Accounting for Pensions and Postretirement Benefits
Short Description
Ch20...
Description
CHAPTER 20 ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITS IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual Answer F T F T T F F T F T F F T F T F T F F T
No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.
Description Funded pension plan. Qualified pension plans. Defined-contribution plan liability. Defined-benefit plans. Vested benefit obligation. Accumulated benefit obligation. Definition of service cost. Definition of interest cost. Recognizing ac accumulated be benefit ob obligation. Pension Asset /Liability balance. Plan amendment and projected benefit obligation increase. Years-of-service amortization method. Expected return and actual return. Unexpected gains and losses. Accumulated OCI (G/L) account and the corridor. Amortization of net gains and losses. Recording prior service cost. Reporting accumulated OCI (PSC) on the balance sheet. Other comprehensive income (PSC) and net income. Reconciliation of PBO and fair value of plan assets.
MULTIPLE CHOICE—Conceptual Answer d c d c b b a c a a d d d a c
No. 21. 22. 23. 24. 25. 26. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35.
Description Factors considered by actuaries. Process of funding a pension plan. Accounting problems in pension plans. Nature of a defined-contribution plan. Nature of a defined-benefit plan. Defi Define ned-c d-con ontr trib ibut utio ion n plan plan chara charact cter eris isti tics cs.. Accounting for a defined-benefit plan. Pension obligation measurement using future salaries. Definition of accumulated benefit obligation. Projected be benefit obligation as as a measure of of pension ob obligation. Alternative measures of the pension obligation. Characteristics of vested benefits. Pension fu funding an and pension ex expense recognition. Components of pension expense. Service cost calculated using future compensation levels.
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Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
b
36.
Settlement interest rates.
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
MULTIPLE CHOICE—Conceptual (cont.) Answer a b b c a c c b a d b a a a d a a b c c c c a c b d b
No. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. *56. *57. *58. *59. *60. *61. *62. *63.
Description Nature of plan assets. Definition of actual return on plan assets. Pension Asset / Liability. Items included in pension expense. Definition of pension expense. Recognition of prior service costs. Amortization of prior service costs. Amortization methods for prior service costs. Defined-benefit plan amendment. Unexpected gains and losses. Recording gains and losses. Use of fair value of plan asset. Gain or loss caused by a plant closing. Reporting pension asset. Intangible asset—deferred pension cost. Identification of a balance sheet account. Recognition of pension asset. Disclosures of pension plan information. Function of of Pension Be Benefit Gu Guaranty Corporation. Postretirement health care benefits. Disclosures of postretirement benefits. Postretirement asset. Postretirement benefits. Accrual period. Expected postretirement benefit obligation. Recognition of prior service cost. Item not recognized.
*This topic is dealt with in an Appendix to the chapter.
MULTIPLE CHOICE—Computational Answer d c a b a a b d d b b a d
No. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76.
Description Calculate pension expense. Calculate pension expense. Calculate pension expense. Calculate pension expense. Determine pension expense. Determine pension liability to be reported. Determine amortization of gain / loss. Calculate pension expense. Calculate pension expense. Calculate pension expense. Calculate actual return on plan assets. Calculate unexpected gain on plan assets. Calculate net loss amortization.
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Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
MULTIPLE CHOICE—Computational Answer b c b c b c b b a c d c b d b d d c d a b a b
No. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. *97. *98. *99.
Description Calculate pr projected be benefit ob obligation ba balance. Calculate fair value of plan assets. Calculate amortization of prior service cost. Calculate interest cost. Determine actual return on plan assets. Calculate the unexpected gain on plan assets. Determine the corridor. Calculate amortization of net gain. Calculate pe pension as asset / liability re recognized in in th the ba balance sh sheet. Calculate pension liability. Calculate pension liability. Calculate pension liability. Calculate amount of intangible asset. Calculate pension liability. Determine pension liability to be reported. Determine pe pension as asset / liability to to be re reported. Determine balance of projected benefit obligation. Determine fair value of plan assets. Determine pe pension as asset / liability to to be re reported. Determine pension liability to be reported. Calculate po postretirement ex expense. Calculate po postretirement ex expense. Calculate po postretirement ex expense.
MULTIPLE CHOICE—CPA Adapted Answer d b c d a b
No. 100. 101. 102. 103. 104. 105.
Description Determine the projected benefit obligation. Nature of interest cost. Determine pe pension as asset / liability to to be be re reported. Determine pe pension as asset / liability to to be be re reported. Calculate pension liability. Calculate pension liability.
EXERCISES I te m E20E20-10 106 6 E20E20-10 107 7 E20E20-10 108 8
Description Pens Pensiion acc accou ount ntin ing g term termin inol olog ogy y. Pens Pensiion ass asset term termiinolo nology gy.. Meas Measur urin ing g and and reco record rdin ing g pen pensi sion on expe expens nse. e.
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
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EXERCISES (cont.) I te m E20E20-10 109 9 E20E20-11 110 0 E20E20-11 111 1 E20-11 -112 E20E20-11 113 3 E20-11 -114 E20-1 E20-115 15 E20E20-11 116 6 *E20 *E20-1 -117 17 *E20 *E20-1 -118 18
Description Meas Measur urin ing g and and reco record rdin ing g pen pensi sion on expe expens nse. e. Addi Additi tion onal al pens pensio ion n liliabil abiliity. ty. Pens Pensiion rec recon onc cili iliatio ation n sche schedu dule le.. Pension pla plan cal calculations. Pens Pensio ion n pla plan n calc calcul ulat atio ion n and and entr entrie ies. s. Corridor amortization. Corr Corrid idor or app appro roac ach h (amo (amort rtiz izat atio ion n of net net gain gains s and and loss losses es.) .) Pens Pensio ion n plan plan cal calcu cula lati tion ons s and and jour journa nall entr entry y. Comp Comput utin ing g and and recor recordi ding ng post postre reti tire reme ment nt expe expens nse. e. Comp Comput utin ing g post postre reti tire reme ment nt exp expen ense se and and APB APBO. O.
PROBLEMS I te m P20-119 P20-119 P20P20-12 120 0 P20P20-12 121 1 P20P20-12 122 2
Description Measur Measuring ing,, record recording ing,, and reporti reporting ng pensio pension n expens expense e and and liabil liability ity.. Meas Measur urin ing g and and reco record rdin ing g pen pensi sion on expe expens nse. e. Prep Prepar ariing a pen pens sion ion wor work k she sheet et.. Amor Amorti tiza zati tion on of prio priorr serv servic ice e cost cost..
CHAPTER LEARNING OBJECTIVES 1.
Distin Distingui guish sh between between accoun accountin ting g for the employe employer's r's pensio pension n plan and accoun accountin ting g for the pension fund.
2.
Identi Identify fy types types of of pensi pension on plans plans and and their their charac character terist istics ics..
3.
Explai Explain n altern alternati ative ve measu measures res for for valui valuing ng the the pensio pension n obliga obligation tion..
4.
List List the the com compo pone nent nts s of of pens pensio ion n expe expens nse. e.
5.
Use a work workshe sheet et for for employ employer' er's s pensi pension on plan plan entrie entries. s.
6.
Descri Describe be the the amorti amortizat zation ion of prior prior servic service e cost costs. s.
7.
Explai Explain n the the accou accounti nting ng for for unex unexpec pected ted gains gains and and loss losses. es.
8.
Explai Explain n the corrid corridor or appro approach ach to to amort amortizi izing ng gains gains and and loss losses. es.
9.
Descri Describe be the requir requireme ements nts for for reporti reporting ng pension pension plans plans in financi financial al stateme statements nts..
*10.
Identify Identify the the differen differences ces between between pensions pensions and postre postretirem tirement ent healthc healthcare are benefit benefits. s.
*11.
Contrast Contrast accoun accounting ting for pensions pensions to to account accounting ing for for other other postretirem postretirement ent benefits. benefits.
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Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Learning Objective 1
1.
TF
2.
TF
21.
3.
TF
4.
TF
23.
5. 6.
TF TF
28. 29.
MC MC
30. 31.
7. 8. 33. 34. 35.
TF TF MC MC MC
36. 37. 38. 39. 40.
MC MC MC MC MC
64. 65. 66. 67. 68.
9.
TF
10.
TF
41.
11. 12.
TF TF
42. 43.
MC MC
44. 45.
13. 14.
TF TF
46. 75.
MC MC
82. 107.
15. 16. 47.
TF TF MC
48. 49. 70.
MC MC MC
76. 83. 84.
17. 18. 19. 20. 50.
TF TF TF TF MC
51. 52. 53. 54. 55.
MC MC MC MC MC
56. 69. 86. 87. 88.
57.
MC
MC 22. MC Learning Objective 2 MC 24. MC 25. Learning Objective 3 MC 32. MC 117. MC 106. E Learning Objective 4 MC 71. MC 80. MC 72. MC 81. MC 73. MC 100. MC 74. MC 101. MC 75. MC 106. Learning Objective 5 MC 77. MC 78. Learning Objective 6 MC 79. MC 109. MC 108. E 119. Learning Objective 7 MC 112. E 120. E 119. P 121. Learning Objective 8 MC 85. MC 112. MC 109. E 113. MC 111. E 114. Learning Objective 9 MC 89. MC 94. MC 90. MC 95. MC 91. MC 96. MC 92. MC 102. MC 93. MC 103. Learning Objective *10
MC
S
26.
MC
MC MC E E E
107. 108. 109. 116. 120.
E E E E P
MC
121.
P
E P
122.
P
E E E
115. 120.
E P
MC MC MC MC MC
104. 105. 110. 111. 119.
MC MC
111. 117.
S
27.
MC
MC MC E E P
120.
P
E E
118.
E
E
P P
Learning Objective *11
57. 58.
MC MC
Note:
59. 60.
MC MC
61. 62.
TF = True-False MC = Multiple Choice
MC MC
63. 97.
E = Exercise P = Problem
MC MC
98. 99.
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
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TRUE-FALSE—Conceptual 1.
A pension pension plan plan is contributo contributory ry when when the employer employer makes makes payment payments s to a funding funding agency agency..
2.
Qualified Qualified pension pension plans permit permit deductibi deductibility lity of the the employer’ employer’s s contribut contributions ions to to the pension pension fund.
3.
An employe employerr does not have have to to report report a liabili liability ty on its balanc balance e sheet sheet in a defined-ben defined-benefit efit plan.
4.
Employers Employers are at risk risk with with defined defined-benefi -benefitt plans plans because because they they must must contrib contribute ute enough enough to to meet the cost of benefits that the plan defines.
5.
Companies Companies compute compute the vested vested benefit benefit obligatio obligation n using using only vested vested benefits, benefits, at current current salary levels.
6.
The accumulated accumulated benefit benefit obligat obligation ion bases bases the deferred deferred compens compensation ation amount amount on both vested and nonvested service using future salary levels.
7.
Service Service cost cost is the expen expense se caused caused by the increas increase e in the the accumul accumulated ated benefi benefitt obligatio obligation n because of employees’ service during the current year.
8.
The inte interes restt compon component ent of of pension pension expen expense se in the the curren currentt period period is comp compute uted d by multiplying the settlement rate by the beginning balance of the projected benefit obligation.
9.
Companies Companies recognize recognize the accumulated accumulated benefit benefit obligati obligation on in their accounts accounts and in in their their financial statements.
10.
The Pensio Pension n Asset Asset / Liability Liability account account balance balance equals equals the the differenc difference e between between the the projected projected benefit obligation and the fair value of pension plan assets.
11.
Companies Companies should should recognize recognize the entire increase increase in project projected ed benefit benefit obligation obligation due to to a plan initiation or amendment as pension expense in the year of amendment.
12.
The FASB FASB requires requires only the years-of years-of-servi -service ce method method for amortiz amortization ation of prior prior servic service e cost. cost.
13.
The differe difference nce betwee between n the expec expected ted return return and and the the actual actual return return is referred referred to as the unexpected gain or loss.
14.
The unexpected unexpected gains and losses losses from changes changes in the projected projected benefi benefitt obligati obligation on are called asset gains and losses.
15.
The Accumulate Accumulated d Other Other Comprehe Comprehensiv nsive e Income Income (G/L) account account is amortized amortized only if itit 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 the Accumula Accumulated ted Other Other Compreh Comprehensiv ensive e Income Income (G/L) (G/L) account account is less less than than the the corridor, corridor, the net gains and losses are subject to amortization.
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17.
When a company company amends its defined defined benefit benefit plan, and recogni recognizes zes prior prior service, service, the projected benefit obligation is increased to recognize this additional liability.
18.
Companies Companies report Accumulate Accumulated d Other Other Comprehe Comprehensiv nsive e Income Income (PSC) as a liability liability on the the balance sheet.
19.
Other Other Compr Comprehe ehensi nsive ve Incom Income e (PSC) (PSC) is report reported ed as part part of of net inco income. me.
20.
Companies Companies must must discl disclose ose a reconciliat reconciliation ion of how the the projecte projected d benefit benefit obligat obligation ion and and the fair value of plan assets changed during the year either in their financial statements or in the notes.
True-False Answers—Conceptual Item
Ans.
Item
Ans.
Item
Ans.
Item
1. 2. 3. 4. 5.
F T F T T
6. 7. 8. 9. 10.
F F T F T
11. 12. 13. 14. 15.
F F T F T
16. 17. 18. 19. 20.
Ans.
F T F F T
MULTIPLE CHOICE—Conceptual 21. 21.
