CHAPTER 19: ACCOUNTING FOR POSTRETIREMENT BENEFITS
1. Under contributory plans the employees bear the majority of the risks of the plan and contribute towards the plan with
deductions from their salaries.
a.
True
b.
False
True
1
Easy
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2. The defined benefit plan is a type of plan in which the employer’s contribution into the pension fund is based on a
formula.
a.
True
b.
False
False
1
Easy
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3. The corridor is defined as 10% of the greater of the beginning of the year projected benefit obligation or the end of the
year fair value of the plan.
a.
True
b.
False
False
1
Easy
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4. The vested benefit obligation is the present value of the benefits the employee is entitled to receive even if the
employee is no longer employed by the company.
a.
True
b.
False
True
1
Easy
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5. To improve usefulness of defined pension plans, GAAP requires disclosure of reconciliations of the beginning and
ending amounts of the projected benefit obligation, including the amounts of the service cost, interest cost, actuarial
gains and losses, benefits paid, and plan amendments.
a.
True
b.
False
True
1
Easy
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6. In June of 2011, IASB amended IAS 19, Employee Benefits, changing its method of accounting for pensions in order to
make the accounting for pensions similar under U.S. GAAP and IFRS.
a.
True
b.
False
False
1
Easy
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7. In deciding how to recognize prior period cost, accounting regulators opted to recognize the liability and reduce other
comprehensive income, then amortize the prior service cost as a component of pension expense. The liability is
reduced and other comprehensive income is increased as the prior service amount is amortized. This method was
chosen in response to constituent arguments even though it violates the matching concept .
a.
True
b.
False
True
1
Easy
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8. Accounting for prior service cost prospectively would violate the matching concept because all the services performed
by the employees were completed in previous periods.
a.
True
b.
False
True
1
Easy
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9. GAAP requires that a company accrue the cost of other post-retirement benefits (OPRBs) during the periods in which
its employees earn the benefits.
a.
True
b.
False
True
1
Easy
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10. Other postretirement benefits are provided to former employees after employment.
a.
True
b.
False
False
1
Easy
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11. An Internal Revenue Code rule that impacts the design of pension plans is that:
a.
employee contributions to the pension fund are not taxable to the employee until pension benefits are actually
received.
b.
pension fund earnings are taxable.
c.
employer contributions to the pension fund are not taxable to the employee at the time pension benefits are
actually received.
d.
all employer pension expenses are deductible for income tax purposes.
a
1
Easy
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12. Vested benefits are
a.
estimated benefits.
b.
benefits to be received as a lump-sum payment.
c.
benefits that will be lost when employment is terminated.
d.
benefits the employee has the right to receive even if the employment is terminated.
d
1
Easy
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13. A pension plan provides for future retirement income based on the employee’s earnings and length of service with the
company. This type of pension plan is termed a
a.
contributory plan.
b.
defined contribution plan.
c.
noncontributory plan.
d.
defined benefit plan.
d
1
Easy
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14. The accumulated benefit obligation (ABO) is equal to the
a.
actuarial present value of all benefits earned as of a specified date, both vested and nonvested, by employees
using current salary levels in the pension plan formula.
b.
actuarial present value of all benefits earned as of a specified date, both vested and nonvested, by employees
using anticipated future salary levels in the pension plan formula.
c.
difference between the annual pension expense and the amount actually funded during the year.
d.
actuarial present value of benefits attributed by the pension plan formula to services rendered by employees
during the current year.
a
1
Moderate
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15. The projected benefit obligation (PBO) is equal to the
a.
actuarial present value of all benefits earned as of a specified date, both vested and nonvested, by employees
using current salary levels in the pension plan formula.
b.
difference between the annual pension expense and the amount actually funded during the year.
c.
actuarial present value of all benefits earned as of a specified date, both vested and nonvested, by employees
using anticipated future salary levels in the pension plan formula.
d.
actuarial present value of benefits attributed by the pension plan formula to services rendered by employees
during the current year.
c
1
Easy
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16. Which of the following statements is true regarding a defined contribution pension plan?
a.
The pension benefits to be received by the employee during retirement are defined in the plan.
b.
Defined contribution plans have the more complex accounting issues than defined benefit plans.
c.
Defined contribution plans do not define the benefits that the pension plan must pay to retired employees.
d.
Employers that use defined contribution plans are assuming more risks than employers that use defined benefit
plans.
c
1
Easy
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17. Which of the following statements is true regarding a defined benefit pension plan?
a.
