Acctg 322_Deboskey Ch 17 Pension Plans

Front 1

Defined contribution pension plans:
A) Are being terminated in favor of defined benefit plans.
B) Are heavily regulated by the government, making them costly to administer.
C) Pay benefits depending upon the success of the employee's investments.
D) All of the choices are correct regarding defined contribution pension plans.

Back 1

C) Pay benefits depending upon the success of the employee's investments.

Front 2

Which of the following components are subtracted to arrive at pension expense for a defined benefit plan?
A) Return on plan assets.
B) Interest cost.
C) Service cost.
D) Amortized portion of prior service cost.

Back 2

A) Return on plan assets.

Front 3

Which of the following is not among the accepted ways of measuring the pension obligation in pension accounting?
A) Actuarial benefit obligation.
B) Projected benefit obligation.
C) Vested benefit obligation.
D) Accumulated benefit obligation.

Back 3

A) Actuarial benefit obligation.

Front 4

The Employee Retirement Income Security Act (ERISA)
A) Drastically tightened vesting requirements.
B) Established the Pension Benefit Guaranty Corporation (PBGC) to impose liens on corporate assets for unfunded pension liabilities.
C) Makes retirement payments for terminated plans and guarantees basic vested benefits when pension liabilities exceed assets.
D) All of the choices are correct regarding ERISA.

Back 4

D) All of the choices are correct regarding ERISA.

Front 5

The _____ estimates retirement benefits by applying the pension formula using anticipated future compensation levels.
A) Actuarial benefit obligation.
B) Vested benefit obligation.
C) Projected benefit obligation.
D) Accumulated benefit obligation.

Back 5

C) Projected benefit obligation.

Front 6

Compared to the accumulated benefit obligation, the projected benefit obligation is
A) More reliable.
B) Less representationally faithful.
C) More relevant.
D) All of the choices are correct regarding the PBO.

Back 6

C) More relevant.

Front 7

Vivian Rowe was hired by Tally Ho Industries on January 1, 2001. The company has a defined benefit pension plan that specifies annual retirement benefits equal to: 1.5% × Service years × Final year's salary. Ms. Rowe is expected to retire on December 31, 2040 after 40 years service. Her retirement period is expected to be 20 years. At the end of 2010, 10 years after being hired, her salary is $60,000. The interest rate is 6%. The company's actuary projects Rowe's salary to be $250,000 at retirement. What is Tally Ho's projected benefit obligation with respect to Vivian Rowe at December 31, 2010? (Round "PV Factor" to 5 decimal places, intermediate and final answer to the nearest dollar amount.)

Back 7

Present value of an ordinary annuity of $1: n = 20, i = 6% 11.46992

Present value of $1: n = 30, i = 6% .17411
--------------------------------------------
$103,229
→ $74,889
$17,973
$430,122

The benefit earned is 1.5% × 10 × $250,000 = $37,500.
The present value of this stream of payments as of December 31, 2040 is $37,500 × 11.46992 = $430,122.
The present value of the obligation as of December 31, 2010 is $430,122 × .17411 = 74,889.

Front 8

Tally Ho Industries funds its defined benefit pension plan by contributing each year the year's service cost plus a portion of the prior service cost. Cash of $30 million was contributed to the pension fund at the end of 2011. Plan assets at the beginning of 2011 were valued at $180 million. The expected rate of return on the investment of those assets was 9%, but the actual return in 2011 was 10%. Retirement benefits of $22 million were paid at the end of 2011 to retired employees. What is the value of the company's pension plan assets at the end of 2011?

Back 8

→ $206 million
$188 million
$176 million
$228 million

The value of the company's pension plan assets at the end of 2011 is computed as follows:
Plan assets, 1/1 $ 180 million
Return on plan assets (10% × $180) 18 million
Cash contribution 30 million
Benefits paid (22 million)
---------------------------------------------
Plan assets, 12/31 $ 206 million

Front 9

Which of the following statements is incorrect regarding pension plan assets?
A) The assets of a pension fund are held by a trustee.
B) An underfunded pension plan means the plan assets exceed the PBO.
C) The pension plan assets are not reported separately in the employer's balance sheet.
D) Plan assets are invested in stocks, bonds, and other income-producing assets.