In determ determin inin ing g the the pres presen entt valu value e of the prospe prospect ctiv ive e bene benefi fits ts (ofte (often n refe referr rred ed to as the projected benefit obligation), the following are considered by the actuary: a. retire retiremen mentt and and mort mortali ality ty rate. rate. b. inte intere rest st rate rates. s. c. benefi benefitt prov provisi isions ons of the plan. plan. d. all all of of the these se fact factors ors..
22.
In a defi defined ned-ben -benefi efitt plan, plan, the the proc process ess of fund funding ing refe refers rs to to a. determ determini ining ng the project projected ed benefit benefit obliga obligatio tion. n. b. determining determining the accumulated accumulated benefit benefit obliga obligation. tion. c. maki making ng the the peri period odic ic cont contri ribu buti tion ons s to a fund fundin ing g agen agency cy to ensure ensure that that fund funds s are are available to meet retirees' claims. d. determining determining the the amount amount that might might be reporte reported d for pension pension expense expense..
23.
In all all pension pension plans plans,, the accou accounti nting ng proble problems ms inclu include de all the the follo followi wing ng except a. measur measuring ing the the amount amount of pensio pension n obligat obligation ion.. b. disclosing disclosing the the status and and effects effects of the plan plan in the financial financial statemen statements. ts. c. allocating allocating the cost cost of the the plan to the the proper proper periods. periods. d. determ determini ining ng the level level of individ individual ual premiu premiums. ms.
24.
In a. b. c. d.
a define defined-co d-contr ntribu ibutio tion n plan, plan, a formul formula a is used used that that defines defines the benefits benefits that that the employee employee will will receive receive at the time of retirem retirement. ent. ensures ensures that pension pension expens expense e and the cash cash funding funding amount amount will will be different different.. requires requires an employe employerr to contribute contribute a certai certain n sum each each period based based on the the formula. formula. ensures ensures that employer employers s are at risk to make make sure funds funds are availab available le at retirement. retirement.
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
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25. 25.
In a defi define ned-b d-ben enef efit it plan plan,, a form formul ula a is used used that that a. requir requires es that the benefi benefitt of gain gain or the risk risk of loss loss from the assets assets contrib contribute uted d to the pension plan be borne by the employee. b. defines defines the benefits benefits that that the employee employee will will receive receive at the time of retirem retirement. ent. c. requires requires that that pension pension expense expense and and the cash funding funding amount be the same. d. defines defines the contribut contribution ion the employe employerr is to make; make; no promise promise is made made concerning concerning the ultimate benefits to be paid out to the employees.
26.
Which Which of of the the follo followi wing ng is not not a char charact acteri eristi stic c of a define defined-c d-cont ontrib ributi ution on pensi pension on plan? plan? a. The employ employer's er's contrib contribution ution each each period period is based on on a formula. formula. b. The benefit benefits s to be receive received d by employe employees es are usuall usually y determ determine ined d by an employ employee’ ee’s s three highest years of salary defined by the terms of the plan. c. The accounti accounting ng for a defined-con defined-contribut tribution ion plan is straig straightforw htforward ard and uncomplic uncomplicated. ated. d. The benefit benefit of gain or the the risk of loss loss from the the assets assets contributed contributed to the the pension pension fund are borne by the employee.
27. 27.
In acco accoun unti ting ng for for a def defin ined ed-b -ben enef efit it pens pensio ion n pla plan n a. an appropriate appropriate funding funding pattern pattern must must be establis established hed to ensure ensure that enough enough monies monies will will be available at retirement to meet the benefits promised. b. the employer' employer's s responsibilit responsibility y is simply simply to make make a contributio contribution n each year year based on the formula established in the plan. c. the expense expense recogni recognized zed each each period period is equal equal to the cash cash contribu contribution. tion. d. the liability liability is determin determined ed based upon known known variables variables that that reflect reflect future salary salary levels levels promised to employees.
28.
Alterna Alternativ tive e method methods s exist exist for for the the measur measureme ement nt of the pens pension ion oblig obligati ation on (liabi (liabilit lity) y).. Which Which measure requires the use of future salaries in its computation? a. Vest Vested ed bene benefi fitt oblig obligat atio ion n b. Accumu Accumulat lated ed benefi benefitt obli obligat gation ion c. Proj Projec ecte ted d benefi benefitt obliga obligati tion on d. Restruc Restructur tured ed bene benefit fit obliga obligatio tion n
29. 29.
The The accu accumu mula late ted d bene benefi fitt obli obliga gati tion on mea measu sure res s a. the pensio pension n obliga obligatio tion n on the basis basis of the plan plan formul formula a applie applied d to years years of service service to date and based on existing salary levels. b. the pensio pension n obliga obligatio tion n on the basis basis of the plan plan formul formula a applie applied d to years years of service service to date and based on future salary levels. c. an estimat estimated ed total total benefit benefit at retire retiremen mentt and then then computes computes the level level cost that will will be suffic sufficien ient, t, togeth together er with with intere interest st expect expected ed to accumu accumulat late e at the assume assumed d rate, rate, to provide the total benefits at retirement. d. the shortest shortest possi possible ble period period for funding funding to maximi maximize ze the tax tax deduction. deduction.
30.
The projec projected ted benefi benefitt oblig obligati ation on is is the the meas measure ure of pensio pension n oblig obligati ation on that that a. is required required to be used for for reporting reporting the service service cost cost component component of pension pension expense. expense. b. requir requires es pension pension expens expense e to be determine determined d solely solely on the basis of the plan formula formula applied to years of service to date and based on existing salary levels. c. requires requires the longest longest possib possible le period period for funding funding to maxim maximize ize the tax tax deduction deduction.. d. is not sancti sanctione oned d under under generally generally accepted accepted account accounting ing principl principles es for reporti reporting ng the service cost component of pension expense.
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Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
31.
Differ Differing ing measur measures es of of the the pensio pension n obliga obligatio tion n can be base based d on a. all years years of service—b service—both oth vested vested and nonvested— nonvested—using using current current salary salary levels. levels. b. only the the vested vested benefits benefits using using curren currentt salary salary levels levels.. c. both vested vested and nonvested nonvested servic service e using using future future salari salaries. es. d. all all of of thes these. e.
32.
Vested be benefits a. usually usually require require a certai certain n minimum minimum number number of years of service service.. b. are those those that that the employee employee is entitle entitled d to receive receive even even if fired. c. are not not continge contingent nt upon upon additiona additionall service service under under the the plan. plan. d. are are defi define ned d by all all of of thes these. e.
33. 33.
The The rela relati tion onsh ship ip betw betwee een n the the amou amount nt fund funded ed and and the the amou amount nt repo report rted ed for for pens pensio ion n expense is as follows: a. pensio pension n expense expense must must equal equal the amoun amountt funded. funded. b. pension pension expense expense will be less less than than the amount funded. funded. c. pension pension expense expense will be more more than than the the amount amount funded. funded. d. pension pension expense expense may be greater greater than, equal equal to, to, or less less than the the amount funded. funded.
34.
The comp computa utatio tion n of pensi pension on expen expense se inclu includes des all all the the follow following ing except a. service service cost cost component component measur measured ed using using current current salary salary levels levels.. b. interes interestt on project projected ed benefit benefit obli obligat gation. ion. c. expect expected ed return return on plan plan asse assets. ts. d. All of thes these e are inclu included ded in the the compu computat tation ion..
35.
In computi computing ng the the servic service e cost cost compone component nt of of pension pension expense, expense, the the FASB FASB conclu concluded ded that that a. the accumulat accumulated ed benefit benefit obligation obligation provides provides a more realist realistic ic measure measure of the pension pension obligation on a going concern basis. b. a company company should should employ an actuari actuarial al funding funding method method to report report pension pension expense expense that best reflects the cost of benefits to employees. c. the projected projected benefit benefit obligati obligation on using future future compensati compensation on levels levels provides provides a realistic realistic measure of present pension obligation and expense. d. all all of of thes these. e.
36.
The inter interest est on the the projec projected ted benef benefit it obliga obligatio tion n compone component nt of pensio pension n expense expense a. reflects reflects the the increment incremental al borrowi borrowing ng rate of the the employer employer.. b. reflects reflects the rates rates at which which pension pension benefits benefits could be be effectively effectively settle settled. d. c. is the the same same as the the expect expected ed return return on plan plan asset assets. s. d. may be be stated stated implic implicitly itly or or explicit explicitly ly when when reported. reported.
37. 37.
One One comp compon onen entt of pensi pension on expen expense se is expe expect cted ed retur return n on plan plan asse assets ts.. Plan asset assets s include a. contributio contributions ns made by the employer employer and contrib contributions utions made by the the employee employee when a contributory plan of some type is involved. b. plan assets assets still still under the control control of the the company company.. c. only assets assets reporte reported d on the balance balance sheet sheet of the the employer employer as prepaid prepaid pension pension cost. cost. d. none none of the these se..
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
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38. 38.
The The act actua uall ret retur urn n on on pla plan n asse assets ts a. is equal equal to the change change in the the fair value value of the the plan assets assets during the the year. year. b. includes includes interest, interest, dividend dividends, s, and changes changes in the market market value value of the fund assets assets.. c. is equal equal to the expected expected rate rate of return times times the fair fair value value of the plan assets assets at the beginning of the period. d. all all of of thes these. e.
39. 39.
In accou account ntin ing g for for a pens pensio ion n plan plan,, any any diff differ eren ence ce between between the pensi pension on cost charg charged ed to expense and the payments into the fund should be reported as a. an offset offset to the the liabilit liability y for prior service service cost. cost. b. pens pensio ion n asse asset/ t/liliab abililit ity. y. c. as othe otherr compr comprehe ehensi nsive ve inco income me (G/L (G/L)) d. as accumulate accumulated d other other comprehensi comprehensive ve income income (PSC). (PSC).
40. 40.
Whic Which h of the the foll follow owing ing items items shoul should d be inclu include ded d in pensi pension on expen expense se calcu calcula late ted d by an employer who sponsors a defined-benefit pension plan for its employees?
a. b. c. d.
Fair value of plan assets Yes Yes No No
Amortization of prior service cost Yes No Yes No
41.
A corpora corporatio tion n has a defineddefined-ben benefi efitt plan. plan. A pension pension liabil liability ity will will result result at the the end of the year if the a. projected projected benefit benefit obligati obligation on exceeds exceeds the fair fair value value of the plan plan assets. assets. b. fair value value of the the plan assets assets exceeds exceeds the the projected projected benefit benefit obliga obligation. tion. c. amount amount of employ employer er contributi contributions ons exceeds exceeds the the pension pension expense. expense. d. amount amount of pension pension expense expense exceeds exceeds the the amount amount of employer employer contrib contribution utions. s.
42.
When When a company company adop adopts ts a pensio pension n plan, plan, prior prior servic service e costs costs shoul should d be charged charged to to a. accumulate accumulated d other other comprehensi comprehensive ve income income (PSC). b. oper operat atio ions ns of pri prior or peri period ods. s. c. Other Other compre comprehen hensiv sive e incom income e (PSC) (PSC).. d. reta retain ined ed earn earnin ings gs..
43.
When When a company company amends amends a pensio pension n plan, plan, for accoun accountin ting g purpose purposes, s, prior prior servic service e costs costs should be a. treated treated as a prior prior period period adjustment adjustment becaus because e no future future periods periods are benefite benefited. d. b. amortized amortized in accorda accordance nce with with procedures procedures used used for income income tax purposes. purposes. c. record recorded ed in other other compre comprehen hensiv sive e income income (PSC). (PSC). d. reported reported as an expense expense in the period the plan plan is amended. amended.
44. 44.
Prio Priorr serv servic ice e cos costt is is amo amort rtiz ized ed on a a. straight-li straight-line ne basis basis over the expecte expected d future future years years of servic service. e. b. years-of-se years-of-service rvice method method or on a straight-li straight-line ne basis over over the average average remaining remaining service service life of active employees. c. straig straightht-lin line e basis basis over over 15 years. years. d. straight-li straight-line ne basis over over the average average remaining remaining service service life life of active active employees employees or 15 years, whichever is longer.
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Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
45.
Whenev Whenever er a defi defined ned-be -benef nefit it plan plan is is amend amended ed and and credi creditt is given given to to emplo employee yees s for years years of of service provided before the date of amendment a. both both the the accu accumu mula late ted d bene benefi fitt obli obliga gati tion on and and the the proj projec ecte ted d bene benefi fitt obli obliga gati tion on are are usually greater than before. b. both both the the accu accumu mula late ted d bene benefi fitt obli obliga gati tion on and and the the proj projec ecte ted d bene benefi fitt obli obliga gati tion on are are usually less than before. c. the expense expense and and the liability liability should should be recognized recognized at the time time of the plan plan change. change. d. the expense expense should should be recognized recognized immediat immediately, ely, but the the liability liability may be deferred deferred until until a reasonable basis for its determination has been identified.
46.
The actu actuari arial al gains gains or or losses losses that that result result from from chang changes es in the the proje projecte cted d benefi benefitt obliga obligatio tion n are called
a. b. c. d.
Asset Gains & Losses Yes No Yes No
Liability Gains & Losses Yes No No Yes
47.
Gains Gains and loss losses es that that relate relate to to the comp computa utatio tion n of pensio pension n expens expense e should should be a. recorded recorded currently currently as as an adjustmen adjustmentt to pension pension expense expense in the period period incurred. incurred. b. record recorded ed currentl currently y and in the future future by applying applying the corridor corridor method method which which provid provides es the amount to be amortized. c. amorti amortized zed over over a 15-year 15-year period period.. d. record recorded ed only only ifif a loss loss is dete determi rmined ned..
