Chapter 17 Pensions and Other Postretirement Benefits
Long-term expected return on plan assets
9%
Assuming no other relevant data exist, what is the pension expense for the year?
a. $190,000.
b. $ 92,400.
c. $ 60,000.
d. $170,000.
63. The following information is related to the defined benefit pension plan of Simpson Company
for the year:
Service cost
$ 90,000
Contributions to pension plan
140,000
Benefits paid to retirees
110,000
Plan assets (fair value), January 1
540,000
Plan assets (fair value), December 31
650,000
Actual return on plan assets
80,000
PBO, January 1
800,000
PBO, December 31
870,000
Discount rate
10%
Long-term expected return on plan assets
9%
Assuming no other relevant data exist, what is the pension expense for the year?
a. $ 90,000.
b. $230,600.
c. $121,400.
d. $154,000.
64. Colombo Enterprises has a defined benefit pension plan. At the end of the reporting year, the
following data were available: beginning PBO, $75,000; service cost, $14,000; interest cost,
$6,000; benefits paid for the year, $9,000; ending PBO, $89,000; and the expected return on
plan assets, $10,000. There were no other pension-related costs. The journal entry to record
the annual pension costs will include a debit to pension expense for:
a. $20,000.
b. $15,000.
c. $12,000.
d. $10,000.
(10,000
Use the following to answer questions 65–67:
The following incomplete (columns have missing amounts) pension spreadsheet is for the current year
for First Republic Corporation (FRC).
($ in millions)
Debit (Credit)
Prior
Service
Net
(Gain)/
Pension
Expense
Cash
Net
Pension
Cost
Loss
(Liability)/
Asset
Beginning balance
28
(90)
Service cost
62
Interest cost
49
Expected return on
assets
Gain/loss on assets
(2)
Amortization of:
Prior service cost
(7)
Net gain/loss
3
Loss on PBO
Contributions to fund
(45)
Retiree benefits paid
Ending balance
(81)
$121,400
65. What was the net pension asset / liability reported in the balance sheet at the end of the year?
a. Net pension asset of $50.
b. Net pension asset of $24.
c. Net pension liability of $50.
d. Net pension liability of $24.
66. What was FRC’s pension expense for the year?
a. $44.
b. $47.
c. $49.
d. $107.
67. What was the actuary’s interest (discount) rate?
a. 7%.
b. 8%.
c. 9%.
Chapter 17 Pensions and Other Postretirement Benefits
d. 10%.
Use the following to answer questions 68–70:
The following refers to the pension spreadsheet (columns have missing amounts) for the current year
for Pancho Villa Enterprises (PVE).
($ in millions)
Debit (Credit)
PBO
Plan
Assets
Prior
Service
Net
(Gain)/
Pension
Expense
Cash
Net
Pension
Cost
Loss
(Liability)/
Asset
Beginning balance
450
60
55
50
Service cost
(85)
Interest cost
(25)
Expected return on
assets
55
Gain/loss on assets
3
Amortization of:
Prior service cost
Net gain/loss
(1)
Loss on PBO
(65)
Contributions to fund
40
Retiree benefits paid
Ending balance
(530)
54
122
68. What was PVE’s pension expense for the year?
a. $250.
b. $50.
c. $68.
d. $62.
Chapter 17 Pensions and Other Postretirement Benefits
69. What was the PBO at the beginning of the year?
a. $160.
b. $400.
c. $500.
d. $610.
70. What were the retiree benefits paid?
a. $45.
b. $50.
c. $55.
d. $60.
71. Which of the following is a correct statement concerning the reporting of the pension plan on
the face of the employer’s balance sheet?
Chapter 17 Pensions and Other Postretirement Benefits
a. Only the plan assets are separately reported.
b. Only the PBO is separately reported.
c. Both the PBO and the plan assets are separately reported.
d. Neither the PBO nor the plan assets is separately reported.
72. Recording pension expense would usually:
a. Increase the PBO.
b. Increase current assets.
c. Increase the prior service cost–AOCI.
d. Increase the net loss–AOCI.
