FAR 14 - PENSIONS Flashcards
PENSION EXPENSE/COST (A-SPIDER)
S P I D E R A
What is the journal entry to fund the Plan?
+ Service Cost (Increase PBO)
+/- PSC Amort (Beg PSC/Avg Svc Life)
+ Interest Cost (Beg PBO x Disc Rate)
- (Actual Return on Plan Assets)
End PA - Begin PA - Contr. + Benefits Pd
+ Deferred gain (unrecognized gain/loss)
- (Excess amort of deferred gain/loss)
+/- Amortization of Existing Net Obligation
= PENSION EXPENSE/COST
Pension Expense 3500
Prepaid Pension 1500
—–CR Cash (overfunding) 5000
—–CR Accrued Pension Cost xx
What is Corridor Approach?
Amortization if deferrals get too large:
- Take larger BegBPO (600) or FV (700)
- Multiply by 10% (x 700) = 70
- Compare to Beg Defer Gain 90-70=$20
- Amortize $20 by AvgRemainSvcLife=20yrs = $1 per year
The following information pertains to Kane Co’s defined benefit pension plan:
Accrued pension cost, 1/1/X4 = $2,000 Service cost = $19,000 Interest cost = $38,000 Expect/actual return plan assets: $22,000 Amort of unrecognized PSC = $52,000 Employer contributions= $40,000
The ending fair value of plan assets is $750,000 and the ending projected benefit obligation is $850,000.
Ignoring income taxes, in its December 31, 20 X4 balance sheet, what is the required adjustment to accrued pension cost (Liability)?
a. $45,000
b. $49,000
c. $51,000
d. $87,000
c. $51,000
EXPLAIN:
Svc Cost = 19 PSC = 52 Int Cost = 38 Return = (22) Def Gn = 0 Excess = 0 Amort = 0 ======> 87
Pension Expense 87
Prepaid Pension xx
—–Cash (overfunding) 40
—–Accrued Pension Cost 47 (plug)
ACCRUED PENSION COST: Begin Pension Cost = 2 Accrued Pension = 47 =================>> 49 REQUIRED ADJUST = 51 Target Liability = 100 (850 - 750)
END PBO >< END FV = unfunded PBO
850,000 - 750,000 = 100,000
Calculate the following amounts for Sparta’s pension cost for 20X5.
- ________ Interest cost
- ________ Expect return on plan assets
- ________ Actual return on plan assets
- ________ Amort of prior service costs
- ________ Minimum amortization of unrecognized gain
Service cost for 20X5 = $90,000
No Contrib made/benefits paid during yr
Unfunded Accrued Pension liability = $8000
Discount Rate = 8 %
Expected rate of return = 10%
Average service life = 12 years
At January 1, 20X5: PBO = $600,000 FV of Pension PA = $720,000 Unrecognized PSC = $240,000 Unamortized Prior Pension Gain = $96,000
At December 31, 20X5:
FV of Penion PA = $825,000
- $48,000 INTEREST COST - Interest cost is equal to the beginning PBO of $600,000 multiplied by the discount rate of 8%, which is $48,000..
- $72,000 EXPECTED RETURN OF PA -The expected return on plan assets is equal to the beginning balance in plan assets of $720,000 multiplied by the expected rate of return of 10% to provide an expected return of $72,000.
3 $105,000 ACTUAL RETURN OF PA - The actual return on plan assets is the increase of $105,000 during the period ($825,000 - $720,000) after adjusting for contributions made to the plan and benefits paid from the plan, neither of which occurred. As a result the actual return would be the entire increase of $105,000
- $20,000 AMORT OF PSC - Since Sparta uses straighlitne amortization over the maximum period, unamortized prior service costs of $240,000 will be amortized over the expected average service life of covered employees of 12 years resulting in amortization of ($240,000/12) $20,000.
5.$ 2,000 MIN AMORT ON UNRECOGNIZED GAIN - An unrecognized gain is amortized when the amount as of the beginning of the period exceeds 10% of the greater of the beginning PBO or the beginning fair value of plan assets. In this case, the fairvalue of plan assets was greater at $720,000 vs $600,000. Unrecognized gains of $96,000 exceed 10% of PA of $72,000 by $24,000. This will be amortized over the expected average service life of employees, which is 12 years, resulting in amortization of
$2,000 ($24,000/12).
For the following, determine if increase, decrease, or has no effect on unfunded accrued pension liability:
- Service cost
- Interest cost
- Actual return on plan assets
- Amortization of prior service costs
- Amortization of unrecognized pension
Service cost for 20X5 = $90,000
No Contrib made/benefits paid during yr
Unfunded Accrued Pension liability = $8000
Discount Rate = 8 %
Expected rate of return = 10%
Average service life = 12 years
At January 1, 20x5: PBO = $600,000 FV of Pension PA = $720,000 Unrecognized PSC = $240,000 Unamortized Prior Pension Gain = $96,000
At December 31, 20X5:
FV of Penion PA = $825,000
- INCREASE - Service cost increases pension cost, so that would also increase unfunded accrued pension liability.
