Chapter 17 Pensions and Other Postretirement Benefits
Answer:
Chapter 17 Pensions and Other Postretirement Benefits
3.
Chapter 17 Pensions and Other Postretirement Benefits
Essay
Instructions:
The following answers point out the key phrases that should appear in students’ answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
185. Differentiate between a defined contribution pension plan and a defined benefit pension plan.
186. Discuss the key quantitative elements of accounting for a defined benefit pension plan.
187. Differentiate between the projected benefit obligation, the accumulated benefit obligation, and
the vested benefit obligation.
Chapter 17 Pensions and Other Postretirement Benefits
188. Pension plans typically require some minimum period of employment before benefits vest.
What is the 1974 federal law governing vesting (as well as other aspects of pensions)? What
are the vesting rules?
189. What is the theoretical and practical trade-off when measuring the pension liability using the
projected benefit obligation compared to the accumulated benefit obligation?
190. DeAngelo Yards, Inc., calculated pension expense for its underfunded pension plan as
follows:
($ in millions)
Chapter 17 Pensions and Other Postretirement Benefits
Service cost $448
Interest cost 300
Expected return on the plan assets ($200 actual, less $20 gain) (180)
Amortization of prior service cost 16
Amortization of net loss 4
Pension expense $588
Required:
Which elements of DeAngelo’s balance sheet are affected by the components of pension
expense? What are the specific changes in these accounts?
191. Discuss income smoothing as the term relates to pension plans.
Chapter 17 Pensions and Other Postretirement Benefits
192. What are the possible components of pension expense? Which of these elements would exist
in every defined benefit plan?
Use the following to answer questions 193 and 194:
In its 2016 annual report to shareholders, JDS Corporation disclosed the following information about
its pension plan:
($ in millions)
2016
2015
PROJECTED BENEFIT OBLIGATION
Beginning balance
$120.0
$102.2
Service cost
4.1
5.5
Interest cost
7.0
6.5
Benefits paid
(2.6
)
(4.4
)
Actuarial loss
6.6
11.4
Ending balance
$135.1
$121.2
The increase in the underfunded projected benefit obligation was primarily attributable to a reduction
in the assumed discount rate. This was combined with the effect of increases in benefits under the
terms of the plan in excess of current inflation rates. The net result was reflected as a reduction in
accumulated other comprehensive income.
193. Explain how the loss is reported in the financial statements (other than the balance sheet).
194. Why did the loss result in a reduction in accumulated other comprehensive income?
195. Discuss the accounting for postretirement benefits prior to 1993 and under current GAAP.
What are the key differences?
196. Prepare a list of how retiree health benefits differ from pension benefits with respect to
accounting, funding, regulation, and employee benefits.
197. The components of postretirement benefit expense are similar to the components of pension
expense. How does the service cost component differ between the two expenses?
198. What is different about the expected postretirement benefit obligation and the accumulated
postretirement benefit obligation?
199. What are the five components of postretirement benefit expense?
Chapter 17 Pensions and Other Postretirement Benefits
200. In its 2016 annual report to shareholders, Livey Companies Inc. (LCI) disclosed the following
information regarding its postemployment benefit plans:
The Company and certain of its affiliates sponsor postemployment benefit plans covering
substantially all salaried and certain hourly employees. The cost of these plans is charged to
expense over the working life of the covered employees. Net postemployment costs consisted
of the following for the years ended December 31, 2016, 2015, and 2014:
(in millions)
2015
2014
Service cost
$26
$ 24
Amortization of net loss
6
2
Other expense
—
161
Net postemployment costs
$32
$187
The company instituted workforce reduction programs in its North American food operations
in 2014. These actions resulted in incremental postemployment costs, which are shown as
other expense above.
Required:
Describe the three components in the net postemployment costs disclosed by LCI.
201. Open Arms Industries has a noncontributory, defined benefit pension plan. During 2016,
changing economic conditions caused the actuary to increase the assumed rate of salary
progression.
Required:
1. Does the change create a gain or does it create a loss for Open Arms? Why?
2. Assuming the magnitude of the change is $7 million. Prepare the appropriate journal entry
to record any 2016 gain or loss. (Ignore income taxes.) If Open Arms prepares its financial
Chapter 17 Pensions and Other Postretirement Benefits
statements according to U.S. GAAP, how will the company report the gain or loss?
3. Would your response to question 2 differ if Open Arms prepares its financial statements
according to International Financial Reporting Standards (IFRS)?
202. The income statement of Starboard Industries includes $12 million for the amortization of a
loss resulting from the company’s actuary changing an estimate used in calculating the
obligation for the pension plan. Does Starboard Industries prepare its financial statements
according to U.S. GAAP or IFRS?
203. How do U.S. GAAP and IFRS differ with regard to reporting prior service costs.
These were in my TB submission (I think) but
didn’t get in this one.
xxx. Generic Company sponsors an unfunded postretirement plan providing healthcare
benefits. The following information relates to the current year’s activity of
Generic’s postretirement benefit plan:
Postretirement benefit expense $150 million
Service cost 120 million
Amortization of net gain–AOCI 10 million
Prior service cost–AOCI none
Retiree benefits paid (end of year) 30 million
Chapter 17 Pensions and Other Postretirement Benefits
What is Generic’s interest cost for the year?
a. $20 million
b. $40 million
c. $30 million
d. $50 million
xxx. In a defined benefit pension plan, the journal entry to record pension expense will
not include:
a. a debit to service cost
b. a credit to projected benefit obligation
c. a debit to amortization of prior service cost
d. a debit to plan assets
xxx. In a defined benefit pension plan, the journal entry to record benefits paid to
retired employees will include:
a. a debit to projected benefit obligation
b. a debit to plan assets
c. a credit to retiree benefits
d. a credit to cash
xxx. In a defined benefit pension plan, the journal entry to record the employer’s annual
cash contribution to plan assets:
a. reduces the employer’s obligation to pay benefits
b. includes a credit to plan assets
c. might reduce next period’s pension expense
d. a debit to cash
Chapter 17 Pensions and Other Postretirement Benefits
xxx. In a defined benefit pension plan, gains and losses (either from changing
assumptions regarding the PBO or the return on assets being higher or lower than
expected) are:
a. deferred and not immediately included in pension expense and net income
b. included in pension expense and net income
c. included in pension expense but not net income
d. included in net income but not in pension expense
.