CHAPTER 14 Pensions and Postretirement Benefits
87. The income statement reporting for other postretirement benefits (OPEB) is based on the
a. cash basis of accounting.
b. accrual basis of accounting.
c. cash or accrual basis of accounting.
d. regulations established by the tax code.
88. Which of the following statements is not accurate with respect to accounting for other post-
retirement plan benefits (OPEB)?
a. Firms are required to make sensitivity disclosures regarding the effect of a 1% increase or
decrease in the health care trend rate assumption.
b. A decrease in the discount rate assumption used may lead to a large gain for a company.
c. The actuarially determined service cost of the plan is accrued over the required years of
service to participate in the postretirement benefit plan (e.g. 10 years).
d. A company which shifts its former salaried employees from its post-65 retiree health plan to
spending accounts that allow participants to buy health care from private exchanges creates a
reduction in earned benefits referred to as a negative plan amendment.
89. Which of the following is not a criticism of pension accounting and reporting?
a. Net income immediately includes fund asset gains and losses, as well as projected benefit
obligation actuarial gains and losses.
b. Management has the discretion with respect to choosing the expected rate of return on plan
assets.
c. Some argue that operating income is misstated due to the deduction of pension expense.
d. Some argue that service cost should be the only component of pension expense.
90. Which of the following statements does not properly represent IFRS guidance on pension
costs?
a. Under IFRS past service cost may be recognized immediately.
b. IFRS uses the discount rate to compute the expected return on plan asset.
c. In recognition that pension costs are related to employee service, all costs are included in
operating activities.
d. Actuarial gains and losses on the PBO and the actual return (less the expected return on plan
assets) are recognized in OCI without subsequent amortization to pension expense.
91. Under IFRS, pension expense generally consists of
a. only the actual payments made to retirees during the fiscal year.
b. only current service cost.
c. current service cost and past service cost .
d. current and past service cost and net interest on the net defined benefit liability or asset.
92. Differences between IFRS and U.S. GAAP in accounting for pensions include all of the
following except:
a. Under U. S. GAAP the asset (liability) on the balance sheet differs from the plan’s actual
funded status, while under IFRS the asset (liability) on the balance sheet equals the plan’s
actual funded status.
b. Under IFRS past service costs are recognized immediately as part of pension expense.
c. Under IFRS actuarial gains and losses are recognized in OCI without subsequent
amortization to pension expense.
d. Pension expense computed using U.S. GAAP is likely to be higher because it allows firms
to use an expected rate of return that exceeds the discount rate.
CHAPTER 14 Pensions and Postretirement Benefits
Problems
93. Swan Company has provided you with the following data pertaining to its pension plan for
the year ended December 31, 2018:
• The 2018 service cost was $175,500.
• The projected benefit obligation as of January 1, 2018 was $1,950,000.
• Plan assets as of January 1, 2018 totaled $2,020,000.
• The actual return on plan assets during 2018 was 10%.
• Amortization of prior service costs during 2018 was $9,750.
• The expected return on plan assets was 8%.
• The pension plan funding during 2018 totaled $170,000.
• The discount rate was 8%.
Required: Prepare the journal entry to record pension expense for the year ended December
31,2018.
94. The Shelast Corporation adopted a defined benefit pension plan on January 1, 2018 and has
provided the following information:
• The projected benefit obligation on January 1, 2018 was $2,160,500.
• The 2018 service cost totaled $250,000; the 2019 service cost totaled $275,000.
• Annual amortization of prior service costs is $216,050.
• The discount rate is 10%.
• The pension plan funding during 2018 was $200,000; the pension plan funding
during 2019 was $225,000.
• The actual return on plan assets was $19,000 during 2019.
Required: Determine the projected benefit obligation balance as of December 31, 2019.
95. The following information pertains to Grumpy Company’s defined benefit pension plan:
• Pension asset as of 1/01/18 $ 4,000
• 2018 service cost $38,000
• 2018 interest cost $76,000
• 2018 prior service cost amortization $12,000
• 2018 expected return on plan assets $44,000
• 2018 plan asset contributions $80,000
• Unamortized prior service cost as of 1/01/18 $48,000
Required:
1. Calculate the pension expense for the year ended December 31, 2018.
2. Prepare the journal entry to record the pension expense for the year ended December 31, 2018.
96. The Hab Company provided the following information pertaining to its defined benefit
pension plan for 2018:
• The projected benefit obligation as of January 1, 2018 was $6,250,000.
