midterm Flashcards
The projected benefit obligation may be less reliable than the accumulated benefit obligation.
True False
True
The amount of the vested benefit obligation is less than the projected benefit obligation and more than the accumulated benefit obligation.
True False
False
An upward revision of inflation and compensation trends would likely cause a gain in the pension benefit obligation.
True False
False
The difference between pension plan assets and the PBO is equal to the funded status of the plan.
True False
True
A net pension asset is the excess of the projected benefit obligation over the plan assets.
True False
False
If a pension plan is underfunded, the company has a net loss-OCI. `
True False
False
Prior service cost is recognized as pension expense over a period of several years.
True False
True
A net gain or net loss affects pension expense only if it exceeds 10% of the pension benefit obligation or 10% of plan assets, whichever is lower.
True False
False
Pension expense and funding amounts are both accounting decisions.
True False
False
There almost always is a balance sheet liability for postretirement benefit plans since very few are funded.
True False
True
The expected postretirement benefit obligation is the discounted present value of the total benefits expected to be paid by the employer to the plan participants.
True False
True
Conceptually, the service method provides a better matching of costs and benefits in amortizing prior service cost than does the straight-line method.
True False
True
Which of the following is not a requirement for a qualified pension plan?
A. It cannot discriminate in favor of highly paid employees.
B. It must cover at least 80% of the employees.
C. It must be funded in advance of retirement.
D. Benefits must vest after a specified period of service, commonly five years.
B.It must cover at least 80% of the employees
Which of the following is not a characteristic of a qualified pension plan?
A. It can be limited to highly compensated salaried employees.
B. It must be funded in advance of retirement.
C. Benefits must vest after a specified period of service.
D. It must cover at least 70% of employees.
A. It can be limited to highly compensated salaried employees.
Which of the following is not usually part of the pension formula under a defined benefit plan?
A. Age at retirement.
B. Number of years of service.
C. Seniority at time of retirement.
D. Compensation level.
C. Seniority at time of retirement
Which of the following describes defined benefit pension plans?
A. They raise few accounting issues for employers.
B. Retirement benefits depend on how much money has accumulated in an individual’s account.
C. They are simple to construct.
D. Retirement benefits are based on the plan benefit formula.
D. Retirement benefit are based on the plan benefit formula
Which of the following describes defined benefit pension plans?
A. The investment risk is borne by the employee.
B. The plans are simple and easy to construct.
C. The investment risk is borne by the employer.
D. Retirement benefits depend on the individual’s account balance.
C. The investment risk is borne by the employer
Defined contribution pension plans that link the amount of contributions to company performance are often called:
A. Incentive savings plans.
B. Thrift plans.
C. Savings plans.
D. None of the above is correct.
A. Incentive saving Plans
The accounting for defined contribution pension plans is easy because each year:
A. The employer records pension expense equal to the amount paid out to retirees.
B. The employer records pension expense based on an amount provided by the actuary.
C. The employer records pension expense equal to the annual contribution.
D. The employer records pension expense based on the earnings of the plan assets.
C. The employer records pension expenses equal to the annual contribution
Which of the following is not an uncertainty that complicates determining how much to set aside each year to ensure that sufficient funds are available to provide the benefits promised under a defined benefit plan?
A. Employee turnover.
B. Number of employees who retired last year.
C. Future inflation rates.
D. Future compensation levels.
B. Number of employees who retired last year.
To help assess the uncertainties that surround a defined benefit pension plan, corporations frequently hire a(n):
A. CPA.
B. Attorney.
C. Investment analyst.
D. Actuary.
D. Actuary
The employer has an obligation to provide future benefits for:
A. Defined benefit pension plans.
B. Defined contribution pension plans.
C. Defined benefit and defined contribution plans.
D. None of the above
A. Defined Benefit Pension Plan
Which of the following statements typifies defined contribution plans?
A. Investment risk is borne by the corporation sponsoring the plan.
B. The plans are more complex than defined benefit plans.
C. Present value factors are used to determine the annual contributions to the plan.
D. The employer’s obligation is satisfied by making the periodic contribution to the plan.
D. The employer’s obligation is satisfied by making the periodic contribution to the plan.
The annual pension expense for what type of pension plan(s) is recorded by a journal entry that includes a debit to pension expense and a credit to a noncurrent liability?
A. A defined benefit plan only.
B. A defined contribution plan only.
C. Both a defined benefit and a defined contribution plan.
D. This is not the correct entry.
A. A Defined Benefit plan onlu
Which of the following is not a way of measuring the pension obligation?
A. Accumulated benefit obligation.
B. Vested benefit obligation.
C. Retiree benefit obligation.
D. Projected benefit obligation.
C. Retiree Benefit Obligation
The portion of the obligation that plan participants are entitled to receive regardless of their continued employment is called the:
A. Vested benefit obligation.
B. Retiree benefit obligation.
C. Actual benefit obligation.
D. True benefit obligation.
A. Vested benefit Obligation
ERISA made major changes in the requirements for pension plan:
A. Vesting.
B. Reporting.
C. Taxing.
D. Investing.
A. Vesting
Compared to the ABO, the PBO usually is:
A. Less material.
B. Less representationally faithful.
C. Less relevant.
D. Less reliable.
D. Less Reliable
Compared to the ABO, the PBO usually is:
A. Larger.
B. More reliable.
C. Less relevant.
D. More material.
A. Larger
Consider the following:
I. Present value of vested benefits at present pay levels.
II. Present value of nonvested benefits at present pay levels.
III. Present value of additional benefits related to projected pay increases.
Which of the above constitutes the accumulated benefit obligation?
A. I and II
Consider the following:
I. Present value of vested benefits at present pay levels.
II. Present value of nonvested benefits at present pay levels.
III. Present value of additional benefits related to projected pay increases.
Which of the above constitutes the projected benefit obligation?
C. I, II, III
Consider the following:
I. Present value of vested benefits at present pay levels.
II. Present value of nonvested benefits at present pay levels.
III. Present value of additional benefits related to projected pay increases.
Which of the above constitutes the vested benefit obligation?
D. i only
Interest cost will:
A. Increase the PBO and increase pension expense.
B. Increase pension expense and reduce plan assets.
C. Increase the PBO and reduce plan assets.
D. Increase pension expense and reduce the return on plan assets.
A. Increase the PBO and increase pension expense
The PBO is increased by:
A. An increase in the average life expectancy of employees.
B. Amortization of prior service cost.
C. An increase in the actuary’s assumed discount rate.
D. A return on plan assets that is lower than expected.
A. An increase in the average life expectancy of employees.
Payment of retirement benefits:
A. Increases the PBO.
B. Increases the ABO.
C. Reduces the GBO.
D. Reduces the PBO.
D. Reduces the PBO
A company’s defined benefit pension plan had a PBO of $265,000 on January 1, 2013. During 2013, pension benefits paid were $40,000. The discount rate for the plan for this year was 10%. Service cost for 2013 was $80,000. Plan assets (fair value) increased during the year by $45,000. The amount of the PBO at December 31, 2013, was:
A. $225,000.
B. $305,000.
C. $331,500.
D. None of the above is correct.
c. 331,500
265,000
80,000
26,500
(40,000)
\_\_\_\_\_\_\_\_\_\_\_
33,1500Mars Inc. has a defined benefit pension plan. On December 31 (the end of the fiscal year), the company received the PBO report from the actuary. The following information was included in the report: ending PBO, $110,000; benefits paid to retirees, $10,000; interest cost, $7,200. The discount rate applied by the actuary was 8%. What was the beginning PBO?
A. $90,000.
B. $100,000.
C. $107,200.
D. $112,000.
A. 90,000
7200/8% =90,000
Louie Company has a defined benefit pension plan. On December 31 (the end of the fiscal year), the company received the PBO report from the actuary. The following information was included in the report: ending PBO, $110,000; benefits paid to retirees, $10,000; interest cost, $8,000. The discount rate applied by the actuary was 8%. What was the service cost for the year?
A. $2,000.
B. $12,000.
C. $18,000.
D. $92,000.
B. 12,000
The following information pertains to Havana Corporation’s defined benefit pension plan:
At the end of 2013, Havana contributed $696 thousand to the pension fund and benefit payments of $624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the actuary’s discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding the PBO.
- What is the 2013 service cost for Havana’s plan?
A. $276 thousand.
B. $528 thousand.
C. $648 thousand.
D. Cannot be determined from the given information.
The computation is as follows:
C. 648 thousand
The following information pertains to Havana Corporation’s defined benefit pension plan:
At the end of 2013, Havana contributed $696 thousand to the pension fund and benefit payments of $624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the actuary’s discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding the PBO.
What is Havana’s 2013 actual return on plan assets?
A. $504 thousand.
B. $618 thousand.
C. $1,128 thousand.
D. None of the above is correct. The computation ($ in 000s) is as follows:
A. 504 thousand
The following information pertains to Havana Corporation’s defined benefit pension plan:
At the end of 2013, Havana contributed $696 thousand to the pension fund and benefit payments of $624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the actuary’s discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding the PBO
What is Havana’s 2013 gain or loss on plan assets?
A. $115.2 thousand.
B. $160.8 thousand.
C. $276 thousand.
D. None of the above is correct.
D. None of the above is correst
576-504 =70
The following information pertains to Havana Corporation’s defined benefit pension plan:
At the end of 2013, Havana contributed $696 thousand to the pension fund and benefit payments of $624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the actuary’s discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding the PBO
What is the 2013 pension expense for Havana’s plan?