Back 9

B) An underfunded pension plan means the plan assets exceed the PBO.

Front 10

The trustee of pension plan assets can be any of the following except
A) The employer sponsoring the plan.
B) A bank.
C) An individual.
D) A trust company.

Back 10

A) The employer sponsoring the plan.

Front 11

The trustee can be an individual, a bank, or a trust company, but not the company sponsoring the pension plan.
True/False

Back 11

True

Front 12

Defined benefit plans are being terminated in favor of defined contribution plans; defined benefit plans are heavily regulated and costly to administer.
True/False

Back 12

True

Front 13

To calculate pension expense for a defined benefit plan, the return on plan assets is subtracted.
True/False

Back 13

True

Front 14

Three different ways to measure the pension obligation have meaning in pension accounting: accumulated benefit obligation, vested benefit obligation, and projected benefit obligation.
True/False

Back 14

True

Front 15

ERISA tightened vesting requirements, can impose liens for unfunded pension liabilities, and provides a form of insurance for employees in that it makes retirement payments in certain circumstances.
True/False

Back 15

True

Front 16

The PBO estimates retirement benefits by applying the pension formula using projected future compensation levels.
True/False

Back 16

True

Front 17

The PBO measurement may be less reliable than the ABO but is more relevant and representationally faithful.
True/False

Back 17

True

Front 18

An underfunded pension plan means the PBO exceeds plan assets.
True/False

Back 18

True

Front 19

The trustee can be an individual, a bank, or a trust company, but not the company sponsoring the pension plan.
True/False

Back 19

True

Front 20

Which of the following statements is correct regarding how a company reports its pension plan in the financial statements?
A) The PBO is not reported separately among liabilities in the balance sheet.
B) The plan assets a company sets aside to pay pension benefits are not separately reported among assets in the balance sheet.
C) A company must report in its balance sheet a liability for the underfunded (or asset for the overfunded) status of its postretirement plans.
D) All of the choices are correct regarding how pensions are reported in the financial statements.

Back 20

D) All of the choices are correct regarding how pensions are reported in the financial statements.

Front 21

Neither the PBO nor the plan assets set aside by the company are reported separately in the balance sheet; however, a company must report in its balance sheet a liability for the underfunded (or asset for the overfunded) status of its postretirement plans.
True/False

Back 21

True

Front 22

Which of the following statements is incorrect regarding how a company reports its pension plan in the financial statements?
A) When a company reports a net pension liability of $100,000 in its 2011 balance sheet, it is not an actual account balance.
B) A company must report in its balance sheet a liability for the underfunded (or asset for the overfunded) status of its postretirement plans.
C) The PBO is reported separately among liabilities in the balance sheet.
D) The plan assets a company sets aside to pay pension benefits are not separately reported among assets in the balance sheet.

Back 22

C) The PBO is reported separately among liabilities in the balance sheet.

Front 23

Neither the PBO nor the plan assets set aside by the company are reported separately in the balance sheet. A company must report in its balance sheet a liability for the underfunded (or asset for the overfunded) status of its postretirement plans, but this amount is not an actual account balance, it's the PBO account balance and the Plan assets account balance reported in the balance sheet as a single net amount.
True/False

Back 23

True

Front 24

Simon Enterprises has a defined benefit pension plan for its employees. The plan provides benefits according to a formula, and Simon Enterprises funds the plan by using an outside trustee. On December 31, 2011 the projected benefit obligation was $379,000 and the plan asset balance was $309,500. What amount(s) will Simon Enterprises report in its December 31, 2011 balance sheet related to its pension plan?
A) $69,500 net pension asset
B) $0
C) $379,000 pension liability and $309,500 pension assets
D) $69,500 net pension liability

Back 24

D) $69,500 net pension liability

Front 25

Companies report the net difference between the PBO and the plan assets, referred to as the "funded status" of the plan. In this case, the PBO exceeds the plan assets by $69,500 and a net pension liability for that amount will be reported.
True/False

Back 25

True

Front 26

Which of the following is a component of pension expense?
A) Service cost
B) Return on plan assets
C) Amortization of prior service cost
D) All of the choices are components of pension expense.

Back 26

D) All of the choices are components of pension expense.

