Pensions

Question 1

Barrett Co. maintains a defined benefit pension plan for its employees. At each balance sheet date, Barrett should report pension liability equal to the
Accumulated benefit obligation.
Projected benefit obligation.
Unfunded accumulated benefit obligation.
Unfunded projected benefit obligation.

Answer 1

Unfunded projected benefit obligation.
This Answer is Correct
The reported liability for defined benefit pension plans is the unfunded projected benefit obligation. This is the projected benefit obligation, less pension plan assets at fair value. Projected benefit obligation is the fundamental measure of a firm’s pension liability, but is reported only in the footnotes.

Question 2

he recognition of a $5,000 actuarial gain at year-end causes:
an increase in pension liability.
an increase in PBO.
a decrease in pension asset.
a credit to pension gain/loss-other comprehensive income.

Answer 2

a credit to pension gain/loss-other comprehensive income.
This Answer is Correct
When the actuarial gain is recognized, pension liability is debited, because PBO is reduced by the gain, and pension liability is the difference between PBO and assets. Pension gain/loss-OCI is credited, because the firm’s pension costs have decreased. The pension gain/loss-OCI account causes other comprehensive income to be credited (increased).

Question 3

The recognition of the amortization of $50 of net gain causes what effect on (1) pension expense, and (2) pension liability?
_1_
_2_
decrease
decrease
decrease
no effect
no effect
decrease
no effect
no effect

Answer 3

decrease
no effect

The amortization decreases pension expense because the gain reduced the firm’s pension costs. The amortization amount is the portion of the gain that is entered into pension expense (as a negative amount). The gain was recorded previously. At that time, pension liability was decreased, and other comprehensive income increased. The complete entry is: (dr.) Pension gain/loss-OCI $50, (cr.) Pension expense 50.

Question 4

Which of the following costs is unique to post-retirement healthcare benefits?
Per capita claims.
Service.
Prior service.
Interest.

Answer 4

The per capital claims cost is the basis for computing the obligation reported for a post-retirement healthcare plan. These costs are estimated based on historical norms adjusted for estimated healthcare cost-trend rates and are affected by the estimated age of employees at retirement, their health, and other factors. Only post-retirement healthcare plans require this type of estimate. Pension benefits, for example, are based on variables such as age at retirement, number of years of service, and final salary. Both defined-benefit pension plans and post-retirement healthcare plans involve the other three answer alternatives. Both have service-cost and interest-cost components for their respective expenses, and both can incur prior-service cos

Question 5

The stockholders of Meadow Corp. approved a stock-option plan that grants the company's top three executives options to purchase a maximum of 1,000 shares each of Meadow's $2 par common stock for $19 per share. The options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determined that the fair value of the compensation is $300,000 and the vesting period is three years. What amount of compensation expense from the options should Meadow record in the year the options were granted?
$20,000
$60,000
$100,000
$300,000

Answer 5

$100,000 (300K / 3 years)

The fair value of a fixed option plan at grant date is the fair value of the option. Typically the fair value of one option is given and that is multiplied by the number of options, but this problem provides the entire fair value. That total fair value is the total compensation expense to be recognized over the service period—the number of years from grant date to vesting. Once the options vest, no more compensation expense is recognized because the manager has provided the necessary service. Compensation expense per year is the total $300,000 compensation expense divided by 3 years, or $100,000 per year.

Question 6

On January 2, 2005, Morey Corp. granted Dean, its president, 20,000 stock appreciation rights for past services. Those rights are exercisable immediately and expire on January 1, 2008.

On exercise, Dean is entitled to receive cash for the excess of the stock’s market price on the exercise date over the market price on the grant date. Dean did not exercise any of the rights during 2005. The market price of Morey’s stock was $30 on January 2, 2005 and $45 on December 31, 2005.

As a result of the stock appreciation rights, Morey should recognize compensation expense for 2005 of

$0
$100,000
$300,000
$600,000

Answer 6

$300,000

This Answer is Correct
The 2005 compensation expense for these stock-appreciation rights equals: (number of shares) × (ending market price − grant-date market price) = 20,000($45 − $30) = $300,000.

The rights are immediately vested, because they can be exercised immediately. Therefore, the entire $300,000 amount is recognized as expense in 2005. Changes in market price in future years, before the rights are exercised, are recognized on a current and prospective basis (change in estimate).