Section 2K - Compensation & Benefit

Question 1

Nome Co. sponsors a defined benefit plan covering all employees. Benefits are based on years of service and compensation levels at the time of retirement. Nome determined that, as of September 30, Year 2, its projected benefit obligation was $380,000, and its plan assets had a $290,000 fair value. Nome’s September 30, Year 2, trial balance showed a pension asset of $20,000. To report the proper pension liability in its September 30, Year 2, balance sheet, what amount should Nome report as an adjustment?

$110,000

$400,000

$380,000

$360,000

Answer 1

$110,000

Since the projected benefit obligation is $90,000 more than the plan assets ($380,000 – $290,000), the total underfunded status of the plan of $90,000 needs to show up on the balance sheet. To adjust from the trial balance amount ($20,000 asset) to the correct ending amount of $90,000 liability requires a $110,000 credit adjustment ($90,000 + $20,000).

Question 2

An entity must recognize on its balance sheet the full __ or ___status of its defined benefit pension plans.

The overfunded or underfunded status is the difference between the ___ value of the plan assets and the projected benefit obligation.

Prior to the issuance of ASU 2017-07, the net benefit costs for retirement were reported as one aggregate amount of compensation cost. ASU 2017-07 requires employers to:

1. present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee ___costs
2. present the other components of the net periodic benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of ___income
3. account for gains and losses from curtailments and settlements, and the cost of certain __ of benefits,

Answer 2

overfunded or underfunded

fair

compensation

operating

termination

Question 3

Net periodic pension cost:

The FASB defines this to be “the amount recognized in an employer’s financial statements as the cost of a pension plan for a period. Components of net periodic pension cost are ___cost, ___cost, actual return on plan ___, gain or loss, amortization of prior __cost or credit, and amortization of the ___asset or obligation existing at the date of initial application of Subtopic 715-30. The term net periodic pension ___is used instead of net pension expense because part of the service cost component recognized in a period may be capitalized along with other costs as part of an asset such as inventory.”

Answer 3

Service, interest, assets, prior serivce, transition

cost

Question 4

___cost: The portion of net periodic pension cost that represents an estimate of the increase in pension benefits payable

Actual return on plan ___: An increase in the plan assets (for example, from dividends received and increases in the fair value of investments held by the plan

Prior service ___amortization: When plan amendments are made, additional benefits are sometimes applied retroactively to employees for service rendered in prior years

Answer 4

Service

assets

cost

Question 5

A company sponsors two defined benefit pension plans. The following information relates to the plans at year-end:
Plan A______ Plan B
FV of plan assets $ 800,000 $1,000,000
Projected benefit obligation 1,000,000 700,000

What amount(s) should the company report in its balance sheet related to the plans?

Liability of $200,000; asset of $300,000

Asset of $100,000

Liability of $100,000

Asset of $1,800,000; liability of $1,700,000

Answer 5

Company Plan A is underfunded by $200,000, the amount of the projected benefit obligation less the fair value of plan assets, and Plan B is overfunded by $300,000, the excess of plan assets over the obligation.

The underfunded plan is a liability and the overfunded plan is an asset. Both must go onto the balance sheet and you do not net or offset the asset versus the liability.

Question 6

An overfunded single-employer defined benefit postretirement plan should be recognized in a classified statement of financial position as a:

noncurrent liability.

current asset.

noncurrent asset.

current liability.

Answer 6

noncurrent asset.

An overfunded plan is recognized as an asset, but only in the noncurrent assets section. The asset is measured as the amount that plan asset fair value exceeds the projected benefit obligation.

Question 7

Interest cost included in the net periodic pension cost recognized by an employer sponsoring a defined benefit pension plan represents the:

shortage between the expected and actual returns on plan assets.

increase in the fair value of plan assets due to the passage of time.

amortization of the discount on unrecognized prior service costs.

increase in the projected benefit obligation due to the passage of time.

Answer 7

increase in the projected benefit obligation due to the passage of time.

FASB ASC 715 states: “The interest cost component of net periodic pension cost is interest on the projected benefit obligation, which is a discounted amount. Measuring the projected benefit obligation as a present value requires accrual of an interest cost at rates equal to the assumed discount rates.”

Question 8

The following information pertains to Kane Co.’s defined benefit pension plan for 20X1:

1. Service cost $40,000
2. Interest cost 15,000
3. Expected return on plan assets 12,000
4. amort of PY service cost 4,000
5. amort of unrecog (gain)/loss (3,000)
6. amort of unrecog transition or obligation 1,500

Kane should recognize total net periodic pension expense on the income statement for 20X1 of:

$75,500.

$64,500.

$5,500.

$45,500.

Answer 8

$45,500.

Remember that service cost is part of net periodic pension cost (NPPC); however, it is classified along with other compensation expense on the income statement, whereas the remaining components of NPPC are shown as pension cost. Kane’s total net periodic pension cost for 20X1 is:

Service cost 40,000
Interest cost 15,000
Expected return on plan assets (12,000)
ammort of prior service costs 4,000
amort of unrecog (gain) loss (3,000)
amort of unrecog transition obligation 1,500
Net periodic pension cost - 20X1 $45,500

Question 9

At December 31 of the current year, Taos Co. estimates that its employees have earned vacation pay of $100,000. Employees will receive their vacation pay next year. Should Taos accrue a liability at Decem­ber 31 if the rights to this compensation accumulated over time or if the rights are vested?

Accumulated, no; Vested, no

Accumulated, yes; Vested, yes

Accumulated, yes; Vested, no

Accumulated, no; Vested, yes

Answer 9

Accumulated, yes; Vested, yes

Rights to paid absences, such as vacation pay, should be accrued as an expense when earned, as long as the rights are vested, or at least accumulate (carry over to the next period).

Question 10

In general, the employer should accrue a liability for such future absences if all the following conditions are met:

1. a. The employer’s obligation relating to employees’ rights to receive compensation for future absences is attributable to employees’ services already ___.
2. b. The obligation relates to rights that ___or accumulate.
3. c. Payment of the compensation is ___.
4. d. The amount can be reasonably ___.

