CHAPTER 20
Accounting for Pensions and Postretirement Benefits
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Basic definitions and
concepts related to pension
plans.
1, 2, 3, 4,
5, 6, 7, 8,
9, 10, 12,
13, 16, 25
15
1, 2, 3,
4, 5, 6
2. Worksheet preparation.
3
3, 4, 6, 7,
9, 13, 15
1, 2, 7, 8, 9,
10, 11, 12
of pension expense.
13, 14, 16
6, 8
7, 10, 11,
12, 13, 14,
5, 6, 7, 8,
9, 10, 12
15
4. Financial statement
recognition, computation of
pension expense.
9, 21,
23, 24
2, 8, 9
3, 9, 11,
12, 13, 14
1, 2, 3, 4,
5, 6, 7, 8,
9, 10, 11
2, 5, 6
5. Reconciliation schedule.
26
10
8, 12, 13
6. Past service cost.
15, 16
5, 6
6
1, 2, 9
1, 4
13, 14, 15
6, 7, 8,
9, 10, 11,
12
8. Disclosure issues.
24, 26
8, 10, 11
3, 4
27, 28,
11, 12
16, 17, 18,
13, 14
19, 20, 21
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Understand the fundamentals of
pension plan accounting.
1, 2, 4
1, 2, 5, 10, 11,
12, 14
6
1, 2, 3, 4,
5, 6
13, 15
9, 10, 11,
3. Explain the accounting for past
service costs.
5, 6
6. 11
2, 3, 9
6
4. Explain the accounting for
remeasurements.
7, 8
11, 12
statements.
12, 15
11, 12
postretirement benefits.
11, 12
16, 17, 18, 19,
20, 21
13, 14
1, 2, 3, 4, 5,
6, 7, 8, 9,
6
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E20.1
Pension expense, journal entry.
Simple
15–20
E20.2
Computation of pension expense.
Simple
10–15
E20.3
Preparation of pension worksheet.
Moderate
15–25
E20.4
Basic pension worksheet.
Simple
10–15
E20.5
Computation of actual return.
Simple
10–15
E20.6
Basic pension worksheet.
Moderate
15–25
E20.7
Pension worksheet, gains and losses
Moderate
20–25
E20.8
Disclosures: Pension expense and other comprehensive income.
Moderate
25–35
E20.9
Pension worksheet.
Moderate
20–25
E20.10
Pension expense, journal entries, statement presentation.
Moderate
20–30
E20.11
Pension expense, journal entries, statement presentation.
Moderate
20–30
E20.12
Computation of actual return, gains and losses, and pension
expense.
Complex
35–45
E20.13
Worksheet for E20.12.
Complex
40–50
E20.14
Pension expense, journal entries.
Moderate
15–20
E20.15
Pension worksheet—missing amounts.
Moderate
20–25
E20.16
Postretirement benefit expense computation.
Moderate
5–10
E20.17
Postretirement benefit worksheet.
Moderate
25–30
E20.18
Postretirement benefit expense computation.
Simple
10–12
E20.19
Postretirement benefit expense computation.
Simple
10–12
E20.20
Postretirement benefit worksheet.
Moderate
15–20
E20.21
Postretirement benefit worksheet—missing amounts.
Moderate
25–30
P20.1
2-year worksheet.
Moderate
40–50
P20.2
3-year worksheet, journal entries, and reporting.
Complex
45–55
P20.3
Pension expense, journal entries.
Complex
40–50
P20.4
Pension expense, journal entries for 2 years.
Moderate
30–40
P20.5
Computation of pension expense, journal entries for 3 years.
Complex
45–55
P20.6
Pension expense, journal entries, and net gain or loss.
Complex
45–60
P20.7
Pension worksheet.
Moderate
35–45
P20.8
Comprehensive 2-year worksheet.
Complex
45–60
P20.9
Comprehensive 2-year worksheet.
Moderate
40–45
P20.10
Pension worksheet—missing amounts.
Moderate
25–30
P20.11
Pension worksheet.
Moderate
35–45
P20.12
Pension worksheet.
Moderate
35–45
P20.13
Postretirement benefit worksheet.
Moderate
30–35
Postretirement benefit worksheet—2 years.
Moderate
40–45
CA20.1
Pension terminology and theory.
Moderate
30–35
CA20.2
Pension terminology.
Moderate
25–30
CA20.3
Basic terminology.
Simple
20–25
CA20.4
Major pension concepts.
Moderate
30–35
CA20.5
Implications of International Accounting Standard No 19.
Complex
50–60
CA20.6
Non-vested employees—an ethical dilemma.
Moderate
20–30
ANSWERS TO QUESTIONS
**1. A pension plan is an arrangement whereby a company undertakes to provide its retired
employees with benefits that can be determined or estimated in advance from the provisions of a
document or from the company’s practices.
**2. A defined contribution plan specifies the employer’s contribution to the plan usually based on a
formula, which may consider such factors as age, length of service, employer’s profit, or
compensation levels.