Defined benefit plans are relatively easy to handle from an accounting perspective.
b.
Employers that use defined benefit plans are assuming more risks than employers that use defined contribution
plans.
c.
Defined benefit plans require an employer to contribute a defined sum each period to a pension fund.
d.
A defined benefit plan requires the employer to fund the plan each year for an amount equal to the pension
expense.
b
1
Easy
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18. GAAP for pension plans requires companies with defined benefit pension plans to
a.
recognize pension expense based on accrual-basis concepts.
b.
recognize pension expense as an amount equal to the actual cash paid to retired employees for the current year.
c.
recognize a pension liability based on the projected benefit obligation concept.
d.
disclose annual pension cost in a footnote only; pension cost was not required to be reported on the income
statement.
a
1
Easy
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19. Which of the following statements is true concerning prior service cost?
a.
Prior service costs are the costs of retroactive benefits.
b.
Prior service cost is reported as a liability at the date of the plan amendment.
c.
Prior service cost is reported as a negative element of other comprehensive income at the date of the plan
amendment.
d.
All of these answer choices are correct.
d
1
Easy
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20. Which of the following is not one of the pension expense components that a company recognizes?
a.
b.
c.
d.
d
1
Easy
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21. The corridor is defined as
a.
1% of the greater of the actual projected benefit obligation or the fair value of the plan assets.
b.
5% of the greater of the actual projected benefit obligation or the fair value of the plan assets.
c.
10% of the greater of the actual projected benefit obligation or the fair value of the plan assets.
d.
15% of the greater of the actual projected benefit obligation or the fair value of the plan assets.
c
1
Easy
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22. In June 2011, the IASB amended IAS 19, Employee Benefits, and significantly changed the method of accounting for
defined benefit plan pensions. Regarding these changes, which of the following statements is false?
a.
Prior to this amendment, the basic principles of accounting for defined benefit plans under IFRS were the
same as U.S. GAAP.
b.
Under IAS 19, prior service cost is immediately recognized on the income statement as an expense, while
under U.S. GAAP prior service cost is recognized in other comprehensive income and reported as a
component of accumulated other comprehensive income on the balance sheet.
c.
The changes in the amendment to IAS 19 make it less likely that GAAP will change to converge with IFRS for
pension accounting.
d.
The major result of the IASB amendments was to remove many of the smoothing devices in pension
accounting.
c
Moderate
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23. In the computation of pension expense, interest cost is the
a.
expected increase in the plan assets due to investing activities.
b.
increase in the projected benefit obligation due to the passage of time.
c.
actuarial present value of benefits.
d.
expected return on plan assets.
b
1
Easy
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24. Which of the following pension-related definitions is not correct?
a.
Vested benefits are payments that are not contingent on the employee’s continuing in the service of the
employer.
b.
Present value is the current worth of an amount or amounts payable or receivable in the future.
c.
Actuarial assumptions are those made by actuaries concerning future events affecting pension costs.
d.
Service cost is the amount paid annually to a funding agency under an unfunded pension plan.
d
1
Easy
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25. Benefits for which the employee’s right to receive a present or future pension benefit is no longer contingent on
remaining in the service of the employer are called
a.
vested benefits.
b.
accumulated benefits.
c.
periodic benefits.
d.
prior service benefits.
a
1
Easy
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26. The Lucas Company offers employees a defined contribution pension plan. In 2015, Lucas contributed $175,000 to
the plan, which paid $195,000 to retired employees. Which of the following statements is true?
a.
Lucas will record an accrued liability of $20,000.
b.
Lucas will report pension expense of $175,000.
c.
Lucas will recognize prior service cost of $20,000.
d.
Lucas will recognize actuarial gains and losses on the plan over current and future periods.
b
1
Moderate
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27. The cost of retroactive benefits granted in a plan amendment or at the initial adoption of a pension plan is called
a.
accumulated benefit cost.
b.
service cost benefits.
c.
prior service cost.
d.
vested benefits.
c
1
Easy
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28. Which of the following would not be a component of pension expense?
a.
prior service cost amortization
b.
interest cost
c.
deferred compensation
d.
return on assets
c
1
Easy
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29. Disclosures for a defined benefit pension plan should include which of the following?
I.
number of beneficiaries
II.
reconciliation of the ending value of the projected benefit obligation
III.
reconciliation of the ending fair value of the plan assets
IV.
the composition of plan assets
V.
the discount rate used
VI.
expected long-term rate of return on plan assets
a.
I, II, III, IV
b.
I, III, V, VI
c.
II, III, V, VI
d.
III, IV, V, VI
c
1
Easy
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30. Which of the following is not a component of pension expense to be reported on a company’s income statement?
a.
interest cost
b.
unrecognized past service cost
c.
service cost
d.
expected return on plan assets
b
1
Easy
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31. If an employer were to account for a defined benefit pension plan on the cash basis, it would be a violation of the
a.
going-concern assumption.
b.
accrual concept.
c.
separate entity concept.
d.
historical accounting.
b
1
Easy
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32. Which statement is false?
a.
In the computation of pension expense, a negative return on plan assets can be added.
b.
The amount of prior service cost is not included as an asset or a liability.
c.
Interest cost is equal to the projected benefit obligation at the end of the period multiplied by the discount rate
used by the company.
d.
A lower-than-expected mortality rate creates a pension loss to a company.
c
1
Easy
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33. Current GAAP regarding employers’ accounting for defined benefit pension plans defines a pension plan as
being underfunded at the end of the period when the
a.
fair value of plan assets exceeds the projected benefit obligation.
b.
projected benefit obligation exceeds the fair value of plan assets.
c.
accumulated benefit obligation exceeds the fair value of the plan assets.
d.
fair value of the plan assets exceed the accumulated benefit obligation.
b
1
Easy
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34. Code:
A =
amortization of unrecognized prior service cost
B =
interest cost
C =
gain or loss (to the extent recognized)
D =
service cost
E =
expected return on plan assets
F =
pension expense
Which equation would be correct for the calculation of pension expense?
a.
F = D + B − E + A ± C
b.
F = B + D ± A ± C + E
c.
F = D − B ± C − E ± A
d.
F = B ± C − E − D ± A
a
1
Moderate
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35. If a pension plan amendment is adopted and retroactive benefits are granted to employees, the amount of the prior
service cost at the date of grant is accounted for
a.
as an intangible asset and liability that are recognized on the plan amendment date.
b.
as a prior period adjustment for the total amount of the prior service cost that is reported on the statement of
retained earnings.
c.
as the total amount of the prior service cost that is recognized as an expense on the current period’s income
statement.
d.
initially as an unamortized amount to be included in the computation of pension expense over future periods.
d
1
Moderate
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36. A company’s pension expense includes all of the following items except
a.
service cost.
b.
employer’s contribution to the pension fund.
c.
amortization of unrecognized prior service cost.
d.
interest cost on the projected benefit obligation.
b
1
Moderate
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37. Amortization of any net gain or loss is included in pension expense of a given year if at the
a.
end of the year, the cumulative net gain or loss exceeds 10% of the greater of the actual projected benefit
obligation or the fair value of the plan assets.
b.
beginning of the year, the cumulative net gain or loss exceeds 10% of the greater of the actual accumulated
benefit obligation or the fair value of the plan assets.
c.
end of the year, the cumulative gain or loss exceeds 10% of the greater of the actual accumulated benefit
obligation or the fair value of the plan assets.
d.
beginning of the year, the cumulative gain or loss exceeds 10% of the greater of the actual projected benefit
obligation or the fair value of the plan assets.
d
1
Moderate
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38. Gage began a defined benefit pension plan on January 1, 2015. During 2015, the service cost was $450,000. Gage
contributed $450,000 to the pension plan for 2015. The actuary said the projected benefit obligation at December 31,
2015 was $450,000. As of December 31, 2015, what statements can Gage make about the pension plan?
I.
The pension plan is fully funded.
II.
Gage does not need to report a liability regarding the pension plan at December 31, 2015.
a.
I
b.
II
c.
both I and II
d.
neither I nor II
c
1
Moderate
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39. In 2015, the Rachel Company initiated a defined benefit pension plan. It recorded $240,000 as pension expense and
paid $280,000 to a funding agency. As a result, Rachel will report
a.
pension assets of $280,000 and pension liabilities of $240,000.
b.
an accrued liability of $50,000.
c.
service cost of $280,000 and unfunded prior service cost of $40,000.
d.
prepaid pension cost of $40,000.
d
1
Moderate
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40. The Maggie Company has a defined benefit pension plan for its employees. The following information pertains to the
pension plan as of December 31, 2015:
Projected benefit obligation, January 1, 2015
$1,650,000
Service cost, 2015
850,000
Interest cost, 2015
125,000
Payments to retired employees
95,000
Actual return on plan assets
109,600
The amount of the December 31, 2015, projected benefit obligation is
a.