Front 27

Pension expense is comprised of service cost, interest cost, amortization of prior service cost, and return on plan assets.
True/False

Back 27

True

Front 28

Which of the following statements is correct?
A) Prior service cost is expensed as incurred.
B) Amortization of a net gain increases pension expense.
C) Interest cost is the discount rate times the PBO balance at the beginning of the year.
D) All of the choices are correct.

Back 28

C) Interest cost is the discount rate times the PBO balance at the beginning of the year.

Front 29

Prior service cost is not expensed as it is incurred. Instead, it is reported as a component of AOCI to be amortized over time. Amortization of a net gain would decrease pension expense.
True/False

Back 29

True

Front 30

Simon Enterprises has a defined benefit pension plan for its 270 employees. In early 2010, Simon Enterprises amended its plan to increase benefits for all plan participants who have an average remaining service life of 14 years. The amendment resulted in prior service cost of $1,778,000. For the year ending December 31, 2011, what amount of prior service cost will be amortized and will it be added to or subtracted from pension expense?
A) $127,000 subtracted from pension expense
B) $470 subtracted from pension expense
C) $127,000 added to pension expense
D) $470 added to pension expense

Back 30

C) $127,000 added to pension expense
The $1,778,000 prior service cost is recognized in equal annual amounts over the average remaining service period, the amount amortized as an increase in pension expense each year of $127,000.

Front 31

Simon Enterprises has a defined benefit pension plan for its 245 employees. On December 31, 2010, Simon Enterprises amended its plan to increase benefits for all plan participants who have an average remaining service life of 16 years. The amendment resulted in prior service cost of $1,290,000. How will Simon Enterprises record the plan amendment on this date?
A) No journal entry is necessary, however a note is made in the general journal.
B) Prior service cost – OCI 1,290,000
PBO 1,290,000
C) PBO 1,290,000
Prior service cost – OCI 1,290,000
D) Loss on plan amendment 1,290,000
Prior service cost – OCI 1,290,000

Back 31

B) Prior service cost – OCI 1,290,000
PBO 1,290,000
The entry to record new prior service cost

Front 32

Simon Enterprises has a defined benefit pension plan for its 300 employees. On December 31, 2010, Simon Enterprises amended its plan to increase benefits for all plan participants who have an average remaining service life of 14 years. The amendment resulted in prior service cost of $1,400,000. During 2011, Simon Enterprises expects a return on plan assets of $47,000. However, due to market conditions the actual gain experienced is $72,000. How will Simon Enterprises record the gain at December 31, 2011?
A) Plan assets 72,000
Gain – OCI 72,000
B) Plan assets 25,000
Gain – OCI 25,000
C) Gain – OCI 25,000
Plan assets 25,000
D) Gain – OCI 72,000
Plan assets 72,000

Back 32

B) Plan assets 25,000
Gain – OCI 25,000
The entry to record an unexpected gain

Front 33

Which of the following is reported as part of other comprehensive income (OCI)?
I. Amortization of prior service cost.
II. New gain resulting from actual return on plan assets exceeding expected return.
A) I only.
B) II only.
C) I and II.
D) Neither I nor II.

Back 33

C) I and II.
I. Amortization of prior service cost.
II. New gain resulting from actual return on plan assets exceeding expected return.

Front 34

New gains and losses and prior service cost are reported as OCI. So is the amortization of their accumulated balances.
True/False

Back 34

True

Front 35

Which of the following statements is correct regarding ratio analysis with regard to pensions?
A) Profitability ratios and the times interest earned ratio will be distorted because pension expense includes the financial components of interest and return on assets.
B) Debt to equity and return on assets ratios cannot be computed for companies with defined benefit pension plans since the PBO and plan assets are omitted from the balance sheet.
C) Companies with relatively sizeable unrecognized pension costs (prior service cost, net gain or loss) can be expected to exhibit a relatively low "transitory" earnings component.
D) All of the choices are correct regarding ratio analysis with regard to pensions.

Back 35

A) Profitability ratios and the times interest earned ratio will be distorted because pension expense includes the financial components of interest and return on assets.