A defined benefit plan specifies a determinable pension benefit that the employee will receive at
**3. The employer is the organization sponsoring the pension plan. The employer incurs the costs
and makes contributions to the pension fund. Accounting for the employer involves: (1) allocating
the cost of the pension plan to the proper accounting periods, (2) measuring the amount of
pension obligation resulting from the plan, and (3) disclosing the status and effects of the plan in
the financial statements.
**4. When the term “fund” is used as a noun, it refers to assets accumulated in the hands of a
**
Questions Chapter 20 (Continued)
5. An actuary’s role is to ensure that the company has established an appropriate funding pattern to
meet its pension obligations, to make predictions and assumptions about future events and
conditions that affect pension costs, and to assist the accountant in measuring facets of the pen-
**6. In measuring the amount of pension benefits under a defined benefit pension plan, an actuary
**7. One measure of the pension obligation is the vested benefit obligation. This measure uses only
current salary levels and includes only vested benefits; that is, benefits the employee is already
entitled to receive even if the employee renders no additional services under the plan.
**8. Cash-basis accounting recognizes pension cost as being equal to the amount of cash paid by
the employer to the pension fund in any period; pension funding serves as the basis for expense
recognition under the cash basis.
Accrual-basis accounting recognizes pension cost as it is incurred and attempts to recognize
pension cost in the same period in which the company receives benefits from the services of its
employees.
9. The net defined benefit obligation (asset) is the deficit or surplus related to a defined pension
plan. The deficit or surplus is the defined benefit obligation less the fair value of plan assets (if
Questions Chapter 20 (Continued)
10. The three components of the change in the net benefit obligation (asset) and their reporting are:
Service cost. Service cost is either current service cost or past service cost. Current service cost
Net interest. Net interest is the net amount computed by multiplying the discount rate by the plan
assets and the defined benefit obligation. If the plan has a net defined benefit obligation at the
Remeasurements. Remeasurements are gains and losses related to the defined benefit
obligation (changes in discount rate or other actuarial assumptions) and gains or losses on the
11. The components of pension expense are:
(1) Service cost component—the actuarial present value of benefits attributed by the pension
benefit formula to employee service during the period, including past service costs
(amendments and curtailments).
LO: 1, Bloom: K, Difficulty: Simple, Time: 5-7, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
12. The service cost component of pension expense is determined as the actuarial present value
of benefits attributed by the pension benefit formula to employee service during the period. The
plan’s benefit formula provides a measure of how much benefit is earned and, therefore, how
Questions Chapter 20 (Continued)
13. Net interest is defined as the amount that accrues by multiplying the net defined benefit
Net Interest = [Defined Benefit Obligation X Discount Rate] – [Plan Assets X Discount Rate]
Because payment of the pension obligation is deferred, companies record the pension liability
on a discounted basis. As a result, the liability accrues interest over the service life of the
employee (passage of time), which is essentially interest expense. Similarly, companies earn a
14. Computation of actual return on plan assets
Fair value of plan assets at end of period $10,150,000
Deduct: Fair value of plan assets at beginning of period 9,200,000
15. Service cost is the actuarial present value of benefits attributed by the pension benefit formula to
employee service during the period. Actuaries compute service cost at the present value of
the new benefits earned by employees during the year. Past service cost is the change in the
16. When a defined benefit plan is either initiated or amended, credit is often given to employees for
years of service provided before the date of initiation or amendment. The cost of these retroactive
17. Also included in past service costs are the reduction in benefits, arising from curtailments. A
curtailment is a significant reduction in the benefit obligation due to a significant reduction in the
Questions Chapter 20 (Continued)
18. Sarah is not correct in her assertion. Remeasurements arise from sudden and large changes in
the fair value of plan assets or changes in actuarial assumptions that affect the amount of the
19. An asset gain occurs when the actual return on the plan assets is greater than the interest
revenue on plan assets while an asset loss occurs when the actual return is less than the
interest revenue on the plan assets.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
20. Liability gains and losses are unexpected gains or losses from changes in the defined benefit
obligation. Liability gains (resulting from unexpected decreases) and liability losses (resulting
21. If pension expense recognized in a period exceeds the current amount funded, a liability account
referred to as Pension Liability arises; the current portion is reported as a current liability, if due
in 12 months. Otherwise, report as non-current.
If the current amount funded exceeds the amount recognized as pension expense, an asset
*22. Bill is not correct. Liability gains and losses, although not included in pension expense, are
recorded in other comprehensive income in the period that they arise. Total comprehensive
23. Jacob AG would report a pension liability of €27,000 (€125,000 – €98,000).
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
*24. Joshua plc would report a pension asset of £10,000 (£345,000 – £335,000).
*
Questions Chapter 20 (Continued)
25. (a) A contributory plan is a pension plan under which employees contribute part of the cost.
In some contributory plans, employees wishing to be covered must contribute; in other
contributory plans, employee contributions result in increased benefits.