$2,515,400.
b.
$2,270,400.
c.
$2,530,000.
d.
$2,420,400.
c
1
Moderate
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41. Given the following information
2015
2016
Service cost
$20,000
$ 24,000
Plan assets at beginning of year
235,000
Projected benefit obligation at beginning of
year
250,000
Discount rate =
9%
Actual and expected rate of return on plan assets =
7%
What is pension expense for 2016?
a.
$17,950
b.
$30,050
c.
$16,850
d.
$24,000
b
1
Challenging
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42. The Peanut Company has a defined benefit pension plan for its employees. The following information pertains to the
pension plan:
Projected benefit obligation, December 31, 2015
$1,680,000
Fair value of plan assets, December 31, 2015
1,739,000
Accrued/prepaid pension cost (asset), December 31, 2014
51,300
The December 31, 2015 adjusting journal entries include a
a.
debit to Accrued/Prepaid Pension Cost for $7,700.
b.
debit to Other Comprehensive Income for $7,700.
c.
credit to Other Comprehensive Income for $110,300.
d.
credit to Accrued/Prepaid Pension Cost for $110,300.
a
1
Moderate
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Exhibit 19-01
Marley Co. has an underfunded prepaid/accrued pension cost of $2,000 (debit balance) at December 31, 2015. The
following information pertains to 2016:
Pension expense
$320,000
Projected benefit obligation, December 31, 2015
840,000
Contributions
330,000
Plan assets (fair value), December 31, 2015
810,000
43. Refer to Exhibit 19-1. The balance in Prepaid/Accrued Pension Cost at December 31, 2016, should be
a.
$30,000 debit.
b.
$30,000 credit.
c.
$8,000 credit.
d.
$10,000 credit.
b
1
Moderate
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44. Refer to Exhibit 19-1. The December 31, 2016, adjusting entry should be
a.
Other Comprehensive Income 30,000
Accrued/Prepaid Pension Cost 30,000
b.
Accrued/Prepaid Pension Cost 30,000
Other Comprehensive Income 30,000
c.
Other Comprehensive Income 42,000
Accrued/Prepaid Pension Cost 42,000
d.
Accrued/Prepaid Pension Cost 40,000
Other Comprehensive Income 40,000
c
1
Moderate
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Exhibit 19-02
The Sophia Company adopted a defined benefit pension plan on January 1, 2015, and prior service credit was granted
to employees. The present value of those benefits was calculated to be $1,245,300 at that date. The service cost is
funded in full at the end of each year, plus an additional amount of $225,000 is funded each year-end. The
unrecognized prior service cost is being amortized by the straight-line method over the remaining 10-year service life
of the company’s active employees. Additional information relating to the company’s pension plan is presented below:
2015
2016
Service cost (annual)
$ 105,000
$125,000
Unrecognized prior service cost
amortization
124,530
124,530
Interest cost
10%
10%
Expected (and actual) return on plan assets
10%
10%
45. Refer to Exhibit 19-02. What is the pension expense for 2015?
a.
$105,000
b.
$229,530
c.
$315,000
d.
$354,060
d
1
Challenging
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United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
46. John Company adopted a defined benefit pension plan on January 1, 2015, and prior service credit was granted to
employees. The present value of that prior service obligation as of January 1, 2015 was $1,400,000 and is being
amortized by the straight-line method over the remaining 20-year service life of the company’s active employees.
Additional information relating to the company’s pension plan for 2015 is presented below:
Annual service cost
$132,000
Contribution to the plan (December 31, 2015)
390,000
Interest cost
10%
Expected (and actual) return on plan assets
12%
What amount should be recorded in Prepaid/Accrued Pension Cost when recording the 2015 pension expense and
funding at December 31, 2015?
a.
$1,200
b.
$48,000
c.
$87,000
d.
$94,800
b
1
Challenging
ACCT.WHAL.16.19.3 – LO: 19.3
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
47. ACE has a defined benefit pension plan. ACE is preparing the December 31, 2015 financial statement disclosures
related to the plan assets. It should disclose which of the following?
I.
Expected Return on Plan Assets
II.
Actual Return on Plan Assets
a.
I
b.
II
c.
both I and II
d.
neither I nor II
c
1
Moderate
ACCT.WHAL.16.19.4 – LO: 19.4
United States – BUSPROG: Reflective Thinking – BUSPROG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Understanding