ch20 Accounting for Pensions and Postretirement Benefits

Question 1

A pension plan is contributory when the employer makes payments to an agency.

Answer 1

FALSE

Question 2

Qualified pension plans permit deductibility of the employer’s contributions to the pension fund.

Answer 2

TRUE

Question 3

Qualified pension plans permit tax-free status of earnings from pension fund assets.

Answer 3

TRUE

Question 4

In a defined contribution plan, the employer must make up any shortfall in the accumulated assets held by the defined contribution trust.

Answer 4

FALSE

Question 5

IFRS encourages, but does not require, companies to use actuaries in the measurement of the pension amounts.

Answer 5

TRUE

Question 6

The employees are the beneficiaries of a defined contribution trust, but the employer is the beneficiary of a defined benefit trust

Answer 6

TRUE

Question 7

An employer does not have to report a liability on its statement of financial position in a defined-benefit plan.

Answer 7

FALSE

Question 8

Employers are at risk with defined-benefit plans because they must contribute enough to meet the cost of benefits that the plan defines.

Answer 8

TRUE

Question 9

Companies compute the vested benefit obligation using only vested benefits, at current salary

Answer 9

TRUE

Question 10

The accumulated benefit obligation bases the deferred compensation amount on both vested and nonvested service using future salary levels

Answer 10

FALSE

Question 11

Regarding the alternatives for measuring the pension liability, the profession adopted the accumulated benefit obligation using the present value of vested and non-vested benefits accrued to date, based on employee’s future salary levels.

Answer 11

FALSE. Current salary levels.

Question 12

If a company grants plan amendments, it allocates the past service cost of providing these retroactive benefits to pension expense in the future, specifically to the remaining service years of the affected employees.

Answer 12

FALSE

Question 13

Service cost is the expense caused by the increase in the accumulated benefit obligation because of employee’s service during the current year

Answer 13

FALSE

Question 14

The interest expense component of pension expense in the current period is computed by multiplying the discount rate by the beginning balance of the defined benefit obligation

Answer 14

TRUE

Question 15

Companies should recognize the entire increase in defined benefit obligation due to a plan initiation or amendment as pension expense in the year of amendment

Answer 15

TRUE

Question 16

For defined benefit plans, IFRS recognizes a pension asset or liability as the funded status of the plan

Answer 16

TRUE

Question 17

The difference between the expected return and the actual return is referred to as the asset gain or loss.

Answer 17

TRUE

Question 18

The unexpected gains and losses from changes in the defined benefit obligation are called asset gains and losses.

Answer 18

FALSE. They are called liability gains and losses.

Question 19

Companies report any actuarial gains or losses charged or credited to other comprehensive income in the statement of financial position

Answer 19

TRUE

Question 20

A curtailment occurs when a company enters into a transaction which eliminates all further obligations for part or all of the benefits provided under a defined benefit plan

Answer 20

FALSE

Question 21

In determining the present value of the prospective benefits (often referred to as the defined benefit obligation), the following are considered by the actuary:
a. retirement and mortality rate
b. interest rates
c. benefit provisions of the plan
d. all of the above

Answer 21

a. retirement and mortality rate
b. interest rates
c. benefit provisions of the plan

Question 22

In a defined benefit plan, the process of funding refers to:
a. determining the defined benefit obligation.
b. determining the accumulated benefit obligation.
c. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees’ claims.
d. determining the amount that might be reported for pension expense.

Answer 22

Making the periodic contributions to a funding agency to ensure that funds are available to meet retirees’ claims

Question 23

In all pension plans, the accounting problems include all of the following, except:
a. measuring the amount of pension obligation
b. disclosing the status and effects of the plan in the financial statements
c. allocating the cost of the plan to the proper periods
d. determining the level of individual premiums

Answer 23

Determining the level of individual premiums

Question 24

In a defined contribution plan, a formula is used that:
defines the benefits that the employee will receive at the time of retirement.
b. ensures that pension expense and the cash funding amount will be different.
c. requires an employer to contribute a certain sum each period based on the formula.
d. ensures that employers are at risk to make sure funds are available at retirement.

Answer 24

Requires an employer to contribute a certain sum each period based on the formula

Question 25

In a defined-benefit plan, a formula is used that:
a. requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee.
b. defines the benefits that the employee will receive at the time of retirement.
c. requires that pension expense and the cash funding amount be the same.
d. defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.