Answer 10

rendered

vest

probable

estimated

Question 11

The rights ___if the employer is obligated to make payment, even if the employee terminates

The rights ___if earned, but unused rights to compensated absences may be carried forward to one or more periods subsequent to that in which they are earned.

Answer 11

vest

accumulates

Question 12

An entity sponsors a defined benefit pension plan that is underfunded by $800,000. A $500,000 increase in the fair value of plan assets would have which of the following effects on the financial statements of the entity?

An increase in the assets of the entity

An increase in accumulated other comprehensive income of the entity for the full amount of the increase in the value of the assets

A decrease in accumulated other comprehensive income of the entity for the full amount of the increase in the value of the assets

A decrease in the liabilities of the entity

Answer 12

A decrease in the liabilities of the entity

An underfunded pension plan means the projected benefit obligation (liability) exceeds the fair value of the plan assets and is shown as a liability. An increase in the asset value reduces the net liability of the entity.

Question 13

Davis Tire Co. has a deferred compensation plan for several key employees. Each employee’s plan contains an agreement not to compete and has a different set of benefits. How should Davis Co. account for this plan?

The plan should be accounted for as a current expense and accrued liability each year of an employee’s service life.

Deferred compensation plans do not need to be reported or disclosed.

A liability, not less than the sum of the nondiscounted future cash flows, should be reported.

The plan should be accounted for as a pension plan or as a health and welfare plan.

Answer 13

The plan should be accounted for as a current expense and accrued liability each year of an employee’s service life.

A deferred compensation plan which is not the equivalent of a pension plan should be reported in accordance with FASB ASC 710-10-25-11. Davis Co. would accrue a liability of not less than the present value of the estimated future payments.

Question 14

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 14

$100,000

The total fair value of the compensation for the stock options must be decided at the grant date, and the total compensation must be recognized evenly over the vesting period during which it is earned.

$300,000 ÷ 3 years = $100,000 compensation expense per year

Question 15

On July 31, 20X1, Tern Co. amended its single employee defined benefit pension plan by granting increased benefits for services provided prior to 20X1. This prior service cost will be reflected in Tern’s income statement for:

years before 20X1 only.

year 20X1, and years before and following 20X1.

year 20X1, and following years only.

year 20X1 only.

Answer 15

year 20X1, and following years only.

FASB ASC 715 requires that prior service cost be included in net perioic pension cost in the year of the plan amendment (including initiation of a plan) in the year of the amendment and the future years of service of each employee active at the date of the amendment who is expected to receive benefits under the plan.

Thus, Tern’s prior service cost will be recognized in net periodic pension cost (reflected in Tern’s income statement) in 20X1 and the future period of service of each employee active at the date of the amendment who is expected to receive benefits under the plan.

The unrecognized prior service cost should be reflected in the accumulated other comprehensive income included in the stockholders’ section of Tern’s December 31, 20X1, balance sheet.

Question 16

FASB ASC 715 requires that prior service cost be included in net ____ pension cost in the year of the amendment and the ___ years of service of each employee active at the date of the amendment who is expected to receive benefits under the plan.

Answer 16

periodic

future

Question 17

Several definitions are important in accounting for defined benefit pension plans.

1. ___: Estimates of future events affecting pension costs, such as mortality, withdrawal from workforce,
2. ___: The present value as of a date of all benefits attributed by the pension benefit formula to employee services rendered to that date.
3. ___: The actuarial present value as of a specified date of the benefits attributed by the pension benefit formula to employee services rendered before that date and based on compensation prior to that date
4. ___The amount that a pension plan could reasonably expect to receive for an investment in a current sale
5. ______: The cost of granting the benefits of a plan amendment retroactively to employees who provided services before the plan amendment

Answer 17

actuarial assumptions

projected benefit obligation

accum. benefit obligation

FV of plan assets

PY service cost

Question 18

A company has multiple defined benefit pension plans. A pension asset reported in the statement of financial position represents the amount by which the:

total fair value of plan assets exceeds the total projected benefit obligation for all overfunded and underfunded plans.

total fair value of all plans exceeds the total accumulated benefit obligation for all overfunded and underfunded plans.

fair value of plan assets exceeds the projected benefit obligation for the company’s overfunded plans.

fair value of plan assets exceeds the accumulated benefit obligation for the overfunded plans.

Answer 18

fair value of plan assets exceeds the projected benefit obligation for the company’s overfunded plans

The fair value of plan assets is the amount that a pension plan(s) could reasonably expect to receive for an investment in a current sale between a willing buyer and a willing seller.

An entity must recognize on its balance sheet the full overfunded or underfunded status of its defined benefit pension plans. The overfunded or underfunded status is the difference between the fair value of the plan assets and the projected benefit obligation.

The right to offset multiple plans does not exist; therefore, a pension asset is the total by which the fair value of plan assets for overfunded plans only exceeds the total projected benefit obligation for just those overfunded plans. Underfunded plans would be shown separately..

Question 19

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?

Total liabilities will be decreased.

Net income will be increased.

Other comprehensive income will be increased.

Current-period expenses will be decreased.

Answer 19

Other comprehensive income will be increased.

Prior service cost is a benefit granted to current workers in respect of their prior service. It is recognized as an expense over the remaining service lives of the benefited workers.

Until then, it is recognized as a part of the total projected benefit obligation, and debited to other comprehensive income (thus lowering other comprehensive income).

As prior service cost is recognized as an expense, it is credited to (taken out of) other comprehensive income (thus increasing it).

Question 20

On January 2, 20X1, East Corp. adopted a defined benefit pension plan. The plan’s service cost of $150,000 was fully funded at the end of 20X1. Prior service cost was funded by a contribution of $60,000 in 20X1. Amortization of prior service cost was $24,000 for 20X1. Assuming that no amortization of unrecognized gain or loss is required in 20X1, what amount should East recognize as net periodic pension cost (including service cost) in 20X1?