*26. Compromises by the IASB to full capitalization or recognition in the financial statements of
relevant pension data resulted in nonrecognition of the defined benefit obligation and plan assets
27. Postretirement benefits other than pensions include healthcare and other welfare benefits
provided to retirees, their spouses, dependents, and beneficiaries. The other welfare benefits
28. The major differences between pension benefits and postretirement benefits are listed below:
Differences between Postretirement Healthcare Benefits and Pensions
Item
Pensions
Healthcare Benefits
Funding
Generally funded.
Generally NOT funded.
Benefit
Well-defined and level dollar amount.
Generally uncapped and great
variability.
Beneficiary
Retiree (maybe some benefit to
surviving spouse).
Retiree, spouse, and other
Benefit Payable
Monthly.
As needed and used.
Level of cost varies geographically
and fluctuates over time.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 20.1
Service cost HK$316,000,000
Interest on DBO 342,000,000
BRIEF EXERCISE 20.2
Ending plan assets €2,000,000
Beginning plan assets (1,680,000)
BRIEF EXERCISE 20.3
UDDIN COMPANY
General Journal Entries
Memo Record
Items
Pension
Expense
Cash
Pension
Asset/
Liability
Defined
Benefit
Obligation
Plan
Assets
1/1/19
250,000 Cr.
250,000 Dr.
Service cost
27,500 Dr.
27,500 Cr.
Interest revenue
25,000 Cr.
25,000 Dr.
17,500 Dr.
Journal entry
27,500 Dr.
BRIEF EXERCISE 20.4
Pension Expense……………………………………………. 61,000,000
Pension Asset/Liability…………………………….. 9,000,000
Cash ……………………………………………………….. 52,000,000
LO: 1, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 20.5
Pension expense
BRIEF EXERCISE 20.6
Current service cost …………………………………………………. €26,000
BRIEF EXERCISE 20.7
Actual return ……………………………………………………………. €1,500
Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only) 20 -12
Asset Loss
(174,000 – 160,000)
14,000 Dr.
14,000 Cr.
Liability Loss
414,000 Dr.
414,000 Cr.*
Journal entry for
2019
62,000 Dr.
200,000 Cr.
428,000 Dr.
290,000
Cr.
Accumulated OCI
12/31/18
0
Balance, Dec. 31,
2019
428,000 Dr.
490,000
Cr.
3,600,000 Cr.
3,110,000 Dr.
*R$3,600,000 – (R$3,100,000 + R$50,000 + R$186,000 – R$150,000)
LO: 4,5, Bloom: AP, Difficulty: Moderate, Time: 20–30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
Cash
Balance, January
1, 2019
200,000
3,100,000 Cr.
2,900,000 Dr.
Service cost
50,000 Dr.
Interest expense
Interest revenue
Contributions
200,000 Cr.
Benefits
BRIEF EXERCISE 20.9
Statement of Comprehensive Income
Revenues …………………………………………………………………. €125,000
BRIEF EXERCISE 20.10
Defined benefit obligation …………………………………………………. €(510,000)
BRIEF EXERCISE 20.11
Service cost ……………………………………………………………………… $40,000
BRIEF EXERCISE 20.12
Postretirement expense ……………………………………….. 240,900
Cash …………………………………………………………….. 160,000
SOLUTIONS TO EXERCISES
EXERCISE 20.1 (15–20 minutes)
(a) Computation of pension expense:
Service cost …………………………………………….. $60,000
Interest expense ($500,000 X .10) ………………. 50,000
EXERCISE 20.2 (10–15 minutes)
Computation of pension expense:
Service cost ……………………………………………………….. €90,000
20–15 Copyright © 2018 Wiley Kieso, IFRS, 3/e, Solutions Manual (For Instructor Use Only)
EXERCISE 20.3 (15–25 minutes)
VELDRE SpA
Pension Worksheet—2019
General Journal Entries
Memo Record
Items
Annual
Pension
Expense
Cash
Pension
Asset/Liability
Defined
Benefit
Obligation
Plan Assets
Balance, January 1, 2019
60,000 Cr.
700,000 Cr.
640,000 Dr.
Service cost
Interest expense*
Interest revenue**
Contributions
105,000 Dr.
Benefits
Journal entry for 2019***
Balance, Dec. 31, 2019
51,000 Cr.
820,000 Cr.
769,000 Dr.
*£39,200 = £490,000 X 8%.
**£39,200 = £490,000 X 8%.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
EXERCISE 20.5 (10–15 minutes)
(a) Computation of Actual Return on Plan Assets
Fair value of plan assets at 12/31/19 ………………….. ₺ 2,725,000
Fair value of plan assets at 1/1/19 ……………………… (2,400,000)
EXERCISE 20.7 (20–25 minutes)
(a)
EXERCISE 20.7 (Continued)
(b) Pension Expense ……………………………………………….. 218,000
OCI – G/L …………………………………………………………… 137,000
EXERCISE 20.8 (25–35 minutes)
(a) Note to financial statements disclosing components of 2019 pension
expense:
Note X: Net pension expense for 2019 is composed of the following