48.
The fair fair value value of pension pension plan plan assets assets is used to to determine determine the corridor corridor and to calculate calculate the the expected return on plan assets. Expected Return Corridor on Plan Assets a. Yes Yes b. Yes No c. No Yes d. No No No
49.
A pensio pension n fund fund gain gain or loss loss that that is caused caused by by a plant plant clos closing ing shou should ld be a. recognized recognized immedia immediately tely as a gain or or loss on the plant plant closin closing. g. b. spread spread over over the the curren currentt year year and futur future e years. years. c. charged charged or credited credited to to the the current current pension pension expense expense.. d. recogn recognize ized d as a prior prior period period adju adjustm stment ent..
50. 50.
A pen pens sion ion lia liabi bili litty is is rep repor orte ted d whe when n a. the projected projected benefit benefit obligatio obligation n exceeds exceeds the fair value value of pension pension plan assets. assets. b. the accumulat accumulated ed benefit benefit obligation obligation is less less than the the fair value value of pension pension plan assets. assets. c. the pension pension expense expense reported reported for the the period is is greater greater than the funding funding amount for for the same period. d. accumu accumulat lated ed other compreh comprehens ensive ive income income exceeds exceeds the fair fair value value of pensio pension n plan plan assets.
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-13
51. 51.
A pens pensio ion n asse assett is is rep repor orte ted d whe when n a. the accumulat accumulated ed benefit benefit obligation obligation exceeds exceeds the the fair value value of pension pension plan assets. assets. b. the accumulat accumulated ed benefit benefit obligation obligation exceeds exceeds the fair value value of pension pension plan assets, assets, but but a prior service cost exists. c. pension pension plan assets assets at at fair value value exceed exceed the accumulated accumulated benefi benefitt obligation. obligation. d. pension pension plan assets assets at at fair value value exceed exceed the projected projected benefit benefit obligatio obligation. n.
52. 52.
Whic Which h of the the fol follo lowi wing ng stat statem emen ents ts is is corre correct ct? ? a. There is an account account titled titled Pension Pension Asset / Liabili Liability. ty. b. There is an accoun accountt titled titled Accumula Accumulated ted Benefit Benefit Obliga Obligation. tion. c. Accumulated Accumulated Other Other Comprehen Comprehensive sive Income Income should should be reported reported in the the liability liability section section of the balance sheet. d. Other compreh comprehensiv ensive e income (PSC) (PSC) should should be includ included ed in net income income..
53.
Accord According ing to the the FASB, FASB, recognit recognition ion of a liabil liability ity is requir required ed when when the projec projected ted benef benefit it obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the projected benefit obligation, the Board a. requir requires es reco recogni gnitio tion n of an asse asset. t. b. requir requires es recogni recognitio tion n of an asset asset if the excess excess fair fair value of plan assets assets exceed exceeds s the corridor amount. c. recommends recommends recogni recognition tion of an an asset but does does not require require such such recognitio recognition. n. d. does does not perm permit it recog recognit nition ion of of an asset asset..
54. 54.
Whic Which h of the the foll follow owing ing discl disclos osure ures s of pensi pension on plan infor informa mati tion on would would not normally be required? a. The majo majorr compone components nts of of pension pension expen expense se b. The amount amount of prior prior service service cost cost changed changed or credit credited ed in previous previous years. years. c. The funded funded status status of the plan plan and the amounts amounts recognize recognized d in the financial financial statemen statements ts d. The rates rates used used in measur measuring ing the the benefit benefit amou amounts nts
55.
The main main purp purpose ose of of the Pens Pension ion Bene Benefit fit Guar Guarant anty y Corpor Corporati ation on is to to a. requir require e minimu minimum m fundin funding g of pensi pensions ons.. b. requir require e plan plan admini administr strato ators rs to publis publish h a compre comprehen hensiv sive e descri descripti ption on and summary summary of their plans. c. administer administer termina terminated ted plans and and to impose impose liens on the employ employer's er's assets assets for certain certain unfunded pension liabilities. d. all all of of thes these. e.
56.
Which of the the followi following ng statement statements s is true about about postretirem postretirement ent health health care benefits? benefits? a. They They are are gen genera eralllly y fund funded ed.. b. The benefi benefits ts are well-define well-defined d and level in dollar dollar amount. amount. c. The benefi beneficiary ciary is the the retiree, retiree, spouse, spouse, and other dependents. dependents. d. The benefi benefitt is payabl payable e monthl monthly. y.
*57. *57.
Whic Which h of the foll follow owin ing g disc disclo losu sure res s of postre postreti tire reme ment nt benefi benefits ts would would not be required by professional pronouncements? a. Postre Postretir tireme ement nt expen expense se for for the peri period od b. A schedule schedule showing showing changes changes in postretirem postretirement ent benefits benefits and and plan assets assets during during the year year c. The The amo amoun untt of of the the EPB EPBO O d. The assumpti assumptions ons and rates used in in computing computing the EPBO EPBO and APBO APBO
20-14
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
*58. *58.
A postr postreti etirem rement ent asset asset is is comp compute uted d as as the the exc excess ess of the the a. expected expected postretire postretirement ment benefit benefit obligatio obligation n over the fair fair value of plan plan assets. assets. b. accumulate accumulated d postretiremen postretirementt benefit benefit obligation obligation over the the fair value value of plan assets assets.. c. fair value value of plan assets assets over over the accumula accumulated ted postretire postretirement ment benefit benefit obligation obligation.. d. accumu accumulat lated ed postre postretir tireme ement nt benefit benefit obliga obligatio tion n over over the fair value of plan plan assets assets,, but not vice versa.
*59. *59.
Postret Postretire iremen mentt benef benefits its may includ include e all of the the foll followi owing ng except a. severa severance nce pay pay to laid laid-of -offf employ employees ees.. b. dent dental al care. are. c. lega legall and and tax tax serv servic ices es.. d. tuit tuitio ion n assi assist stan ance ce..
*60. *60.
Gain Gains s or los losse ses s can can repre represe sent nt cha chang nges es in in a. EPBO EPBO or the fair fair value value of of pension pension plan plan assets assets.. b. EPBO EPBO or the book book value value of pens pension ion plan plan assets assets.. c. APBO APBO or the the fair fair value value of pens pension ion plan plan asse assets. ts. d. APBO APBO or the book book value value of pens pension ion plan plan assets assets..
*61. *61.
Which Which of the followi following ng statemen statements ts about about the expect expected ed postret postretire iremen mentt benefit benefit obligat obligation ion (EPBO) is not correct? a. The EPBO EPBO is is an actua actuaria riall presen presentt value value.. b. The EPBO EPBO is reco recorded rded in the the accou accounts nts.. c. The EPBO EPBO is used used in in measuri measuring ng period periodic ic expen expense. se. d. All All of the these se are are cor corre rect ct..
*62.
Which of the the following following statem statements ents about about the the recogniti recognition on of a prior servic service e cost related related to a postretirement obligation is correct? a. The prior prior service service amount is recogni recognized zed in the income income statement statement in in the current current period. period. b. The prior prior service service cost cost is recogniz recognized ed in the income income statem statement ent net of of tax. tax. c. Restatemen Restatementt of previousl previously y issued issued annual financ financial ial statemen statements ts is required. required. d. The prior prior service service cost amount amount affects affects comprehe comprehensive nsive income income in the current current period. period.
*63.
Which of the the followi following ng is recogni recognized zed in in the accounts accounts and and in the financi financial al stateme statements? nts? a. Accumulated Accumulated postretirem postretirement ent benefit benefit obligation obligation b. Postre Postretir tireme ement nt asse assett / liab liabili ility ty c. Expec Expected ted postre postretir tireme ement nt benefit benefit obliga obligatio tion n d. All All of of these hese..
Multiple Choice Answers —Conceptual Item
21. 22. 23. 24. 25. 26. 27.
Ans.
d c d c b b a
Item
28. 29. 30. 31. 32. 33. 34.
Ans.
c a a d d d a
Item
35. 36. 37. 38. 39. 40. 41.
Ans.
c b a b b c a
Item
42. 43. 44. 45. 46. 47. 48.
Ans.
c c b a d b a
Item
49. 50. 51. 52. 53. 54. 55.
Ans.
Item
Ans.
Item
Ans.
a a d a a b c
56. *57. *58. *59. *60. *61. *62.
c c c a c b d
*63.
b
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-15
MULTIPLE CHOICE—Computational 64.
Presen Presented ted below below is pensi pension on inform informati ation on relate related d to Woods, Woods, Inc. Inc. for for the year year 2013: 2013: Service cost $92,000 Interest on projected benefit obligation 54,000 Interest on vested benefits 24,000 Amortization of prior service cost cost due to increase in benefits 12,000 Expected return on plan assets 18,000 The amount of pension expense to be reported for 2013 is a. $128,000. b. $164,000. c. $182,000. d. $140,000.
65. 65.
Kraf Kraft, t, Inc. Inc. spon sponso sors rs a defi define ned-b d-ben enef efit it pensio pension n plan plan.. The The foll follow owin ing g data data relate relates s to the operation of the plan for the year 2013. Service cost $ 250,000 Contributions to the plan 220,000 Actual return on plan assets 180,000 Projected benefit obligation (beginning of year) 2,400,000 Fair value of plan assets (beginning of year) 1,600,000 The expected return on plan assets and the settlement rate were both 10%. The amount of pension expense reported for 2013 is a. $250,000. b. $310,000. c. $330,000. d. $490,000.
66.
Presen Presented ted below below is is infor informat mation ion relate related d to Jensen Jensen Inc. Inc. pensi pension on plan plan for for 2013 2013.. Service cost $1,100,000 Actual return on plan assets 210,000 Interest on projected benefit obligation 390,000 Amortization of net loss 90,000 Amortization of prior service cost cost due to increase in benefits 165,000 Expected return on plan assets 180,000 What amount should be reported for pension expense in 2013? a. $1,565,000 b. $1,535,000 c. $1,715,000 d. $1,355,000
20-16 67.
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Barton Barton,, Inc. Inc. receiv received ed the the follow following ing infor informat mation ion from from its its pensi pension on plan plan trust trustee ee conce concerni rning ng the the operation of the company's defined-benefit pension plan for the year ended December 31, 2013. January 1, 20 2013 December 31 31, 20 2013 Fair value of pension plan assets $4,200,000 $4,500,000 Projected benefit obligation 4,800,000 5,160,000 Accumulated benefit obligation 840,000 1,020,000 Accumulated OCI – (Gains / Losses) Losses) -0(90,000) The The serv servic ice e cost cost comp compon onen entt of pens pensio ion n expe expens nse e for for 2013 2013 is $390 $390,0 ,000 00 and and the the amortization of prior service cost due to an increase in benefits is $60,000. The settlement rate is 10% and the expected rate of return is 9%. What is the amount of pension expense for 2013? a. $390,000 b. $552,000 c. $561,000 d. $462,000
Use the following information for questions 68 through 70.
The following information for Cooper Enterprises is given below: December 31, 2013 Assets and obligations Plan assets (at fair value) $200,000 Accumulated benefit obligation 370,000 Projected benefit obligation 400,000 Other Items Pension asset / liability, January 1, 2013 10,000 Contributions 120,000 Accumulated other comprehensive loss 167,900 There were no actuarial gains or losses at January 1, 2013. The average remaining service life of employees is 10 years. 68.
What What is the the pensio pension n expens expense e that Coop Cooper er Enterp Enterpris rises es shoul should d report report for for 2013? 2013? a. $152,100 b. $220,000 c. $120,000 d. $167,900
69.
What What is the amount amount that that Cooper Cooper Enter Enterpri prises ses shoul should d report report as its pensio pension n liabili liability ty on its balance sheet as of December 31, 2013? a. $200,000 b. $30,000 c. $370,000 d. $400,000
70.
The amorti amortizat zation ion of Othe Otherr Comp Compreh rehens ensive ive Loss Loss for for 2014 2014 is: is: a. $0 b. $12,790 c. $23,000 d. $16,790
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
71.
20-17
The foll followi owing ng inform informati ation on is relat related ed to the the pensio pension n plan of Long Long,, Inc. Inc. for 2013. 2013. Actual return on plan assets Amortization of net gain Amortization of prior service cost cost due to increase in benefits Expected return on plan assets Interest on projected benefit obligation Service cost
$200,000 82,500 150,000 230,000 362,500 900,000
Pension expense for 2013 is a. $1,2 $1,295 95,,000. 000. b. $1,2 $1,265 65,,000. 000. c. $1,130,000. d. $1,1 $1,100 00,,000. 000. 72.
Presen Presented ted below below is is pension pension infor informat mation ion for for Green Green Compa Company ny for the the year year 2013: 2013: Expected return on plan assets Interest on vested benefits Service cost Interest on projected benefit obligation Amortization of prior service cost cost due to increase in benefits
$24,000 15,000 40,000 21,000 18,000
The amount of pension expense to be reported for 2013 is a. $103,000. b. $79,000. c. $60,000. d. $55,000. 73.
