CHAPTER 20
ACCOUNTING FOR PENSIONS
AND POSTRETIREMENT BENEFITS
CHAPTER LEARNING OBJECTIVES
1. Discuss the fundamentals of pension plan accounting.
2. Use a worksheet for employer’s pension plan entries.
3. Explain the accounting for past service costs.
4. Explain the accounting for remeasurements.
5. Describe the requirements for reporting pension plans in financial statements.
6. Explain the accounting for other postretirement benefits.
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 2
TRUE-FALSE—Conceptual
1. A pension plan is contributory when the employer makes payments to a funding agency.
2. Qualified pension plans permit deductibility of the employer’s contributions to the pension
fund.
3. Qualified pension plans permit tax-free status of earnings from pension fund assets.
4. In a defined contribution plan, the employer must make up any shortfall in the
accumulated assets held by the defined contribution trust.
5. IFRS encourages, but does not require, companies to use actuaries in the measurement
of the pension amounts.
6. The employees are the beneficiaries of a defined contribution trust, but the employer is
the beneficiary of a defined benefit trust.
7. An employer does not have to report a liability on its statement of financial position in a
defined-benefit plan.
8. Employers are at risk with defined-benefit plans because they must contribute enough to
meet the cost of benefits that the plan defines.
9. Companies compute the vested benefit obligation using only vested benefits, at current
salary levels.
10. The accumulated benefit obligation bases the deferred compensation amount on both
vested and nonvested service using future salary levels.
11. Regarding the alternatives for measuring the pension liability, the profession adopted the
accumulated benefit obligation using the present value of vested and non-vested benefits
accrued to date, based on employees’ future salary levels.
12. If a company grants plan amendments, it allocates the past service cost of providing these
retroactive benefits to pension expense in the future, specifically to the remaining service–
years of the affected employees.
13. Service cost is the expense caused by the increase in the accumulated benefit obligation
because of employees’ service during the current year.
14. The interest expense component of pension expense in the current period is computed by
multiplying the discount rate by the beginning balance of the defined benefit obligation.
15. Companies should recognize the entire increase in defined benefit obligation due to a plan
initiation or amendment as pension expense in the year of amendment.
16. For defined benefit plans, IFRS recognizes a pension asset or liability as the funded
status of the plan.
Accounting for Pensions and Postretirement Benefits
20-3
17. The difference between the expected return and the actual return is referred to as the
asset gain or loss.
18. The unexpected gains and losses from changes in the defined benefit obligation are
called asset gains and losses.
19. Companies report any actuarial gains or losses charged or credited to other
comprehensive income in the statement of financial position.
20. A curtailment occurs when a company enters into a transaction that eliminates all further
obligations for part or all of the benefits provided under a defined benefit plan.
True-False Answers—Conceptual
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MULTIPLE CHOICE—Conceptual
21. In determining the present value of the prospective benefits (often referred to as the
defined benefit obligation), the following are considered by the actuary:
a. retirement and mortality rate.
b. interest rates.
c. benefit provisions of the plan.
d. all of these answer choices are considered.
22. In a defined–benefit plan, the process of funding refers to
a. determining the defined benefit obligation.
b. determining the accumulated benefit obligation.
c. making the periodic contributions to a funding agency to ensure that funds are
available to meet retirees’ claims.
d. determining the amount that might be reported for pension expense.
23. In all pension plans, the accounting problems include all the following except
a. measuring the amount of pension obligation.
b. disclosing the status and effects of the plan in the financial statements.
c. allocating the cost of the plan to the proper periods.
d. determining the level of individual premiums.
24. In a defined-contribution plan, a formula is used that
a. defines the benefits that the employee will receive at the time of retirement.
b. ensures that pension expense and the cash funding amount will be different.
c. requires an employer to contribute a certain sum each period based on the formula.
d. ensures that employers are at risk to make sure funds are available at retirement.
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 4
25. In a defined–benefit plan, a formula is used that
a. requires that the benefit of gain or the risk of loss from the assets contributed to the
pension plan be borne by the employee.
b. defines the benefits that the employee will receive at the time of retirement.
c. requires that pension expense and the cash funding amount be the same.
d. defines the contribution the employer is to make; no promise is made concerning the
ultimate benefits to be paid out to the employees.
s26. Which of the following is not a characteristic of a defined-contribution pension plan?
a. The employer’s contribution each period is based on a formula.
b. The benefits to be received by employees are usually determined by an employee’s
three highest years of salary defined by the terms of the plan.
c. The accounting for a defined-contribution plan is straightforward and uncomplicated.
d. The benefit of gain or the risk of loss from the assets contributed to the pension fund
are borne by the employee.
s27. In accounting for a defined–benefit pension plan
a. an appropriate funding pattern must be established to ensure that enough monies will
be available at retirement to meet the benefits promised.
b. the employer’s responsibility is simply to make a contribution each year based on the
formula established in the plan.
c. the expense recognized each period is equal to the cash contribution.
d. the liability is determined based upon known variables that reflect future salary levels
promised to employees.
s28. Alternative methods exist for the measurement of the pension obligation (liability). Which
measure requires the use of future salaries in its computation?
a. Vested benefit obligation
b. Accumulated benefit obligation
c. Defined benefit obligation
d. Restructured benefit obligation
29. The accumulated benefit obligation measures
a. the pension obligation on the basis of the plan formula applied to years of service to
date and based on existing salary levels.
b. the pension obligation on the basis of the plan formula applied to years of service to
date and based on future salary levels.
c. an estimated total benefit at retirement and then computes the level cost that will be
sufficient, together with interest expected to accumulate at the assumed rate, to
provide the total benefits at retirement.
d. the shortest possible period for funding to maximize the tax deduction.
