CHAPTER 20
ACCOUNTING FOR PENSIONS
AND POSTRETIREMENT BENEFITS
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer No. Description
MULTIPLE CHOICE—Conceptual
Answer No. Description
Test Bank for Intermediate Accounting, Sixteenth Edition
20-2
MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
MULTIPLE CHOICE—Computational
Accounting for Pensions and Postretirement Benefits
20-3
MULTIPLE CHOICE—Computational
Answer No. Description
MULTIPLE CHOICE—CPA Adapted
Answer No. Description
BRIEF EXERCISES
Item Description
BE20-106 Pension accounting terminology.
BE20-107 Pension asset terminology.
BE20-108 Measuring and recording pension expense.
Test Bank for Intermediate Accounting, Sixteenth Edition
20-4
BRIEF EXERCISES (cont.)
Item Description
BE20-109 Measuring and recording pension expense.
BE20-110 Additional pension liability.
EXERCISES
Item Description
E20-111 Pension reconciliation schedule.
E20-112 Pension plan calculations.
E20-113 Pension plan calculation and entries.
E20-114 Corridor amortization.
E20-115 Corridor approach (amortization of net gains and losses.)
E20-116 Pension plan calculations and journal entry.
*E20-117 Computing and recording postretirement expense.
*E20-118 Computing postretirement expense and APBO.
PROBLEMS
Item Description
P20-119 Measuring, recording, and reporting pension expense and liability.
P20-120 Measuring and recording pension expense.
P20-121 Preparing a pension work sheet.
P20-122 Amortization of prior service cost.
P20-123 Pension worksheet-missing amounts.
P20-124 Pension worksheet.
Accounting for Pensions and Postretirement Benefits
20-5
CHAPTER LEARNING OBJECTIVES
1. Understand the fundamentals of pension plan accounting.
2. Use a worksheet for employer’s pension plan entries.
3. Describe the accounting and amortization of prior service costs.
4. Explain the accounting and amortization for unexpected gains and losses.
5. Describe the requirements for reporting pension plans in financial statements.
*6. Identify the differences between pensions and postretirement healthcare benefits.
*7. Contrast accounting for pensions to accounting for other postretirement benefits.
8. Compare the accounting for pensions under GAAP and IFRS.
Test Bank for Intermediate Accounting, Sixteenth Edition
20-6
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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TRUE-FALSE STATEMENTS
1.
1
K
5.
1
K
9.
2
K
13.
4
K
17.
5
K
2.
1
K
6.
1
K
10.
2
K
14.
4
K
18.
5
K
3.
1
C
7.
1
K
11.
3
K
15.
4
C
19.
5
K
4.
1
K
8.
1
K
12.
3
K
16.
4
C
*20.
6
K
MULTIPLE CHOICE QUESTIONS
21.
1
K
38.
1
K
55.
5
K
72.
1
AP
89.
5
AP
22.
1
K
39.
1
C
56.
5
K
73.
1
AP
90.
5
AP
23.
1
K
40.
1
C
57.
6
K
74.
1
AP
91.
5
AP
24.
1
K
41.
2
C
58.
6
K
75.
1
AP
92.
5
AP
25.
1
K
42.
3
K
59.
7
K
76.
4
AP
93.
5
AP
26.
1
C
43.
3
K
60.
7
K
77.
2
AP
94.
5
AP
27.
1
K
44.
3
K
61.
7
K
78.
4
AP
95.
5
AP
28.
1
K
45.
3
C
62.
7
C
79.
3
AP
96.
5
AP
29.
1
K
46.
4
C
63.
7
K
80.
1
AP
97.
7
AP
30.
1
K
47.
4
K
64.
1
AP
81.
1
AP
98.
7
AP
31.
1
C
48.
4
C
65.
1
AP
82.
4
AP
99.
7
AP
32.
1
K
49.
4
K
66.
1
AP
83.
4
AP
100.
1
AP
33.
1
K
50.
5
K
67.
1
AP
84.
4
AP
101.
1
K
34.
1
K
51.
5
K
68.
1
AP
85.
4
AP
102.
5
AP
35.
1
C
52.
5
K
69.
5
AP
86.
5
AP
103.
5
C
36.
1
K
53.
5
C
70.
4
AP
87.
5
AP
104.
5
C
37.
1
K
54.
5
K
71.
1
AP
88.
5
AP
105.
5
AP
BRIEF EXERCISES
106.
1
K
107.
1, 4
C
108.
1, 3
AP
109.
1, 3
AP
110.
5
AP
EXERCISES
111.
5
AP
113.
4
AP
115.