$150,000

$0

$126,000

$174,000

Answer 20

$174,000

Question 21

Visor Co. maintains a defined benefit pension plan for its employees. The service cost component of Visor’s net periodic pension cost is measured using the:

projected benefit obligation.

expected return on plan assets.

unfunded vested benefit obligation.

unfunded accumulated benefit obligation.

Answer 21

projected benefit obligation.

The service cost component is the portion of net periodic pension cost that represents an estimate of the increase in pension benefits payable (specifically, the increase in the projected benefit obligation) as a result of employee services rendered in the current period. It is included separately in compensation expense on the income statement; it is not included in net periodic pension cost.

Question 22

The following information pertains to Gali Co.’s defined benefit pension plan for 20X1:

Fair value of plan assets (beginning of year) $350,000
Fair value of plan assets (end of year) 525,000
Employer contributions 110,000
Benefits paid 85,000

What is Gali’s actual return on plan assets?

$65,000

$150,000

$260,000

$175,000

Answer 22

$150,000

Question 23

On January 2, 20X1, Farm Co. granted an employee an option to purchase 1,000 shares of Farm’s common stock at $40 per share. The option became exercisable on December 31, 20X2, after the employee had completed two years of service, and was exercised on that date. The fair value of the option on January 2, 20X1, was $10 per option.

What amount should Farm recognize as compensation expense for 20X1?

$10,000

$40,000

$5,000

$0

Answer 23

$5,000

FASB ASC 718-10-30-2 requires that the fair value method be used. Except in very rare circumstances, the intrinsic value method is no longer acceptable.

Accordingly, total compensation cost for Farm Co. is the $10,000 fair value of the options on the grant date (1,000 shares × $10 fair value per option on January 2, 20X1).

The $10,000 total compensation cost should be amortized over Farm’s 2-year service period at the rate of $5,000 per year ($10,000 ÷ 2 years = $5,000). The compensation expense for 20X1 therefore is $5,000.

Question 24

The funded status of a defined benefit pension plan for a company should be reported in the:

statement of financial position.

notes to the financial statements only.

income statement.

statement of cash flows.

Answer 24

statement of financial position.

The over- or underfunded status of a defined benefit pension plan must be shown as an asset or a liability on the balance sheet, the statement of financial position.

If plan assets exceed the projected benefit obligation, then the excess is a noncurrent asset; if plan assets are less, the deficiency is a current or noncurrent liability.

Question 25

On which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?

Date of restriction lapse

Date of grant

Date of exercise

Date of vesting

Answer 25

Date of grant

Both the intrinsic value method and the fair market value method use the grant date to measure the cost for stock issued to employees. At the grant date, one must compute a value for the shares used as compensation, which will be earned and taken as an expense over the service period.

Question 26

Note section disclosures in the financial statements for pensions do not require inclusion of which of the following?

A detailed description of the plan, including employee groups covered

The components of net period pension costs

The company’s best estimate of contributions expected to be paid into the plan in the next fiscal year

The amount of net prior service cost or credit in accumulated other comprehensive income

Answer 26

period pension

contributions

other comprehensive income

A detailed description of the plan, including employee groups covered

The FASB requires extensive disclosures regarding pensions. Among these are the components of net periodic pension cost and the estimated plan contributions for the year following the latest year reported in the statement of financial position.

The FASB requires, for each annual statement of financial position presented, “the amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost, showing separately the net gain or loss, net prior service cost or credit, and net transition asset or obligation.” Note that service cost is presented along with compensation expense, while the remaining items of net periodic pension cost are presented on a separate line item.

Question 27

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 related to the company’s defined benefit pension plan at year-end?

A credit balance of $420,000

A debit balance of $420,000

A debit balance of $70,000

A credit balance of $70,000

Answer 27

A debit balance of $70,000

Changes in the plan assets and/or projected benefit obligation (PBO) fall into three categories: (1) changes due to unrecognized gains and losses, (2) changes due to prior service cost, and (3) changes associated with a transition asset or obligation. In all three categories, the initial event or occurrence is reflected as a change in the plan asset/PBO with an offsetting change in other comprehensive income; that is, it is not initially included in the determination of pension expense.

The amount to be reported in accumulated other comprehensive income is the net gain of $140,000 and the prior service cost of $210,000, for a net debit balance of $70,000.

Question 28

Changes in the plan assets and/or projected benefit obligation (PBO) fall into three categories: (1) changes due to ___gains and losses, (2) changes due to ___cost, and (3) changes associated with a ___asset or obligation.

In all three categories, the initial event or occurrence is reflected as a change in the plan asset/PBO with an offsetting change in ___; that is, it is not initially included in the determination of pension expense.

Answer 28

unrecognized

prior service

transition

other comprehensive income

Question 29

To prevent the accumulated other comprehensive income related to unrealized gains and losses from getting too large, current GAAP utilizes a ___approach.

Under this approach, the accumulated other comprehensive income (AOCI) related to unrealized gains and losses does not have to be ___. As long as the balance in that particular AOCI does not exceed __% of the larger of the beginning-of-year balances in the projected benefit obligation or the market-related value of the plan assets.

The market-related value of plan assets can be either fair market value or a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years. The market-related value of plan assets is herein assumed to be the same as fair value.

If it does exceed this limit, the excess must be ___over the average remaining service period of active employees who are expected to receive benefits under the plan.

Answer 29

corridor

amortized, 10

amortized

Question 30

A company that maintains a defined benefit pension plan for its employees reports an underfunded pension liability on its year-end balance sheet. This underfunded pension liability represents the amount that the:

fair value of the plan assets exceeds the accumulated benefit obligation.

projected benefit obligation exceeds the fair value of the plan assets.

accumulated benefit obligation exceeds the fair value of the plan assets.

fair value of the plan assets exceeds the projected benefit obligation.

Answer 30

projected benefit obligation exceeds the fair value of the plan assets..