Front 36

Debt to equity and return on assets ratios can be computed for companies with defined benefit pension plans, but since the PBO and plan assets are omitted from the balance sheet, those numbers must be obtained from the footnotes and the computations adjusted for those numbers. Companies with relatively sizeable unrecognized pension costs (prior service cost, net gain or loss) can be expected to exhibit a relatively high "transitory" earnings component.
True/False

Back 36

True

Front 37

Which of the following statements is correct regarding pension plan terminations?
A) Companies may not terminate a pension plan unless a similar pension plan is initiated at the same date.
B) Companies curtail plans to reduce costs and lessen risk.
C) GAAP requires a loss to be reported if a company terminates its pension plan, but gains are deferred until realized.
D) All of the statements are correct.

Back 37

B) Companies curtail plans to reduce costs and lessen risk.

Front 38

To cut down on cumbersome paperwork and lessen their exposure to the risk posed by defined benefit plans, many companies are providing defined contribution plans instead. When a plan is terminated, GAAP requires a gain or loss to be reported at that time.
True/False

Back 38

True

Front 39

Simon Enterprises has a noncontributory, defined benefit pension plan. The plan assets had a fair market value of $190,000 at December 31, 2010. On January 3, 2011, Simon Enterprises amended the pension formula to increase benefits for each service year. The change resulted in prior service cost of $165,000, adding to the previous projected benefit obligation of $1,850,000. The prior service cost is to be amortized (expensed) over 15 years. The service cost is $63,000 for 2011. Both the actuary's discount rate and the expected rate of return on plan assets were 10%. The actual rate of return on plan assets was 12%. At December 31, 2011, $33,000 was contributed to the pension fund and $45,000 was paid to retired employees. The net loss AOCI at the beginning of the year was $31,000. What amount will Simon Enterprises record for pension expense for the year ended December 31, 2011?
A) $294,500
B) $252,700
C) $256,500
D) $275,500
Pension expense is computed as follows:

Back 39

Pension expense is computed as follows: C) $256,500

Front 40

The actuary's estimate of the total postretirement benefits (at their discounted present value) expected to be received by plan participants describes the expected postretirement benefit obligation (EPBO).

Back 40

True

Front 41

Vivian Rowe was hired by Tally Ho Industries on January 1, 2001. The company has postretirement benefit plan that will pay Ms. Rowe's health care benefits during retirement. This benefit has a present value of $23,284 at the end of 2010. Vivian Rowe is expected to work for Tally Ho for 32 service years. What is the accumulated postretirement benefit obligation at December 31, 2010 assuming a 6% discount rate?
A) $23,284
B) $728
C) $24,681
D) $7,276

Back 41

D) $7,276

The APBO is the portion of the EPBO related to service up to a particular date. In this case, the EPBO is $23,284 and the APBO is 10/32 of this amount or $7,276.

Front 42

Vivian Rowe was hired by Tally Ho Industries on January 1, 2001. The company has postretirement benefit plan that will pay Ms. Rowe's health care benefits during retirement. This benefit has a present value of $22,984 at the end of 2010. Vivian Rowe is expected to work for Tally Ho for 40 service years. What is the accumulated postretirement benefit obligation at December 31, 2011 assuming a 3% discount rate? (Round your intermediate calculations and final answers to the nearest dollar amount.)
A) $23,674
B) $6,030
C) $6,101
D) $6,510
The APBO is the portion of the EPBO related to service up to a particular date.

Back 42

The APBO is the portion of the EPBO related to service up to a particular date.

D) $6,510

APBO 12/31/10 ($22,984 × 10/40) $ 5,746
Interest cost ($5,746 × 3%) 172
Service cost ($22,984 × 1.03 = $23,674 × 1/40 = $592) 592
---------------------------------------------APBO 12/31/11 $ 6,510

Front 43

Which of the following statements regarding postretirement plans other than pensions is correct?
A) Losses and gains associated with postretirement benefit plans are recorded as part of net income in the period they arise.
B) The attribution period includes years of service beyond the full eligibility date if the employee is expected to work after that date.
C) All of the choices are correct regarding postretirement benefit plans.
D) The journal entry to record the annual expense and funding for postretirement benefit plans is the same as the journal entry to record the annual expense and funding for a pension plan.

Back 43

D) The journal entry to record the annual expense and funding for postretirement benefit plans is the same as the journal entry to record the annual expense and funding for a pension plan.