Hubbard Hubbard,, Inc. receiv received ed the followi following ng informat information ion from from its pension pension plan trustee trustee concer concernin ning g the operation of the company's defined-benefit pension plan for the year ended December 31, 2013. 1/1/13 1/1 /13 12/31/ 12/ 31/13 13 Projected benefit obligation $11,400,000 $11,760,000 Pension assets (at fair value) 6,000,000 6,900,000 Accumulated benefit obligation 2,400,000 2,760,000 Net (gains) and losses -0240,000 The The serv servic ice e cost cost comp compon onen entt of pens pensio ion n expe expens nse e for for 2013 2013 is $940 $940,0 ,000 00 and and the the amor amorti tiza zati tion on of prio priorr serv servic ice e cost cost due due to an incr increa ease se in bene benefi fits ts is $180 $180,0 ,000 00.. The The settlement rate is 10% and the expected rate of return is 8%. What is the amount of pension expense for 2013? a. $1,816,000 b. $1,780,000 c. $1,708,000 d. $1,540,000
20-18
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Use the following information for questions 74 through 76. The following data are for the pension plan for the employees of Lockett Company. Accumulated benefit obligation Projected benefit obligation Plan assets (at fair value) AOCL – net loss Settlement rate (for year) Expected rate of return (for year)
1/1/12 1/1 /12 $2,500,000 2,700,000 2,300,000 -0-
12/31/ 12/ 31/12 12 $2,600,000 2,800,000 3,000,000 480,000 10% 8%
12/31/ 12/ 31/13 13 $3,400,000 3,700,000 3,300,000 500,000 9% 7%
Lock Locket ett’ t’s s cont contri ribu buti tion on was was $420 $420,0 ,000 00 in 2013 2013 and and bene benefi fits ts paid paid were were $375 $375,0 ,000 00.. Lock Locket ettt estimates that the average remaining service life is 15 years. 74. 74.
The The actu actual al ret retur urn n on plan plan ass asset ets s in in 2013 2013 was was a. $300,000. b. $255,000. c. $200,000. d. $155,000.
75.
Assume Assume that that the actual return return on plan plan assets assets in 2013 2013 was was $265,000. $265,000. The unexpec unexpected ted gain gain on plan assets in 2013 was a. $32,000. b. $55,000. c. $35,000. d. $34,000.
76.
The corrido corridorr for 2013 was was $300,000. $300,000. The amount amount of AOCI-ne AOCI-nett loss loss amortized amortized in 2013 2013 was was a. $33,333. b. $32,000. c. $14,000. d. $12,000.
Use the following information for questions 77 and 78. On January 1, 2013, Newlin Co. has the following balances: Projected be benefit ob obligation ion Fair value of plan assets
$2,100,000 1,800,000
The settlement rate is 10%. Other data related to the pension plan for 2013 are: Service cost Amortization of prior service costs due to increase in benefits Contributions Benefits paid Actual return on plan assets Amortization of net gain
$180,000 60,000 300,000 155,000 237,000 18,000
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-19
77.
The bala balance nce of the the projec projected ted benef benefit it oblig obligati ation on at Decem December ber 31, 31, 2013 2013 is a. $2,6 $2,635 35,,000. 000. b. $2,3 $2,335 35,,000. 000. c. $2,305,000. d. $2,2 $2,287 87,,000. 000.
78.
The fair fair valu value e of plan plan asset assets s at at Dece Decembe mberr 31, 31, 2013 2013 is a. $2,3 $2,380 80,,000. 000. b. $2,2 $2,200 00,,000. 000. c. $2,182,000. d. $2,1 $2,164 64,,000. 000.
79.
Rathke, Rathke, Inc. Inc. has has a defined-bene defined-benefit fit pension pension plan covering covering its its 50 employees. employees. Rathke Rathke agrees agrees to amend its pension benefits. As a result, the projected benefit obligation increased by $1,800,000. Rathke determined that all its employees are expected to receive benefits under the plan over the next 5 years. In addition, 20% are expected to retire or quit each year. Assuming that Rathke uses the years-of-service method of amortization for prior service cost, the amount reported as amortization of prior service cost in year one after the amendment is a. $360,000. b. $600,000. c. $180,000. d. $480,000.
Use the following information for questions 80 through 84. The following information relates to the pension plan for the employees of Turner Co.: Accum. benefit obligation Projected benefit obligation Fair value of plan assets AOCI – net (gain) or loss Settlement rate (for year) Expected rate of return (for year)
1/1/12 1/1 /12 $2,640,000 2,790,000 2,550,000 -0-
12/31/ 12/ 31/12 12 $2,760,000 2,988,000 3,120,000 (432,000) 11% 8%
12/31/ 12/ 31/13 13 $3,600,000 4,002,000 3,444,000 (480,000) 11% 7%
Turner estimates that the average remaining service life is 16 years. Turner's contribution was $378,000 in 2013 and benefits paid were $282,000. 80. 80.
The The int inter eres estt cos costt for for 2013 2013 is a. $268,920. b. $303,600. c. $328,680. d. $440,220.
81. 81.
The The act actua uall ret retur urn n on plan plan ass asset ets s in in 2013 2013 is is a. $204,000. b. $228,000. c. $294,000. d. $324,000.
20-20
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
82.
The unexpe unexpecte cted d gain gain or or loss loss on plan plan asset assets s in in 2013 2013 is is a. $19, $19,68 680 0 los loss s. b. $11, $11,28 280 0 gai gain. n. c. $9,600 ga gain. d. $107 $107,2 ,280 80 gai gain. n.
83. 83.
The The cor corri rido dorr fo for 201 2013 3 is is a. $309,600. b. $312,000. c. $339,000. d. $400,200.
84. 84.
The The amou amount nt of of AOCI AOCI (ne (nett gain gain)) amort amortiz ized ed in in 2013 2013 is is a. $7,650. b. $7,500. c. $5,813. d. $4,988.
85. 85.
Pres Presen ente ted d belo below w is info inform rmat atio ion n rela relate ted d to Deck Decker er Manu Manufa fact ctur urin ing g Comp Compan any y as of December 31, 2013: Projected benefit obligation Accumulated OCI -net gain Accumulated OCI (PSC)
$800,000 300,000 405,000
The amount for the prior service cost is related to an increase in benefits. The fair value of the pension plan assets is $600,000. The pension asset / liability reported on the balance sheet at December 31, 2013 is a. Pensio Pension n liab liabili ility ty of $200,0 $200,000 00 b. Pensio Pension n liab liabili ility ty of $600,0 $600,000 00 c. Pens Pensio ion n liabi liabilility ty of $80 $800, 0,00 000 0 d. Pensio Pension n liabi liabilit lity y of of $1,2 $1,205, 05,000 000 Use the following information for questions 86 and 87. Foster Corporation received the following report from its actuary at the end of the year: Dece Decemb mber er 31, 31, 201 2012 2 Dece Decemb mber er 31, 31, 201 2013 3 Projected benefit obligation $1,800,000 $2,000,000 Accumulated benefit obligation 1,300,000 1,480,000 Fair value of pension plan assets 1,380,000 1,440,000 86.
The amou amount nt repor reported ted as as the pens pension ion liab liabili ility ty at Dece Decembe mberr 31, 2012 2012 is is a. $ -0-. b. $400,000. c. $420,000. d. $500,000.
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
87.
20-21
The amou amount nt repor reported ted as as the pens pension ion liab liabili ility ty at Dece Decembe mberr 31, 2013 2013 is is a. $2,000,000 b. $1,480,000 c. $520,000 d. $560,000
Use the following information for questions 88 and 89. The following information relates to Jackson, Inc.: Plan assets (at fair value) Pension expense Projected benefit obligation Annual contribution to plan Accumulated OCI (PSC)
For the Year Ended December 31, 2012 20 12 2013 20 13 $1,310,000 $1,824,000 570,000 450,000 1,620,000 1,984,000 600,000 450,000 480,000 420,000
88. 88.
The The amou amount nt repor reporte ted d as the liabi liabilility ty for pensi pension ons s on the Decem Decembe berr 31, 31, 2012 2012 balan balance ce sheet is a. $ -0-. b. $30,000. c. $310,000. d. $280,000.
89. 89.
The The amou amount nt repor reporte ted d as the liabi liabilility ty for pensi pension ons s on the Decem Decembe berr 31, 31, 2013 2013 balan balance ce sheet is a. $ -0-. b. $160,000. c. $1,984,000. d. $420,000.
90.
Presen Presented ted below below is is infor informat mation ion relate related d to Noble Noble Inc. Inc. as of of Decem December ber 31, 2013. 2013. Accumulated OCI (G/L) $ 90,000 Projected benefit obligation 3,600,000 Accumulated benefit obligation 3,420,000 Vested benefits 1,620,000 Plan assets (at fair value) 3,354,000 Accumulated OCI (PSC) -0The amount reported as the pension liability on Noble's balance sheet at December 31, 2013 is as follows: a. $ -0-. b. $66,000. c. $90,000. d. $246,000.
20-22 91. 91.
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Ross Rossii Comp Compan any y has a defi define ned-b d-ben enef efit it plan. plan. At the end of 2013 2013,, it has deter determi mine ned d the following information related to its pension plan: Projected benefit obligation $750,000 Accumulated benefit obligation 660,000 Fair value of pension plan assets 610,000 The amount of pension liability that is reported in Rossi's balance sheet at the end of 2013 is a. $150,000. b. $140,000. c. $90,000. d. $50,000.
92.
Presen Presented ted below below is pensi pension on inform informati ation on relate related d to Waters Waters Company Company as of of Decembe Decemberr 31, 2013: Accumulated benefit obligation $3,000,000 Projected benefit obligation 3,500,000 Plan assets (at fair value) 3,700,000 Accumulated OCI (G / L) 100,000 The amount to be reported as Pension Asset / Liability as of December 31, 2013 is a. Pensio Pension n Liab Liabili ility ty of $500,0 $500,000. 00. b. Pens Pensio ion n Asset Asset of $70 $700, 0,00 000. 0. c. Pensio Pension n Liab Liabili ility ty of $200,0 $200,000. 00. d. Pens Pensio ion n Asset Asset of $20 $200, 0,00 000. 0.
Use the following information for questions 93 and 94. On January 1, 2011, Parks Co. has the following balances: Projected benefit obligation Fair value of plan assets
$4,200,000 3,750,000
The settlement rate is 10%. Other data related to the pension plan for 2013 are: Service cost $240,000 Amortization of prior service costs 54,000 Contributions 270,000 Benefits paid 300,000 Actual return on plan assets 264,000 Amortization of net gain 18,000 93.
The bala balance nce of of the proj project ected ed benef benefit it oblig obligati ation on at Dece Decembe mberr 31, 2013 2013 is is a. $4,5 $4,572 72,,000. 000. b. $4,5 $4,590 90,,000. 000. c. $4,554,000. d. $4,5 $4,560 60,,000. 000.
94.
The fair fair valu value e of plan plan asset assets s at at Dece Decembe mberr 31, 31, 2013 2013 is a. $3,4 $3,456 56,,000. 000. b. $3,7 $3,714 14,,000. 000. c. $3,984,000. d. $4,2 $4,284 84,,000. 000.
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
95. 95.
20-23
Hugg Huggin ins s Comp Company any has the follo followi wing ng inform informat atio ion n at Decem Decembe berr 31, 31, 2013 2013 relate related d to its pension plan: Projected benefit obligation $4,000,000 Accumulated benefit obligation 3,200,000 Plan assets (fair value) 4,500,000 Accumulated OCI (PSC) 300,000 The amount of pension asset / liability Huggins Company would recognize at December 31, 2013 is a. Pensio Pension n liab liabili ility ty of $300,0 $300,000. 00. b. Pensio Pension n asse assett of of $1,300 $1,300,00 ,000. 0. c. Pensio Pension n liab liabili ility ty of $800,0 $800,000. 00. d. Pens Pensio ion n asset asset of $50 $500, 0,00 000. 0.
96.
The following following pension pension plan information information is for for Farr Farr Company Company at Decemb December er 31, 31, 2013. 2013. Projected benefit obligation Accumulated benefit obligation Plan assets (at fair value) Accumulated OCI (PSC) Pension expense for 2013 Contribution for 2013
$8,700,000 7,500,000 6,150,000 540,000 3,000,000 2,400,000
The amount to be reported as the liability for pensions on the December 31, 2013 balance sheet is a. $2,5 $2,550 50,,000. 000. b. $2,2 $2,250 50,,000. 000. c. $1,650,000. d. $1,3 $1,350 50,,000. 000. *97. *97.
The follo followi wing ng facts facts relate relate to the the Patton Patton Co. post postret retire iremen mentt benefit benefits s plan plan for 2013: 2013: Service cost $190,000 Discount rate 9% APBO, January 1, 2013 $1,500,000 EPBO, January 1, 2013 $2,000,000 Benefit payments to employees $115,000 The amount of postretirement expense for 2013 is a. $190,000. b. $325,000. c. $370,000. d. $440,000.
20-24 *98.
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
The follow following ing facts facts relate relate to to the postretirem postretirement ent benefit benefits s plan of Keller, Keller, Inc. for 2013: 2013: Service cost $780,000 Discount rate 8% APBO, January 1, 2013 $4,000,000 EPBO, January 1, 2013 $4,800,000 Average remaining service to full eligibility 20 years Average remaining service to expected retirement 25 years The amount of postretirement expense for 2013 is a. $1,1 $1,100 00,,000. 000. b. $1,2 $1,260 60,,000. 000. c. $1,300,000. d. $1,1 $1,164 64,,000. 000.
*99.
The follow following ing facts facts relate relate to to the Gamble Co. postre postretireme tirement nt benefits benefits plan for for 2013: 2013: Service cost $156,000 Discount rate 10% EPBO, January 1, 2013 $1,095,000 APBO, January 1, 2013 $900,000 Actual return on plan assets in 2013 $31,500 Expected return on plan assets in 2013 $24,000 The amount of postretirement expense for 2013 is a. $214,500. b. $222,000. c. $241,500. d. $246,000.