FASB ASC 715-20-45-3 requires that an entity report on its balance sheet the underfunded or overfunded pension plan. In the case of a pension plan, the underfunded pension liability represents the excess of the projected benefit obligation over the fair value of the plan assets.

The underfunded amount for a postretirement plan other than pensions would represent the excess of the accumulated benefit obligation over the fair value of the plan assets.

Question 31

Jan Corp. amended its defined benefit pension plan, granting a total credit of $100,000 to four employees for services rendered prior to the plan’s adoption. The employees, A, B, C, and D, are expected to retire from the company as follows:

1. “A” will retire after three years.
2. “B” and “C” will retire after five years.
3. “D” will retire after seven years.
4. What is the amount of prior service cost amortization in the first year?

$20,000

$0

$25,000

$5,000

Answer 31

$20,000 /// 300635

Question 32

On January 2, 20X3, Oak Company adopted a defined benefit pension plan. At the end of 20X3, the plan had a projected benefit obligation of $97,000. The plan assets had a value of $67,000 at the end of 20X3. During 20X4, the plan’s service cost was $72,000. Amortization of unrecognized loss equaled $3,500 for 20X4. The settlement rate for the pension plan is 8% and the expected return on plan assets is 5%. What amount should Oak recognize as net periodic pension cost (including service cost) in 20X4?

$72,150

$79,610

$86,610

$79,910

Answer 32

$79,910

Oak Company’s net periodic pension cost for 20X4 is $79,910, as shown below:

Service cost $72,000
Interest cost 7,760
Amortization of past service cost 0
Expected return on plan assets (3,350)
Amortization of unrecognized gain/loss 3,500
$79,910

The expected return is a reduction of periodic pension cost. The amortization of unrecognized loss is added to pension cost because it is including losses in pension cost that have not been recognized before and since losses have a debit normal balance just like expenses, the loss amortization is added to arrive at pension cost. Service cost is shown as a component of compensation expense on the income statement.

Question 33

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 (AOCI), ignoring income tax effects?

A $450,000 credit

A $450,000 debit

A $500,000 debit

A $550,000 credit

Answer 33

A $450,000 debit

When plan amendments are made, additional benefits are sometimes applied retroactively to employees for service rendered in prior years. This increase in the benefits represents a cost to the employer that GAAP requires to be recognized as a component of pension expense over the remaining service years of the affected employees.

The unrecognized prior service cost must be recognized as a component of Other Comprehensive Income. The amortization of the unrecognized prior service cost is recognized as an increase in pension expense and as a reduction of the unrecognized amount remaining in Accumulated Other Comprehensive Income.

At the end of year 1, 1/10 or $50,000 amortization would reduce the $500,000 unrecognized prior service cost, so the net entry to AOCI would be a debit of $450,000.

Question 34

In a compensatory stock option plan for which the grant, vesting, and exercise dates are all different, the additional paid-in capital—stock options account should be reduced at the:

beginning of the service period.

vesting date.

date of grant.

exercise date.

Answer 34

exercise date.

Total compensation cost is determined at the date of grant, based on the fair value of the award at that date. This total compensation cost is recognized over the service period by recording the following type of entry (ignoring, for simplicity, the income tax effect):

Question 35

A company granted its employees 100,000 stock options on January 1, year 1. The stock options had a grant date fair value of $15 per option and a three-year vesting period. On January 1, year 2, the company estimated the fair value of the stock options to be $18 per option. Assuming that the company did not grant any additional options or modify the terms of any existing option grants during year 2, what amount of share-based compensation expense should the company report for the year ended December 31, year 2?

$800,000

$600,000

$500,000

$700,000

Answer 35

$500,000

The FASB requires that the fair value method be used for stock options. The fair value method recognizes the cost of consideration received for employee services to be the fair value at the grant date of the stock options ($15). The servicing period is the three-year vesting period. The company should report $500,000 [(100,000 × $15) ÷ 3] of share-based compensation expense for the year ended December 31, year 2.

Question 36

The following data relates to Nola Co.’s defined benefit pension plan as of December 31, 20X1:

1. Accumulated benefit obligation $140,000
2. Plan assets at fair value 260,000
3. Projected benefit obligation 160,000

What amount should Nola report on its December 31, 20X1 balance sheet?

1. Overfunded plan assets of $100,000
2. Overfunded plan assets of $260,000
3. Underfunded plan liability of $160,000
4. Overfunded plan assets of $120,000

Answer 36

Overfunded plan assets of $100,000

FASB ASC 715-20-45-3 requires that an entity report on its balance sheet the underfunded or overfunded pension plan. In the case of a pension plan, the underfunded pension liability represents the excess of the projected benefit obligation over the fair value of the plan assets.

Thus, Nola should report a $100,000 overfunded pension asset for the excess of the $260,000 fair value of the plan assets over the $160,000 projected benefit obligation.

Question 37

A company provides a defined benefit pension plan for all of its employees. The fair value of the plan assets at year-end is $45,000,000. The values of the accumulated benefit obligation and projected benefit obligation at year-end are $46,000,000 and $60,000,000, respectively. The company expects to make benefit payments totaling $2,000,000 next year. What amount should the company report in the year-end financial statements as a liability in connection with the defined benefit pension plan?

$15,000,000

$1,000,000

$3,000,000

$17,000,000

Answer 37

$15,000,000.

An entity must recognize on its balance sheet the full overfunded or underfunded status of its defined benefit pension plans. The overfunded or underfunded status is the difference between the fair value of the plan assets ($45 million) and the projected benefit obligation (PBO, $60 million). Since the PBO exceeds plan assets, there is a $15 million net liability.

Question 38

FASB ASC 505-50-15-2 establishes a fair value approach for stock-based employee compensation plans. The fair value methodology is also extended to cover issuance of:

cash dividends to shareholders.

long-term debt for goods and services.

equity instruments for goods and services.

bonds for certain types of assets.

Answer 38

equity instruments for goods and services.