73. Accumulated other comprehensive income:
a. Is a liability.
b. Might include prior service cost.
c. Includes accumulated pension expense.
d. Is reported in the income statement.
74. A statement of comprehensive income does not include:
a. Net income.
b. Losses from the return on assets exceeding expectations.
c. Losses from changes in estimates regarding the PBO.
d. Prior service cost.
75. Amortizing prior service cost for pension plans will:
a. Increase retained earnings and increase accumulated other comprehensive income.
b. Decrease retained earnings and decrease accumulated other comprehensive income.
c. Increase retained earnings and decrease accumulated other comprehensive income.
d. Decrease retained earnings and increase accumulated other comprehensive income.
76. A statement of comprehensive income does not include:
a. Gains from the return on pension assets exceeding expectations.
b. Gains and losses on unsold held–to-maturity securities.
c. Losses from the return on pension assets falling short of expectations.
d. Prior service cost.
77. Gains and losses can occur with pension plans when:
a. Either the PBO or the return on plan assets turns out to be different than expected.
b. Either the ABO or the return on plan assets turns out to be different than expected.
c. Either the PBO, the ABO, or the return on plan assets turns out to be different than
expected.
d. Either the PBO or the ABO turns out to be different than expected.
78. A gain from changing an estimate regarding the obligation for pension plans will:
Chapter 17 Pensions and Other Postretirement Benefits
a. Increase assets.
b. Increase liabilities.
c. Decrease shareholders’ equity.
d. Increase shareholders’ equity.
79. Castillo Company has a defined benefit pension plan. At the end of the reporting year, the
following data were available: beginning PBO, $75,000; service cost, $18,000; interest cost,
$5,000; benefits paid for the year, $9,000; ending PBO, $89,000; the expected return on plan
assets, $10,000; and cash deposited with pension trustee, $17,000. There were no other
pension-related costs. The journal entry to record the annual pension costs will include a credit
to the PBO for:
a. $13,000.
b. $17,000.
c. $18,000.
d. $23,000.
80. At December 31, 2015, Mongo, Inc., reported in its balance sheet a net loss of $3 million
related to its pension plan. The actuary for Mongo at the end of 2016 increased her estimate of
future salary levels. Mongo’s entry to record the effect of this change will include:
a. A debit to loss–OCI and a credit to PBO.
b. A debit to PBO and a credit to loss–OCI.
Chapter 17 Pensions and Other Postretirement Benefits
c. A debit to pension expense and a credit to PBO.
d. A debit to pension expense and a credit to loss–OCI.
81. JL Health Services reported a net loss–AOCI in last year’s balance sheet. This year, the
company revised its estimate of future salary levels causing its PBO estimate to decline by
$24. Also, the $48 million actual return on plan assets was less than the $54 million expected
return. As a result:
a. The statement of comprehensive income will report a $6 million gain and a $24 million
loss.
b. The net pension liability will increase by $18 million.
c. Accumulated other comprehensive income will increase by $18 million.
d. The net pension liability will decrease by $24 million.
82. Amortizing a net loss for pensions will:
a. Increase retained earnings and increase accumulated other comprehensive income.
b. Decrease retained earnings and decrease accumulated other comprehensive income.
c. Increase retained earnings and decrease accumulated other comprehensive income.
d. Decrease retained earnings and increase accumulated other comprehensive income.
83. Amortizing a net gain for pensions and other postretirement benefit plans will:
a. Increase retained earnings and increase accumulated other comprehensive income.
b. Decrease retained earnings and decrease accumulated other comprehensive income.
c. Increase retained earnings and decrease accumulated other comprehensive income.
d. Decrease retained earnings and increase accumulated other comprehensive income.
84. Amortizing prior service cost for pensions and other postretirement benefit plans will:
a. Decrease retained earnings.
b. Increase assets.
c. Decrease assets.
d. Decrease shareholders’ equity.
85. The key elements of a defined benefit pension plan include all of the following except:
a. The pension expense.
b. The plan assets.
c. Amortized future benefits.
d. The employer’s obligation.