30. The defined benefit obligation is the measure of pension obligation that
a. is required to be used for reporting the service cost component of pension expense.
b. requires pension expense to be determined solely on the basis of the plan formula
applied to years of service to date and based on existing salary levels.
c. requires the longest possible period for funding to maximize the tax deduction.
d. is not sanctioned under international financial reporting standards for reporting the
service cost component of pension expense.
Accounting for Pensions and Postretirement Benefits
20-5
31. Differing measures of the pension obligation can be based on
a. all years of service—both vested and nonvested—using current salary levels.
b. only the vested benefits using current salary levels.
c. both vested and nonvested service using future salaries.
d. All of these answer choices are correct.
32. Vested benefits
a. usually require a certain minimum number of years of service.
b. are those that the employee is entitled to receive even if fired.
c. are not contingent upon additional service under the plan.
d. are defined by all of these answer choices.
33. The relationship between the amount funded and the amount reported for pension
expense is as follows:
a. pension expense must equal the amount funded.
b. pension expense will be less than the amount funded.
c. pension expense will be more than the amount funded.
d. pension expense may be greater than, equal to, or less than the amount funded.
34. The computation of pension expense includes all the following except
a. service cost component measured using current salary levels.
b. interest on defined benefit obligation.
c. interest revenue on plan assets.
d. All of these answer choices are included in the computation.
35. In computing the service cost component of pension expense, the IASB concluded that
a. the accumulated benefit obligation provides a more realistic measure of the pension
obligation on a going concern basis.
b. a company should employ an actuarial funding method to report pension expense that
best reflects the cost of benefits to employees.
c. the defined benefit obligation using future compensation levels provides a realistic
measure of present pension obligation and expense.
d. All of these answer choices are correct.
36. The interest rate used on the defined benefit obligation component of pension expense
a. reflects the incremental borrowing rate of the employer.
b. reflects the rates at which pension benefits could be effectively settled.
c. is the same rate used to compute the interest revenue on plan assets.
d. may be stated implicitly or explicitly when reported.
37. One component of pension expense is interest revenue on plan assets. Plan assets
include
a. contributions made by the employer and contributions made by the employee when a
contributory plan of some type is involved.
b. plan assets still under the control of the company.
c. only assets reported on the statement of financial position of the employer as pension
asset/liability.
d. None of these answer choices are correct.
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 6
38. The actual return on plan assets
a. is equal to the change in the fair value of the plan assets during the year.
b. includes interest, dividends, and changes in the fair value of the fund assets.
c. is equal to the expected rate of return times the fair value of the plan assets at the
beginning of the period.
d. All of these answer choices are correct.
39. In accounting for a pension plan, any difference between the pension cost charged to
expense and the payments into the fund should be reported as
a. an offset to the liability for past service cost.
b. pension asset/liability.
c. as other comprehensive income (G/L)
d. as accumulated other comprehensive income (PSC).
40. Which of the following items should be included in pension expense calculated by an
employer who sponsors a defined-benefit pension plan for its employees?
Fair value Past
of plan assets service cost
a. Yes Yes
b. Yes No
c. No Yes
d. No No
41. A corporation has a defined-benefit plan. A pension liability will result at the end of the
year if the
a. defined benefit obligation exceeds the fair value of the plan assets.
b. fair value of the plan assets exceeds the defined benefit obligation.
c. amount of employer contributions exceeds the pension expense.
d. amount of pension expense exceeds the amount of employer contributions.
42. When a company adopts a pension plan, past service costs should be charged to
a. other comprehensive income (PSC).
b. operations of prior periods.
c. operations of the current period.
d. retained earnings.
43. When a company amends a pension plan, for accounting purposes, past service costs
should be
a. treated as a prior period adjustment because no future periods are benefited.
b. amortized in accordance with procedures used for income tax purposes.
c. recorded in other comprehensive income (PSC).
d. reported as an expense in the period the plan is amended.
44. Past service cost is amortized on a
a. straight-line basis over the expected future years of service.
b. years-of-service method or on a straight-line basis over the average remaining service
life of active employees.
c. straight-line basis over 10 years.
d. past service costs are not amortized.
Accounting for Pensions and Postretirement Benefits
20-7
45. Whenever a defined-benefit plan is amended and credit is given to employees for years of
service provided before the date of amendment
a. both the accumulated benefit obligation and the defined benefit obligation are usually
greater than before.
b. both the accumulated benefit obligation and the defined benefit obligation are usually
less than before.
c. the expense and the liability should be recognized at the time the benefits are paid.
d. the expense should be recognized immediately, but the liability may be deferred until a
reasonable basis for its determination has been identified.
46. The unexpected gains or losses that result from changes in the defined benefit obligation
are called
Asset Liability
Gains & Losses Gains & Losses
a. Yes Yes
b. No No
c. Yes No
d. No Yes
47. A pension liability is reported when
a. the defined benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation is less than the fair value of pension plan assets.
c. the pension expense reported for the period is greater than the funding amount for the
same period.
d. accumulated other comprehensive income exceeds the fair value of pension plan assets.
48. A pension asset is reported when
a. the accumulated benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation exceeds the fair value of pension plan assets, but a
past service cost exists.
c. pension plan assets at fair value exceed the accumulated benefit obligation.
d. pension plan assets at fair value exceed the defined benefit obligation.
49. Which of the following statements is correct?
a. There is an account titled Pension Asset / Liability.
b. There is an account titled Defined Benefit Obligation.
c. Unrecognized net gain or loss should be reported in the liability section of the balance
sheet.
d. Other comprehensive income (PSC) should be included in net income.