FASB ASC 505-50-15-2 applies to “all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments or by incurring liabilities to a goods or service provider that is not an employee in amounts based, at least in part, on the price of the entity’s shares or other equity instruments or that require or may require settlement by issuing the entity’s equity shares or other equity instruments.”

Question 39

Fair Value Method

The FASB requires the fair value method. It applies to all share-based payment plans except equity instruments held by an___ plan

• The fair value method recognizes the cost of ____ for employee services at the fair value of the equity instruments issued. .
  
  • The objective of the measurement process is to estimate the fair value at the ___date of the stock options and other equity instruments to which employees are entitled when they have rendered the required services and satisfied all other conditions necessary to earn the right to benefit from the instruments.

Answer 39

employee stock ownership plan (ESOP).

consideration received

Question 40

Wolf Co.’s grant of 30,000 stock appreciation rights enables key employees to receive cash equal to the difference between $20 and the market price of the stock on the date each right is exercised. The service period is 20X1 through 20X3, and the rights are exercisable in 20X4 and the following year.

The market price of the stock was $25 and $28 on December 31, 20X1 and 20X2, respectively. Assuming that the fair value of the stock appreciation rights was $5 at December 31, 20X1, and $8 at December 31, 20X2, what amount should Wolf report as the liability under the stock appreciation rights plan in its December 31, 20X2, balance sheet?

$0

$240,000

$130,000

$160,000

Answer 40

$160,000

FV of SARs at 12/31/X2 (30k x $8 fair value) $240k
% to service period through 12/31/X2… 2/3
Liability at 12/31/X2 $160,000

. The measurement date for a liability award, such as Wolf’s, is the date of settlement. Liabilities incurred under share-based payment arrangements, such as Wolf’s SARs, are remeasured at the end of each reporting period until settlement.

The 30,000 stock appreciation rights (SAR) entitle the holders to receive cash equal to the excess of the market price of the stock on the exercise date over $20. At 12/31/Y2, the estimate of total SAR compensation expense is $240,000 [30,000 × ($28 – $20)]. Since the required service period is 3 years, this total expense will be allocated over a 3-year period. By the end of year 2, the second year, 2/3 of the total estimated compensation expense should be accrued, resulting in a SAR liability of $160,000 (2/3 × $240,000).

Question 41

The FASB does not require an employer to accrue a liability for ____accumulating rights to receive sick pay benefits.

Answer 41

nonvesting

Question 42

On September 1, Year 1, Howe Corp., offered special termination benefits to employees who had reached the early retirement age specified in the company’s pension plan. The termination benefits consisted of lump-sum and periodic future payments.

Additionally, the employees accepting the company offer receive the usual early retirement pension benefits. The offer expired on November 30, Year 1. Actual or reasonably estimated amounts at December 31, Year 1, relating to the employees accepting the offer are as follows:

1. Lump-sum payments totaling $475,000 were made on January 1, Year 2.
2. Periodic payments of $60,000 annually for three years will begin January 1, Year 3. The present value at December 31, Year 1, of these payments was $155,000.
3. Reduction of accrued pension costs at December 31, Year 1, for the terminating employees was $45,000.

In its December 31, Year 1, balance sheet, Howe should report a total liability of special termination bene­fits of:

$655,000.

$475,000.

$630,000.

$585,000.

Answer 42

$630,000.

The total liability that needs to be recognized is for the lump sum and the present value of the periodic payments ($475,000 + $155,000 = $630,000). It is not to be offset against the reduction in accrued pension costs.

Question 43

• A pension plan is an arrangement whereby a company provides benefits that can be determined or estimated in advance to its __employees.
  
  • A pension plan is be thought of as ___compensation

Pension plans typically have three parties:

1. ___): The company establishing the plan for the benefit of its employees
2. ___: Those individuals who qualify to receive benefits under the pension plan
3. . ___: A financial institution

Answer 43

retired

deferred

ER (sponsor)

EE

Trustee

Question 44

Defined ___plans: Payments to employees are based on the amounts contributed into the plan that

Defined ___plans: Benefits to be received by employees in the future are defined, rather than the contribution

Under current generally accepted accounting principles, pension plans are accounted for by __accounting

Answer 44

contribution

benefit

accrual

Question 45

Ross Co. pays all salaried employees on a Monday for the 5-day workweek ended the previous Friday. The last payroll recorded for the year ended December 31, 20X1, was for the week ended December 26, 20X1.

The payroll for the week ended January 2, 20X2, included regular weekly salaries of $80,000 and vacation pay of $25,000 for vacation time earned in 20X1 not taken by December 31, 20X1. Ross had accrued a liability of $20,000 for vacation pay at December 31, 20X0. In its December 31, 20X1, balance sheet, what amount should Ross report as accrued salary and vacation pay?

$73,000

$68,000

$48,000

$79,000

Answer 45

$73,000

Employees were paid through Friday, December 26, 20X1. Salaries were unpaid for Monday, December 29 through Wednesday, December 31 (three days).

Accrued salary at 12/31/X1 (3/5 x $80,000) $48,000
Accrued vacation pay for 20X1 25,000
Total Accrual at 12/31/X1 $73,000

Balance at December 31, 20X0, ($20,000) is not used in this computation. The 20X0 accrual amounts would have been used during 20X1.

Question 46

a

Answer 46

$175,000

The value of the restricted stock is earned equally over the 4-year vesting period, and the compensation expenses must be divided equally into those years. The total expense is the value of the shares multiplied by the amounts: 10,000 × $20 = $200,000, and also 20,000 × $25 for an additional $500,000, for a total of $700,000 compensation expense, earned 1/4th each year: $700,000 × 0.25 = $175,000.

Question 47

Determining Fair Value

The fair value of an equity share (for example, a stock option) should be based on the observable market price of a share with the ___ or ___terms and conditions, if one is available. If an observable market price is not available, which is the usual case, the fair value should be estimated using an acceptable valuation technique. The valuation technique should be one that:

1. a. is applied in a manner ___with the fair value measurement objective,
2. b. is based on established ___of financial economic theory and generally applied in that field, and
3. c. reflects all ___characteristics of the instruments.

