Chapter 19: Accounting for Postretirement Benefits
48. On January 1, 2015, a company had $84,000 of unrecognized prior service cost. The years-of-future-service method of
amortization is used. The company has seven employees, as indicated below:
Expected Years of
Employee
Future Service
A
3
B
5
C
5
D
6
E
6
F
8
G
9
What amount of prior service cost should be included in pension expense for 2015?
a.
$2,000
b.
$9,333
c.
$12,000
d.
$14,000
d
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ACCT.WHAL.16.19.4 – LO: 19.4
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
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49. Vested benefits are
a.
estimated benefits.
b.
not contingent on future service to a company.
c.
to be received as a lump sum payment.
d.
lost when employment is terminated.
50. Which of the following items attributable to a defined benefit pension plan would be recognized on a company’s
balance sheet?
Projected Benefit
Pension Plan
Prepaid Pension
Obligation
Assets
Costs
I.
Yes
Yes
Yes
II.
Yes
Yes
No
III.
Yes
No
No
IV.
No
No
Yes
a.
I
b.
II
c.
III
d.
IV
51. Current GAAP requires that the net gain or loss from a settlement or curtailment be included in the
a.
statement of retained earnings.
b.
income statement.
c.
balance sheet.
d.
statement of cash flows.
52. The Pension Benefit Guaranty Corporation’s purpose is to
a.
allow companies to exit bankruptcy.
b.
insure defined contribution pension plans.
c.
insure defined benefit pension plans.
d.
guarantee taxpayers that the federal government will pay pension benefits.
53. ERISA (Pension Reform Act of 1974) provides guidance for
a.
accumulated benefit obligation.
b.
actual return on plan assets.
c.
minimum funding during the year.
d.
projected benefit obligations.
54. GAAP requires that a company record a loss and liability for termination benefits when
a.
the amount can be reasonably estimated.
b.
the employee accepts the offer.
c.
the corporation extends the offer.
d.
both a and b.
55. A company must fund its pension plan each year at an amount that at least equals service cost for the year plus the
amount needed to amortize any underfunding over a
a.
maximum of three years.
b.
maximum of five years.
c.
minimum of three years but not more than six years.
d.
maximum of seven years.
56. If a company uses the indirect method to report cash flows, it
a.
subtracts any increase in its accrued pension cost from net income.
b.
subtracts any increase in accrued pension cost as an investing activity.
c.
adds any increase in its accrued pension cost to net income.
d.
adds any increase in accrued pension cost as a financing activity.
57. Disclosures for vested benefits
a.
are not required.
b.
are related to the projected benefit obligation.
c.
are related to the accumulated benefit obligation.
d.
are related to the plan assets.
58. The expense for other postretirement benefits, such as health care benefits, dental benefits, and eye care benefits,
currently is accounted for
a.
on an accrual basis.
b.
on a cash basis.
c.
on either a cash basis or an accrual basis; both methods are acceptable.
d.
by footnote disclosure only.
59. Which of the following statements is true?
a.
Funding for postretirement health care benefits is legally required, and contributions are tax deductible.
b.
Funding for postretirement health care benefits is legally required, but contributions are not tax deductible.
c.
Funding for postretirement health care benefits is not legally required, and contributions are not tax deductible.
d.
Funding for postretirement health care benefits is not legally required, but contributions are tax deductible.
60. Which of the following statements regarding postretirement benefits other than pensions is true?
a.
A liability for postretirement benefits other than pensions is not required to be reported on the balance sheet.
b.
The interest component of the net postretirement benefit expense is based on the accumulated postretirement
benefit obligation (APBO).
c.
The interest component of the net postretirement benefit expense is based on the expected postretirement
benefit obligation (EPBO).
d.
An intangible asset for other postemployment benefits (OPEB) is required to be reported on a company’s
balance sheet.
61. Postemployment benefits are provided to former employees
a.
after employment.
b.
after retirement.
c.
before retirement.
d.
after employment but before retirement.
62. Which of the following is typically the most significant OPEB (other postemployment benefits)?
a.
life insurance
b.
health care
c.
legal service
d.
tuition assistance
63. Which of the following disclosures are required by GAAP for OPEBs?
a.
the assumed healthcare cost trend rates
b.
the amounts of securities included in the plan assets
c.
the types of securities included in the plan assets
d.
All of these answer choices are required
64. With respect to the process of assigning the cost of postretirement benefits to periods of employee service, the
attribution period starts on the
a.
hiring date.
b.
vesting date.
c.
termination date.
d.
retirement date.
65. With respect to the process of assigning the cost of postretirement benefits to periods of employee service, attribution
period ends at
a.
the expected retirement date.
b.
the actual retirement date.
c.
the full eligibility date.
d.
either a or b.