50. According to the IASB, recognition of a liability is required when the defined benefit
obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan
assets exceeds the defined benefit obligation, the Board
a. requires recognition of an asset.
b. requires recognition of an asset if the excess fair value of plan assets exceeds the
corridor amount.
c. recommends recognition of an asset but does not require such recognition.
d. does not permit recognition of an asset.
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 8
51. Which of the following disclosures of pension plan information would not normally be
required?
a. The major components of pension expense
b. The amount of past service cost changed or credited in previous years.
c. The funded status of the plan and the amounts recognized in the financial statements
d. The rates used in measuring the benefit amounts
52. Differences between pensions and postretirement benefits include all of the following
except
a. Postretirement healthcare benefits are generally uncapped while pensions are
generally well-defined.
b. Postretirement healthcare benefits are generally paid as needed and used, whereas
pension benefits are generally paid monthly.
c. Postretirement healthcare benefits are generally paid only to the retiree while,
pensions are generally paid to the retiree, the spouse, and other dependents.
d. Postretirement healthcare benefits are generally not funded while pensions are
generally funded.
Multiple Choice Answers—Conceptual
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MULTIPLE CHOICE—Computational
53. Presented below is pension information related to Woods, Inc. for the year 2019:
Service cost €72,000
Interest on defined benefit obligation 54,000
Interest on vested benefits 24,000
Expected return on plan assets 18,000
The amount of pension expense to be reported for 2019 is
a. €120,000.
b. €144,000.
c. €162,000.
d. €108,000.
Accounting for Pensions and Postretirement Benefits
20-9
54. Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the
operation of the plan for the year 2019.
Service cost € 200,000
Contributions to the plan 220,000
Actual return on plan assets 180,000
Defined benefit obligation (beginning of year) 2,400,000
Fair value of plan assets (beginning of year) 1,600,000
The discount rate was 10%. The amount of pension expense reported for 2019 is
a. €200,000.
b. €260,000.
c. €280,000.
d. €440,000.
55. Presented below is information related to Jensen Inc. pension plan for 2019.
Service cost €900,000
Actual return on plan assets 210,000
Interest on defined benefit obligation 390,000
Net loss 30,000
Past service cost due to increase in benefits 165,000
Interest revenue on plan assets 180,000
What amount should be reported for pension expense in 2019?
a. €1,365,000
b. €1,335,000
c. €1,275,000
d. €1,155,000
56. Barton, Inc. received the following information from its pension plan trustee concerning the
operation of the company’s defined–benefit pension plan for the year ended December 31,
2019.
January 1, 2019 December 31, 2019
Fair value of pension plan assets £4,200,000 £4,500,000
Defined benefit obligation 4,800,000 5,160,000
Accumulated OCI—Net Gain / Loss -0- (90,000)
The service cost component of pension expense for 2019 is £360,000 and the past service
cost due to an increase in benefits is £60,000. The discount rate is 10%. What is the
amount of pension expense for 2019?
a. £360,000
b. £522,000
c. £531,000
d. £432,000
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 10
Use the following information for questions 57 and 58.
The following information for Cooper Enterprises is given below:
December 31, 2019
Assets and obligations
Plan assets (at fair value) €100,000
Defined benefit obligation 200,000
Other Items
Pension asset / liability, January 1, 2019 5,000
Contributions 60,000
Accumulated OCI(Gain/Loss) 83,950
There was no accumulated OCI at January 1, 2019. The average remaining service life of
employees is 10 years.
57. What is the pension expense that Cooper Enterprises should report for 2019?
a. €71,050
b. €110,000
c. €60,000
d. €83,950
58. What is the amount that Cooper Enterprises should report as its pension liability on its
statement of financial position as of December 31, 2019?
a. €100,000
b. €15,000
c. €105,000
d. €200,000
59. The following information is related to the pension plan of Long, Inc. for 2019.
Actual return on plan assets €200,000
Net gain on liability 82,500
Past service cost due to increase in benefits 150,000
Interest on plan assets 230,000
Interest on defined benefit obligation 362,500
Service cost 800,000
Pension expense for 2019 is
a. €1,195,000.
b. €1,165,000.
c. €1,000,000.
d. €1,082,500.
60. Presented below is pension information for Green Company for the year 2019:
Interest on plan assets €24,000
Interest on vested benefits 15,000
Service cost 30,000
Interest on defined benefit obligation 21,000
Past service cost due to increase in benefits 18,000
The amount of pension expense to be reported for 2019 is
a. €93,000.
b. €69,000.
c. €60,000.
Accounting for Pensions and Postretirement Benefits
20–11
d. €45,000.
61. Hubbard, Inc. received the following information from its pension plan trustee concerning
the operation of the company’s defined-benefit pension plan for the year ended December
31, 2019.
1/1/19 12/31/19
Defined benefit obligation £11,400,000 £11,760,000
Pension assets (at fair value) 6,000,000 6,900,000
Net (gains) and losses -0- 240,000
The service cost component of pension expense for 2019 is £840,000 and the past
service cost due to an increase in benefits is £180,000 effective January 1, 2019. The
discount rate is 10%. What is the amount of pension expense for 2019?
a. £1,800,000
b. £1,578,000
c. £1,506,000
d. £1,380,000
Use the following information for questions 62 and 63.
The following data are for the pension plan for the employees of Lockett Company.
1/1/18 12/31/18 12/31/19
Defined benefit obligation €8,100,000 €8,400,000 €11,100,000
Plan assets (at fair value) 6,900,000 9,000,000 9,900,000
AOCI – net loss -0- 1,440,000 1,500,000
Discount rate (for year) 8% 7%
Lockett’s contribution was €1,260,000 in 2019 and benefits paid were €1,125,000. Lockett
estimates that the average remaining service life is 15 years.
62. The actual return on plan assets in 2019 was
a. €900,000.
b. €765,000.
c. €600,000.
d. €465,000.