A. $594 thousand.
B. $606 thousand.
C. $678 thousand.
D. None of the above is correct.
B. 606 thousand
An underfunded pension plan means that the:
A. PBO is less than plan assets.
B. PBO exceeds plan assets.
C. ABO is less than plan assets.
D. ABO exceeds plan assets.
B. PBO exceeds plan assets.
An overfunded pension plan means that the:
A. PBO is less than plan assets.
B. PBO exceeds plan assets.
C. ABO is less than plan assets.
D. ABO exceeds plan assets.
A. PBO is less than plan assets.
Data for 2013 were as follows: PBO, January 1, $240,000 and December 31, $270,000; pension plan assets (fair value) January 1, $180,000, and December 31, $230,000. The projected benefit obligation was underfunded at the end of 2013 by:
A. $30,000.
B. $60,000.
C. $20,000.
D. $40,000.
d. 40,000
270,000-230000 =40,000
Pension expense is decreased by:
A. Amortization of prior service cost.
B. Amortization of net gain.
C. Benefits paid to retired employees.
D. Prior service cost.
B.
Interest cost is calculated by multiplying the:
A. ABO by the expected return on the plan assets.
B. ABO by the discount rate.
C. PBO by the expected return on plan assets.
D. PBO by the discount rate.
D
The three components of pension expense that are present most often are:
A. Service cost, prior service cost, and gain on plan assets.
B. Service cost, interest cost, and gain from revisions in pension liability.
C. Service cost, contribution cost, and prior service cost.
D. Service cost, interest cost, and expected return on plan assets.
D
The pension expense includes periodic changes that occur:
A. In the PBO.
B. In the PBO and the plan assets.
C. In the plan assets.
D. In the PBO and the ABO.
B
Which of the following is true?
A. A projected benefits approach is used to determine the periodic pension expense.
B. An accumulated benefits approach is used to determine the periodic pension expense.
C. A vested benefits approach is used to determine the periodic pension expense.
D. The pension expense is unrelated to the pension obligation.
A
The component of pension expense that results from amending a pension plan to give recognition to previous service of currently enrolled employees is the amortization of:
A. Prior service costs.
B. Amendment costs.
C. Retiree service costs.
D. Transition costs.
A
When accounting for pensions, delayed recognition of gains and losses in earnings achieves:
A. Income averaging.
B. Expense averaging.
C. Income optimization.
D. Income smoothing.
D
Which of the following is not a potential component of pension expense?
A. Return on plan assets.
B. Prior service cost.
C. Retiree benefits paid.
D. Gains and losses.
C
A net gain or loss affects the pension expense only if it exceeds an amount equal to what percentage of the PBO or plan assets, whichever is higher?
A. 5%.
B. 10%.
C. 15%.
D. 20%.
B
Pension gains related to plan assets occur when:
A. The return on plan assets is higher than expected.
B. The vested benefit obligation is less than expected.
C. Retiree benefits paid out are less than expected.
D. The accumulated benefit obligation is more than expected.
a
The amortization of a net gain has what effect on pension expense?
A. Decreases it.
B. Has no effect on it.
C. Increases it (but only by the amount over 10% of the PBO).
D. Increases it (regardless of the amount).
A
Assume that at the beginning of the current year, a company has a net gain-AOCI of $25,000,000. At the same time, assume the PBO and the plan assets are $200,000,000 and $150,000,000, respectively. The average remaining service period for the employees expected to receive benefits is 10 years. What is the amount of amortization to pension expense for the year?
A. $3,000,000.
B. $500,000.
C. $2,500,000.
D. $1,500,000.
B
Assume that at the beginning of the current year, a company has a net gain-AOCI of $60,000,000. At the same time, assume the PBO and the plan assets are $300,000,000 and $450,000,000, respectively. The average remaining service period for the employees expected to receive benefits is 10 years. What is the amount of amortization to pension expense for the year?
A. $6,000,000.
B. $15,000,000.
C. $1,500,000.
D. $7,500,000.
C
Amortizing prior service cost for pension plans will:
A. Decrease assets.
B. Increase liabilities.
C. Increase shareholders’ equity.
D. Decrease retained earnings.
D
Scallion Company received the following reports of its defined benefit pension plan for the current calendar year:
The long-term expected rate of return on plan assets is 10%. Assuming no other data are relevant, what is the pension expense for the year?
A. $197,000.
B. $227,000.
C. $172,000.
D. $202,000.
D
Fox Company received the following reports of its defined benefit pension plan for the current calendar year:
The long-term expected rate of return on plan assets is 8%. Assuming no other data are relevant, what is the pension expense for the year?
A. $384,000.
B. $360,000.
C. $424,000.
D. $374,000.
A
The following information is related to the defined benefit pension plan of Dreamworld Company for the year:
Assuming no other relevant data exist, what is the pension expense for the year?
A. $190,000.
B. $92,400.
C. $60,000.
D. $170,000.
B