• The discount rate was 8%.
• The service cost was $300,000.
• The amortization of prior service cost was $100,000.
• The expected return on plan assets was 10%.
• The actual return on plan assets was $800,000.
• The fair value of plan assets on January 1, 2018 was $5,000,000.
• Pension payments to retirees during the year totaled $250,000.
• Contributions to the pension plan totaled $200,000.
• Amortization of net actuarial losses totaled $125,000.
Required:
1. Determine the pension expense for 2018.
2. Determine the projected benefit obligation as of December 31, 2018.
3. Determine the fair value of plan assets as of December 31, 2018.
4. Determine whether the pension plan is overfunded or underfunded, the amount to be
reported on the December 31, 2018 balance sheet, and determine whether the amount
is a pension asset or a pension liability.
97. Buffalo Company adopted a defined benefit pension plan as of January 1, 2018. Buffalo has
provided the following information pertaining to its pension plan:
• The projected benefit obligation as of January 1, 2018 was determined to be
$1,050,000.
• Service cost for 2018 is $225,000
• Amortization of prior service cost will be $52,500 per year.
• The projected benefit obligation as of December 31, 2018 was determined to be
$1,380,000.
• The first contribution of $500,000 to the pension plan asset fund was made on
December 31, 2018.
• The discount rate is 10%.
CHAPTER 14 Pensions and Postretirement Benefits
Required:
1. Prepare the journal entry for the adoption of the pension plan at January 1, 2018.
2. Determine the pension expense for the year ended December 31, 2018.
3. Prepare one journal entry to record the pension expense and one journal entry to record the
pension funding for the year ended December 31, 2018.
4. Determine the balance of the pension liability at December 31, 2018.
98. Krabby, Inc. had the following information at December 31, 2018:
Balances at December 31, 2018:
Market-related value of plan assets $ 5,000
Projected benefit obligation 4,200
Funded status: Pension asset 800
AOCI – Prior service cost 300
AOCI – Actuarial loss 700
The following assumptions are being used for the pension plan in 2019:
Discount rate 5%
Expected rate of return on assets 8%
Average remaining work life 10 years
Remaining amortization period for prior service costs 6 years
You have the following additional information for 2019:
Service cost $442
Cash contributed to the plan at year end 250
Pension benefits paid by the plan at year end 465
Actual return on plan assets 650
New actuarial loss on the projected benefit obligation 64
Required:
1. Determine the pension expense for 2019.
2. Determine the balance of the plan assets at December 31, 2019.
3. Determine the balance of the projected benefit obligation at December 31, 2019.
4. Determine the balance of AOCI – Actuarial loss at December 31, 2019.
5. Determine the amount of the pension asset (liability) that will appear on Krabby’s
December 31, 2019 balance sheet.
Answer:
CHAPTER 14 Pensions and Postretirement Benefits
CHAPTER 14 Pensions and Postretirement Benefits
99. The Boulder Rock Company has provided the following information pertaining to its defined
benefit plan:
• The projected benefit obligation was $2,100,000 on January 1, 2018.
• Recognition of prior service cost during 2018 was $150,000.
• Service cost for 2018 was $300,000.
• Plan assets on January 1, 2018 totaled $1,500,000.
• The expected return on plan assets was 10%.
• The actual return on plan assets was 8%.
• The discount rate was 8%.
• The December 31, 2018 contribution to the plan asset fund was $450,000.
• Benefits paid to retirees during 2018 totaled $225,000.
Required:
1. Determine Boulder’s pension expense for 2018.
2. Determine the projected benefit obligation (PBO) as of December 31, 2018.
3. Prepare the journal entries to record pension expense and the funding for the year ended
December 31, 2018.
4. Determine the balance of the pension plan assets.
5. Determine what should be reported on the December 31, 2018 balance sheet with
respect to the funded status of the defined benefit pension plan.
Answer:
100. Describe three differences between the accounting for pensions relative to the accounting
for postretirement benefits other than pensions.
