Chapter 17 Pensions and Other Postretirement Benefits
114. With respect to Ralph, what is the service cost to be included in Oregon’s 2016 postretirement
benefit expense, rounded to the nearest dollar?
a. $ 3,544.
b. $ 6,365.
c. $20,000.
d. $ 5,272.
115. With respect to Ralph, what is the interest cost to be included in Oregon’s 2017 postretirement
benefit expense, rounded to the nearest dollar?
a. $7,802.
b. $7,877.
c. $8,766.
d. None of these answer choices is correct.
Chapter 17 Pensions and Other Postretirement Benefits
116. Assume the actuary estimates the net cost of providing health care benefits to a particular
employee during his retirement years to have a present value of $60,000. If the benefits relate
to an estimated 25 years of service and five of those years have been completed:
a. The EPBO would be $12,000.
b. The EPBO would be $8,400.
c. The APBO would be $8,400.
d. The APBO would be $12,000.
117. The EPBO for a particular employee on January 1, 2016, was $30,000. The APBO at the
beginning of the year was $6,000. The appropriate discount rate for this postretirement plan is
5%. The employee is expected to serve the company for a total of 25 years with 5 of those
years already served as of January 1, 2016. What is the APBO at December 31, 2016?
a. $6,300.
b. $7,200.
c. $7,500.
d. $7,560.
118. The EPBO for a particular employee on January 1, 2016, was $150,000. The APBO at the
beginning of the year was $30,000. The appropriate discount rate for this postretirement plan
is 5%. The employee is expected to serve the company for a total of 25 years with 5 of those
years already served as of January 1, 2016. What is the APBO at December 31, 2016?
a. $37,800.
b. $42,800.
c. $31,500.
d. $30,000.
119. At December 31, 2015, Mallory, Inc., reported in its balance sheet a net loss of $12 million
related to its postretirement benefit plan. The actuary for Mallory at the end of 2016 increased
her estimate of future health care costs. Mallory’s entry to record the effect of this change will
include:
a. A debit to Loss–OCI and a credit to APBO.
b. A debit to APBO and a credit to Loss–OCI.
c. A debit to Postretirement benefit expense and a credit to APBO.
d. A debit to Postretirement benefit expense and a credit to Loss–OCI.
120. The net postretirement benefit liability (APBO minus plan assets) is increased by:
a. Service cost.
b. Expected return on plan assets.
c. Amortization of net gain.
d. Cash contributions to plan assets.
121. In a postretirement health care plan, prior service cost is attributed to the service of active
employees from the date of the amendment to:
a. The partial eligibility date.
b. The retirement date.
c. The full eligibility date.
d. The date of death.
122. Recording the expense for postretirement benefits will not:
a. Increase the APBO.
b. Increase the postretirement benefit assets.
c. Decrease the prior service cost.
d. Increase the net loss–AOCI.
Use the following to answer questions 123–125:
The following data are for Guava Company’s retiree health care plan for the current calendar year.
Number of employees covered
5
Years employed as of January 1
4 (each)
Attribution period
20 years
EPBO, January 1
$60,000
EPBO, December 31
$63,600
Interest rate
6%
Funding and plan assets
None
123. What is the interest cost to be included in the current year’s postretirement benefit expense?
a. $3,600.
b. $720.
c. $768.
d. $4,000.
124. What is the service cost to be included in the current year’s postretirement benefit expense?
a. $3,000.
b. $3,180.
c. $3,200.
Chapter 17 Pensions and Other Postretirement Benefits
d. $4,000.
125. What is the correct entry to record postretirement benefit expense for the current year?
a.
Postretirement benefit expense
APBO
3,900
b.
Postretirement benefit expense
Cash
3,900
c.
Postretirement benefit expense
APBO
4,000
d.