Answer 47

same or similar

consistent

principles

substantive

Question 48

On January 1, year 1, a company grants 5,000 nonqualified stock options to an employee with a strike price of $3 per option and fair value of $8 per option. All of the options vest at the end of 5 years from the grant date. At the end of year 1, the company’s stock price was $10 per share. What amount of annual stock compensation cost should the company report for year 1?

$0

$3,000

$5,000

$8,000

Answer 48

$8,000

The estimated compensation expense for the 5-year vesting period is $40,000 (option fair value of $8 × 5,000 options), which is allocated ratably over the 5-year period. The company should report $8,000 ($40,000 ÷ 5 years) compensation expense for year 1 through year 5, assuming no employees forfeit their options.

Incorrect

Corporations often provide various types of stock options and other equity plans for their officers and key employees. GAAP requires that these options be accounted for under the fair value method at the grant date. The expense is based on the fair value of the option at the grant date and not the fair value of the stock because the employees are being given the option (i.e., right) to buy the stock, and not the actual shares of the corporation’s stock. GAAP requires the expense to be recognized ratably over the vesting period.

Question 49

Answer 49

$60,000

As of December 31, Year 8, Webb Co. has a projected benefit obligation of $750,000 and projected fair value of plan assets of $675,000, leading to a projected underfunding of $75,000 (projected benefit obligation exceeds plan assets). To decrease this underfunding to $15,000, Webb would need to contribute $60,000, bringing the total fair value of plan assets to $735,000.

Question 50

The following information relates to a company’s defined benefit pension plan at December 31:

1. Accumulated benefit obligation $1,035,000
2. Projected benefit obligation 1,250,000
3. Prior service cost 113,000
4. Net gain on plan assets 167,000
5. Plan assets (fair value) 737,000

What amount should the company report as its pension liability at December 31?

$352,000

$567,000

$513,000

$400,000

Answer 50

$513,000

The company should report $513,000 ($1,250,000 − $737,000) as its pension liability at December 31. In a defined benefit plan, benefits to be paid are the result of many estimates and assumptions about salary levels, retirement ages, employee turnover, etc.

The FASB requires an entity to recognize on its balance sheet the full overfunded or underfunded status of its defined benefit pension plans. The overfunded (i.e., asset) or underfunded (i.e., liability) status is the difference between the fair value of the plan assets and the projected benefit obligation.

Question 51

The following information pertains to Lee Corp.’s defined benefit pension plan for the current year:

Service cost $160,000
Actual and expected gain on plan assets 35,000
unexpect loss on plan assets related to
a disposal of a subsidiary 40,000
Amortization of prior service cost 5,000
Annual interest on pension obligation 50,000

What amount should Lee report as a separate line item titled “net periodic pension cost” in its current year-end income statement?

$220,000

$180,000

$250,000

$20,000

Answer 51

$20,000

Service cost is a component of net periodic pension cost (NPPC), but it is not included with NPPC on the income statement. Rather, it is a separate line item included with compensation expense.

To compute the net periodic pension cost, subtract the expected rate of return on plan assets, add the amortization of prior service cost, and add the interest cost on the pension obligation:

$(35,000) + $5,000 + $50,000 = $20,000

Question 52

North Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days.

Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken.

At December 31, 20X1, North’s unadjusted balance of liability for compensated absences was $21,000. North estimated that there were 150 vacation days and 75 sick days available at December 31, 20X1. North’s employees earn an average of $100 per day. In its December 31, 20X1, balance sheet, what amount of liability for compensated absences is North required to report?

1. $15,000
2. $21,000
3. $36,000
4. $22,500

Answer 52

$15,000

FASB ASC 710-10-25-7 provides that “an employer is not required to accrue a liability for nonvesting accumulating rights to receive sick pay benefits…” Thus, North Corp.’s liability for compensated absences at December 31, 20X1, is $15,000 for the 150 vacation days (at $100 per day).

Question 53

____are employees’ absences, such as for vacations, illness, and holidays, for which it is expected that the employees will be paid.

Answer 53

Compensated absences

Question 54

If the payment of employee’s compensation for future absences is probable, the amount can be reasonably estimated, and the obligation relates to rights that accumulate, the compensation should be:

accrued if attributable to employees’ services whether already rendered or not.

recognized when paid.

accrued if attributable to employees’ services not already rendered.

accrued if attributable to employees’ services already rendered.

Answer 54

accrued if attributable to employees’ services already rendered.

Four conditions are necessary for accrual of employees’ compensation for future absences according to provisions in FASB ASC 710-10-25-1. The four conditions are:

1. rights to compensation vest or accumulate,
2. payment of compensation is probable,
3. amount of payment can be reasonably estimated, and
4. the compensation is attributable to employees’ services already rendered.

Question 55

What is the present value of all future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date and based on current and past compensation levels?

Interest cost

Service cost

Projected benefit obligation

Accumulated benefit obligation

Answer 55

Accumulated benefit obligation

FASB ASC 715-30-20 states, “The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels.”

Accumulated benefit obligation is based upon prior compensation. Project benefit obligation is based on future compensation.

Question 56

On January 2, 20X1, Loch Co. established a noncontributory defined-benefit pension plan covering all employees and contributed $400,000 to the plan.

At December 31, 20X1, Loch determined that the 20X1 service and interest costs on the plan were $720,000. The expected and the actual rate of return on plan assets for 20X1 was 10%.

There are no other components of Loch’s net periodic pension cost. What amount should Loch report as accrued pension cost in its December 31, 20X1, balance sheet?

$720,000

$280,000

$360,000

$320,000

Answer 56

Question 57

The following information pertains to Hamling Corporation’s defined benefit pension plan for 20X7:

1. Fair value of plan assets (beginning of year) $496,000
2. Fair value of plan assets (end of year) 856,000
3. Employer contributions 301,000
4. Benefits paid 98,000

What is Hamling’s actual return on plan assets?