Answer 25

Defines the benefits that the employee will receive at the time of retirement

Question 26

Which of the following is not a characteristic of a defined contribution plan?
a. the employer’s contribution each period is based on a formula
b. the benefits to be received by employees are usually determined by an employee’s three highest years of salary defined by the terms of the plan
c. the accounting for a defined contribution plan is straightforward and uncomplicated
d. the benefit of gain or the risk of loss from the assets contributed to the pension plan are borne by the employee

Answer 26

The benefits to be received by employees are usually determined by an employee’s three highest years of salary defined by the terms of the plan

Question 27

In accounting for a defined-benefit pension plan
a. an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised
b. the employer’s responsibility is simply to make a contribution each year based on the formula established in the plan
c. the expense recognized in each period is equal to the cash contribution
d. the liability is determined based upon known variables that reflect future salary levels promised to employees

Answer 27

An appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised

Question 28

Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?

Answer 28

DEFINED BENEFIT OBLIGATION. Accumulated benefit obligation requires current salaries

Question 29

The accumulated benefit obligation measures:
a. the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
b. the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
c. an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement.
d. the shortest possible period for funding to maximize the tax deduction.

Answer 29

The pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels

Question 30

The defined benefit obligation is the measure of pension obligation that:
a. is required to be used for reporting the service cost component of pension expense.
b. requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels.
c. requires the longest possible period for funding to maximize the tax deduction.
d. is not sanctioned under international financial reporting

Answer 30

Is required to be used for reporting of the service cost component of pension expense

Question 31

Differing measures of the pension obligation can be based on:
a. all years of service-both vested and nonvested-using current salary levels
b. only the vested benefits using current salary levels
c. both vested an nonvested service using salary levels
d. all of the above

Answer 31

a. all years of service-both vested and nonvested-using current salary levels
b. only the vested benefits using current salary levels
c. both vested an nonvested service using salary levels

Question 32

Vested benefits:
a. usually require a certain minimum number of years of service
b. are those that the employee is entitled to receive even if fired
c. are not contingent upon additional service under the plan
d. are defined by all of these answer choices.

Answer 32

a. usually require a certain minimum number of years of service
b. are those that the employee is entitled to receive even if fired
c. are not contingent upon additional service under the plan

Question 33

The relationship between the amount funded and the amount reported for pension expense is as follows:
a. pension expense must equal the amount funded.
b. pension expense will be less than the amount funded.
c. pension expense will be more than the amount funded.
d. pension expense may be greater than, equal to, or less than the amount funded.

Answer 33

The pension expense may be greater than, equal to, or less than the amount funded

Question 34

The computation of pension expense includes all of the following except:
a. service cost component using current salary levels
b. interest on defined benefit obligation
c. interest revenue on plan assets
d. all of the above are included in the computation

Answer 34

Service cost component using current salary levels

Question 35

In computing the service cost component of pesnsion expense, the IASB concluded that:
a. the accumulated benefit obligation provides a more realistic measure of the pension obligation on a going concern basis
b. the company should employ ann actuarial funding method to report pension expense that best reflects the cost of benefits to employees
c. the defined benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense
d. all of the above

Answer 35

The defined benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense

Question 36

The interest rate used on the defined benefit obligation component of pension expense:
a. reflects the incremental borrowing rate of the employer
b. reflects the rates at which pension benefits could be effectively settled
c. is the same rate used to compute the interest revenue on plan assets
d. may be stated implicitly or explicitly when reported

Answer 36

Is the same rate used to compute the interest revenue on plan assets

Question 37

One component of pension expense is interest revenue on plan assets. Plan assets include:
a. contributions made by the employer and contributions made by the employee when a contributory plan of some type is involved.
b. plan assets still under the control of the company.
c. only assets reported on the statement of financial position of the employer as pension asset/liability.
d. None of these answer choices are correct.

Answer 37

Contributions made by the employer and contributions made by the employee when a contributory plan of some type is involved

Question 38

The actual return on plan assets:
a. is equal to the change in the fair value of the plan assets during the year.
b. includes interest, dividends, and changes in the fair value of the fund assets.
c. is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period.
d. All of these answer choices are correct.

Answer 38

Includes interest, dividends, and changes in fair value of the fund assets

Question 39

In accounting for a pension plan, the difference between the pension cost charged to expense and the payments into the fund should be reported as:
a. an offset to the liability for past service cost.
b. pension asset/liability.
c. as other comprehensive income (G/L)
d. as accumulated other comprehensive income (PSC).