Front 44

Losses and gains related to postretirement benefit plans (as well as any new prior service cost should it occur) are recorded the same way as for pensions – as part of OCI until amortized. The attribution period does not include years of service beyond the full eligibility date even if the employee is expected to work after that date.
True/False

Back 44

True

Front 45

Vivian Rowe was hired by Tally Ho Industries on January 1, 2001. The company has postretirement benefit plan that will pay Ms. Rowe's health care benefits during retirement. This benefit has a present value of $23,384 at the end of 2010, assuming a 3% discount rate. Vivian Rowe is expected to work for Tally Ho for 34 service years. What is the service cost component of postretirement benefit expense for the year ended December 31, 2011? (Round your intermediate calculations and final answers to the nearest dollar amount.)
A) $206
B) $708
C) $6,878
D) $671

Back 45

B) $708

The service cost component is the fraction of the EPBO considered to be earned this year. In this case:
Service cost = 708 ($23,384 × 1.03 = $24,086 × 1/34 = $708)

Front 46

Which of the following is not among the required disclosures for postretirement benefit plans?
A) A breakdown of the components of the annual pension and postretirement benefit expenses for the years reported.
B) Disclosure of names and ages of expected retirees.
C) Estimate of expected contributions to fund the plan for the next year.
D) Estimated benefit payments presented separately for the next five years and in the aggregate for years 6–10.

Back 46

B) Disclosure of names and ages of expected retirees.

The names and ages of retirees are not among the required disclosures for postretirement benefit plans.

Front 47

Which of the following statements is correct regarding accounting for gains and losses related to pensions under IFRS?
A) Under IFRS gains and losses related to pensions may be included in the income statement as they occur.
B) Under IFRS, gains and losses may be expensed only when the accumulated net gain or net loss exceeds a specified corridor, or threshold.
C) Under IFRS, if a company includes actuarial gains and losses among OCI items in the statement of comprehensive income, the gains and losses are not subsequently amortized to expense.
D) All of the choices are correct regarding the accounting treatment for gains and losses under IFRS.

Back 47

D) All of the choices are correct regarding the accounting treatment for gains and losses under IFRS.

Front 48

Under both U.S. GAAP and IFRS, a company may choose to include gains and losses in the income statement as they occur; also under both systems, gains and losses may be expensed only when they exceed a specific threshold. U.S. GAAP requires that gains and losses be included among OCI items in the statement of comprehensive income, thus subsequently become part of AOCI. This is permitted under IAS No. 19, but not required. If this choice is made, under IAS No. 19 the gains and losses are not subsequently amortized to expense and recycled or reclassified from other comprehensive income as is required under U.S. GAAP (when the accumulated net gain or net loss exceeds the 10% threshold).
True/false

Back 48

True

Front 49

Which of the following statements is correct regarding accounting for prior service cost related to pensions under IFRS?
A) Under IFRS prior service cost is called past service cost.
B) Under IFRS, prior service cost is expensed immediately to the extent it relates to benefits that are nonvested.
C) Under IFRS, any prior service cost not expensed is reported as an increase in other comprehensive income or accumulated other comprehensive income.
D) All of the choices are correct regarding accounting for prior service cost under IFRS.

Back 49

A) Under IFRS prior service cost is called past service cost.

Front 50

Under IFRS, prior service cost is expensed immediately to the extent it relates to benefits that are vested. Any prior service cost not expensed, is reported as an offset or increase to the defined benefit obligation or DBO (called projected benefit obligation or PBO under U.S. GAAP).

Back 50

True

Front 51

Which of the following is incorrect regarding the service method for amortizing prior service cost?
A) The service method is the FASB's recommended approach.
B) The service method allocates an equal amount of prior service cost to each year of the average service period of employees.
C) The service method amortizes an equal amount per employee each year.
D) The service method allocates the prior service cost to each year in proportion to the fraction of the total remaining service years worked in each of those years.

Back 51

B) The service method allocates an equal amount of prior service cost to each year of the average service period of employees.

Front 52

The straight-line method allocates an equal amount of prior service cost to each year of the average service period of employees. The service method allocates the prior service cost to each year in proportion to the fraction of the total remaining service years worked in each of those years. The service method amortizes an equal amount per employee each year and is the approach recommended by the FASB.

Back 52

True