$157,000

$203,000

$399,000

$360,000

Answer 57

$157,000

Question 58

Payne, Inc., implemented a defined benefit pension plan for its employees on January 2, Year 3. The following data are provided for the year, as of December 31, Year 3:

1. Projected benefit obligation $103,000
2. Plan assets at fair value 78,000
3. Net periodic pension cost 90,000
4. Employer’s contribution 70,000

What amount should Payne record as additional pension liability at December 31, Year 3?

$5,000

$0

$20,000

$45,000

Answer 58

$5,000

This question uses the somewhat outdated terminology “additional pension liability,” but the concept is still basically true.

The amount by which the net periodic pension cost exceeds the contribution is $20,000 ($90,000 – $70,000), and that amount, plus an additional $5,000 of liability must be recognized on the balance sheet, for a total underfunded pension amount of $25,000 (projected benefit obligation of $103,000 – plan assets of $78,000).

Question 59

Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $0.50 par common stock, when the market price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment?

$900

$200

$50

$100

Answer 59

$100

The intrinsic method is the excess of the market price over the exercise price.

Market price (100 x $10) $1,000
_Exercise price (100 x $9) 900_
Intrinsic value $ 100

Question 60

The provisions of FASB ASC 718-10-25-2, “Recognition Principle for Share-Based Payment Transactions,” apply to all of the following transactions except those related to:

stock options awarded to employees.

transfer of other equity instruments to employees.

employee stock ownership plan instruments.

common stock granted to employees.

Answer 60

employee stock ownership plan instruments.

FASB ASC 718-10-25-2 applies to all transactions in which an entity grants shares of its common stock, stock options, or other equity instruments to its employees, except for equity instruments held by an employee stock ownership plan (as per FASB ASC 718-10-15-7).

Question 61

The following information pertains to Seda Co.’s pension plan for the current year:

1. Actuarial estimate of projected benefit obligation at 1/1 $72,000
2. Assumed discount rate 10%
3. Service costs for the year $18,000
4. Pension benefits paid during the year $15,000

If no change in actuarial estimates occurred during the year, Seda’s projected benefit obligation at Decem­ber 31 of the current year was:

$79,200.

$75,000.

$82,200.

$64,200.

Answer 61

$82,200.

To compute projected benefit obligation at the end of the year, start with the beginning-of-year balance, add service cost, add interest cost, and subtract out benefits paid out during the year.

Interest cost is computed by multiplying the discount rate times the beginning year balance, so interest cost is:

$72,000 × 0.10 = $7,200

Thus, the end-of-year balance is:

$72,000 + $7,200 + $18,000 – $15,000 = $82,200

Question 62

The intrinsic method is the excess of the ___price over the ___ price.

Answer 62

market , exercise

Question 63

Regarding stock-based compensation, FASB ASC 718-10-30-10 requires that the total amount of compensation cost recognized in a stock-based employee compensation award be based on the total number of instruments that:

have a cash market.

eventually vest.

have a fair value greater than their par value.

are allowed under federal securities statutes.

Answer 63

eventually vest.

The provisions of FASB ASC 718-10-30-10 through 30-12 indicate that the total amount of compensation cost recognized at the end of the service period should be based on the number of instruments for which the requisite service period has been rendered (that is for the requisite service period has been completed)

. An entity must base initial accruals of compensation cost “on the estimated number of instruments for which the requisite service period is expected to be rendered.

That estimate shall be revised if subsequent information indicates that the actual number of instruments is likely to differ from previous estimates.” The final revised estimate is the number of instruments that eventually vest.

Question 64

FASB ASC 718-10-30-2 requires a method of accounting for stock-based compensation plans that is based on:

book value.

fair value.

par value.

discounted value.

Answer 64

fair value.

FASB ASC 718-10-30-2 requires the use of a fair value based method of accounting for stock-based compensation plans with very few exceptions (allowing intrinsic value use).

Question 65

Mangrove Corp. amended its defined benefit pension plan, granting a total credit of $210,000 to five employees for services rendered prior to the plan’s adoption. The employees, Preator, Burnett, Gentry, Williams, and Frisby, are expected to retire from the company as follows:

1. Preator will retire after five years.
2. Frisby will retire in six years.
3. Burnett, Gentry, and Williams will retire after eight years.

What is the amount of prior service cost amortization in the first year if Mangrove elects to amortize prior service costs through the assignment of equal amounts of costs to future years of service?

$26,250

$30,000

$42,000

$0

Answer 65

$30,000

This method, similar to sum-of-the-years’-digits depreciation, results in a declining amortization expense over the expected service period. The fraction that represents the annual amortization rate has a numerator equal to the current year’s equivalent years of service and a denominator equal to the total future service years for all employees.

Question 66

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?

A liability of $6,100

An asset of $16,100

Nothing, as the fair value of the plan assets exceeds the accumulated benefit obligation

An unrealized loss of $6,100

Answer 66

A liability of $6,100

1. On the balance sheet, the company would recognize a noncurrent asset (if plan assets exceed PBO, or projected benefit obligation, which they do not) or a liability in relation to the underfunded plan.
2. The PBO, or present value of the expected pension costs (a liability), exceeds the present value of the assets available to pay these costs, so the company recognizes a liability, for the excess.
3. PBO is $68,100, and taking away the plan asset value of $62,000 leaves an unfunded excess liability of the difference, $6,100. It would presumably be noncurrent, but we are not given enough facts to know for sure.

Question 67

An employee of Hickory was granted an option to purchase 2,000 shares of Hickory’s $7 par value common stock at $35 per share. This option was granted on January 2, 20X4. The option became exercisable on December 31, 20X6, after the employee had completed three years of service, and was exercised on that date when the market price of the Hickory’s stock was $42. The fair value of the option on January 2, 20X4, was $8.50 per option. Hickory’s entry to record the exercise of the stock options will include a:

credit to Additional Paid-in Capital–Stock Options for $17,000.

credit to Additional Paid-in Capital–Common Stock for $73,000.

debit to Additional Paid-in Capital–Common Stock for $73,000.

credit to Common Stock for $84,000.