Multiple Choice Answers —Computational Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
64. 65. 66. 67. 68. 69.
d c a b a a
70. 71. 72. 73. 74. 75.
b d d b b b
76. 77. 78. 79. 80. 81.
d b c b c b
82. 83. 84. 85. 86. 87.
c b b a c d
88. 89. 90. 91. 92. 93.
c b d b d d
94. 95. 96. 97. 98. 99.
c d a b a b
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-25
MULTIPLE CHOICE—CPA Adapted 100. 100.
The foll followi owing ng inform informati ation on pertai pertains ns to Hopso Hopson n Co.'s Co.'s pensio pension n plan: plan: Actuarial estimate of projected benefit obligation obligation at 1/1/13 Assumed discount rate Service costs for 2013 Pension benefits paid during 2013
$72,000 10% $28,000 $15,000
If no change in actuarial estimates occurred during 2013, Hopson's projected benefit obligation at December 31, 2013 was a. $74,200. b. $85,000. c. $90,200. d. $92,200. 101. 101.
Inte Intere rest st cost cost incl includ uded ed in pens pensio ion n expe expens nse e reco recogn gniz ized ed for for a peri period od by an empl employ oyer er sponsoring a defined-benefit pension plan represents the a. shortage shortage between between the the expected expected and actual actual returns returns on plan assets. assets. b. increase increase in the projected projected benefit benefit obligati obligation on due to the the passage passage of time. time. c. increase increase in the the fair fair value of plan plan assets assets due to to the passag passage e of time. time. d. amortizatio amortization n of the the discount discount on accumulat accumulated ed OCI (PSC). (PSC).
102. 102.
Loga Logan n Corp Corp., ., a comp compan any y whose hose stoc stock k is public publicly ly traded traded,, prov provid ides es a nonc noncon ontr trib ibut utory ory defined-benefit pension plan for its employees. The company's actuary has provided the following information for the year ended December 31, 2013: Projected benefit obligation $650,000 Accumulated benefit obligation 525,000 Fair value of plan assets 825,000 Service cost 240,000 Interest on projected benefit obligation 24,000 Amortization of prior service cost cost 60,000 Expected and actual return on plan assets 82,500 The market-related asset value equals the fair value of plan assets. No contributions have been made for 2013 pension cost. In its December 31, 2013 balance sheet, Logan should report a pension asset / liability of a. Pensio Pension n liab liabili ility ty of $650,0 $650,000 00 b. Pens Pensio ion n asse assett of $82 $825, 5,00 000 0 c. Pens Pensio ion n asse assett of $175 $175,0 ,000 00 d. Pensio Pension n liab liabili ility ty of $525,0 $525,000 00
103. 103.
Seigel Seigel Co. Co. maintai maintains ns a defined-b defined-bene enefit fit pensi pension on plan for for its employ employees ees.. At each balanc balance e sheet date, Yeager should report a pension asset / liability equal to the a. accumu accumulat lated ed bene benefit fit obliga obligatio tion. n. b. projec projected ted benefi benefitt obli obligat gation. ion. c. accumu accumulat lated ed benefi benefitt obli obligat gation ion.. d. funded status relative relative to the the projecte projected d benefit benefit obligati obligation. on.
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Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
104.
Ohlman, Ohlman, Inc. Inc. maintains maintains a defined-ben defined-benefit efit pension pension plan plan for its employees. employees. As As of December December 31, 2013, the market value of the plan assets is less than the accumulated benefit obligation. The projected benefit obligation exceeds the accumulated benefit obligation. In its balance sheet as of December 31, 2013, Ohlman should report a liability in the amount of the a. excess excess of the projected projected benefit benefit obligatio obligation n over the fair fair value of the the plan assets. assets. b. excess excess of the accumulat accumulated ed benefit benefit obligation obligation over over the fair value value of the plan plan assets. assets. c. projec projected ted benefi benefitt obliga obligation tion.. d. accumu accumulat lated ed bene benefit fit obliga obligatio tion. n.
105. 105.
At Decem Decembe berr 31, 31, 2013 2013,, the the foll follow owing ing infor informa mati tion on was provid provided ed by the the Varg Vargas as Corp. Corp. pension plan administrator: Fair value of plan assets $4,500,000 Accumulated benefit obligation 5,580,000 Projected benefit obligation 7,700,000 What is the amount of the pension liability that should be shown on Vargas' December 31, 2013 balance sheet? a. $7,700,000 b. $3,200,000 c. $2,120,000 d. $1,080,000
Multiple Choice Answers —CPA Adapted Item
Ans.
100. 101.
d b
Item
Ans.
102. 103.
c d
Item
104. 105.
Ans.
a b
DERIVATIONS — Computational No. Answer 64. d
Derivation $92,000 + $54,000 + $12,000 – $18,000 = $140,000.
65.
c
$250,000 + ($2,400,000 × .10) – ($1,600,000 × .10) = $330,000.
66.
a
$1,100,000 + $390,000 + $90,000 + $165,000 – $180,000 = $1,565,000.
67.
b
$390,000 + $60,000 + ($4,800,000 × .10) – ($ ($4,200,000 × .09) = $552,000.
68.
a
$200,000 + $120,000 - $167,900 = $152,100.
69.
a
$400,000 - $200,000 = $200,000.
70.
b
($167,900 - $40,000) ÷ 10 = $12,790.
71.
d
$900,000 + $362,500 – $230,000 – $82,500 + $150,000 = $1,100,000.
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-27
DERIVATIONS — Computational (cont.) No. Answer 72. d
Derivation $40,000 + $21,000 + $18,000 – $24,000 = $55,000.
73.
b
$940,000 + ($11,400,000 × .10) – ($6 ($6,000,000 × .08) + $180,000 = $1,780,000.
74.
b
($3,300,000 – $3,000,000) – $420,000 + $375,000 = $255,000
75.
b
$265,000 – ($3,000,000 × .07) = $55,000.
76.
d
($480,000 – $300,000) ÷ 15 = $12,000.
77.
b
$2,100,000 + $180,000 + ($2,100,000 × .10) – $155,000 = $2,335,000.
78.
c
$1,800,000 + $237,000 + $300,000 – $155,000 = $2,182,000.
79.
b
50 + 40 + 30 + 20 + 10 = 150. $1,800,000 ÷ 150 = $12,000/service yr. $12,000 × 50 = $600,000.
80.
c
$2,988,000 × .11 = $328,680.
81.
b
($3,444,000 – $3,120,000) – ($378,000 – $282,000) = $228,000.
82.
c
$228,000 – ($3,120,000 × .07) = $9,600.
83.
b
$3,120,000 × .10 = $312,000.
84.
b
($432,000 – $312,000) ÷ 16 = $7,500.
85.
a
$800,000 – $600,000 = $200,000.
86.
c
$1,800,000 – $1,380,000 = $420,000.
87.
d
$2,000,000 – $1,440,000 = $560,000.
88.
c
$1,620,000 – $1,310,000 = $310,000.
89.
b
$1,984,000 – $1,824,000 = $160,000.
90.
d
$3,600,000 – $3,354,000 = $246,000.
91.
b
$750,000 – $610,000 = $140,000.
92.
d
$3,700,000 – $3,500,000 = $200,000.
93.
d
$4,200,000 + $240,000 – $300,000 + ($4,200,000 × .10) = $4,560,000.
94.
c
$3,750,000 + $264,000 + $270,000 – $300,000 = $3,984,000.
95.
d
$4,500,000 – $4,000,000 = $500,000 (Asset).
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Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
DERIVATIONS — Computational (cont.) 96.
a
$8,700,000 – $6,150,000 = $2,550,000.
*97.
b
$190,000 + $135,000 = $325,000.
*98.
a
$780,000 + $320,000 = $1,100,000.
*99.
b
$156,000 + $90,000 – $24,000 = $222,000.
DERIVATIONS — CPA Adapted No. Answer 100. d
Derivation $72,000 + $28,000 + ($72,000 × .10) – $15,000 = $92,200.
101.
b
Conceptual.
102.
c
$825,000 - $650,000 = $175,000.
103.
d
Conceptual.
104.
a
Conceptual.
105.
b
$7,700,000 – $4,500,000 = $3,200,000.
EXERCISES Ex. 20-106—Pension accounting terminology.
Briefly explain the following terms: (a) (a) Serv ervice ice cos costt (b) (b) Inter nteres estt cos cost (c) (c) Prio Priorr ser servi vice ce cost cost (d) (d) Vest Vested ed bene benefi fits ts Solution 20-106
(a)
The servic service e cost compone component nt of pension pension expense expense is the actuari actuarial al present present value value of benefits benefits attributed by the pension benefit formula to employee service during the current period.
(b) (b)
The The inte intere rest st cost cost comp compon onen entt of pensio pension n expe expens nse e is the intere interest st for the period period on the the projected benefit obligation outstanding during the period. To simplify the calculation, the amount of interest is computed by applying a single rate to the beginning balance of the projected benefit obligation.
(c)
When When a define defined-b d-bene enefit fit plan plan is initiate initiated d or amended, amended, credit credit that is given given to employee employees s for service provided before the date of initiation or amendment results in prior service cost. The amount of prior service cost is computed by an actuary.
(d)
Vested Vested benefi benefits ts are those those the the employe employee e is entitled entitled to receiv receive e even if the emplo employee yee is no longer employed under the plan.
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-29
Ex. 20-107—Pension assets.
Discuss the following ideas related to pension assets: (a) Market Market-rel -relate ated d asset asset value. value. (b) Actual Actual return return on plan plan asset assets. s. (c) Expec Expected ted return return on plan plan asset assets. s. (d) Unexpe Unexpecte cted d gains gains and losse losses s on plan plan assets assets.. Solution 20-107
(a)
Market-rel Market-related ated asset asset value value is a moving moving average average of pension pension plan plan assets assets calculat calculated ed over not not more than five years. The actual return is what the plan assets earn during the period including market appreciation (depreciation). (We assume that the fair value of the plan assets is used in all computations.)
(b)
The actual actual return return on plan assets assets is computed computed by finding finding the the change change in the fair value value of plan plan assets during the period. This change is adjusted by deducting contributions and adding benefits paid out during the year.
(c)
The expected expected return on plan assets assets is found found by multiplyin multiplying g the expecte expected d rate of return return by the the market-related asset value at the beginning of the period.
(d)
An unexpected asset gain occurs when the actual return on plan assets is greater than the the expected return on plan assets and an unexpected loss occurs when the actual return is less than the expected return.
Ex. 20-108—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, 2013: Janua anuary ry 1, 2013 013 Dec Decembe emberr 31, 31, 2013 2013 Projected benefit obligation $2,500,000 $2,850,000 Fair value of plan assets 1,250,000 1,600,000 Accumulated benefit obligation 1,930,000 2,620,000 Accumulated OCI – (PSC) 540,000 300,000 The service cost component for 2013 is $120,000 and the amortization of prior service cost is $240,0 $240,000. 00. The company company's 's actual actual funding funding of the plan plan in 2013 2013 amount amounted ed to $490,0 $490,000. 00. The expected return on plan assets and the settlement rate were both 8%. Instructions
(a) (b)
Determ Determine ine the the pensi pension on expen expense se to be be reporte reported d in 2013. 2013. Prepare Prepare the journal journal entry entry to to record record pension pension expense expense and the the employers employers'' contributi contribution on to the the pension plan in 2013.
20-30
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Solution 20-108
(a)
Service cost Interest on projected benefit obligations ($2,500,000 × 8%) Expected return on plan assets ($1,250,000 × 8%) Amortization of prior service cost cost Pension expense—2013
(b)
Pensio Pension n Expen Expense se .... ....... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Pension Pension Asset Asset / Liabili Liability ty ....... ............. ........... .......... ........... ............ ........... .......... .......... ........... ............. ....... Cash ............................................................. .......... .......... .......... ......... ... Other Comprehensive Income (PSC) .............................
$120,000 200,000 (100,000) 240,000 $460,000 460,00 460,000 0 270,000 270,000 490,000 240,000
Ex. 20-109—Measuring and recording pension expense.
Presented below is information related to Jones Department Stores, Inc. pension plan for 2013. Accumulated benefit obligation (at year-end) $600,000 Service cost 520,000 Funding contribution for 2013 480,000 Settlement rate used in actuarial computation 10% Expected return on plan assets 9% Amortization of PSC (due to benefit increase) increase) 100,000 Amortization of net gains 48,000 Projected benefit obligation (at beginning of period) 450,000 Fair value of plan assets (at beginning of period) 360,000 Instructions
(a) (b)
Compute Compute the amount of pension pension expense expense to to be reported reported for 2013. 2013. (Show (Show computat computations. ions.)) Prepar Prepare e the journa journall entry to record record pension pension expense expense and the employer employer's 's contrib contributi ution on for 2013.
Solution 20-109
(a)
(b)
Service cost Interest on projected benefit obligation ($450,000 × 10%) Expected return on plan assets ($360,000 × 9%) Amortization of PSC Amortization of net gains Pension expense—2013 Pensio Pension n Expens Expense.. e..... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Other Other Compreh Comprehens ensive ive Incom Income e (G/L).. (G/L)..... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ...... Cash............................................................... .......... ...... ........ .......... ...... Other Comprehensive Income (PSC)................................ Pension As Asset / Liability....................................................
$520,000 45,000 (32,400) 100,000 (48,000) $584,600 584,60 584,600 0 48,000 48,000 480,000 100,000 52,600
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-31
Ex. 20-110 — Recording pension asset / liability.