63. Assume that the actual return on plan assets in 2019 was €800,000. The gain on plan
assets in 2016 was
a. €191,000.
b. €170,000.
c. €149,000.
d. €107,000.
64. At the end of the current period, Oxford Ltd. has a defined benefit obligation of £195,000
and pension plan assets with a fair value of £110,000. The amount of the vested benefits
for the plan is £105,000. What amount related to its pension plan will be reported on the
company’s statement of financial position?
a. £5,000
b. £90,000
c. £85,000
d. £20,000
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 12
65. At the end of the current year, Kennedy Co. has a defined benefit obligation of £335,000
and pension plan assets with a fair value of £245,000. The amount of the vested benefits
for the plan is £225,000. Kennedy has an accumulated actuarial gain of £8,300. What
account and amountrelated to its pension plan will be reported on the company’s
statement of financial position?
a. Pension liability of £74,300
b. Pension liability of £90,000
c. Pension asset of £233,300
d. Pension asset of £110,000
66. At the end of the current year, Churchill Industries has a defined obligation of £433,000
and pension plan assets with a fair value of £265,000. The amount of the vested benefits
for the plan is £225,000. Churchill has an accumulated actuarial gain of £12,900. What
account and amountrelated to its pension plan will be reported on the company’s
statement of financial position?
a. Pension asset of £168,000
b. Pension liability of £109,100
c. Pension liability of £134,900
d. Pension asset of £115,900
67. For 2019, Garvey Chambers plc had pension expense of £61 million and contributed £52
million to the pension fund. Which of the following is the journal entry that Garvey
Chambers would make to record pension expense and funding?
a. Pension Expense………………………………………….. 61,000,000
Pension Asset/Liability…………………………………. 9,000,000
Cash…………………………………………………. 52,000,000
b. Pension Expense…………………………………………. 61,000,000
Pension Asset/Liability…………………………………. 9,000,000
Cash………………………………………………… 70,000,000
c. Pension Expense…………………………………………. 52,000,000
Pension Asset/Liability………………………………… 9,000,000
Cash………………………………………………… 61,000,000
d. Pension Expense………………………………………… 9,000,000
Pension Asset/Liability………………………………… 52,000,000
Cash………………………………………………… 61,000,000
Accounting for Pensions and Postretirement Benefits
20–13
68. Clarkson Co. provides the following information about its pension plan for the year 2019.
Service cost £90,000
Contribution to the plan 16,000
Actual return on plan assets 62,000
Benefits paid 40,000
Plan assets at January 1, 2019 710,000
Defined benefit obligation at January 1, 2019 810,000
Unrecognized past service cost balance at January 1, 2019 100,000
Discount rate 9%
Based on this information, what is the pension expense for 2019?
a. £108,000
b. £271,900
c. £199,000
d. £208,000
69. Carlton Co. provides the following information about its pension plan for the year 2019.
Service cost £95,000
Contribution to the plan 16,000
Actual return on plan assets 65,000
Benefits paid 40,000
Plan assets at January 1, 2019 810,000
Defined benefit obligation at January 1, 2019 910,000
Unrecognized past service cost balance at January 1, 2019 100,000
Discount rate 8%
Based on this information, what is the pension expense for 2019?
a. £210,800
b. £203,000
c. £72,800 111,000
d. £211,000
70. At January 1, 2019, Wembley Company had plan assets of €250,000 and a defined benefit
obligation of the same amount. During 2019, service cost was €27,500, the discount rate
was 10%, actual and expected return on plan assets were €25,000, contributions were
€20,000, and benefits paid were €17,500. Based on this information what would be the
defined benefit obligation for Wembley Company for 2019?
a. €277,500
b. €285,000
c. €27,500
d. €302,500
71. At January 1, 2019, Trevor Company had plan assets of €215,000 and a defined benefit
obligation of the same amount. During 2019, service cost was €22,500, the discount rate
was 10% actual and expected return on plan assets were €26,000, contributions were
€20,000, and benefits paid were €19,500. Based on this information what would be the
Defined benefit obligation for Trevor Company for 2019?
a. €263,500
b. €239,500
c. €22,500
d. €259,000
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 14
72. At January 1, 2019, Wembley Company had plan assets of €250,000 and a defined
benefit obligation of the same amount. During 2019, service cost was €27,500, the
discount rate was 10% actual return on plan assets was €25,000, contributions were
€20,000, and benefits paid were €17,500. Based on this information, what would be the
amount of plan assets on 12/31/19?
a. A debit balance of €277,500
b. A debit balance of €295,000
c. A credit balance of €7,500
d. A credit balance of €285,000
73 At January 1, 2019, Pimlico Company had plan assets of £215,000 and a defined benefit
obligation of the same amount. During 2019, service cost was £27,500, the discount rate
was 10% actual return on plan assets was £28,000, contributions were £22,000, and
benefits paid were £18,500. Based on this information, what would be the amount of plan
assets on 12/31/19?
a. A debit balance of £265,000
b. A debit balance of £5,500
c. A credit balance of £246,500
d. A credit balance of £283,500
Use the following information for questions 74 and 75.
On January 1, 2019, Newlin Co. has the following balances:
Defined benefit obligation €2,100,000
Fair value of plan assets 1,800,000
The discount rate is 10%. Other data related to the pension plan for 2019 are:
Service cost €180,000
Past service costs due to increase in benefits 60,000
Contributions 300,000
Benefits paid 105,000
Actual return on plan assets 237,000
Net gain on liability 18,000
74. The balance of the defined benefit obligation at December 31, 2019 is
a. €2,433,000.
b. €2,385,000.
c. €2,355,000.
d. €2,337,000.