Chapter 17 Pensions and Other Postretirement Benefits
86. The net pension liability (PBO minus plan assets) is increased by:
a. Service cost.
b. Expected return on plan assets.
c. Amortization of prior service cost.
d. Cash contributions to plan assets.
87. The net pension liability (PBO minus plan assets) is decreased by:
a. Service cost.
b. Expected return on plan assets.
c. Amortization of net gain–AOCI.
d. Prior service cost.
Chapter 17 Pensions and Other Postretirement Benefits
Use the following to answer questions 88–90:
The following incomplete (columns have missing amounts) pension spreadsheet is for Old Tucson
Corporation (OTC).
($ in millions)
PBO
Plan
Prior
Net
Pension
Cash
Net Pension
debit (credit)
Assets
Service
(Gain)
Expense
(Liability) /
Cost
Loss
Asset
Beginning balance
(500)
58
Service cost
62
Interest cost
Expected return on
assets
(23)
Gain/loss on assets
(2)
Amortization of:
Prior service cost
(6)
Net gain/loss
Loss on PBO
(25)
25
Contributions to fund
(56)
Retiree benefits paid
43
(43)
Ending balance
(574)
288
54
78
(286)
88. What was the prior service cost at the beginning of the year?
a. $48.
b. $54.
c. $56.
d. $60.
89. What is OTC’s pension expense for the year?
a. $78.
b. $72.
c. $66.
d. $18.
Chapter 17 Pensions and Other Postretirement Benefits
90. What was the balance of the net pension asset / liability reported in the balance sheet at the
end of the previous year?
a. Net pension asset of $250.
b. Net pension asset of $442.
c. Net pension liability of $250.
d. Net pension liability of $442.
91. Prior to 1993, postretirement benefits other than pensions generally were accounted for on the:
a. Accrual basis.
b. Cash basis.
c. Modified accrual basis.
d. Hybrid basis.
92. According to generally accepted accounting principles, accounting for postretirement benefits
other than pensions must adhere to the:
a. Accrual basis of accounting.
b. Cash basis of accounting.
Chapter 17 Pensions and Other Postretirement Benefits
c. Modified accrual basis.
d. Modified cash basis.
93. Accounting for postretirement health care benefits is similar, in most respects, to accounting
for:
a. Payroll taxes.
b. Health insurance costs for current employees.
c. Pension benefits.
d. Sick pay and vacation pay.
94. Eligibility for postretirement health care benefits usually is based on the employee’s:
a. Job title.
b. Number of years in the profession.
c. Number of years in the current position.
d. Age and/or years of service.
95. Eligibility requirements and the nature of benefits for postretirement health care plans usually
are specified in the:
a. Written plan.
b. Informal plan.
c. Substantive plan.
d. Severance plan.
96. Which of the following is not included among the assumptions needed to estimate
postretirement health care benefits?
a. Employee turnover.
b. Expected retirement age of plan participants.
c. Life expectancy of plan participants.
d. Return on plan assets.
97. Which one of the following assumptions is needed to estimate both postretirement health care
benefits and pension benefits?
a. Per capita claims cost.
b. Expected cost trend rate.
c. Benefits provided by other governmental or private plans.
d. Employee turnover.
98. The estimated medical costs are expected to be $7,500 during an employee’s retirement. The
retiree is expected to pay 30% of the cost and Medicare is expected to pay 50% of the cost.
What is the company’s estimated net cost of benefits?
a. $5,250.
b. $7,500.
c. $1,500.
d. $3,750.
99. With pensions, service cost reflects additional benefits employees earn from an additional
year’s service. The service cost for retiree health care plans is:
a. An allocation to the current year of a portion of an estimated fixed total cost.
b. An allocation to the current year of a portion of an existing liability.
c. An amount earned by a defined benefit formula.
d. The amount paid to retired employees.
100. Pension benefits and postretirement health benefits typically are similar in their:
a. Application of present value concepts.
b. Vesting policies.
c. Coverage for eligible dependents.
d. Relationship between cost of coverage and length of service.
101. A company’s total obligation for postretirement benefits is measured by the:
a. APBO.
b. HMOP.
c. HOBO.
d. EPBO.