4
AP
117.
7
AP
112.
4
AP
114.
4
C
116.
1
AP
118.
7
AP
PROBLEMS
119.
3, 5
AP
121.
2, 4
AP
123.
2
AN
120.
1, 4,
5
AP
122.
3
AP
124.
2
AP
Accounting for Pensions and Postretirement Benefits
20-7
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. An employer does not have to report a liability on its balance sheet in a defined-benefit
plan.
4. Employers are at risk with defined-benefit plans because they must contribute enough to
meet the cost of benefits that the plan defines.
5. Companies compute the vested benefit obligation using only vested benefits, at current
salary levels.
6. The accumulated benefit obligation bases the deferred compensation amount on both
vested and nonvested service using future salary levels.
7. Service cost is the expense caused by the increase in the accumulated benefit obligation
because of employees’ service during the current year.
8. The interest component of pension expense in the current period is computed by
multiplying the settlement rate by the beginning balance of the projected benefit
obligation.
9. Companies recognize the accumulated benefit obligation in their accounts and in their
financial statements.
10. The Pension Asset / Liability account balance equals the difference between the projected
benefit obligation and the fair value of pension plan assets.
11. Companies should recognize the entire increase in projected benefit obligation due to a
plan initiation or amendment as pension expense in the year of amendment.
Test Bank for Intermediate Accounting, Sixteenth Edition
20-8
12. The FASB makes it mandatory to use only the years–of-service method for amortization of
prior service cost.
13. The difference between the expected return and the actual return is referred to as the
unexpected gain or loss.
14. The unexpected gains and losses from changes in the projected benefit obligation are
called asset gains and losses.
15. The Accumulated Other Comprehensive Income (G/L) account is amortized only if it
exceeds 10 percent of the larger of the beginning balances of the projected benefit
obligation or the market-related plan assets value.
16. If the Accumulated Other Comprehensive Income (G/L) account is less than the corridor,
the net gains and losses are subject to amortization.
17. When a company amends its defined benefit plan, and recognizes prior service, the
projected benefit obligation is increased to recognize this additional liability.
18. Companies report Accumulated Other Comprehensive Income (PSC) as a liability on the
balance sheet.
19. Companies must disclose a reconciliation of how the projected benefit obligation and the
fair value of plan assets changed during the year either in their financial statements or in
the notes.
*20. Benefits under a pension plan can include the retiree, the retiree’s spouse, and other
dependents.
True-False Answers—Conceptual
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Accounting for Pensions and Postretirement Benefits
20-9
MULTIPLE CHOICE—Conceptual
21. In determining the present value of the prospective benefits (often referred to as the
projected benefit obligation), which of the following are not considered by the actuary?
a. Retirement and mortality rate.
b. Interest rates.
c. Benefit provisions of the plan.
d. Insurance provisions of the plan
22. In a defined–benefit plan, the process of funding refers to
a. determining the projected 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.
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.
Test Bank for Intermediate Accounting, Sixteenth Edition
20–10
26. 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 determined by an employee’s highest
compensation level 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 is
borne by the employee.
27. 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.
28. 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. Projected 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. the level cost that will be sufficient, together with interest to provide the total benefits
at retirement.
d. the shortest possible period for funding to maximize the tax deduction.
30. The projected 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 generally accepted accounting principles for reporting the
service cost component of pension expense.
Accounting for Pensions and Postretirement Benefits
20–11
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 answers 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 answers.
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 projected benefit obligation.
c. expected return on plan assets.
d. Amortization of prior service cost.
35. In computing the service cost component of pension expense, the FASB 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 projected benefit obligation using future compensation levels provides a realistic
measure of present pension obligation and expense.
d. The projected benefit obligation using current compensation levels provides a realistic
measure of present pension obligation and expansion.
36. The interest on the projected 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 as the expected return on plan assets.
d. may be stated implicitly or explicitly when reported.
Test Bank for Intermediate Accounting, Sixteenth Edition
20–12
37. One component of pension expense is actual return on plan assets. Plan assets include
a. assets that a company holds to earn a reasonable return, generally at minimum risk.
b. plan assets still under the control of the company.
c. only assets reported on the balance sheet of the employer as prepaid pension cost.
d. None of these answers are correct.
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. is equal to interest expenses accrued each year on the projected benefit obligation,
just as it does on any discounted debt.
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 prior 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?
Amortization of
Fair value prior
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. projected benefit obligation exceeds the fair value of the plan assets.
b. fair value of the plan assets exceeds the projected benefit obligation.
c. amount of employer contributions exceeds the pension expense.
d. amount of pension expense exceeds the amount of employer contributions.
