Chapter 20

Question 1

In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), which of the following are considered by the actuary?

A) Retirement and mortality rate.
B) Interest rates.
C) Benefit provisions of the plan.
D) All of these are considered.

Answer 1

D) All of these are considered.

Question 2

In all pension plans, the accounting problems include all the following except

A) allocating the cost of the plan to the proper periods.
B) disclosing the status and effects of the plan in the financial statements.
C) determining the level of individual premiums.
D) measuring the amount of pension obligation.

Answer 2

C) determining the level of individual premiums.

Question 3

In a defined-contribution plan, a formula is used that

A) defines the benefits that the employee will receive at the time of retirement.
B) ensures that pension expense and the cash funding amount will be different.
C) ensures that employers are at risk to make sure funds are available at retirement.
D) requires an employer to contribute a certain sum each period based on the formula.

Answer 3

D) requires an employer to contribute a certain sum each period based on the formula.

Question 4

In a defined-benefit plan, a formula is used that

A) requires that pension expense and the cash funding amount be the same.
B) defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.
C) requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee.
D) defines the benefits that the employee will receive at the time of retirement.

Answer 4

D) defines the benefits that the employee will receive at the time of retirement.

Question 5

Which of the following is not a characteristic of a defined-contribution pension plan?

A) The benefits to be received by employees are determined by an employee’s highest compensation level defined by the terms of the plan.
B) The benefit of gain or the risk of loss from the assets contributed to the pension fund is borne by the employee.
C) The employer’s contribution each period is based on a formula.
D) The accounting for a defined-contribution plan is straightforward and uncomplicated.

Answer 5

A) The benefits to be received by employees are determined by an employee’s highest compensation level defined by the terms of the plan.

Question 6

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

A) Accumulated benefit obligation
B) Vested benefit obligation
C) Projected benefit obligation
D) Restructured benefit obligation

Answer 6

C) Projected benefit obligation

Question 7

The accumulated benefit obligation measures

A) the level cost that will be sufficient, together with interest to provide the total benefits at retirement.
B) the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
C) the shortest possible period for funding to maximize the tax deduction.
D) the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.

Answer 7

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

Question 8

Differing measures of the pension obligation can be based on

A) all years of service—both vested and nonvested—using current salary levels.
B) only the vested benefits using current salary levels.
C) both vested and nonvested service using future salaries.
D) all of these answers are correct.

Answer 8

D) all of these answers are correct.

Question 9

Vested benefits

A) are not contingent upon additional service under the plan.
B) are those that the employee is entitled to receive even if fired.
C) usually require a certain minimum number of years of service.
D) are defined by all of these answers.

Answer 9

D) are defined by all of these answers.

Question 10

The computation of pension expense includes all the following except

A) all of these are included in the computation.
B) interest on projected benefit obligation.
C) expected return on plan assets.
D) service cost component measured using current salary levels.

Answer 10

D) service cost component measured using current salary levels.

Question 11

In computing the service cost component of pension expense, the FASB concluded that

A) all of these answers are correct.
B) the accumulated benefit obligation provides a more realistic measure of the pension obligation on a going concern basis.
C) the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense.
D) a company should employ an actuarial funding method to report pension expense that best reflects the cost of benefits to employees.

Answer 11

C) the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense.

Question 12

The projected benefit obligation is the measure of pension obligation that

A) is required to be used for reporting the service cost component of pension expense.
B) requires the longest possible period for funding to maximize the tax deduction.
C) is not sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense.
D) 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.

Answer 12

A) is required to be used for reporting the service cost component of pension expense.

Question 13

The interest on the projected benefit obligation component of pension expense

A) may be stated implicitly or explicitly when reported.
B) reflects the incremental borrowing rate of the employer.
C) reflects the rates at which pension benefits could be effectively settled.
D) is the same as the expected return on plan assets.

Answer 13

C) reflects the rates at which pension benefits could be effectively settled.

Question 14

One component of pension expense is actual return on plan assets. Plan assets include

A) plan assets still under the control of the company.
B) only assets reported on the balance sheet of the employer as prepaid pension cost.
C) none of these answers are correct.
D) assets that a company holds to earn a reasonable return, generally at minimum risk.

Answer 14

D) assets that a company holds to earn a reasonable return, generally at minimum risk.

Question 15

The actual return on plan assets

A) all of these answers are correct.
B) includes interest, dividends, and changes in the fair value of the fund assets.
C) is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period.
D) is equal to the change in the fair value of the plan assets during the year.

Answer 15

B) includes interest, dividends, and changes in the fair value of the fund assets.

Question 16

In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as

A) pension asset/liability.
B) as accumulated other comprehensive income (PSC).
C) an offset to the liability for prior service cost.
D) as other comprehensive income (G/L).

Answer 16

A) pension asset/liability.

Question 17

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

Amortization of
prior
service cost

A) Yes Yes

B) No Yes

C) Yes No

D) No No

Answer 17

B) No Yes

Question 18

A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the

A) amount of pension expense exceeds the amount of employer contributions.
B) projected benefit obligation exceeds the fair value of the plan assets.
C) fair value of the plan assets exceeds the projected benefit obligation.
D) amount of employer contributions exceeds the pension expense.

Answer 18

B) projected benefit obligation exceeds the fair value of the plan assets.