75. The fair value of plan assets at December 31, 2019 is
a. €2,430,000.
b. €2,250,000.
c. €2,232,000.
d. €2,214,000.
Accounting for Pensions and Postretirement Benefits
20–15
Use the following information for questions 76 through 79.
The following information relates to the pension plan for the employees of Turner Co.:
1/1/18 12/31/18 12/31/19
Defined benefit obligation €5,580,000 €5,976,000 €8,004,000
Fair value of plan assets 5,100,000 6,240,000 6,888,000
Net (gain) or loss -0- (164,000) (96,000)
Discount rate (for year) 11% 11%
Turner estimates that the average remaining service life is 16 years. Turner‘s contribution was
$756,000 in 2019 and benefits paid were €564,000.
76. The interest expense for 2019 is
a. €537,840.
b. €607,200.
c. €657,360.
d. €880,440.
77. The actual return on plan assets in 2019 is
a. €408,000.
b. €456,000.
c. €588,000.
d. €648,000.
78. The gain or loss on plan assets in 2019 is
a. €96,000 gain.
b. €201,360 loss.
c. €230,400 loss.
d. €68,000 gain.
79. The net interest amount for 2019 is
a. €122,760 loss.
b. €30,800 gain.
c. €122,766 gain
d. €38,800 loss.
80. Dawson plc amends its defined pension plan on January 1, 2019, resulting in £420,000 of
past service cost. The company has 400 active employees, of which 100 vest immediately
(25%) and the other 300 (75%) vest in four years. The past service cost applicable to the
vested employees is £105,000 and vests immediately. The past service cost related to the
unvested employees is £315,000 and vests over five years. How much of past service
costs would Dawson include in pension expense in 2019?
a. £420,000
b. £126,000
c. £105,000
d. £168,000
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 16
81. Clarkson plc amends its defined pension plan on January 1, 2019, resulting in £520,000 of
past service cost. The company has 600 active employees, of which 120 vest immediately
(20%) and the other 480 (80%) vest in three years. The past service cost applicable to the
vested employees is £104,000 and vests immediately. The past service cost related to the
unvested employees is £416,000 and vests over five years. How much of the past service
costs would Clarkson include in pension expense in 2019?
a. £332,800
b. £520,000
c. £416,000
d. £436,800
82. Towson Ltd. has experienced tough competition, leading it to seek concessions from its
employees in the company’s pension plan. In exchange for promises to avoid layoffs and
wage cuts, the employees agreed to receive lower pension benefits in the future. As a
result, Towson amended its pension plan on January 1, 2019, and recorded past service
cost of €225,000. The average period to vesting for the benefits affected by this plan is 6
years. What is the amount of past service cost included in pension expense for 2019?
a. €37,500
b. €112,500
c. €225,000
d. €18,750
83. Brompton Ltd. is evaluating amendments to its pensions plans. Plan 1 covers its salaried
employees and Plan 2 provides benefits to its hourly workers. On January 1, 2019,
Brompton will grant employees in Plan 2 additional pension benefits of €318,000 based on
their past service. Employees in this plan have an average period to vesting of 6 years.
Plan 1 will be amended to reduce benefits by €160,000 (in exchange, employees will
receive increased contributions to the company’s defined contribution plan). Employees in
this plan have an average period to vesting of 5 years. What is the total past service cost
included in pension expense 2019?
a. €43,455
b. €158,000
c. €36,933
d. €21,000
84. Willshire Ltd. is evaluating amendments to its pensions plans. Plan 1 covers its salaried
employees and Plan 2 provides benefits to its hourly workers. On January 1, 2019,
Willshire will grant employees in Plan 2 additional pension benefits of £240,000 based on
their past service. Employees in this plan have an average period to vesting of 8 years.
Plan 1 will be amended to reduce benefits by £120,000 (in exchange, employees will
receive increased contributions to the company’s defined contribution plan). Employees in
this plan have an average period to vesting of 6 years. What is the total past service cost
included in pension expense 2019?
a. £50,000
b. £120,000
c. £25,714
d. £10,000
Accounting for Pensions and Postretirement Benefits
20–17
Use the following information for questions 85 and 86.
Foster Corporation received the following report from its actuary at the end of the year:
December 31, 2018 December 31, 2019
Defined benefit obligation €1,600,000 €1,800,000
Fair value of pension plan assets 1,380,000 1,440,000
85. The amount reported as the pension liability at December 31, 2018 is
a. € -0-.
b. €200,000.
c. €220,000.
d. €360,000.
86. The amount reported as the pension liability at December 31, 2019 is
a. €1,800,000
b. €1,600,000
c. €380,000
d. €360,000
Use the following information for questions 87 and 88.
The following information relates to Jackson, Inc.:
For the Year Ended December 31,
2018 2019
Plan assets (at fair value) €1,260,000 €1,824,000
Pension expense 570,000 450,000
Defined benefit obligation 1,620,000 1,884,000
Annual contribution to plan 600,000 450,000
Past service costs 480,000 0
87. The amount reported as the liability for pensions on the December 31, 2018 statement of
financial position is
a. € -0-.
b. €30,000.
c. €360,000.
d. €390,000.
88. The amount reported as the liability for pensions on the December 31, 2019 statement of
financial position is
a. € -0-.
b. €60,000.
c. €1,884,000.
d. €520,000.
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 18
89. Presented below is information related to Noble Inc. as of December 31, 2019.
Net gain/loss £ 90,000
Defined benefit obligation 3,600,000
Vested benefits 1,620,000
Plan assets (at fair value) 3,384,000
The amount reported as the pension liability on Noble’s statement of financial position at
December 31, 2019 is as follows:
a. £ -0-.
b. £90,000.
c. £126,000.
d. £216,000.