66. A list of terms (a–i) and a list of descriptive phrases (1-9) related to pension accounting are provided below:
a.
actuary
b.
expected return on plan assets
c.
defined benefit plan
d.
noncontributory plan
e.
prior service cost
f.
service cost
g.
accumulated benefits obligation
h.
pension expense
i.
Pension Reform Act of 1974 (ERISA)
____
1.
Amount normally recorded at the end of a period and often at the time of funding,
although often not equal to the amount of funding.
____
2.
Uses compound interest techniques with projections of future events to estimate
components of pension costs.
____
3.
Specifically states either postretirement employee benefits or the method of
determining such benefits by formula.
____
4.
Is the primary component of pension cost.
____
5.
Generally requires service costs to be funded in the current year.
____
6.
Places the entire pension cost on the employer.
____
7.
A negative component of pension cost.
____
8.
The actuarial present value of all the benefits attributed by the pension benefit
formula to employee service rendered before a specified date,
____
9.
Is the amount actuarially assigned to years before the inception of the plan.
1.
h
4.
f
7.
2.
a
5.
i
8.
3.
c
6.
d
9.
Required:
Match each item to its descriptive phrase by placing the appropriate letter in the space provided.
67. On December 31, 2015, Clemson Company determined that the 2015 service cost on its defined benefit pension plan
was $245,000. At the beginning of 2015, Clemson had pension plan assets totaling $990,000 and a projected benefit
obligation of $750,000. Its discount rate and expected long-term rate of return on plan assets for 2015 were both 12%.
Required:
1) Compute the amount of Clemson’s pension expense for 2015.
2) Record the journal entries for Clemson’s 2015 pension expense if it funds the pension plan in the amount of (a)
$225,000 and (b) $210,000.
68. During 2015, the Electric Company experienced a difference between its expected and actual projected benefit
obligation. At the beginning of 2016, Electric’s actuary notified them of the following accumulated information
related to their plan:
Net loss (1/1/2016)
$ 165,000
Actual projected benefit obligation (1/1/2016)
356,000
Fair value of plan assets (1/1/2016)
$ 865,000
On December 31, 2016, Electric is in the process of calculating the net gain or loss to include in its pension expense
for 2016. The average remaining service life of its employees is 10 years and there are no differences between the
company’s expected and annual rate of return on plan assets in 2016.
Required:
Compute the amount of the net gain or loss to include in the pension expense for 2016. Note whether it is an addition
or subtraction to the pension expense.
Loss at beginning of 2016
$ 165,000
Excess loss
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Bloom’s: Analyzing
69. The following information is provided regarding a company’s pension plan:
Service cost
$ 640,000
Projected benefit obligation, Jan. 1
4,500,000
Fair value plan assets, Jan. 1
3,750,000
Amortization of unrecognized prior service cost for the year
250,000
Interest cost
8%
Employer contribution to fund
845,000
Expected (and actual) return on plan assets
10%
Required:
a.
Prepare the December 31 journal entry to record pension expense.
b.
Explain the difference between “interest cost” and the “expected return on plan assets.”
Pension Expense*
Prepaid/Accrued Pension Cost
Cash
*Service cost
obligation
(0.08 × $4,500,000)
Amortization of prior service costs
Pension expense
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ACCT.WHAL.16.19.3 – LO: 19.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
70. Teresa Company had the following information related to its pension plan:
Beginning of
2016
2017
2018
Projected benefit obligation
$6,000
$7,990
$9,200
Plan assets
8,400
10,300
8,800
Net loss reported by actuary
1,990
For simplicity, an average remaining service life of 3 years is always used.
An additional net loss of $1,990 was reported as of January 1, 2017 (see table). This amount has been included in the
January 1, 2017, projected benefit obligation balance.
Required:
Compute the amount of loss that should be included in pension expense in:
a.
2017
b.
2018
a.
b.
71. Karen Company began a defined benefit pension plan on January 1, 2016. No prior service credit was granted to
employees. Service costs amounted to $34,000 in 2016 and $37,000 in 2017. All contributions to the fund were made
at the end of the year. A 10% discount rate was used. The expected (and actual) rate of return of plan assets was 12%.
Required:
Prepare journal entries for December 31, 2016 and 2017, assuming:
a.
Funding equaled expense.
b.
$31,000 was funded each year.
c.
$38,000 was funded each year.
a.
2016:
Pension Expense
Cash
2017:
Pension Expense
($37,000 + $3,400 − $4,080)
Cash
b.
2016:
Pension Expense
Cash
Prepaid/Accrued Pension Cost
2017:
Pension Expense
($37,000 + $3,400 − $3,720)
Cash
Prepaid/Accrued Pension Cost
c.