Accounting for Pensions and Postretirement Benefits
20–13
42. When a company adopts a pension plan, prior service costs should be charged to
a. accumulated other comprehensive income (PSC).
b. operations of prior periods.
c. Other comprehensive income (PSC).
d. retained earnings.
43. When a company amends a pension plan, for accounting purposes, prior 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. Prior 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 15 years.
d. straight-line basis over the average remaining service life of active employees or 15
years, whichever is longer.
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 projected benefit obligation are
usually greater than before.
b. both the accumulated benefit obligation and the projected benefit obligation are
usually less than before.
c. the expense and the liability should be recognized at the time of the plan change.
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 actuarial gains or losses that result from changes in the projected benefit obligation
are called
Asset Liability
Gains & Losses Gains & Losses
a. Yes Yes
b. No No
c. Yes No
d. No Yes
Test Bank for Intermediate Accounting, Sixteenth Edition
20–14
47. Gains and losses that relate to the computation of pension expense should be
a. recorded currently as an adjustment to pension expense in the period incurred.
b. recorded currently and in the future by applying the corridor method which provides
the amount to be amortized.
c. amortized over a 15-year period.
d. recorded only if a loss is determined.
48. The fair value of pension plan assets is used to determine the corridor and to calculate the
expected return on plan assets.
Expected Return
Corridor on Plan Assets
a. Yes Yes
b. Yes No
c. No Yes
d. No No
49. A pension fund gain or loss that is caused by a plant closing should be
a. recognized immediately as a gain or loss on the plant closing.
b. spread over the current year and future years.
c. charged or credited to the current pension expense.
d. recognized as a prior period adjustment.
50. A pension liability is reported when
a. the projected 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.
51. 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
prior service cost exists.
c. pension plan assets at fair value exceed the accumulated benefit obligation.
d. pension plan assets at fair value exceed the projected benefit obligation.
Accounting for Pensions and Postretirement Benefits
20–15
52. Which of the following is true of pension termination?
a. Companies can terminate a pension plan whenever they wish to do so.
b. Terminating a pension plan is illegal in U.S.
c. A company must start a new defined benefit plan after it eliminates the old one.
d. FASB requires recognition in earnings of a gain or loss when a pension obligation is
terminated.
53. According to the FASB, recognition of a liability is required when the projected benefit
obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan
assets exceeds the projected 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.
54. 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 prior 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
55. The main purpose of the Pension Benefit Guaranty Corporation is to
a. require minimum funding of pensions.
b. require plan administrators to publish a comprehensive description and summary of
their plans.
c. administer terminated plans and to impose liens on the employer’s assets for certain
unfunded pension liabilities.
d. force an voluntary termination of a pension plan whenever the risks related to
nonpayment of the pension obligation seem too little.
56. Which of the following statements is true about postretirement health care benefits?
a. They are generally funded.
b. The benefits are well–defined and level in dollar amount.
c. The beneficiary is the retiree, spouse, and other dependents.
d. The benefit is payable monthly.
Test Bank for Intermediate Accounting, Sixteenth Edition
20–16
*57. Which of the following disclosures of postretirement benefits would not be required by
professional pronouncements?
a. Postretirement expense for the period
b. A schedule showing changes in postretirement benefits and plan assets during the year
c. The amount of the EPBO
d. The assumptions and rates used in computing the EPBO and APBO
*58. Which of the following is true of healthcare benefits?
a. Healthcare benefit plans are generally not funded.
b. Healthcare benefits are payable monthly.
c. Variables in healthcare benefits are generally predictable.
d. The benefits are well–defined in healthcare benefits.
*59. A postretirement asset is computed as the excess of the
a. expected postretirement benefit obligation over the fair value of plan assets.
b. accumulated postretirement benefit obligation over the fair value of plan assets.
c. fair value of plan assets over the accumulated postretirement benefit obligation.
d. accumulated postretirement benefit obligation over the fair value of plan assets, but
not vice versa.
*60. Gains or losses can represent changes in
a. EPBO or the fair value of pension plan assets.
b. EPBO or the book value of pension plan assets.
c. APBO or the fair value of pension plan assets.
d. APBO or the book value of pension plan assets.
*61. Which of the following statements about the expected postretirement benefit obligation
(EPBO) is not correct?
a. The EPBO is an actuarial present value.
b. The EPBO is recorded in the accounts.
c. The EPBO is used in measuring periodic expense.
d. The EPBO is an actuarial present value and is used in measuring periodic expense.
*62. Which of the following statements about the recognition of a prior service cost related to a
postretirement obligation is correct?
a. The prior service amount is recognized in the income statement in the current period.
b. The prior service cost is recognized in the income statement net of tax.
c. Restatement of previously issued annual financial statements is required.
d. The prior service cost amount affects comprehensive income in the current period.
Accounting for Pensions and Postretirement Benefits
20–17
*63. Which of the following is recognized in the accounts and in the financial statements?
a. Accumulated postretirement benefit obligation
b. Postretirement asset / liability
c. Expected postretirement benefit obligation
d. Deterred asset
Multiple Choice Answers—Conceptual
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MULTIPLE CHOICE—Computational
64. Presented below is pension information related to Woods, Inc. for the year 2018:
Service cost $410,000
Interest on projected benefit obligation 270,000
Interest on vested benefits 120,000
Amortization of prior service cost due to increase in benefits 60,000
Expected return on plan assets 90,000
The amount of pension expense to be reported for 2018 is
a. $590,000.
b. $770,000.
c. $860,000.
d. $650,000.
65. Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the
operation of the plan for the year 2018.
Service cost $ 345,000
Contributions to the plan 330,000
Actual return on plan assets 270,000
Projected benefit obligation (beginning of year) 3,600,000
Fair value of plan assets (beginning of year) 2,400,000
The expected return on plan assets and the settlement rate were both 10%. The amount
of pension expense reported for 2018 is
a. $345,000.
b. $435,000.
c. $465,000.
d. $705,000.
Test Bank for Intermediate Accounting, Sixteenth Edition
20–18
66. Presented below is information related to Jensen Inc. pension plan for 2018.
Service cost $1,360,000
Actual return on plan assets 280,000
Interest on projected benefit obligation 520,000
Amortization of net loss 120,000
Amortization of prior service cost due to increase in benefits 220,000
Expected return on plan assets 240,000
What amount should be reported for pension expense in 2018?
a. $1,980,000
b. $1,940,000
c. $2,180,000
d. $1,700,000
67. 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,
2018.
January 1, 2018 December 31, 2018
Fair value of pension plan assets $5,600,000 $6,000,000
Projected benefit obligation 6,400,000 6,880,000
Accumulated benefit obligation 1,120,000 1,360,000
Accumulated OCI – (Gains / Losses) -0- (120,000)
The service cost component of pension expense for 2018 is $600,000 and the
amortization of prior service cost due to an increase in benefits is $80,000. The settlement
rate is 10% and the expected rate of return is 9%. What is the amount of pension expense
for 2018?
a. $600,000
b. $816,000
c. $828,000
d. $696,000
Accounting for Pensions and Postretirement Benefits
20–19
68. What is the pension expense that Cooper Enterprises should report for 2018?
a. $456,300
b. $660,000
c. $360,000
d. $503,700
69. What is the amount that Cooper Enterprises should report as its pension liability on its
balance sheet as of December 31, 2018?
a. $600,000
b. $90,000
c. $1,110,000
d. $1,200,000
70. The amortization of Other Comprehensive Loss for 2018 is
a. $0.
b. $38,370.
c. $69,000.
d. $50,370.
Test Bank for Intermediate Accounting, Sixteenth Edition
20–20
71. The following information is related to the pension plan of Long, Inc. for 2018.
Actual return on plan assets $400,000
Amortization of net gain 165,000
Amortization of prior service cost due to increase in benefits 300,000
Expected return on plan assets 460,000
Interest on projected benefit obligation 725,000
Service cost 1,700,000
Pension expense for 2018 is
a. $2,490,000.
b. $2,430,000.
c. $2,160,000.
d. $2,100,000.
72. Presented below is pension information for Green Company for the year 2018:
Expected return on plan assets $72,000
Interest on vested benefits 45,000
Service cost 150,000
Interest on projected benefit obligation 63,000
Amortization of prior service cost due to increase in benefits 54,000
The amount of pension expense to be reported for 2018 is
a. $339,000.
b. $267,000.
c. $180,000.
d. $195,000.
73. 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, 2018.
1/1/18 12/31/18
Projected benefit obligation $13,300,000 $13,720,000
Pension assets (at fair value) 7,000,000 8,050,000
Accumulated benefit obligation 2,800,000 3,220,000
Net (gains) and losses -0- 280,000
The service cost component of pension expense for 2018 is $1,040,000 and the
amortization of prior service cost due to an increase in benefits is $210,000. The
settlement rate is 10% and the expected rate of return is 8%. What is the amount of
pension expense for 2018?
a. $2,062,000
b. $2,020,000
c. $1,936,000
d. $1,740,000