90. Presented below is pension information related to Waters Company as of December 31,
2019:
Defined benefit obligation €3,500,000
Plan assets (at fair value) 3,600,000
Net gain/loss 100,000
The amount to be reported as Pension Asset / Liability as of December 31, 2019 is
a. Pension Liability of €200,000.
b. Pension Asset of €200,000.
c. Pension Liability of €100,000.
d. Pension Asset of €100,000.
Use the following information for questions 91 and 92.
On January 1, 2019, Parks Co. has the following balances:
Defined benefit obligation €4,200,000
Fair value of plan assets 3,750,000
The discount rate is 10%. Other data related to the pension plan for 2019 are:
Service cost €240,000
Past service costs 54,000
Contributions 270,000
Benefits paid 225,000
Actual return on plan assets 264,000
Net gain on liability 18,000
91. The balance of the defined benefit obligation at December 31, 2019 is
a. €4,572,000.
b. €4,676,400.
c. €4,629,000.
d. €4,635,000.
92. The fair value of plan assets at December 31, 2019 is
a. €3,531,000.
b. €3,789,000.
c. €4,059,000.
d. €4,284,000.
Accounting for Pensions and Postretirement Benefits
20–19
93. Huggins Company has the following information at December 31, 2019 related to its
pension plan:
Defined benefit obligation €4,000,000
Plan assets (fair value) 4,200,000
The amount of pension asset / liability Huggins Company would recognize at December 31,
2019 is
a. Pension liability of €300,000.
b. Pension asset of €1,000,000.
c. Pension liability of €200,000.
d. Pension asset of €200,000.
94. The following pension plan information is for Farr Company at December 31, 2019.
Defined benefit obligation £8,400,000
Plan assets (at fair value) 6,150,000
Past service costs 540,000
Pension expense for 2019 3,000,000
Contribution for 2019 2,400,000
The amount to be reported as the liability for pensions on the December 31, 2019 balance
sheet is
a. £2,250,000.
b. £1,950,000.
c. £1,710,000.
d. £1,050,000.
95. At December 31, 2019, Trafalgar Corporation had a defined benefit obligation of €510,000
which included €127,000 of past service costs, and plan assets of €322,000. Based on
this information, what is the funded status of Trafalgar’s pension?
a. €322,000
b. €61,000
c. €188,000
d. €315,000
96. At December 31, 2019, Crosson Corporation had a defined benefit obligation of €620,000
which included €122,000 of past service costs, and plan assets of €347,000. Based on
this information, what is the funded status of Crosson’s pension?
a. €347,000
b. €395,000
c. €273,000
d. €151,000
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 20
97. As a result of a discontinued operation, Wimbledon Ltd. is curtailing some benefits provided
in its pension plan. It has the following data related to the plan.
Defined benefit obligation (Credit) €(1,500)
Fair value of plan assets (Debit) 1,350
Pension asset/liability € (150)
The reduction results in a €180 reduction in the defined benefit obligation (there is no
impact on the plan assets). The employees affected comprise 20% of all employees in the
plan. What journal entry would be recorded for the curtailment by Wimbledon?
a. Pension Asset/Liability 170
Pension Expense 170
b. Pension Asset/Liability 180
Pension Expense 180
c. Pension Asset/Liability 30
Pension Expense 30
d. Pension Asset/Liability 210
Pension Expense 210
98. Guzman Company discontinues an operating segment, and employees of the discontinued
segment will earn no further benefits. Using current actuarial assumptions (including
current market interest rates and other current market prices) immediately before the
curtailment, Guzman has a defined benefit obligation (000 omitted) with a net present
value of €1,000, plan assets with a fair value of €820, and net cumulative actuarial gains
of €50. The curtailment reduces the net present value of the obligation by €100 to €900.
What was the effect of the curtailment?
a. €100 gain
b. €180 loss
c. €100 loss
d. €95 gain
Multiple Choice Answers—Computational
Item
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Item
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Item
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Item
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Item
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Item
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Accounting for Pensions and Postretirement Benefits
20–21
MULTIPLE CHOICE—CPA Adapted
99. The following information pertains to Hopson Co.’s pension plan:
Actuarial estimate of defined benefit obligation at 1/1/19 £72,000
Assumed discount rate 10%
Service costs for 2019 £18,000
Pension benefits paid during 2019 £15,000
If no change in actuarial estimates occurred during 2019, Hopson’s defined benefit
obligation at December 31, 2019 was
a. £64,200.
b. £75,000.
c. £79,200.
d. £82,200.
100. Interest cost included in pension expense recognized for a period by an employer
sponsoring a defined-benefit pension plan represents the
a. shortage between the expected and actual returns on plan assets.
b. increase in the defined benefit obligation due to the passage of time.
c. increase in the fair value of plan assets due to the passage of time.
d. amortization of the discount on PSC.
101. Logan Corp., a company whose stock is publicly traded, provides a noncontributory
defined-benefit pension plan for its employees. The company’s actuary has provided the
following information for the year ended December 31, 2019:
Defined benefit obligation €600,000
Fair value of plan assets 825,000
Service cost 240,000
Interest on defined benefit obligation 24,000
Past service cost 60,000
Expected return and interest revenue on plan assets 33,000
No contributions have been made for 2019 pension cost. In its December 31, 2019
statement of financial position, Logan should report a pension asset / liability of
a. Pension liability of €600,000
b. Pension asset of €824,000
c. Pension asset of €225,000
d. Pension liability of €525,000
102. Seigel Co. maintains a defined-benefit pension plan for its employees. At each statement
of financial position date, Yeager should report a pension asset / liability equal to the
a. accumulated benefit obligation.
b. defined benefit obligation.
c. vested benefit obligation.
d. funded status relative to the defined benefit obligation.
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 22
103. Ohlman, Inc. maintains a defined-benefit pension plan for its employees. As of December
31, 2019, the fair value of the plan assets is less than the vested benefit obligation. The
defined benefit obligation exceeds the vested benefit obligation. In its balance sheet as of
December 31, 2019, Ohlman should report a liability in the amount of the
a. excess of the defined benefit obligation over the fair value of the plan assets.
b. excess of the vested benefit obligation over the fair value of the plan assets.
c. defined benefit obligation.
d. vested benefit obligation.
104. At December 31, 2019, the following information was provided by the Vargas Corp.
pension plan administrator:
Fair value of plan assets €4,500,000
Defined benefit obligation 7,200,000
What is the amount of the pension liability that should be shown on Vargas’ December 31,
2019 statement of financial position?
a. €7,200,000
b. €2,700,000
c. €1,620,000
d. €1,080,000
Multiple Choice Answers—CPA Adapted
Item
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DERIVATIONS — Computational
No. Answer Derivation
Accounting for Pensions and Postretirement Benefits
20–23
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 24
DERIVATIONS — CPA Adapted
No. Answer Derivation
Accounting for Pensions and Postretirement Benefits
20–25
EXERCISES
Ex. 20-105—Pension accounting terminology.
Briefly explain the following terms:
(a) Service cost
(b) Interest cost
(c) Past service cost
(d) Vested benefits
Solution 20-105
Ex. 20-106—Pension assets.
Discuss the following ideas related to pension assets:
(a) Actual return on plan assets.
(b) Interest revenue on plan assets.
(c) Gains and losses on plan assets.
Solution 20-106
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 26
Ex. 20-107—Measuring and recording pension expense.
Kessler, Inc. received the following information from its pension plan trustee concerning the
operation of the company’s defined-benefit pension plan for the year ended December 31, 2019:
January 1, 2019 December 31, 2019
Defined benefit obligation €2,500,000 €2,850,000
Fair value of plan assets 1,250,000 1,600,000
The service cost component for 2019 is €150,000 and past service cost is €240,000 (plan
amendment effective January 1, 2019). The company’s actual funding of the plan in 2019
amounted to €510,000. The discount rate is 8%.
Instructions
(a) Determine the pension expense to be reported in 2019.
(b) Prepare the journal entry to record pension expense and the employers’ contribution to the
pension plan in 2019.
Solution 20-107
Ex. 20-108—Measuring and recording pension expense.
Presented below is information related to Jones Department Stores, Inc. pension plan for 2019.
Service cost €520,000
Funding contribution for 2019 500,000
Discount rate 10%
Past service costs (due to benefit increase as of January 1, 2019) 100,000
Defined benefit obligation (at beginning of period) 480,000
Fair value of plan assets (at beginning of period) 360,000
Instructions
(a) Compute the amount of pension expense to be reported for 2019. (Show computations.)
(b) Prepare the journal entry to record pension expense and the employer’s contribution for
2019.
Accounting for Pensions and Postretirement Benefits
20–27
Solution 20-108
Ex. 20-109— Recording pension asset / liability.
Miles Co. had the following selected balances at December 31, 2019:
Defined benefit obligation €4,700,000
Fair value of plan assets 4,340,000
Instructions
Calculate the pension asset / liability to be recorded at December 31, 2019.
Solution 20-109
Ex. 20-110—Pension plan calculations.
The following information is for the pension plan for the employees of Payne, Inc.
12/31/18 12/31/19
Defined benefit obligation £3,040,000 £4,000,000
Fair value of plan assets 3,080,000 3,520,000
Discount rate 8% 8%
Payne estimates that the average remaining service life is 15 years. Payne’s contribution was
£520,000 in 2019 and benefits paid were £280,000.
Instructions
(a) Calculate the interest cost for 2019.
(b) Calculate the actual return on plan assets in 2019.
(c) Calculate the gain or loss in 2019.
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 28
Solution 20-110
Ex. 20-111—Pension plan calculations and entries.
Selected Information about the pension plan of Roman Co. is as follows:
12/31/18 12/31/19
Defined benefit obligation €4,800,000 €5,020,000
Past service costs (Plan amendment January 1, 2019) 500,000
Fair value of plan assets 4,650,000 4,800,000
Pension expense 1,000,000 1,420,000
Contribution 985,000 1,350,000
Discount rate (for year) 9% 8%
Instructions
(a) Calculate the pension asset / liability at December 31, 2019.
(b) Prepare the entry for 2019 to record the pension expense and contribution.
Solution 20-111
Accounting for Pensions and Postretirement Benefits
20–29
Ex. 20-112—Pension plan calculations and journal entry.
On January 1, 2019, McGee Co. had the following balances:
Defined benefit obligation €7,200,000
Fair value of plan assets 7,200,000
Other data related to the pension plan for 2019:
Service cost 315,000
Contributions to the plan 459,000
Benefits paid 450,000
Actual return on plan assets 432,000
Discount rate 6%
Instructions
(a) Determine the defined benefit obligation at December 31, 2019. There are no net gains or
losses.
(b) Determine the fair value of plan assets at December 31, 2019.
(c) Calculate pension expense for 2019.
(d) Prepare the journal entry to record pension expense and the contributions for 2019.
Solution 20-112
Test Bank for Intermediate Accounting: IFRS Edition, 3e
20 – 30
PROBLEMS
Pr. 20-113—Measuring, recording, and reporting pension expense and liability.
Tucker, Inc. on January 1, 2019 initiated a noncontributory, defined–benefit pension plan that
grants benefits to its 100 employees for services rendered in years prior to the adoption of the
pension plan. The average remaining service life per employee is 12 years. An actuarial
consulting firm has indicated that the present value of the defined benefit obligation on January 1,
2019 was €5,040,000. On December 31, 2019 the following information was provided concerning
the pension plan’s operations for its first year.