Miles Co. had the following selected balances at December 31, 2013: Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Accumulated OCI (PSC)
$4,750,000 4,550,000 4,340,000 170,000
Instructions
Calculate the pension asset / liability to be recorded at December 31, 2013. Solution 20-110
$4,750,000 - $ 4,340,000 = $410,000 pension liability. Ex. 20-111—Pension calculations.
Montoya Company has available the following information about its defined-benefit pension plan for the year ending December 31, 2013: Service cost for 2013 $ 25,000 Accumulated benefit obligation 683,000 Plan assets at fair value 630,000 Accumulated OCI (PSC) 300,000 Vested benefit obligation 505,000 Market-related asset value 725,000 Projected benefit obligation 825,000 Accumulated OCI net gain 90,000 Interest on projected benefit obligation 64,000 Instructions
(a) Calculate the pension asset / liability to be recorded at December 31, 2013. (b) Calcul Calculate ate the 2014 2014 amorti amortizat zation ion of the net gain. gain. The averag average e remain remaining ing service service life of employees is 10 years. Solution 20-111
(a) $825,000 $825,000 - $630,000 = $195,000 $195,000 Pension Pension liability. liability. (b) [$90,000 [$90,000 – ($825,000 ($825,000 X 10%)] 10%)] ÷ 10 10 = $750. Ex. 20-112—Pension plan calculations.
The following information is for the pension plan for the employees of Payne, Inc. Accumulated benefit obligation Projected benefit obligation Fair value of plan assets AOCI – Net (gain) or loss Settlement rate Expected rate of return
12/31/1 12/3 1/12 2 $2,800,000 3,140,000 3,180,000 (425,000) 8% 7%
12/31/ 12/ 31/13 13 $3,760,000 4,000,000 3,630,000 (480,000) 8% 6%
20-32
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Payne estimates that the average remaining service life is 15 years. Payne's contribution was $520,000 in 2013 and benefits paid were $280,000. Instructions
(a) (a) (b) (c) (d)
Calc Calcula ulate te the the int intere erest st cost cost for for 201 2013. 3. Calcul Calculate ate the actual actual return return on plan plan assets assets in 2013 2013.. Calcul Calculate ate the unexpe unexpecte cted d gain gain or loss loss in in 2013 2013.. Calculate Calculate the corridor corridor for 2013 2013 and the amorti amortizatio zation n of the net net gain gain for 2013.
Solution 20-112
(a) (a)
$3,1 $3,140 40,0 ,000 00 × 8% 8% = $251 $251,2 ,200 00
(b)
Fair value of plan assets (12/31/13) Fair value of plan assets (1/1/13) Contributions Benefits paid Actual return on plan assets
$3,630,000 (3,180,000) 450,000 (520,000) 280,000 $ 210,000
(c)
Actual return (see b.) Expected return ($3,180,000 × 6%) Unexpected gain
$ 210,000 190,800 $ 19,200
(d)
.10 × $3,180 $3,180,00 ,000 0 = $318, $318,000 000;; .10 .10 × $3,14 $3,140,0 0,000 00 = $314 $314,00 ,000. 0. The corridor is the larger, $318,000. $425,000 – $318,000 = $107,000; $107,000 ÷ 15 = $7,133 amortization of net gain.
Ex. 20-113—Pension plan calculations and entries.
Selected Information about the pension plan of Roman Co. is as follows: 12/31/1 12/ 31/12 2 12/31/ 12/ 31/13 13 Accumulated benefit obligation $4,700,000 $4,930,000 Projected benefit obligation 4,900,000 5,150,000 Accumulated OCI (PSC) 1,800,000 1,600,000 Fair value of plan assets 4,750,000 4,800,000 Pension expense 1,000,000 1,650,000 Contribution 985,000 1,350,000 Discount rate (for year) 9% 8% Instructions (a) (a) What What is the the corr corrid idor or for for 201 2013? 3? (b) Calcul Calculate ate the the pension pension asset asset / liabi liabilit lity y at Decemb December er 31, 2013. 2013. (c) Prepare Prepare the entry for 2013 2013 to record the pensio pension n expense expense and and contribut contribution. ion. Solution 20-113
(a)
.10 × $4,900 $4,900,00 ,000 0 = $490, $490,000 000;; .10 .10 × $4,75 $4,750,0 0,000 00 = $475 $475,00 ,000 0 The corridor is the larger, $490,000.
(b)
Projected benefit obligation Fair value of plan assets Pension asset / liability
$5,150,000 (4,900,000) $ 250,000
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-33
Solution 20-113 (cont.)
(c)
Pension Pension Expense... Expense......... ........... .......... .......... ........... ........... .......... ........... ............ ........... .......... .......... ........... ........ 1,650,000 1,650,000 Cas Cash.... .......... ...... ........ ...... ........ ...... .... .... .... .... ........ ...... ........ ...... ........ ...... ........ ...... ........ ...... .... .... .... .... .... .... .... Other Comprehensive Income (PSC)................................ Pension Asset / Liability....................................................
1,35 1,350, 0,00 000 0 200,000 100,000
Ex. 20-114—Corridor amortization.
Explain corridor amortization. Solution 20-114
The FASB invented the corridor approach for amortizing pension plan gains and losses when they get too large. The net gain or loss gets too large when it exceeds the arbitrarily selected criterion of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related asset value. Generally, the straight-line method, based on service lives, is used to amortize these gains and losses. Ex. 20-115—Corridor approach (amortization of net gains and losses.)
Gibbs Company has 200 employees who are expected to receive benefits under the company's defined-benefit pension plan. The total number of service-years of these employees is 2,000. The actuary for the company's pension plan calculated the following net gains and losses: For the Year Ended December 31 2012 2013 2014
(Gain) Or Loss $610,000 (554,000) 990,000
Prior to 2012, there was no unrecognized net gain or loss. Information about the company's projected benefit obligation and market-related (and fair) value of plan assets follows: As of January 1 2012 20 12 2013 20 13 2014 20 14 Projected benefit obligation $2,100,000 $2,340,000 $2,940,000 Fair value of plan assets 1,680,000 2,460,000 2,550,000 Instructions
Based on the above information about Gibbs Company, prepare a schedule which reflects the amount of net gain or loss to be amortized by the company as a component of pension expense for the years 2012, 2013, and 2014. The company amortizes net gains or losses using the straight-line method over the average service life of participating employees.
20-34
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Solution 20-115
Corridor Test and Gain/Loss Amortization Schedule Beginning Beginni ng of Year Accumulated Accumul ated OCI PBO Plan Assets Corridor (Gain / Loss) 2012 $2,100,000 $1,680,000 $210,000 $ -02013 2,340,000 2,460,000 246,000 610,000 2014 2,940,000 2,550,000 294,000 19,600**
Amortization $ -036,400* -0-
Average Service Years = 2,000 ÷ 200 = 10 years *$610,000 – $246,000 = $364,000 ÷ 10 = $36,400 **$610,000 – $554,000 – $36,400 = $19,600. Ex. 20-116—Pension plan calculations and journal entry.
On January 1, 2012, McGee Co. had the following balances: Projected benefit obligation Fair value of plan assets
$7,700,000 7,700,000
Other data related to the pension plan for 2012: Service cost Contributions to the plan Benefits paid Actual return on plan assets Settlement rate Expected rate of return
315,000 459,000 450,000 462,000 9% 6%
Instructions
(a) (b) (c) (c) (d)
Determine Determine the the projected projected benefit benefit obligation obligation at December December 31, 31, 2013. 2013. There There are no net gains gains or losses. Determ Determine ine the the fair fair value value of plan plan assets assets at at Decemb December er 31, 2013 2013.. Calc Calcul ulat ate e pens pensio ion n expe expens nse e for for 2013 2013.. Prepare Prepare the journal journal entry to record record pension pension expens expense e and the contributio contributions ns for 2013.
Solution 20-116
(a)
Projected benefit obligation, January 1 Service cost Interest cost (9% × $7,700,000) Benefits paid Projected benefit obligation, December 31
$7,700,000 315,000 693,000 (450,000) $8,258,000
(b)
Fair value of plan assets, January 1 Actual return Contributions Benefits paid Fair value of plan assets, December 31
$7,700,000 462,000 459,000 (450,000) $8,171,000
(c)
Service cost Interest cost (9% × $7,700,000) Actual (and expected) return on plan assets Pension expense
$315,000 693,000 (462,000) $546,000
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-35
Solution 20-116 (cont.)
(d)...Pension Expense... Expense......... ........... .......... .......... ........... ........... .......... ........... ............ ........... .......... .......... ........... ........ Pension As Asset / Liability.................................................... Cash............................................................... .......... ...... ........ .......... ......
546,000 546,000 87,000 459,000
*Ex. 20-117 —Computing and recording postretirement expense.
The following information is related to the Stone Co. postretirement benefits plan for 2013: Service cost $168,000 Discount rate 10% EPBO, January 1, 2013 820,000 APBO, January 1, 2013 690,000 Actual return on plan assets in 2013 22,400 Expected return on plan assets in 2013 29,000 Contributions (funding) 224,000 Instructions
(a) Compute Compute the amount of postreti postretirement rement expense expense for 2013. (Show (Show comput computations ations.) .) (b) Prepar Prepare e the journal journal entry entry to record record postret postretire iremen mentt expen expense se and Stone' Stone's s contribut contribution ions s for 2013. *Solution 20-117
(a)
Se S ervice cost Interest cost (10% × $690,000) Actual return on plan assets Unexpected loss Postretirement expense—2013
$168,000 69,000 (22,400) (6,600) $208,000
(b)
Postre Postretir tireme ement nt Expen Expense. se.... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ........ .......... .......... .......... ........ ... Postre Postretir tireme ement nt Asset Asset / Liabilit Liability.. y..... ...... ...... ...... ...... ...... ...... ....... ........ ......... .......... .......... .......... ....... .. Cash ............................................................. .......... .......... .......... ......... ...
208,00 208,000 0 16,000 16,000 224,000
*Ex. 20-118 —Computing postretirement expense and APBO.
The following information is related to the postretirement benefits plan of Heerey, Inc. for 2013: Service cost $ 280,000 Discount rate 8% APBO, January 1, 2013 2,200,000 EPBO, January 1, 2013 2,400,000 Actual return on plan assets in 2013 104,000 Expected return on plan assets in 2013 95,600 Amortization of PSC, due to benefit increase 107,200 Contributions (funding) 400,000 Benefit payments 208,000
20-36
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Instructions
(a) (b)
Compute Compute the the amount amount of postretirem postretirement ent expen expense se for for 2013. 2013. (Show (Show computations computations.) .) Comput Compute e the the amoun amountt of the APBO APBO at Decemb December er 31, 31, 2013 2013..
*Solution 20-118
(a)
Se S ervice cost Interest cost (8% × $2,200,000) Actual return on plan assets Unexpected gain Amortization of PSC Postretirement expense—2013
(b)
APBO, January 1, 2013 Service cost Interest cost Benefit payments APBO, December 31, 2013
$280,000 176,000 (104,000) 8,400 107,200 $467,600 $2,200,000 280,000 176,000 (208,000) $2,448,000
PROBLEMS Pr. 20-119 —Measuring, recording, and reporting pension expense and liability.
Tucker, Inc. on January 1, 2013 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 total expected service-years of the 100 employees who are expected to receive benefits under the plan is 1,200. An actuarial consulting firm has indicated that the presen presentt value value of the projected projected benefi benefitt obliga obligatio tion n on January January 1, 2013 2013 was $5,280 $5,280,00 ,000. 0. On Decemb December er 31, 2013 2013 the follow following ing inform informati ation on was provid provided ed concer concernin ning g the pensio pension n plan's plan's operations for its first year. Employer's contribution at end of year $1,600,000 Service cost 600,000 Projected benefit obligation 6,362,400 Plan assets (at fair value) 1,600,000 Expected return on plan assets 9% Settlement rate 8% Instructions
(a) (a) (b) (c)
Comp Comput ute e the the pens pensio ion n expe expens nse e reco recogn gniz ized ed in 2013. 2013. Assu Assume me the prior prior serv servic ice e cost cost is amortized over the average remaining service life of the employees. Prepare Prepare the journal journal entries entries to reflect reflect account accounting ing for for the company company's 's pension pension plan plan for the the year ended December 31, 2013. Indica Indicate te the amount amounts s that are repor reported ted on the income income state statemen mentt and the balance balance sheet sheet for 2013.
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-37
Solution 20-119
(a)
Se Service cost Interest on on pr projected be benefit obligation ($ ($5,280,000 × 8%) Amortization of prior service cost* cost* Pension expense—2013
*1,200 100
$ 600,000 422,400 440,000 $1,462,400
= 12 years average remaining service life
$5,280,000 = $440,000 12 (b)
(c)
Pension Pension Expense... Expense......... ........... .......... .......... ........... ........... .......... ........... ............ ........... .......... .......... ........... ...... 1,462,400 1,462,400 Pension Pension Asset Asset / Liabili Liability... ty........ ........... ............ ........... .......... .......... ........... ........... .......... ........... ............. ....... 577,600 577,600 Cash. ash....... ...... ........ ...... ........ ...... .... .... .... .... ........ ...... ........ ...... ........ ...... ........ ...... .... .... .... .... .... .... .... .... .... .... .... .... OCI - PSC.........................................................................
1,60 1,600, 0,00 000 0 440,000
Income statement
Pension Expense
$1,462,400
Note that the Other comprehensive income (PSC) charge is added to net income to determine Total comprehensive income. The presentation of net income and other comprehensive income can be shown in a single combined statement, separate statements, or in the statement of stockholders’ equity. Balance Sheet Liabilities
Pension liability liabilit y
$4,762,400 4,762,4 00
Stockholders’ Stockholders’ Equity
Accumulated OCI (PSC)
$4,840,000
Pr. 20-120 —Measuring and recording pension expense.