Answer 39

PENSION ASSET/PENSION LIABILITY

Question 40

Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees?

Fair value of plan assets: Yes or no?

Past service cost: Yes or no?

Answer 40

Fair value of plan assets: NO

Past service cost: YES

Question 41

A corporation has a defined benefit plan. A pension liability will result at the end of the year if the:
a. defined benefit obligation exceeds the fair value of the plan assets.
b. fair value of plan assets exceeds the defined benefit obligation
c. amount of employer contributions exceeds the pension expene
d. amount of pension expense exceeds the amount of employer contributions

Answer 41

Defined benefit obligation exceeds the fair value of the plan assets.

Question 42

When a company adopts a pension plan, past service costs should be charged to:
a. other comprehensive income (PSC).
b. operations of prior periods.
c. operations of the current period.
d. retained earnings.

Answer 42

OPERATIONS OF THE CURRENT PERIOD

Question 43

When a company amends a pension plan, for accounting purposes, past service costs should be:

Answer 43

REPORTED AS AN EXPENSE IN THE PERIOD THE PLAN IS AMENDED

Question 44

Past service cost is amortized on a:
a. straight-line basis over the expected future years of service.
b. years-of-service method or on a straight-line basis over the average remaining service
life of active employees.
c. straight-line basis over 10 years.
d. past service costs are not amortized.

Answer 44

PAST SERVICE COSTS ARE NOT AMORTIZED

Question 45

Whenver a defined benefit plan is amended and credit is given to the employees for years of service provided before the date of amendment:
a. both the accumulated benefit obligation and the defined benefit obligation are usually greater than before
b. both the accumulated benefit obligation and the defined benefit obligation are usually less than before
c. the expense and the liability should be recognized at the time the benefits are paid
d. the expense should be recognized immediately, but the liability may be deferred until a reasonable basis for its determination has been identified.

Answer 45

Both the accumulated benefit obligation and the defined benefit obligation are usually greater than before

Question 46

The unexpected gains or losses that result from changes in the obligation are called:
a. asset gains and losses
b. liability gains and losses

Answer 46

LIABILITY GAINS AND LOSSES

Question 47

A pension liability is reported when:
a. the defined benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation is less than the fair value of pension plan assets.
c. the pension expense reported for the period is greater than the funding amount for the same period.
d. accumulated other comprehensive income exceeds the fair value of pension plan assets.

Answer 47

The defined benefit obligation exceeds the fair value of the pension plan assets

Question 48

A pension asset is reported when:
a. the accumulated benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation exceeds the fair value of pension plan assets, but a past service cost exists.
c. pension plan assets at fair value exceed the accumulated benefit obligation.
d. pension plan assets at fair value exceed the defined benefit obligation.

Answer 48

Pension plan assets at fair value exceed the accumulated benefit obligation

Question 49

There is account titled Pension Asset/Liability

Answer 49

TRUE

Question 50

There is an account titled Defined Benefit Obligation

Answer 50

FALSE

Question 51

Unrecognized net gain or loss should be reported in the liability section of the balance sheet.

Answer 51

FALSE

Question 52

Other comprehensive income should be included in net income

Answer 52

FALSE

Question 53

Under the IASB, recognition of a liability is required when the defined benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the defined benefit obligation, the Board:
a. requires recognition of an asset.
b. requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.
c. recommends recognition of an asset but does not require such recognition.
d. does not permit recognition of an asset.

Answer 53

REQUIRES RECOGNITION OF AN ASSET

Question 54

Which of the following disclosures of pension plan information would not normally be made required?
a. the major components of pension expense
b. the amount of past service cost charged or credited in previous years
c. the funded status of the plan and the amounts recognized in the financial statements
d. the rates used in measuring the benefit amounts

Answer 54

The amount of past service cost charged or credited in previous years

Question 55

Differences between pensions and post retirement benefits include all of the following except:
a. postretirement healthcare benefits are generally uncapped, while pensions are generally well-defined
b. postretirement healthcare benefits are generally paid as needed and used, whereas pension benefits are generally paid monthly
c. postretirement healthcare benefits are generally paid only to the retiree while pensions are generally paid to the retiree, spouse, and other dependents
d. postretirement healthcare benefits are generally not funded while pensions are generally funded.

Answer 55

Postretirement healthcare benefits are generally paid only to the retiree while pensions are generally paid to the retiree, spouse, and other dependents