Postretirement benefit expense
APBO
7,600
Service cost: $63,600 x 1/20 =
Interest cost: $60,000 x 4/20 x 6% =
Postretirement benefit expense
126. When the service method is used for amortizing prior service costs, the amount recognized
each year is:
a. In proportion to the fraction of the total remaining service years worked during the year.
b. A constant amount or fixed amount.
c. Prior service cost divided by the average remaining service life of the active employee
group.
d. Prior service cost divided by the average estimated retirement age of the currently
enrolled employee group.
Chapter 17 Pensions and Other Postretirement Benefits
127. On January 1, 2015, WOW amended its defined benefit pension plan. The amount of prior
service costs caused by this action was $720,000. WOW uses the service method for
amortizing prior service costs. The following service years were provided by the company
actuary: 2015, 20; 2016, 15; 2017, 12; 2018, 8; and 2019, 5. Twenty employees benefit from
this amendment. In 2016, the amortization amount would be:
a. $12,000.
b. $180,000.
c. $144,000.
d. $300,000.
128. Persoff Industries International has a defined benefit pension plan. The company revised its
estimate of future salary levels causing its defined benefit obligation to increase by $16
million. Also, Persoff’s $25 million actual return on plan assets exceeded the 5% high-grade
corporate bond rate times the $440 million plan assets. Persoff prepares its financial
statements in accordance with International Financial Reporting Standards (IFRS). The
company will:
a. Record a $3 million decrease in its plan assets.
b. Record a $16 million gain–OCI.
c. Change an amount in the equity section of the balance sheet to be subsequently amortized
to pension expense.
d. Change an amount in the equity section of the balance sheet that will never be amortized
to pension expense.
Chapter 17 Pensions and Other Postretirement Benefits
Using IFRS, the gain and the loss become part of AOCI in the equity section of the balance sheet. We
do not subsequently amortize that amount.
129. Under IFRS, components of other comprehensive income:
a. Can be reported as part of a single statement of comprehensive income.
b. Are not permitted to be reported.
c. Must be reported in a separate statement of comprehensive income.
d. Can be reported as part of a statement of shareholders’ equity.
130. Revenue and expense items and components of other comprehensive income can be reported
in a single statement of comprehensive income using:
a. U.S. GAAP.
b. IFRS.
c. Both U.S. GAAP and IFRS.
d. Neither U.S. GAAP nor IFRS.
131. Revenue and expense items and components of other comprehensive income can be reported
in the statement of shareholders’ equity using:
a. U.S. GAAP.
b. IFRS.
c. Both U.S. GAAP and IFRS.
d. Neither U.S. GAAP nor IFRS.
Chapter 17 Pensions and Other Postretirement Benefits
132. Actuarial gains and losses are reported as OCI as they occur using:
a. U.S. GAAP.
b. IFRS.
c. Both U.S. GAAP and IFRS.
d. Neither U.S. GAAP nor IFRS.
133. Prior service cost is included among OCI items in the statement of comprehensive income and
thus subsequently becomes part of AOCI where it is amortized over the average remaining
service period using
a. U.S. GAAP.
b. IFRS.
c. Both U.S. GAAP and IFRS.
d. Neither U.S. GAAP nor IFRS.
134. Prior service cost is expensed immediately using:
a. U.S. GAAP.
b. IFRS.
c. Both U.S. GAAP and IFRS.
d. Neither U.S. GAAP nor IFRS.
Chapter 17 Pensions and Other Postretirement Benefits
Chapter 17 Pensions and Other Postretirement Benefits
Matching Pair Questions
135. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the most correct term by placing the number designating
that term in the space provided.
TERM
PHRASE
NUMBER
1. Noncontributory pension plan
A shareholders’ equity account.
____
2. Contribution to pension fund
A financing decision.
____
3. Pension expense
All funding is provided by the employer.
____
4. Prior service cost
Reduced by return on assets.
____
5. The PBO exceeds plan assets
Reported as a net pension liability.
____
Answer:
PHRASE
NUMBER
1. Noncontributory pension plan
A shareholders’ equity account.
2. Contribution to pension fund
A financing decision.
3. Pension expense
All funding is provided by the employer.
4. Prior service cost
Reduced by return on assets.
5. The PBO exceeds plan assets
Reported as a net pension liability.
136. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBER
1. Gain on plan assets
Causes a loss-other comprehensive income.
____
2. Return on plan assets less than the
expectation
Caused by changes in assumptions used to
measure the PBO.
____
3. Prior service cost
Caused by plan amendment.
____
4. Overfunded pension plan
Causes a gain-other comprehensive income.
____
5. Return on plan assets exceeds the
expectation
Pension plan assets exceed the PBO.
____
Answer:
Chapter 17 Pensions and Other Postretirement Benefits
137. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBER
1. Loss-other comprehensive income
Created by “ERISA” legislation.
____
2. Accumulated benefit obligation
Created only by the passage of time.
____
3. Pension Benefit Guaranty Corp.
Future salary levels estimated to be higher
than previously expected.
____
4. Funded status
Current pay levels implicitly assumed.
____
5. Interest cost
Difference between PBO and plan assets.
____
TERM
PHRASE
NUMBER
1. Loss-other comprehensive income
Created by “ERISA” legislation.
2. Accumulated benefit obligation
Created only by the passage of time.
3. Pension Benefit Guaranty Corp.
Future salary levels estimated to be higher
4. Funded status
Current pay levels implicitly assumed.
5. Interest cost
Difference between PBO and plan assets.
138. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBER
1. Amortize net loss–AOCI
Excess over 10% of the larger of plan assets or PBO.
____
2. Delayed recognition in
earnings
Future compensation levels estimated.
____
3. Projected benefit obligation
Gain from revised expectation of return on plan
assets.
____
4. Vested benefit obligation
Increased by employer contributions.
____
5. Plan assets
Not contingent on continued employment.
____
Answer:
Chapter 17 Pensions and Other Postretirement Benefits
139. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBER
1. Accumulated other
comprehensive income
Protection for employee pension rights.
____
2. Service cost
Reported as a shareholders’ equity account.
____
3. Defined benefit plan
Reduce(s) both the PBO and plan assets.
____
4. Vesting requirements
Retirement benefits specified by formula.
____
5. Retiree benefits paid
Included in the calculation of pension expense.
____
TERM
PHRASE
NUMBER
comprehensive income
Protection for employee pension rights.
2. Service cost
Reported as a shareholders’ equity account.
3. Defined benefit plan
Reduce(s) both the PBO and plan assets.
4. Vesting requirements
Retirement benefits specified by formula.
5. Retiree benefits paid
Included in the calculation of pension expense.
Chapter 17 Pensions and Other Postretirement Benefits
140. Listed below are six terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBER
1. EPBO
Return on plan assets lower or (higher) than
expected.
____
2. Loss or (gain) on plan
assets
Risk borne by employee.
____
3. Defined contribution plan
Increase in the PBO.
____
4. Discount rate
Trade-off between relevance and reliability.
____
5. Choice between PBO and
ABO
Used by actuaries to adjust for the time value of
money.
____
6. Service cost
Actuarial estimate of other postretirement
benefits to be received by participants.
____
TERM
141. Listed below are eight terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the most correct term.
TERM
PHRASE
NUMBER
1. Attribution
Discounted present value of total postretirement
benefit costs.
____
2. EPBO
Discount rate times beginning APBO.
____
3. Postretirement health care
Portion of the EPBO attributed to the current
period.
____
4. APBO (postretirement)
Process of assigning the cost of benefits to the
years during which those benefits are assumed to
be earned by employees.
____
5. Service cost
Related to need, not service.
____
6. Interest cost
The portion of the EPBO attributed to employee
service to date.
____
TERM
1. Attribution
Discounted present value of total postretirement
2. EPBO
Discount rate times beginning APBO.
3. Postretirement health care
Portion of the EPBO attributed to the current
5. Service cost
Related to need, not service.
6. Interest cost
The portion of the EPBO attributed to employee
service to date.