Employer’s contribution at end of year €1,600,000
Service cost 600,000
Defined benefit obligation 6,043,200
Plan assets (at fair value) 1,600,000
Discount rate 8%
Instructions
(a) Compute the pension expense recognized in 2019.
(b) Prepare the journal entries to reflect accounting for the company’s pension plan for the year
ended December 31, 2019.
(c) Indicate the amounts that are reported on the income statement and the statement of
financial position for 2019.
Solution 20-113
Accounting for Pensions and Postretirement Benefits
20–31
Pr. 20-114—Measuring and recording pension expense.
Presented below is information related to the pension plan of Zimmer Inc. for the year 2019.
1. The service cost related to pension expense is £240,000 using the defined benefits approach.
2. The defined benefit obligation and plan assets at the beginning of the year are £300,000 and
£80,000, respectively. The discount rate is 10%.
3. The plan was modified on January 1, 2019 resulting in past service cost of £140,000.
4. The contribution made to the pension fund in 2019 was £231,000.
Instructions
(a) Determine the pension expense to be reported on the income statement for 2019. (Round
all computations to nearest dollar.)
(b) Prepare the journal entry(ies) to record pension expense for 2019.
Solution 20-114
Pr. 20-115—Preparing a pension work sheet.
The accountant for Marlin Corporation has developed the following information for the company’s
defined-benefit pension plan for 2019:
Service cost €500,000
Actual return on plan assets 260,000
Annual contribution to the plan 900,000
Past service cost, effective January 1, 2019 105,000
Benefits paid to retirees 60,000
Discount rate 10%
Accumulated OCI—Gain/Loss, January 1, 2019 0%
Instructions
(a) Using the above information for Marlin Corporation, complete the pension work sheet for
2019. Indicate (credit) entries by parentheses. Calculated amounts should be supported.
(b) Prepare the journal entry to reflect the accounting for the company’s pension plan for the
year ending December 31, 2019.
Pr. 20-115 (cont.) Marlin Corporation
Pension Work Sheet—2019
——————————————————————————————————————————————————————————
General Journal Entries Memo Entries
—————————————————————————————————————————————————————————
Annual Defined
Pension OCI Pension Asset/ Benefit Plan
Expense Cash Gain/Loss Liability Obligation Assets
——————————————————————————————————————————————————————————
Bal., Dec. 31, 2018 (1,000,000) (3,750,000) 2,750,000
——————————————————————————————————————————————————————————
Past Service Cost
——————————————————————————————————————————————————————————
Adjusted Bal.
——————————————————————————————————————————————————————————
Service Cost
——————————————————————————————————————————————————————————
Interest Expense
——————————————————————————————————————————————————————————
Interest Revenue
——————————————————————————————————————————————————————————
Asset Gain/Loss
——————————————————————————————————————————————————————————
Contributions
——————————————————————————————————————————————————————————
Benefits
——————————————————————————————————————————————————————————
Journal entry
for 2019 _______
Balance, Dec. 31, 2019
20 – 32 Test Bank for Intermediate Accounting: IFRS Edition
Solution 20-115 Marlin Corporation
Pension Work Sheet—2019
Test Bank for Intermediate Accounting: IFRS Edition
20 – 34
Solution 20-115 (cont.)
Pr. 20-116 – Pension Worksheet – Missing Amounts
The accounting staff of Elias Inc. has prepared the following pension worksheet. Unfortunately,
several entries in the worksheet are not readable. The company has asked your assistance in
completing the worksheet and completing the accounting tasks related to the pension plan for
2019.
General Journal Entries
Memo Record
Items
Annual
Pension
Expense
Cash
OCI—
Gain/Loss
Pension
Asset/
Liability
Defined
Benefit
Obligation
Plan
Assets
Balance, Jan. 1,
2019
1,700
(4,200)
2,500
PSC
(1)
(1)
Adj. Bal.
(5,000)
Service cost
(2)
(600)
Interest expense
(3)
(500)
Interest revenue
(4)
(5)
Asset gain/loss
25
(6)
Contributions
(1,200)
1,200
Benefits
300
(300)
Liability increase
(7)
Journal entry
(8)
(9)
(10)
(11)
Acc. OCI,
Jan. 1, 2016
Balance, Dec. 31, 2016
(12)
1,585
5,465
3,880
Instructions
(a) Determine the missing amounts in the 2019 pension worksheet, indicating whether the
amounts are debits or credits.
(b) Prepare the journal entry to record 2019 pension expense for Elias Inc.
Accounting for Pensions and Postretirement Benefits
20–35
SOLUTION 20-116
Test Bank for Intermediate Accounting: IFRS Edition
20 – 36
Pr. 20-117 – Pension Worksheet
Howard Corp. sponsors a defined-benefit pension plan for its employees. On January 1, 2019,
the following balances related to this plan.
Plan assets (fair value) £450,000
Defined benefit obligation 600,000
Pension asset/liability 10,000 Cr.
As a result of the operation of the plan during 2019, the actuary provided the following additional
data at December 31, 2019.
Service cost for 2019 £ 75,000
Actual return on plan assets in 2019 45,000
Past service cost, effective Jan. 1 120,000
Contributions in 2019 115,000
Benefits paid retirees in 2019 70,000
Discount rate 8%
Average remaining service life of active employees 10 years
Instructions
(a) Compute pension expense for Howard Corp. for the year 2019 by preparing a pension
worksheet.
(b) Prepare the journal entry for pension expense.
(a) Howard Corp.
Pension Worksheet—2019
20 – 38 Test Bank for Intermediate Accounting: IFRS Edition
SOLUTION 20-117 (Continued)