PE3

Question 1

A pension plan is contributory when the employer makes payments to a funding 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 levels.

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 employees’ future salary levels.

Answer 11

FALSE

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 employees’ 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

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 that eliminates all further obligations for part or all of the benefits provided under a defined benefit plan.

Answer 20

FALSE

Question 21

Presented below is pension information related to Woods, Inc. for the year 2019:
Service cost €72,000
Interest on defined benefit obligation 54,000
Interest on vested benefits 24,000
Expected return on plan assets 18,000
The amount of pension expense to be reported for 2019 is
a. €120,000.
b. €144,000.
c. €162,000.
d. €108,000.

Answer 21

d

Question 22

Kraft, Inc. sponsors a defined-benefit pension plan. The following data relates to the operation of the plan for the year 2019.
Service cost € 200,000
Contributions to the plan 220,000
Actual return on plan assets 180,000
Defined benefit obligation (beginning of year) 2,400,000
Fair value of plan assets (beginning of year) 1,600,000
The discount rate was 10%. The amount of pension expense reported for 2019 is
a. €200,000.
b. €260,000.
c. €280,000.
d. €440,000.

Answer 22

c

Question 23

Presented below is information related to Jensen Inc. pension plan for 2019.
Service cost €900,000
Actual return on plan assets 210,000
Interest on defined benefit obligation 390,000
Net loss 30,000
Past service cost due to increase in benefits 165,000
Interest revenue on plan assets 180,000
What amount should be reported for pension expense in 2019?
a. €1,365,000
b. €1,335,000
c. €1,275,000
d. €1,155,000

Answer 23

c

Question 24

Presented below is pension information for Green Company for the year 2019:
Interest on plan assets €24,000
Interest on vested benefits 15,000
Service cost 30,000
Interest on defined benefit obligation 21,000
Past service cost due to increase in benefits 18,000
The amount of pension expense to be reported for 2019 is
a. €93,000.
b. €69,000.
c. €60,000.
d. €45,000.

Answer 24

d

Question 25

Hubbard, 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, 2019.
1/1/19 12/31/19
Defined benefit obligation £11,400,000 £11,760,000
Pension assets (at fair value) 6,000,000 6,900,000
Net (gains) and losses -0- 240,000
The service cost component of pension expense for 2019 is £840,000 and the past service cost due to an increase in benefits is £180,000 effective January 1, 2019. The discount rate is 10%. What is the amount of pension expense for 2019?
a. £1,800,000
b. £1,578,000
c. £1,506,000
d. £1,380,000

Answer 25

b

Question 26

At the end of the current year, Kennedy Co. has a defined benefit obligation of £335,000 and pension plan assets with a fair value of £245,000. The amount of the vested benefits for the plan is £225,000. Kennedy has an accumulated actuarial gain of £8,300. What account and amountrelated to its pension plan will be reported on the company’s statement of financial position?
a. Pension liability of £74,300
b. Pension liability of £90,000
c. Pension asset of £233,300
d. Pension asset of £110,000

Answer 26

b

Question 27

Clarkson Co. provides the following information about its pension plan for the year 2019.
Service cost £90,000
Contribution to the plan 16,000
Actual return on plan assets 62,000
Benefits paid 40,000
Plan assets at January 1, 2019 710,000
Defined benefit obligation at January 1, 2019 810,000
Unrecognized past service cost balance at January 1, 2019 100,000
Discount rate 9%

Based on this information, what is the pension expense for 2019?
a. £108,000
b. £271,900
c. £199,000
d. £208,000

Answer 27

d

Question 28

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 these answer choices are considered.

Question 29

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.

Question 30

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.

Question 31

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. 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.

Question 32

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.

Question 33

Which of the following is not a characteristic of a defined-contribution pension 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 fund are borne by the employee.

Question 34

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 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.

Question 35

Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?
a. Vested benefit obligation
b. Accumulated benefit obligation
c. Defined benefit obligation
d. Restructured benefit obligation

Question 36

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.

Question 37

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 standards for reporting the service cost component of pension expense.

Question 38

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 and nonvested service using future salaries.
    d. All of these answer choices are correct.

Question 39

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.

Question 40

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.