Presented below is information related to the pension plan of Zimmer Inc. for the year 2013. 1. The The serv servic ice e cost cost rela relate ted d to pens pensio ion n expe expens nse e is $240 $240,0 ,000 00 usin using g the the proj projec ecte ted d bene benefi fits ts approach. 2. The projected projected benefit benefit obligation obligation and the accumula accumulated ted benefit benefit obligation obligation at the beginning beginning of the year are $350,000 and $280,000, respectively. The expected return on plan assets is 9% and the settlement rate is 10%.
20-38
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Pr. 20-120 (cont.)
3. The The accu accumu mula late ted d OCI OCI – prio priorr serv servic ice e cost cost at the the begi beginn nnin ing g of the year year is $140 $140,0 ,000 00.. The The company has a workforce of 200 employees, all who are expected to receive benefits under the plan. The total number of service-years is 1,000 and the service-years attributable to 2013 is 200. The company has decided to use the years-of-service method of amortization for these costs. 4. At the beginning beginning of the period, period, fair fair value value of pension pension plan assets, assets, $280,000 $280,000.. The company company had an Accumulated OCI (loss) at the beginning of the period of $90,000. Any amortization of unrecognized net loss is recognized on a straight-line basis over the average remaining service-life of the employees. 5. The contribu contribution tion made made to the the pension pension fund fund in 2013 2013 was was $226,000. $226,000. Instructions
(a) (b)
Determ Determine ine the pensi pension on expense expense to be reporte reported d on the income income statemen statementt for 2013. 2013. (Round (Round all computations to nearest dollar.) Prepare Prepare the the journal journal entry(ies) entry(ies) to record record pension pension expense expense for 2013.
Solution 20-120
(a)
Service cost Interest on projected benefit obligation (10% × $350,000) Expected return on plan assets (9% × $280,000) Amortization of prior service cost cost (1) Amortization of loss (2) Pension expense
$240,000 35,000 (25,200) 28,000 11,000 $288,800
(1) $140,000 1,000
= $140
200 × $140 = $28,000 (2) Fair value of plan assets
$280,000 10% $ 28,000 $350,000 10% $ 35,000
Projected benefit obligation
Net loss (beginning of period) ($ 90,000) Higher of 10% of projected benefit obligation or fair value of plan assets 35,000 Amount to be amortized ($ 55,000) 1,000
Expected Future Years of Service =
200
= 5 years Number of Employees
$55,000 5 years
= $11,000
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-39
Solution 20-120 (cont.)
(b)
Pensio Pension n Expens Expense.. e..... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... OCI (G/L)............................................................................. OCI-PSC.............................................................................. Pension Asset / Liability....................................................... Cash................................................................... ....... .......... ...... ........ ......
288,80 288,800 0 11,000 28,000 23,800 226,000
Pr. 20-121 —Preparing a pension work sheet.
The accountant for Marlin Corporation has developed the following information for the company's defined-benefit pension plan for 2013: Service cost $500,000 Actual return on plan assets 240,000 Annual contribution to the plan 900,000 Amortization of prior service cost cost 125,000 Benefits paid to retirees 60,000 Settlement rate 10% Expected rate of return on plan assets 8% The accumulated benefit obligation at December 31, 2013, amounted to $3,250,000. Instructions
(a) (b)
Using Using the above inform informati ation on for Marlin Marlin Corpor Corporati ation, on, comple complete te the pension pension work sheet sheet for 2013. Indicate (credit) entries by parentheses. Calculated amounts should be supported. Prepare Prepare the journal journal entry entry to reflect reflect the accountin accounting g for the company's company's pension pension plan plan for the the year ending December 31, 2013.
Pr. 20-121 (cont.)
Marlin Corporation Pension Work Sheet—2013 ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— General Journal Entries Memo Entries ————————————————————————————————— ———————————————— ————————————————————————————————— ———————————————————————— ———————— Annual OCI Pension Projected Pension Gain / Asset / Benefit Plan Expense Cash PSC Loss Liability Obligation Assets ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Bal., Dec. 31, 2012 625,000 1,000,000 (3,500,000) 2,750,000 ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Service Cost ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Interest Cost ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Actual return ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Unexpected gain/loss ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Amortization of PSC ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Contributions ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Benefits ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Gain/loss amort. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Journal entry for 2013 Balance, Dec. 31, 2013
A c c o u n ti n g fo r
P e n s io n s
a n d P o s tr e ti
re m e n t B e
n e fi
ts P a g e 2 0 -3 9
Marlin Corporation Pension Work Sheet—2013 ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— General Journal Entries Memo Entries ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— OCI
Solution 20-121
Annual Prior Gain / Pension Projected Pension Service Loss Asset / Benefit Plan Expense Cash Cost Liability Obligation Assets ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Bal., Dec. 31, 2012 750,000 Cr. 3,500,000 Cr. 2,750,000 Dr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Service Cost 500,000 Dr. 500,000 Cr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Interest Cost (1) 350,000 Dr. 350,000 Cr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Actual return 240,000 Cr. 240,000 Dr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Unexpected gain/loss (2) 20,000 Dr. 20,000 Cr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Amortization of PSC 125,000 Dr. 125,000 Cr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Contributions 900,000 Cr. 900,000 Dr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Benefits 60 000 Dr 60 000 Cr
T e s t B a n k fo r
In te rm e d
ia te A c c o u n ti n g , F o u
rt
e e n
Marlin Corporation Pension Work Sheet—2013 ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— General Journal Entries Memo Entries ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— OCI
Solution 20-121
Annual Prior Gain / Pension Projected Pension Service Loss Asset / Benefit Plan Expense Cash Cost Liability Obligation Assets ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Bal., Dec. 31, 2012 750,000 Cr. 3,500,000 Cr. 2,750,000 Dr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Service Cost 500,000 Dr. 500,000 Cr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Interest Cost (1) 350,000 Dr. 350,000 Cr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Actual return 240,000 Cr. 240,000 Dr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Unexpected gain/loss (2) 20,000 Dr. 20,000 Cr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Amortization of PSC 125,000 Dr. 125,000 Cr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Contributions 900,000 Cr. 900,000 Dr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Benefits 60,000 Dr. 60,000 Cr. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Gain/loss Amort.. ————————————————————————————————— ———————————————— ————————————————————————————————— ————————————————————————— ————————— Journal entry for 2013 755,000Dr. 900,000Cr 1 25 25,000 Cr. 20,000 Cr. 290,000 Dr. AOCI, 12/31/12
625,000 Dr.
Bal., Dec. 31, 2013
500,000 Dr.
-0-
20,000 Cr. 460,000 Cr. 4,290,000 Cr. 3,830,000 Dr.
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
Page 20-41
20-41
Solution 20-121 (cont.)
(b)
(1) (1)
$3,5 $3,500 00,0 ,000 00 × 10% 10% = $35 $350, 0,00 000 0
(2) (2)
$240 $240,0 ,000 00 – ($2, ($2,75 750, 0,00 000 0 × 8%) 8%) = $20, $20,00 000 0
Pensio Pension n Expens Expense.. e..... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Pension Pension Asset Asset / Liabili Liability... ty........ ........... ............ ........... .......... .......... ........... ........... .......... ........... ............. ....... Cash............................................................... .......... ...... ........ .......... ...... Other Co Comprehensive In Income (P (PSC) .. ............................... Other Comprehensive Income (G/L).................................
755,00 755,000 0 290,000 290,000 900,000 125,000 20,000
Pr. 20-122 —Amortization of prior service cost using years-of-service method.
On January 1, 2012, Solano Incorporated amended its pension plan which caused an increase of $3,600 $3,600,00 ,000 0 in its projec projected ted benefi benefitt obliga obligatio tion. n. The compan company y has 400 employ employees ees who who are expected to receive benefits under the company's defined-benefit pension plan. The personnel department provided the following information regarding expected employee retirements:
T e s t B a n k fo r
In te rm e d
ia te A c c o u n ti n g , F o u
rt
it
e e n th E d io n
P a g e 2 0 -4 0
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-41
Solution 20-121 (cont.)
(b)
(1) (1)
$3,5 $3,500 00,0 ,000 00 × 10% 10% = $35 $350, 0,00 000 0
(2) (2)
$240 $240,0 ,000 00 – ($2, ($2,75 750, 0,00 000 0 × 8%) 8%) = $20, $20,00 000 0
Pensio Pension n Expens Expense.. e..... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... Pension Pension Asset Asset / Liabili Liability... ty........ ........... ............ ........... .......... .......... ........... ........... .......... ........... ............. ....... Cash............................................................... .......... ...... ........ .......... ...... Other Co Comprehensive In Income (P (PSC) .. ............................... Other Comprehensive Income (G/L).................................
755,00 755,000 0 290,000 290,000 900,000 125,000 20,000
Pr. 20-122 —Amortization of prior service cost using years-of-service method.
On January 1, 2012, Solano Incorporated amended its pension plan which caused an increase of $3,600 $3,600,00 ,000 0 in its projec projected ted benefi benefitt obliga obligatio tion. n. The compan company y has 400 employ employees ees who who are expected to receive benefits under the company's defined-benefit pension plan. The personnel department provided the following information regarding expected employee retirements: Number of Employees 40 120 60 160 20 400
Expected Retirements On December 31 2012 2013 2014 2015 2016
The company plans to use the years-of-service method in calculating the amortization of prior service cost as a component of pension expense. Instructions
Prepare a schedule which shows the amount of annual prior service cost amortization that the company will recognize as a component of pension expense from 2012 through 2016. Solution 20-122
Computation of Service-Years Year 2012 2013 2014 2015 2016
40
120 120
60 60 60
160 160 160 160
40
240
180
640
Cost Per Service Year: $3,600,000 ÷ 1,200 = $3,000.
20 20 20 20 20 100
Total 400 360 240 180 20 1,200
20-42
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Solution 20-122 (cont.)
Solano Incorporated Computation of Annual Prior Service Cost Amortization Total Service-Years 400 360 240 180 20 1,200
Year 2012 2013 2014 2015 2016
Cost Per Service-Year $3,000 3,000 3,000 3,000 3,000
Annual Amortization $1,200,000 1,080,000 720,000 540,000 60,000 $3,600,000
Pr. 20-123 – 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 2013. General Journal Entries
Items
Annual Pension Expense
Cash
OCI —Prior Service Cost
Memo Record
OCI — Gain/Loss
Pension Asset/Liability
700 Cr.
Projected Benefit Obligation
Balance, Jan. 1, 2013 Service cost
(1)
600
Interest cost
(2)
280
Actual return
(3)
Unexpected gain Amortization of PSC Contributions
115
(4)
(5)
85 1,200
1,200 300 (6)
(7)
(8)
(9)
300
545
(10)
(11)
Accumulated OCI, OCI, Dec. 31, 2012
700
0
Balance, Dec. 31, 2013
615
430
Instructions
3,500
430
Benefits Liability increase Journal entry
4,200
Plan Assets
495
5,325
4,830
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-43
(a) Determine the missing amounts in the 2013 pension worksheet, indicating whether the
amounts are debits or credits. (b) Prepare the journal entry to record 2013 pension expense for Elias Inc.
SOLUTION 20-123
(a)
Below is the the complete completed d workshee worksheet, t, indicat indicating ing debit debit and credit entries. entries. General Journal Entries Annual Pension Expense
Balance, Jan. 1, 2013 Service cost Interest cost Actual return Unexpected gain Amortization of PSC Contributions Benefits Liability increase Journal entry Accumulated OCI, Dec. 31, 2012 Balance, Dec. 31, 2013
(b) (b)
OCI—Prior Serv Servic ice e Cost Cost Cash
Memo Record OCI— OCI—Ga Gain in// Loss
Pension Asset/Liability 700 Cr.
600 Dr. 280 Dr. 430 Cr. 115 Dr. 85 Dr.
Projected Benefit Obligation 4,200 Cr. 600 Cr. 280 Cr.
3,500 Dr.
430 Dr. 115 Cr. 85 Cr. 1,200 Cr.
650 Dr.
Plan Assets
1,200 Cr.
85 Cr. 700 Dr. 615 Dr.
300 Dr. 545 Cr.
545 Dr. 430 Dr. 0 430 Dr.
Pens Pensio ion n Expe Expens nse. e... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ...... ...... ...... ... Othe Otherr Compr Compreh ehen ensi sive ve Incom Income e (G/L). (G/L)... .... ..... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. Pensio Pension n Asset/ Asset/Lia Liabil bility ity... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ......... .......... ......... ......... ....... .. Cas Cash... h..... .... .... .... ........ ...... ........ ...... ........ ...... .... .... .... .... ........ ...... ........ ...... ........ ...... .... .... .... .... .... .... .... .... .. Other Comprehensive Income (PSC)...........................
1,200 Dr. 300 Cr.
205 Dr. 495 Cr.
650 650 430 430 205 1,20 1,200 0 85
5,325 Cr.
4,830 Dr.
