer questions 62 – 64:
REFERENCE: Ref. 14_07
The Marino 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 $950,000 during 2018 and $1,045,000 during 2019.
• The prior service cost amortization each year was $290,000.
• The contribution to the pension plan was $1,500,000 on December 31, 2018 and
$1,800,000 on December 31, 2019.
• The actuarially determined discount rate and the expected return on plan assets was 10%.
• The actual return on plan assets was 9.5%.
• Retirement benefits pertaining to years of service prior to 2018 were granted to the
employees. The prior service cost is being amortized over the remaining ten-year life of
the employees.
[QUESTION]
REFER TO: Ref. 14_07
62. What is the pension expense for the year ended December 31, 2018?
a. $1,240,000
b. $1,530,000
c. $950,000
d. $1,380,000
[QUESTION]
REFER TO: Ref. 14_07
63. What is the pension expense for the year ended December 31, 2019?
a. $1,335,000
b. $1,280,000
c. $1,185,000
d. $1,599,000
[QUESTION]
REFER TO: Ref. 14_07
64. What is the balance of the projected benefit obligation as of December 31, 2019?
a. $5,599,000
b. $2,090,000
CHAPTER 14 Pensions and Postretirement Benefits
c. $2,575,000
d. $4,895,000
65. The Brand Corporation’s January 1, 2018 balance sheet reports a net pension liability of
$243,000. On December 31, 2018, the projected benefit obligation was $4,975,000, the fair value
of the plan assets was $4,679,000, and the accumulated benefit obligation was $3,482,500. The
December 31, 2018 balance sheet should report a net pension liability totaling
a. $243,000
b. $296,000
c. $4,975,000
d. $3,482,500
66. The Canton Corporation’s January 1, 2018 balance sheet reports a net pension asset of
$397,500. On December 31, 2018, the projected benefit obligation was $6,479,000, the fair value
of the plan assets was $6,747,000, and the accumulated benefit obligation was $3,482,500. The
December 31, 2018 balance sheet should report
a. net pension asset of $397,500.
b. net pension asset of $268,000.
c. net pension liability of $3,482,500.
d. net pension liability of $3,264,500.
CHAPTER 14 Pensions and Postretirement Benefits
67. The net pension liability that must be shown on the balance sheet of the plan sponsor is the
a. accumulated benefit obligation.
b. projected benefit obligation.
c. excess of the accumulated benefit obligation over the plan assets at fair value.
d. excess of the projected benefit obligation over the fair value of plan assets.
68. New actuarial losses arising in the current year would:
a. increase the PBO and increase OCI.
b. decrease OCI and decrease plan assets.
c. increase PBO and decrease OCI.
d. decrease plan assets and increase pension expense.
69. The present value of the expected pension benefits that will ultimately be paid is the
a. accumulated benefit obligation.
b. projected benefit obligation.
c. minimum balance sheet liability.
d. accrued pension liability.
70. Which of the following is not correct regarding prior service costs?
a. They result from retroactive changes to a pension plan.
b. They can result in either an increase or decrease in the pension benefit obligation.
c. Unlike the minimum amortization method for actuarial gains or losses, there is no corridor
concept for prior service cost amortization.
d. A corridor concept similar to that for actuarial gains and losses is used for prior service.
71. Which of the following statements does not properly describe accounting for OPEB plans?
a. Losses related to OPEB arise from a decrease in the discount rate assumptions.
b. OPEB plans are deemed to be riskier than other debt instruments.
c. OPEB plans are mandatorily funded under the same ERISA rules as pension plans.
d. Losses related to OPEB arise from an increase in the life expectancy assumptions.
72. Which of the following statements is not correct?
a. The U.S. income tax code influences pension fund contributions.
b. The U.S. income tax code creates incentives for firms to overfund their pension plans.
c. The earnings from pension fund investments are taxable to the pension plan sponsor.
d. Firms with larger union memberships tend to have higher pension funding ratios.
73. Which of the following statements best describes how U.S. tax laws affect company funding
of pension plans?
a. The tax laws limit the deductibility of contributions to pension plans for firms whose plans
are underfunded.
b. The tax laws encourage companies to overfund their pension plans.
c. Higher marginal tax rates incentivized companies to underfund their pension plans.
d. The tax laws have little to no impact on the funding of pension plans.
74. Which of the following does not apply to the ERISA law?
a. ERISA mandates that employers with over 1,000 employees offer a pension plan.
b. ERISA limits pension investments in the employer’s stock to 10% of plan assets.
c. ERISA created the PBGC.
d. ERISA introduced minimum funding requirements.
75. Which of the following is not a required disclosure pertaining to defined benefit pension
plans?
a. A reconciliation of the beginning and ending projected benefit obligation balances.
b. The retirement benefits that are expected to be paid in the next five years.
c. The amount of pension expense and its components.
d. The contributions to be made into the pension fund for each of the next ten years.
76. Which of the following statements pertaining to defined benefit pension plans is not correct?
a. Pension expense may be allocated to different categories of expenses within an income
statement.
b. A company may have multiple pension plans of which some may be overfunded and some
may be underfunded and they are netted together to report the overall pension asset
(liability).
c. A small change in the pension discount rate can shift the funded status of the pension from
year to year.
d. A curtailment loss may occur because a division of a company is sold.
77. Which of the following statements is correct?
a. Firms with high marginal tax rates tend to have lower funding ratios.
b. The short-term pension risk ratio is calculated by dividing the projected benefit obligation
by the market value of common stock.
c. The funded status of a pension plan does not throw light on cash flow problems.
d. Firms with less stringent capital constraints tend to have higher funding ratios.
78. Analysts reporting on companies will pay close attention to the disclosures regarding pension
benefits. Key points include all of the following except:
a. the common rule of thumb is that a 1% decrease in discount rate would increase PBO by
17.0% whereas a 1% increase would decrease it by 14.5%.
b. while companies with overfunded plans can suspend funding for long periods and use the
cash for other operating purposes, underfunded plans may reflect past and continuing cash
flow difficulties
c. to help analysts determine whether fund assets are large enough to satisfy currently
anticipated pension benefit payouts, FASB ASC Topic 715 requires firms to provide a table
CHAPTER 14 Pensions and Postretirement Benefits
that lists the dollar benefits expected to be paid in each of the ensuing five years and in the
aggregate for the five years thereafter.
d. because of high assumed discount rates, most pension plans have remained underfunded with
funding ratios ranging between 69% and 86% since 2008.
79. When assessing pension risk, analysts compute ratios for both long- and short-term risk.
Which statement below is not correct?
a. For both long and short term the denominator is the market value of common stock.
b. Pension assets are deducted from the PBO in only the long term calculation.
c. Pension assets are deducted from the PBO in only the short term calculation.
d. The computed ratios are generally compared to a median (e.g. Compustat data).
80. Which item is not a component included by analysts in assessing short-term pension risk?
a. Union negotiations
b. Declines in interest rates
c. Debt downgrades
d. Liquidity problems
81. Which of the following is not a proper description of the pension Accumulated Benefit
Obligation (ABO)?
CHAPTER 14 Pensions and Postretirement Benefits
a. If excludes projected salary increases between the statement date and the employee’s
expected retirement date.
b. If the pension plan was frozen the company would only have to pay the ABO.
c. The difference between the ABO and PBO represents the losses workers would suffer if they
leave the company prior to retirement.
d. The ABO may be used for balance sheet and income statement presentation under US
GAAP.
82. Which of the following is not a similarity between the accounting for a defined benefit
pension plan and accounting for other postretirement benefit plans?
a. The financial statement disclosures.
b. Actuarial assumptions are extensively used.
c. The funding requirements.
d. The applicable GAAP standards.
83. A major difference between accounting for pension plans and accounting for other
postretirement benefit plans is that
a. postretirement benefit plans other than pensions are not required to be funded.
b. postretirement benefit plans other than pensions do not create a liability to be shown on the
plan sponsor’s balance sheet.
c. postretirement benefit plans other than pensions do not deduct the return on plan assets
when funded.
d. there is no accumulated postretirement benefit obligation for other postretirement plans
other than pensions
84. When accounting for funded postretirement benefit plans other than pensions (OPEB), which
one of the following is subtracted in the calculation of postretirement benefit expense?
a. Interest cost
b. Actual return on plan assets
c. Expected return on plan assets
d. Service cost
85. Postretirement benefits other than pensions (OPEB) are computed based upon
a. current salary amounts.
b. current benefit amounts.
c. future salary amounts.
d. future benefit amounts.
86. Which of the following is often not a component of other post retirement benefit (OPEB)
expense?
a. Service cost.
b. Interest cost.
c. Prior service cost amortization.
d. Actual return on plan assets.