Chapter 17 Pensions and Other Postretirement Benefits
Problems
142. On January 1 of the current reporting year, Coda Company‘s projected benefit obligation was
$30 million. During the year, pension benefits paid by the trustee were $4 million. Service
cost was $10 million. Pension plan assets earned $5 million as expected. At the end of the
year, there was no net gain or loss and no prior service cost. The actuary’s discount rate was
10%.
Required:
Determine the amount of the projected benefit obligation at December 31.
(in millions)
Beginning PBO
Service cost
Interest cost (10% x $30)
Loss (gain) on PBO
Ending PBO
143. Pension data for Matta Corporation include the following for the current calendar year:
($ in
millions)
Discount rate, 10%
PBO, January 1
$360
PBO, December 31
450
ABO, January 1
200
ABO, December 31
275
Cash contributions to pension fund, December 31
100
Benefit payments to retirees, December 31
54
Required:
Assuming no change in actuarial assumptions and estimates, determine the service cost
component of pension expense for the current year.
Beginning PBO, January 1
Service cost
Interest cost (10% x $360)
Loss (gain) on PBO
Retiree benefits paid
Ending PBO, December 31
144. The following information relates to Hatami Company’s defined benefit pension plan during
the current reporting year:
Plan assets at fair value, January 1
$600,000,000
Expected return on plan assets
50,000,000
Actual return on plan assets
40,000,000
Contributions to the pension fund (end of year)
90,000,000
Amortization of net loss
0
Pension benefits paid (end of year)
32,000,000
Pension expense
60,000,000
Required:
Determine the balance of pension plan assets at fair value on December 31.
($ in millions)
Plan assets beginning of the year
Actual return
Cash contributions
Retiree benefits
)
Plan assets end of the year
145. The following information relates to Schmidt Sausage Co.’s defined benefit pension plan
during the current reporting year:
($ in millions)
Plan assets beginning of the year
$400
Expected return on plan assets
40
Actual return on plan assets
32
Cash contributions
60
Amortization of net loss
8
Retiree benefits
9
Required:
Determine the amount of pension plan assets at fair value on December 31.
Chapter 17 Pensions and Other Postretirement Benefits
146. Pension data for Sewell Corporation include the following for the current calendar year:
Discount rate, 8%
Expected return on plan assets, 10%
Actual return on plan assets, 12%
PBO, January 1
$620,000,000
Plan assets, January 1
630,000,000
Plan assets, December 31
670,000,000
Benefit payments to retirees, December 31
55,000,000
Required:
Assuming cash contributions were made at the end of the year, what was the amount of those
contributions?
($ in millions)
Plan assets beginning of the year
Actual return (12% x $630)
Cash contributions
Retiree benefits
Plan assets end of the year
147. Pension data for Goldman Company included the following for the current calendar year:
Service cost
$100,000
PBO, January 1
750,000
Chapter 17 Pensions and Other Postretirement Benefits
Plan assets, January 1
800,000
Amortization of prior service cost
6,000
Amortization of net loss
2,000
Discount rate, 8%
Expected return on plan assets, 10%
Actual return on plan assets, 12%
Required:
Determine pension expense for the year.
Service cost
Interest cost (8% x $750,000)
Expected return ($800,000 x 10%)
)
Amortization of prior service cost
Amortization of net loss
Pension expense
148. Vrable Corporation has a defined benefit pension plan. Two alternative possibilities for
pension-related data for the current calendar year are shown below:
Case 1
Case 2
Net loss (gain), Jan. 1
$240,000
$(230,000
)
Loss (gain) on plan assets
(8,000
)
(6,000
)
Loss (gain) on PBO
(17,000
)
12,000
ABO, Jan. 1
(1,900,000
)
(1,500,000
)
PBO, Jan. 1
(2,500,000
)
(1,700,000
)
Plan assets, Jan.1
2,100,000
2,000,000
Average remaining service period
of active employees (years)
10
12
Required:
For each independent case, calculate amortization of the net loss or gain that should be
included as a component of pension expense for the current year.
Case 1
Case 2
Net loss or gain
Less: 10% corridor*
Excess
$ 30,000
Service period
Amortization
$2,500