Question 19

When a company adopts a pension plan, prior service costs should be charged to

Entry field with correct answer
A) retained earnings.
B) accumulated other comprehensive income (PSC).
C) operations of prior periods.
D) other comprehensive income (PSC).

Answer 19

D) other comprehensive income (PSC)

Question 20

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

A) amortized in accordance with procedures used for income tax purposes.
B) recorded in other comprehensive income (PSC).
C) reported as an expense in the period the plan is amended.
D) treated as a prior period adjustment because no future periods are benefited.

Answer 20

B) recorded in other comprehensive income (PSC).

Question 21

Prior service cost is amortized on a

A) straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer.
B) straight-line basis over the expected future years of service.
C) years-of-service method or on a straight-line basis over the average remaining service life of active employees.
D) straight-line basis over 15 years.

Answer 21

C) years-of-service method or on a straight-line basis over the average remaining service life of active employees.

Question 22

Gains and losses that relate to the computation of pension expense should be

A) amortized over a 15-year period.
B) recorded currently and in the future by applying the corridor method which provides the amount to be amortized.
C) recorded only if a loss is determined.
D) recorded currently as an adjustment to pension expense in the period incurred.

Answer 22

B) recorded currently and in the future by applying the corridor method which provides the amount to be amortized.

Question 23

The market-related asset value is used to determine the corridor and to calculate the expected return on plan assets.

Corridor

Expected Return
on Plan Assets

A) No No

B) Yes Yes

C) Yes No

D) No Yes

Answer 23

B) Yes Yes

Question 24

According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the projected benefit obligation, the Board

A) requires recognition of an asset.
B) requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.
C) recommends recognition of an asset but does not require such recognition.
D) does not permit recognition of an asset.

Answer 24

A) requires recognition of an asset.

Question 25

The main purpose of the Pension Benefit Guaranty Corporation is to

A) administer terminated plans and to impose liens on the employer’s assets for certain unfunded pension liabilities.
B) require minimum funding of pensions.
C) all of these answers are correct.
D) require plan administrators to publish a comprehensive description and summary of their plans.

Answer 25

A) administer terminated plans and to impose liens on the employer’s assets for certain unfunded pension liabilities.

Question 26

In accounting for a defined-benefit pension plan

A) the expense recognized each period is equal to the cash contribution.
B) an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.
C) the liability is determined based upon known variables that reflect future salary levels promised to employees.
D) the employer’s responsibility is simply to make a contribution each year based on the formula established in the plan.

Answer 26

B) an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.

Question 27

Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date of amendment

A) the expense should be recognized immediately, but the liability may be deferred until a reasonable basis for its determination has been identified.
B) both the accumulated benefit obligation and the projected benefit obligation are usually greater than before.
C) both the accumulated benefit obligation and the projected benefit obligation are usually less than before.
D) the expense and the liability should be recognized at the time of the plan change.

Answer 27

B) both the accumulated benefit obligation and the projected benefit obligation are usually greater than before.

Question 28

A pension liability is reported when

A) the pension expense reported for the period is greater than the funding amount for the same period.
B) accumulated other comprehensive income exceeds the fair value of pension plan assets.
C) the accumulated benefit obligation is less than the fair value of pension plan assets.
D) the projected benefit obligation exceeds the fair value of pension plan assets.

Answer 28

D) the projected benefit obligation exceeds the fair value of pension plan assets.

Question 29

A pension asset is reported when

A) pension plan assets at fair value exceed the projected benefit obligation.
B) the accumulated benefit obligation exceeds the fair value of pension plan assets.
C) the accumulated benefit obligation exceeds the fair value of pension plan assets, but a prior service cost exists.
D) pension plan assets at fair value exceed the accumulated benefit obligation.

Answer 29

A) pension plan assets at fair value exceed the projected benefit obligation.

Question 30

Which of the following disclosures of pension plan information would not normally be required?

A) The amount of prior service cost changed or credited in previous years.
B) The rates used in measuring the benefit amounts.
C) The major components of pension expense.
D) The funded status of the plan and the amounts recognized in the financial statements.

Answer 30

A) The amount of prior service cost changed or credited in previous years.

Question 31

The main purpose of the Pension Benefit Guaranty Corporation is to

A) require minimum funding of pensions.
B) all of these answers are correct.
C) require plan administrators to publish a comprehensive description and summary of their plans.
D) administer terminated plans and to impose liens on the employer’s assets for certain unfunded pension liabilities.

Answer 31

D) administer terminated plans and to impose liens on the employer’s assets for certain unfunded pension liabilities.

Question 32

Gains and losses that relate to the computation of pension expense should be

A) recorded currently as an adjustment to pension expense in the period incurred.
B) recorded only if a loss is determined.
C) recorded currently and in the future by applying the corridor method which provides the amount to be amortized.
D) amortized over a 15-year period.

Answer 32

C) recorded currently and in the future by applying the corridor method which provides the amount to be amortized.

Question 33

The market-related asset value is used to determine the corridor and to calculate the expected return on plan assets.

Corridor
Expected Return
on Plan Assets

A) No No

B) Yes No

C) Yes Yes

D) No Yes

Answer 33

C) Yes Yes

Question 34

According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the projected benefit obligation, the Board

A) recommends recognition of an asset but does not require such recognition.
B) does not permit recognition of an asset.
C) requires recognition of an asset.
D) requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.

Answer 34

C) requires recognition of an asset.