20-44
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Pr. 20-124 - Pension Worksheet
Howard Corp. sponsors a defined-benefit pension pension plan for its employees. On January 1, 2013, the following balances related to this plan. Plan assets (fair value) Projected benefit obligation Pension asset/liability Prior service cost OCI – Loss
$500,000 600,000 100,000 Cr. 75,000 65,000
As a result of the operation of the plan during 2013, the actuary provided the following following additional data at December 31, 2013. Service cost for 2013 $ 75,000 Actual return on plan assets in 2013 45,000 Amortization of prior service cost cost 15,000 Contributions in 2013 115,000 Benefits paid retirees in 2013 80,000 Settlement rate 7% Expected return rate 8% Average remaining service life of active active employees 10 years Instructions
(a) Compute pension expense for Howard Corp. for the year 2013 by preparing a pension worksheet. (b) Prepare the journal entry for pension expense.
(a)
Annual Pension Expense Balance, Jan. 1, 2013 Service cost Interest cost* Actual return Unexpected gain** Amortization of PSC PSC Amortization of loss*** loss*** Contributions Benefits Journal entry for 2013 Accumulated OCI, OCI, Dec. 31, 2012 2012 Balance, Dec. 31, 2013
Howard Corp. Pension Worksheet—2013 General Journal Entries Memo Record OCI—Prior Projected Service OCI— Pension Benefit Plan Cash Cost Gain/Loss Asset/Liability Obligation Assets 100,000 Cr. 60 6 00,000 Cr. 500,000 Dr. 75,000 Cr. 42,000 Cr. 45,000 Dr.
75,000 Dr. 42,000 Dr. 45,000 Cr. 5,000 Dr. 15,000 Dr. 500 Dr.
A c c o u n ti n g r
P e n s io n s a n d P o s tr e
5,000 Cr. 15,000 Cr. 500 Cr. 115,000 Cr.
115,000 Dr. 80,000 Dr. 80,000 Cr.
92,500 Dr. 115,000 Cr. 15 15,000 Cr. 5,500 Cr. 75,000 Dr. 65,000 Dr. 60,000 Dr. 59,500 Dr.
43,000 Dr. 57,000 Cr.
Year
1/1 Projected Benefit Obligation
re m e n t B e n e fi
ts
Value of 1/1 Plan Assets
2013 $600,000 $500,000 ****($65,000 – $60,000) = $5,000 ÷ 10 = $500.
20-46
ti
637,000 Cr. 580,000 Dr.
*$42,000 = $600,000 X .07. **$5,000 = ($500,000 X .08) – $45,000. ***
fo
10% Corridor
Accumulated OCI (G/L), 1/1
Minimum Amortization of Loss for 2013
$60,000
$65,000
*$500****
P a g e 2 0 -4 5
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
SOLUTION 20-124 (Continued)
(b) Pensio Pension n Expen Expense. se.... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ...... Pensio Pension n Asset/ Asset/Lia Liabil bility ity... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ......... ....... .. Other Comprehensive Income (PSC)....................................... Other Co Comprehensive In Income (G (G/L)......................................... Cash..................................................................................... ......... ...
92,500 92,500 43,000 43,000 15,000 5,500 115,000
A c c o u n ti n g r
fo P e n s io n s a n d P
20-46
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
SOLUTION 20-124 (Continued)
(b) Pensio Pension n Expen Expense. se.... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ...... Pensio Pension n Asset/ Asset/Lia Liabil bility ity... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ......... ....... .. Other Comprehensive Income (PSC)....................................... Other Co Comprehensive In Income (G (G/L)......................................... Cash..................................................................................... ......... ...
92,500 92,500 43,000 43,000 15,000 5,500 115,000
A c c o u n ti n g
fo r
P e n s io n s a n d P o s tr e ti
re m e n t B e fi
n e ts
P a g e 2 0 -4 6
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
20-47
IFRS QUESTIONS True/False
1.
The The acco accoun unti ting ng for for def defin ined ed-b -ben enef efit it pen pensi sion on pla plans ns is is the the same same und under er U.S U.S.. GAAP GAAP and and IFR IFRS. S.
2.
Prio Priorr serv servic ice e cost cost is rec recog ogni nize zed d on the the bal balan ance ce she sheet et und under er bot both h U.S. U.S. GAA GAAP P and and IFRS IFRS..
3.
Prior Prior servic service e cost cost is amorti amortized zed into into inco income me over over the the expect expected ed serv service ice lives lives of employ employees ees under both U.S. GAAP and IFRS.
4.
Unde Underr IFRS IFRS compa compani nies es may may reco recogn gniz ize e actu actuar aria iall gains gains and and loss losses es in in incom income e imme immedi diat atel ely. y.
5.
Unde Underr U.S. U.S. GAA GAAP P comp compan anie ies s may may eith either er rec recog ogni nize ze act actua uari rial al gai gains ns and and los losse ses s in inc incom ome e immediately or amortize them over the expected service lives of employees.
Answers to True/False:
1. 2. 3. 4. 5.
False False True True False
Multiple Choice
1.
The The Inte Intern rnat atio iona nall Acco Accoun unti ting ng Stan Standa dard rds s Boar Board d has has prop propos osed ed cha chang nges es to to IFRS IFRS pen pensi sion on accounting including all of the following except a. elimination elimination of smooth smoothing ing via via the the corridor corridor approach. approach. b. different different presenta presentation tion of pensio pension n costs in the income income stateme statement. nt. c. requiring requiring recognitio recognition n of actuarial actuarial gains gains and losses losses over the expected expected service service lives lives of employees. d. a new category category of pensions pensions for for accounting accounting purpose purpose – “contributi “contribution-bas on-based ed promises.” promises.”
2.
Midl Midlan and d Compa Company ny fol follo lows ws U.S U.S.. GAAP GAAP for for its exte extern rnal al fina financ ncia iall repor reporti ting ng wher wherea eas s Bailey Bailey Company follows IFRS for its external financial reporting. The amount contributed by Midland for its defined contribution plan for 2013 amounted to $59,000 and the amount contributed by Bailey for its defined contribution plan for 2013 amounted to $76,000. The remaining service lives of employees at both firms is estimated to be 10 years. What is the amount of expense related to pension costs recognized by each company in its income statement for the year ended December 31, 2013? a. b. c. d.
Midland $ 5,900 $59,000 $59,000 $ 5,900
Bailey $76,000 $76,000 $ 7,600 $ 7,600
20-48 3.
Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Midl Midlan and d Compa Company ny fol follo lows ws U.S U.S.. GAAP GAAP for for its exte extern rnal al fina financ ncia iall repor reporti ting ng wher wherea eas s Bailey Bailey Company follows IFRS for its external financial reporting. Both companies have definedbenefit pension plans. At December 31, 2013, prior to any adjusting entries, Midland Company’s actuarial loss subject to amortization/recognition amounted to $59,000 and Bailey Company’s actuarial loss subject to amortization/recognition amounted to $76,000. The remaining services lives of employees at both firms is estimated to be 10 years. What is the maximum amount of loss that could be recognized by each company in its income statement for the year ended December 31, 2013? a. b. c. d.
Midland $ 5,900 $59,000 $59,000 $ 5,900
Bailey $76,000 $76,000 $ 7,600 $ 7,600
4.
Whic Which h of the the foll follow owin ing g is tru true e wit with h rega regard rd to to pens pensio ion n acco accoun unti ting ng und under er U.S U.S.. GAAP GAAP and and IFRS? a. Accounting Accounting for for defined-benef defined-benefit it pensions pensions is typicall typically y a less important important issue issue in the U. S. than in other parts of the world. b. The accounti accounting ng for defined-ben defined-benefit efit pension pension plans plans is the same same under U.S. U.S. GAAP and IFRS. c. Prior servic service e cost is is recognized recognized on the balance balance sheet sheet under under both U.S. U.S. GAAP and and IFRS. d. Prior service service cost cost is amortize amortized d into income income over the expec expected ted service service lives of of employees under both U.S. GAAP and IFRS.
5.
Pens Pensio ion n liab liabililit itie ies s will will be imp impac acte ted d in cou count ntri ries es wher where e popul populat atio ion n aging aging is is an iss issue ue.. According to the text, which which of the following countries/areas is the the most rapidly aging in the developed world? a. Japan b. Europe c. Unit nited Sta States tes d. All three three areas areas are aging aging at the same approx approximate imate rate.
6.
Midl Midlan and d Compa Company ny fol follo lows ws U.S U.S.. GAAP GAAP for for its exte extern rnal al fina financ ncia iall repor reporti ting ng wher wherea eas s Bailey Bailey Company follows IFRS for its external financial reporting. The remaining service lives of employees at both firms is estimated to be 10 years. The following information is available for each company at December 31, 2013 related to their respective defined-benefit pension plans. Midland Bailey Net of pension assets and liabilities $110,000 $130,000 Prior service cost $220,000 $175,000 What is the amount of prior service cost recognized by each company in its income statement for the year ended December 31, 2013? Midland Bailey a. $220,000 $175,000 b. $ 22,000 $175,000 c. $ 22,000 $ 17,500 d. $220,000 $ 17,500
Accounting for Pensions Pensions and Postretirement Postretirement Benefits
7.
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Midl Midlan and d Compa Company ny fol follo lows ws U.S U.S.. GAAP GAAP for for its exte extern rnal al fina financ ncia iall repor reporti ting ng wher wherea eas s Bailey Bailey Company follows IFRS for its external financial reporting. The remaining service lives of employees at both firms is estimated to be 10 years. The following information is available for each company at December 31, 2013 related to their respective defined-benefit pension plans. Midland Bailey Net of pension assets and liabilities $110,000 $130,000 Prior service cost $220,000 $175,000 What is the amount of Pension Asset/Liability recognized by each company in its income statement for the year ended December 31, 2013? Midland Bailey a. $110,000 $130,000 b. $ 11,000 $130,000 c. $110,000 $ 13,000 d. $ 11,000 $ 13,000
8.
Midl Midlan and d Compa Company ny fol follo lows ws U.S U.S.. GAAP GAAP for for its exte extern rnal al fina financ ncia iall repor reporti ting ng wher wherea eas s Bailey Bailey Company follows IFRS for its external financial reporting. The remaining service lives of employees at both firms is estimated to be 10 years. The following information is available for each company at December 31, 2013 related to their respective defined-benefit pension plans. Midland Bailey Net of pension assets and liabilities $110,000 $130,000 Prior service cost (after amortization, if any) $220,000 $175,000 What is the amount of Prior Service Cost recognized by each company on its balance sheet at December 31, 2013? Midland Bailey a. $220,000 $175,000 b. $-0$175,000 c. $-0$-0d. $220,000 $-0-
9.
The The IASB IASB and and the the FAS FASB B are study studyin ing g seve severa rall issu issues es rel relat ated ed to to acco accoun unti ting ng for for pen pensi sion ons s including all of the following except a. elimin eliminati ating ng smoot smoothin hing g provis provision ions. s. b. requiring requiring companies companies to report report actual actual asset asset returns and any actuarial actuarial gains gains and losses losses directly in the income statement. c. requiring requiring companies companies to to report various various components components of pension pension expense, expense, such such as interest cost, separately in the income statement along with other interest expense. d. All of the above above issues issues are are under under study study by the the IASB IASB and the the FASB. FASB.
10.
Which Which of of the the follo followi wing ng is fals false e regard regarding ing the the acco account unting ing for for pens pension ions s under under IFRS IFRS and U.S. U.S. GAAP? a. Prior servic service e cost is is recognized recognized on the balance balance sheet sheet under under U.S. GAAP GAAP only. only. b. Under U.S. U.S. GAAP companies companies must must amortize amortize actuaria actuariall gains and and losses losses over the the expected service lives of employees. c. Prior servic service e cost is is amortized amortized into into income income over the the expected expected servic service e lives of of employees under U.S. GAAP only. d. Under IFRS IFRS companie companies s may recogniz recognize e actuarial actuarial gains gains and losses losses in income income immediately.
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Test Bank for Intermediate Intermediate Accounting, Fourteenth Edition
Answers to Multiple Choice:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
c b a d a c a d d c
Short Answer
1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS IFRS with respect to the accounting for pensions. 1. The The prim primary ary IFRS IFRS lit liter erat atur ure e has has rece recent ntly ly bee been n amen amende ded, d, res resul ulti ting ng in in sign signif ific ican antt convergence between IFRS and U.S. GAAP in this area. For example, IFRS and U.S. GAAP separate pension plans into defined contribution plans and defined benefit plans. The accounting for defined contribution plans is similar. For defined benefit plans, both IFRS and U.S. GAAP recognize the net of the pension assets and liabilities on the balance sheet and both GAAPs amortize prior service costs into income over the expected service lives of employees. Notable differences are that (1) Unlike U.S. GAAP, which recognizes prior service cost on the balance sheet (as an element of Accumulated Other Comprehensive Income), IFRS does not recognize prior service costs on the balance sheet, (2) Under IFRS companies have the choice of recognizing actuarial gains and losses in income immediately or amortizing them over the expected remaining working lives of employees. U.S. GAAP does not permit choice; actuarial gains and losses (and prior service cost) are recognized in Accumulated Other Comprehensive Income and amortized to income over remaining service lives. 2. Briefly Briefly discuss discuss the IASB/FASB IASB/FASB convergence convergence efforts efforts in the area area of postretiremen postretirement-bene t-benefit fit accounting. 2. The FASB and the IASB are working collaboratively collaboratively on a postretirement-benefit project. project. As discussed in the chapter, the FASB has issued a rule addressing the recognition of benefit plans in financial statements. The FASB has begun work on the second phase of the project, which will reexamine expense measurement of postretirement benefit plans. The IASB also has added a project in this area but they are on different schedule. The IASB has recently issued a discussion paper on pensions proposing: (1) elimination of smoothing via the corridor approach, (2) a different presentation of pension costs in the income statement, and (3) a new category of pensions for accounting purposes - so-called “contribution-based promises”.
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