- INCREASE- Interest cost increases pension cost, so that would also increase unfunded accrued pension liability.
- DECREASE - Actual returns on plan assets decreases pension cost, but this is netted with the deferred gain to get the expected return on plan assets
- INCREASE - Amortization of PSC increases pension cost since we are increasing employee benefits, this increases our cost or pension expense for the period
- DECREASE
FAR 14.04 - POST RETIREMENT BENEFITS OTHER THAN PENSIONS
An employer’s obligation for postretirement health benefits that are expected to be fully provided to or for an employee must be fully accrued by the date the…
Employee retires.
Benefits are utilized.
Benefits are paid.
Employee is fully eligible for benefits.
Employee is fully eligible for benefits.
EXPLANATION
An employer’s obligation for postretirement health benefits that are expected to be fully provided to or for an employee must be fully accrued by the date the employee is fully eligible for benefits since it is a benefit provided for services that the entity has already received from the employee.
FAR 14.02 - PENSION EXPENSE
At the beginning of year 1, a company amends its defined benefit pension plan for an additional $500,000 in prior service cost. The amendment covers employees with a 10-year average remaining service life.
At the end of year 1, what is the net entry to accumulated other comprehensive income (OCI), ignoring income tax effects?
A $450,000 debit.
A $500,000 debit.
A $550,000 credit.
A $450,000 credit
A $450,000 debit.
EXPLANATION:
An adjustment to the terms of a defined benefit pension plan that increases prior service cost by $500,000 also increases the excess of the projected benefit obligation over the fair value of plan assets.
It is recognized with an increase, or credit, to the additional liability and a debit to other comprehensive income (OCI).
Since it covers employees with an average 10 year remaining service life, it will be amortized at the rate of $50,000 per year with an increase, or debit, to pension expense and a credit to OCI. The net effect on OCI is a debit of $450,000.
FAR 14.02 - PENSION EXPENSE
Each of the following is a component of the changes in the net assets available for benefits of a defined benefit pension plan trust, except…
Benefits paid to participants.
Contributions from the employer and participants.
The net change in fair value of each significant class of investments.
The net change in the actuarial present value of accumulated plan benefits.
The net change in the actuarial present value of accumulated plan benefits.
EXPLANATION:
The following are all components of changes in net (plan) assets available for the benefit of a defined benefit pension plan trust.
The net change in fair value of each significant class of investments (that is, the actual return on the plan assets), contributions from the employer and participants, and benefits paid to participants.
The net change in the actuarial present value of accumulated plan benefits is NOT a component of changes in net assets available for the benefit of a defined benefit pension plan trust, as follows:
Plan Assets (Beg PA x Actual Return): ---------- Beg Plan Assets ---------- +Contributions Plug -> +/-Actual Return (Difference) --------- - Benefits Paid --------- Ending
FAR 14.01 - TYPES OF PENSION PLANS
The following information pertains to Kane Co’s defined benefit pension plan:
Accrued pension cost, January 1, 20X4 = $2,000
Service cost = $19,000
Interest cost = $38,000
Expected/actual return on plan assets= $22,000
Amortization of unrecognized PSC= $52,000
Employer contributions = $40,000
The ending fair value of plan assets is $750,000 and the ending projected benefit obligation is $850,000.
Ignoring income taxes, in its December 31, 20X4 balance sheet, what is the required adjustment to accrued pension cost (Liability)?
$51,000
$49,000
$87,000
$45,00
$51,000
Pension expense for 20X4 will be equal to service cost + interest – expected and actual return on plan assets +
amortization of prior service cost for a total of ($19,000 + $38,000 - $22,000 + $52,000) $87,000.
Since the employer contribution was $40,000, the accrued pension cost will increase by $47,000 to $49,000 (Begin Pension Cost of $2,000 + $47,000).
If the ending PBO is $850,000 and the ending fair value of plan assets is $750,000, the plan is underfunded by $100,000.
With an accrued pension liability of $49,000, an additional liability of $51,000 is needed.
FAR 14.03 - PENSION PRESENTATION
At year end, a company has a defined benefit pension plan with a projected benefit obligation of $350,000; a net gain of $140,000 that was not previously recognized in net periodic pension cost; and prior service cost of $210,000 that was not previously recognized in net periodic pension cost.
What amount should be reported in accumulated other comprehensive income (AOCI) related to the company’s defined benefit pension plan at year end?
A debit balance of $420,000
A credit balance of $70,000
A debit balance of $70,000
A credit balance of $420,000
A debit balance of $70,000
EXPLANATION:
Any gains and losses not already recognized as pension expense are recognized in accumulated other comprehensive income.