2016:
Pension Expense
Prepaid/Accrued Pension Cost
Cash
2017:
Pension Expense
($37,000 + $3,400 − $4,560)
Prepaid/Accrued Pension Cost
Cash
1
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ACCT.WHAL.16.19.3 – LO: 19.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
72. The Donna Company adopted a defined benefit pension plan on January 1, 2016, and prior service credit was granted
to employees. As of January 1, 2016, the prior service cost is $68,250. The unrecognized prior service cost is
amortized by the straight-line method over the remaining 15-year service life of the company’s active employees.
Funding for the pension plan was $170,745 and $186,933 at December 31, 2016 and 2017, respectively.
2016
2017
Annual service cost
$161,877
$178,065
Discount (interest) rate
8%
8%
Expected (and actual) return on plan assets
10%
10%
Required:
Prepare the journal entries to record net periodic pension expense and the funding as of December 31, 2016 and 2017.
Show computations and round answers to the nearest dollar.
12/31/2016
Pension Expense ($161,877 + $5,460* + $4,550**)
Cash
Prepaid/Accrued Pension Cost
*$68,250 × .08 = $5,460
**$68,250/15 years = $4,550
12/31/2017
Pension Expense
($178,065 + $18,847* − $17,075** + $4,550)
Prepaid/Accrued Pension Cost
2,546
Cash
*.08 × ($68,250 + $5,460 + $161,877) = $18,847
**.10 × $170,745 = $17,075
1
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ACCT.WHAL.16.19.3 – LO: 19.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
73. Jennifer Corp’s defined benefit pension plan had an amendment as of January 1, 2016, that retroactively included
benefits of $1,500,000. The remaining service life of the employees impacted by this change is 10 years. Jennifer uses
the straight-line method to amortize the prior service cost.
As of January 1, 2016, Jennifer had the following information related to its pension plan, including adjustments for
the plan amendment:
Accrued/prepaid pension cost (credit)
$3,790,000
Projected benefit obligation
5,200,000
Accumulated other comprehensive income (debit)
1,500,000
Fair value of plan assets
1,410,000
Interest (discount) rate
10%
Expected rate of return on plan assets
12%
The actuary reported service cost of $600,000 in both 2016 and 2017. Annual payments to retirees totaled $90,000.
The trustee of the plan assets reported the actual rate of return to be 11% in 2016.
Jennifer’s annual year-end contribution to the plan equals the current year’s service cost less actual return on plan
assets plus interest growth of the projected benefit obligation and amortization of prior service costs and/or gains and
losses as calculated for pension expense.
Required:
a.
Compute Jennifer’s 2016 contribution.
b.
Compute Jennifer’s 2016 pension expense.
c.
Prepare the journal entry to record the pension expense and pension contribution.
d.
Compute the December 31, 2016 balance in Pension Benefit Obligation.
e.
Compute the December 31, 2016 balance in Plan Assets.
f.
Prepare the adjusting journal entry to record the plan’s adjustment to other comprehensive income at
December 31, 2016.
g.
Is Jennifer’s plan overfunded or underfunded, and by how much, as of December 31, 2016?
a.
Service cost
Interest cost (10% × $5,200,000)
Actual return on plan assets (11% × $1,410,000)
Amortize prior service cost ($1,500,000/10 years)
2016 contribution
b.
Service cost
Interest cost
Expected return (12% × $1,410,000)
Amortize prior service cost
2016 pension expense
c.
Pension Expense
Accrued/Prepaid Pension Cost
Cash
1,114,900
d.
Beginning balance
Service cost
Interest cost
Projected benefit obligation, December 31, 2016
Expected return on assets ($1,410,000 × .12)
74. The following information is related to a company’s pension plan:
Projected benefit obligation
$5,000
Accumulated benefit obligation
4,000
Plan assets (fair value)
3,000
Accrued/prepaid pension cost
800
Prior service cost
1,800
Required:
a.
Prepare the adjusting journal entry to update the pension liability.
b.
Assume that instead of Accrued/Prepaid Pension Cost having a credit balance of $800, it
had a $600 debit balance. Prepare the adjusting journal entry to record the pension liability.
Other Comprehensive Income
Accrued/Prepaid Pension Cost*
* Projected benefit obligation
Plan assets
Ending accrued/prepaid pension cost
Unfunded accrued pension cost, beginning
balance
Adjustment
b.
Other Comprehensive Income
Accrued/Prepaid Pension Cost*
* Projected benefit obligation
Plan assets
Ending accrued/prepaid pension cost
Beginning accrued/prepaid pension cost
Adjustment
1
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ACCT.WHAL.16.19.3 – LO: 19.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing