Quiz 2

Question 1

What are contributory pension plans

Answer 1

Employees voluntarily make payments to increase their benefits. Similar to 401k

Question 2

What are noncontributory pension plans

Answer 2

Employers bear the entire cost of the pension

Question 3

Who bears the risk in an defined contribution and benefit plan

Answer 3

In a contribution plan the risk is borne by employees. In a benefit plan the risk is borne by employer

Question 4

Who makes predictions on the Projected Benefit Obligation (PBO). What affects these predictions

Answer 4

Actuaries.

Mortality rates, employee turnover, interest and earning rates, etc.

Question 5

FASB requires the use of which type of pension obligation

Answer 5

Projected Benefit Obligation

Question 6

What are the three measures of pension obligation

Answer 6

Vested - benefit for vested employees at current salaries
Accumulated - benefits for nonvested employees at current salaries
Projected - Benefits for vested and non vested at future salaries

Question 7

What is overfunded and underfunded status

Answer 7

When PA > PBO it is overfunded

When PBO < PA it is underfunded

Question 8

What are the 5 components of pension expense

Answer 8

Service cost for the year (increase)
Interest on liability (increase)
Actual return on plan assets (general decrease)
Amort of PSC (general increase)
Gain or loss (increase/decrease)

Question 9

What is the entry for service cost

Answer 9

Debit Pension Expense

Credit PBO

Question 10

A gain or loss in pensions is defined by what

Answer 10

Sudden and large changes in fair value of plant assets. Happens to assets due to stock market. Liabilities due to change in assumptions

Question 11

What are the elements of a pension worksheet

Answer 11

A table consisting of items, annual pension expense, cash OCI(PSC and G/L), pension asset/liability, and memo record for PBO and PA

Question 12

On January 1, 2020, Zarle Company provides the following information related to its pension plan for the year 2020.
Plan assets, January 1, 2020, are $100,000.
Projected benefit obligation, January 1, 2020, is $100,000.
Annual service cost is $9,000.
Settlement rate is 10 percent. (PBO * .10)
Actual return on plan assets is $10,000.
Funding contributions are $8,000.
Benefits paid to retirees during the year are $7,000.

Describe the entry process

Answer 12

Debit 9000 service cost to expense
Debit 10000 interest cost to expense
Credit 10000 actual return to expense
Credit 8000 cash for contributions
Take difference between expense and cash for Pension Liability

Question 13

PSC is calculated using what method

Answer 13

The years of service method

Question 14

What accounts are under other comprehensive income for pensions

Answer 14

Prior service cost and Gain/Loss

Question 15

What is prior service cost

Answer 15

When benefiting employees for past work for a plan, Employer should recognize the pension expense over the remaining service lives of the employees who are expected to benefit from the change in the plan.

Question 16

What is the smoothing technique

Answer 16

How FASB handles gains/losses in pensions

Question 17

What component of return do companies include in a given year

Answer 17

Companies include the expected return on the plan assets as a component of pension expense, not the actual return in a given year. difference between the expected return and actual return is referred to as an unexpected gain/loss

Question 18

What is the corridor approach

Answer 18

An approach for amortizing the accumulated OCI account balance when it gets too large. 10% or larger of the beginning PBO or PA balance.

Question 19

Shin Corporation had a projected benefit obligation of $3,100,000 and plan assets of $3,300,000 at January 1, 2020.
Shin also had a net actuarial loss of $465,000 in Accumulated OCI at January 1, 2020.
The average remaining service period of Shin’s employees is 7.5 years.

Compute Shin’s minimum amortization loss

Answer 19

Shin has too much in OCI (3.3m*.1)=330k

465k in OCI > 330k corridor

Must amortize the additional 135k over the service life of 7.5 years

135k/7.5=18000

Question 20

How does overfunded or underfunded status get recognized

Answer 20

Companies must recognize on their balance sheet the overfunded (pension asset) or underfunded (pension liability) status of their defined benefit pension plan.

Question 21

OCI Loss is what entry

Answer 21

a credit

Question 22

OCI Gain is what entry

Answer 22

a debit

Question 23

OCI PSC expense is what entry

Answer 23

a credit

Question 24

What is a deferred tax liability

Answer 24

Deferred Tax Liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

Question 25

What is a deferred tax asset

Answer 25

Deferred Tax Asset represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year.

Question 26

What is a cumulative temporary difference

Answer 26

When taxable income is different than pretax financial income due to a difference to be paid out in later years

Question 27

What is the general entry for deferred tax liability

Answer 27

Debit Income Expense

Credit Income Expense Payable and deferred tax liability (income * tax rate)