There is a credit gain of $140,000 and a debit loss of $210,000, for a net debit to AOCI of $70,000.
FAR 14.02 - PENSION EXPENSE
A company has a defined benefit pension plan for its employees. On December 31, year 1, the accumulated
benefit obligation is $45,900, the projected benefit
obligation is $68,100, and the fair value of the plan assets is $62,000.
What amount, if any, related to the defined benefit
plan should be recognized in the balance sheet at
December 31, year 1?
An unrealized loss of $6,100.
Nothing, as the fair value of the plan assets exceeds the accumulated benefit obligation.
An asset of $16,100.
A liability of $6,100.
A liability of $6,100.
EXPLANATION:
The balance sheet should reflect the funded status of a defined-benefit pension plan. The funded status is the
difference between the projected benefit obligation and the fair value of the plan assets.
If the fair value of the plan assets is greater than the PBO, a net asset exists.
If the fair value of the plan assets is less than the PBO, a net liability exists.
Since the fair value of the plan assets ($62,000) is less than the PBO ($68,100) a liability exists for the difference ($68,100 - $62,000 =$6,100).
FAR 14.02 - PENSION EXPENSE
The funded status of a defined benefit pension plan for a company should be reported in…
The statement of financial position.
The notes to the financial statements only.
The statement of cash flows.
The income statement
The statement of financial position.
EXPLANATION:
The funded status of a defined benefit pension plan for a company should be reported in the statement of financial position, or Balance sheet.
The funded status is the difference between the ending projected benefit obligation and the fair value of plan assets.
This difference gives rise to either a net liability or a net asset either of which are presented on the statement of financial position, or the Balance Sheet.
FAR 14.02 - PENSION EXPENSE
Payne, Inc. implemented a defined-benefit pension plan for its employees on January 2, 20X3. The following data are provided for 20X3, as of December 31, 20X3:
Projected benefit obligation= $103,000
Plan assets at fair value = $78,000
Net periodic pension cost =$90,000
Employer’s contribution = $70,000
What amount should Payne record as additional minimum pension liability at December 31, 20X3?
$5,000
$45,000
$0
$20,000
$5,000
EXPLANATION:
With a projected benefit obligation of $103,000 and plan assets of $78,000, Payne must report a minimum pension liability of $25,000.
Payne contributed only $70,000 to the plan based on pension cost of $90,000 indicating that there is already an accrued pension liability of $20,000.
In order to reflect the minimum liability of $25,000, Payne will need to accrue an additional liability of $5,000.
FAR 14.01 - TYPES OF PENSION PLANS
Payne, Inc. implemented a dened-benefit pension plan for its employees on January 2, 20X3. The following data are provided for 20X3, as of December 31, 20X3:
Projected benefit obligation $103,000
Plan assets at fair value $78,000
Net periodic pension cost $90,000
Employer’s contribution $70,000
Unfunded prior service cost $4,000
Considering only the preceding data, what debit entry should Payne make in other comprehensive income for the year ended December 31, 20X3?
$5,000
$1,000
$0
$25,000
$5,000
EXPLANATION:
With a projected benefit obligation of $103,000 and plan assets of $78,000, Payne must report a minimum pension liability of $25,000.
Payne contributed only $70,000 to the plan based on pension cost of $90,000 indicating that there is already an accrued pension liability of $20,000.
In order to achieve an accrued pension liability of $25,000, Payne will need to accrue an additional liability of $5,000, indicating a debit entry to OCI of $5,000 for the period.
FAR 14.02 - PENSION EXPENSE
A company has an underfunded defined benefit pension plan. During the current year, the company uses the years-of-service method to amortize its prior service cost. What effect will the amortization of prior service cost have on the company’s current-year financial statements?
Current period expenses will be decreased.
Net income will be increased.
Other comprehensive income will be increased.
Total liabilities will be decreased.
Other comprehensive income will be increased.
EXPLANATION:
Prior service cost is first recognized in its entirety in OCI with a debit to OCI and a credit to PBO.
In subsequent periods this PSC OCI loss is amortized and recognized in periodic pension cost, resulting in an increase in periodic pension cost, a debit, and an
increase in OCI, a credit, as the loss is moved out of OCI and recognized in periodic pension cost.
For example, in Year 1 a company amends its pension plan to include prior service cost of 100. The Year 1 journal entry is:
Dr OCI - Prior Service Cost 100
—–Cr PBO - Prior Service Cost 100
Note that a debit to OCI is a loss to OCI; if this were the only component of OCI it would properly be termed Other Comprehensive Loss, not Income.
If the yearly amortization amount is 10, at the end of Year 1 and subsequent years there will be a gradual recognition of the prior service cost in periodic pension cost, which moves the loss out of OCI little by little, while smoothing the PSC effects on Income from
Continuing Operations:
Dr Pension Cost 10
——————Cr OCI 10