102. The process of assigning the cost of postretirement benefits to the years during which those
Chapter 17 Pensions and Other Postretirement Benefits
benefits are assumed to be earned by employees is called:
a. Restitution.
b. Retribution.
c. Attribution.
d. Assignation.
103. The attribution period for postretirement benefits spans each year of service from the
employee’s date of hire to the employee’s date of:
a. Full eligibility.
b. Death.
c. Retirement.
d. Termination.
104. The attribution period for postretirement health care plans does not include:
a. The first five years of service.
b. The year of hire.
c. The employee probation period.
d. The years of service beyond the full eligibility date.
105. If no estimates are changed and there is no net loss or gain or prior service cost, which of the
following amounts related to an unfunded postretirement benefit plan will not increase with
each additional year of service before the full eligibility date?
a. Other comprehensive income.
b. Postretirement benefit expense.
c. APBO.
Chapter 17 Pensions and Other Postretirement Benefits
d. EPBO.
106. The postretirement benefit obligation is the:
a. Future value of the estimated benefits during retirement.
b. Present value of the estimated benefits during retirement.
c. Fair value of the estimated benefits during retirement.
d. Actual value of estimated benefits during retirement.
107. The APBO increases each year by the:
a. Interest accrued on the APBO and the portion of the EPBO attributed to that year.
b. Interest accrued on the EPBO and the portion of the EPBO attributed to that year.
c. Interest accrued on the APBO and the portion of the APBO attributed to that year
d. Interest accrued on the EPBO and the portion of the APBO attributed to that year.
108. The attribution approach required by GAAP for postretirement health care plans is to assign:
a. An equal fraction of the EPBO to each year the employee is on the company payroll.
b. An equal fraction of the APBO to each year the employee is on the company payroll.
c. An equal fraction of the APBO to each year of service from the employee’s hire date to
the employee’s full eligibility date.
d. An equal fraction of the EPBO to each year of service from the employee’s hire date to the
employee’s full eligibility date.
109. The amount of cash paid annually for unfunded postretirement health benefit plans, assuming
they are not independently insured, usually is equal to:
a. The amount required by the actuarial formula.
b. The present value of future benefits.
c. The amount necessary to cover future benefits.
d. The amount necessary to pay the current year’s health care cost.
110. A company’s postretirement health care benefit plan had an APBO of $265,000 on January 1,
2016. During 2016, retiree benefits paid were $40,000. The discount rate for the plan for this
year was 10%. Service cost for 2016 was $80,000. Plan assets (fair value) increased during the
year by $45,000. The amount of the APBO at December 31, 2016, was:
a. $225,000.
b. $305,000.
c. $331,500.
d. $371,500.
Use the following to answer questions 111–115:
Oregon Co.’s employees are eligible for retirement with benefits at the end of the year in which both
age 60 is attained and they have completed 35 years of service. The benefits provide 15 years
reimbursement for health care services of $20,000 annually, beginning one year from the date of
retirement.
Ralph Young was hired at the beginning of 1977 by Oregon after turning age 22 and is expected to
Chapter 17 Pensions and Other Postretirement Benefits
retire at the end of 2018 (age 60). The discount rate is 4%. The plan is unfunded.
The PV of an ordinary annuity of $1 where n = 15 and i = 4% is 11.11839.
The PV of $1 where n = 2 and i = 4% is 0.92456
111. What is the present value of Ralph’s net benefits as of his expected retirement date, rounded to
the nearest dollar?
a. $166,580.
b. $222,368.
c. $300,000.
d. None of these answer choices is correct.
112. With respect to Ralph, what is Oregon’s expected postretirement benefit obligation (EPBO) at
the end of 2016, rounded to the nearest dollar?
a. $137,045.
b. $205,593.
c. $246,810.
d. $768,000.
113. With respect to Ralph, what is Oregon’s accumulated postretirement benefit obligation
(APBO) at the end of 2016, rounded to the nearest dollar?
a. $130,544.
b. $205,593.
c. $195,050.
d. None of these answer choices is correct.