Answer 67

credit to Additional Paid-in Capital–Common Stock for $73,000.

When stock options are exercised in full, the amount recorded to Additional Paid-in Capital—Stock Options is equal to the total compensation expense recorded for the stock options (2,000 × $8.50 = $17,000). Cash is recorded for the amount of the exercise price times the number of options exercised (2,000 × $35 = $70,000).

The issuance of the new shares is also recorded, at par (2,000 × $7 = $14,000). The journal entry for the exercise of the options granted by Hickory is as follows:

Question 68

On January 1, year 1, the board of directors of a corporation granted 10,000 stock options to the CEO. Each option permits the purchase of one share of stock at $25 per share, the current market price of the stock. The options are exercisable on December 31, year 4, as long as the CEO is still employed. The options expire on December 31, year 5. The grant date fair value of each option is $5. The corporation must recognize:

$12,500 of compensation expense per year for four years.

$50,000 of compensation expense when the options are exercised.

$50,000 of compensation expense in year 1.

$10,000 of compensation expense per year for five years.

Answer 68

$12,500 of compensation expense per year for four years.

The objective of the measurement process is to allocate the fair value of the stock options (as of the grant date) to the period in which the employees have rendered the required services and satisfied all other conditions necessary to earn the right to benefit from the options.

The total fair value of the options on the grant date is $50,000 (10,000 options at $5). The CEO earns the right to these options ratably over a four-year period, so each year the corporation must recognize $12,500 ($50,000 ÷ 4) of compensation expense.

Question 69

Wall Corp.’s employee stock purchase plan specifies the following:

1. For every $1 withheld from employees’ wages for the purchase of Wall’s common stock, Wall contributes $2.
2. The stock is purchased from Wall’s treasury stock at market price on the date of purchase.

The following information pertains to the plan’s 20X1 transactions:

1. Employee withholding for the year—$350,000
2. Market value of 150,000 share issued—$1,050,000
3. Carrying amount of treasury stock issued (cost)—$900,000

Before payroll taxes, what amount should Wall recognize as expense in 20X1 for the stock purchase plan?

$900,000

$550,000

$700,000

$1,050,000

Answer 69

$700,000

Since Wall Corp. contributes $2 for every $1 the employees contribute, Wall Corp.’s expense in 20X1 for the employee stock purchase plan is:

2 × Employee withholding = 2 × $350,000 = $700,000

The gain on the treasury stock issued does not affect the expense. It is recorded separately as “Contributed Capital from Treasury Stock Transactions.”

Question 70

There are also noncompensatory stock purchase plans that allow employees to buy shares of the corporation’s stock but are not treated as a compensation expense. These plans require the following:

1. Substantially all ___employees meeting limited employment qualifications may participate.
2. The time permitted for plan enrollment of an option or purchase right is limited to a reasonable period, not exceeding __days.
3. The discount from the market price of the stock is no greater than would be reasonable in an offer of stock to ___or others.

Answer 70

full-time

reasonable, 31 days

stockholders

Question 71

Payne, Inc., implemented a defined-benefit pension plan for its employees on January 2, 20X1. The following data are provided for 20X1, as of December 31, 20X1:

• Projected benefit obligation $140,000
• Accumulated benefit obligation 103,000
• Plan assets at fair value 90,000

What amount should Payne report on its December 31, 20X1, balance sheet?

An overfunded pension asset of $90,000

An underfunded pension liability of $13,000

An underfunded pension liability of $50,000

An underfunded pension liability of $140,000

Answer 71

An underfunded pension liability of $50,000

FASB ASC 715-20-45-3 requires that an entity report on its balance sheet the underfunded or overfunded pension plan. In the case of a pension plan, the underfunded pension liability represents the excess of the projected benefit obligation over the fair value of the plan assets.

Thus, Payne should report a $50,000 underfunded pension liability for the excess of the $140,000 projected benefit obligation over the $90,000 fair value of the plan assets.

Question 72

Parker Co. amended its pension plan on January 2 of the current year. It also granted $600,000 of unrecognized prior service costs to its employees. The employees are all active and expect to provide 2,000 service years in the future, with 350 service years this year. What is Parker’s unrecognized prior service cost amortization for the year?

$0

$2,000

$105,000

$600,000

Answer 72

$105,000

When plan amendments are made, additional benefits are sometimes applied retroactively to employees for service rendered in prior years. This increase in the benefits to be paid to employees represents a cost to the employer. GAAP requires that this cost be recognized as a component of net periodic pension cost over the remaining service years of the affected employee

Question 73

For a defined benefit pension plan, the discount rate used to calculate the projected benefit obligation is determined by:

both the expected rate on plan assets and the actual return on plan assets.

neither the expected rate on plan assets nor the actual return on plan assets.

the actual return on plan assets.

the expected rate on plan assets.

Answer 73

neither the expected rate on plan assets nor the actual return on plan asset

The discount rate for the projected benefit obligation is generally based on long-term debt interest rates. It has no direct relationship to the actual or the expected rate of return on plan assets.

Question 74

Harmony Co. has a single-employer defined benefit pension plan. Harmony should report a liability related to the plan equal to which of the following amounts?

The unfunded projected benefit obligation

The accumulated benefit obligation

The projected benefit obligation

The unfunded vested benefit obligation

Answer 74

The unfunded projected benefit obligation

The FASB requires an entity to recognize on its balance sheet the full underfunded status of its defined benefit pension plans.

This is the difference between the fair value of the plan assets and the projected benefit obligation, including all actuarial gains and losses, prior service cost, and any remaining transition amounts.

If the benefit obligation is greater than the fair value of plan assets, the plan is underfunded, and a net liability (i.e., unfunded projected benefit obligation) is reported.