EXAM 2

Question 1

Define Pension Plan

arrangement whereby an 1) em___r provides 2) be___s (p____c payments) to employees after
they 3) re___e for se____s they provided while they were 4) w____ng

Answer 1

1) employer
2) benefits (periodic payments)
3) retire for services
4) working

Question 2

A pension plan is said to be 1) fu____d when the employer sets 2) fu___ a___e for fu___e pension benefits by making payments to a funding 3) a___cy that is responsible for accumulating the assets of the pension fund

Answer 2

1) funded
2) funds aside future
3) agency

Question 3

Define contributory plan

the employees 1) b___r part of the c__ of the stated 2) be____s or vo___ly make payments to
increase their benefits.

Answer 3

1) bear part of the cost
2) benefits or voluntarily

Question 4

In a noncontributory plan, the employer bears the 1) e___e c___t.

Answer 4

1) entire cost.

Question 5

Defined Contribution Plan

the employer agrees to contribute a 1) c__n s__ to a fund each period based on a formula.

The accounting for a defined contribution plan is straightforward. The 2) e___er’s responsibility is simply to make a contribution to the pension fund each year based on the formula established in the plan.

Thus, the employer’s 3) an__l ex___e is the amount it is obligated to contribute to the pension trust. If the contribution is made in 4) f___l each year, 5) n__ pension a___t or pension li___ty is reported on the balance sheet

Answer 5

1) certain sum
2) employer’s
3) annual expense
4) full
5) no pension asset or pension liability

Question 6

Defined Benefit Plan

1) de___s the benefits that the employee will receive at the time of 2) re____nt.

The formula that is typically used provides for the benefits to be a function of the level of 3) co____n near r____nt and the number of y___s of se__e

Answer 6

1) defines
2) retirement
3) compensation near retirement and the number of years of service

Question 7

In general, the pension obligation is the deferred liability (the future obligation related to the pension) the company has to its employees for their services under the terms of the pension plan. However, there are three ways to measure this
liability:

1. Ve___ Benefit Obligation
2. Ac___ed Benefit Obligation
3. Pr___d Benefit Obligation

Answer 7

1. Vested Benefit Obligation
2. Accumulated Benefit Obligation
3. Projected Benefit Obligation

Question 8

Define Vested Benefit Obligation

Base the computation on the vested benefits that 1) cu____ e___es are entitled to.

The vested benefits pension obligation is computed using 2) cur___ sa___ le___, including only 3) v___ed benefits

Answer 8

1) current employees
2) current salary levels
3) vested

Question 9

Define Accumulated Benefit Obligation

Base the computation on 1) a__ years of service performed by employees under the plan, both 2) ve___ and n____ed, using cur___ s___ry levels

Answer 9

1) all
2) vested and nonvested, using current salary levels

Question 10

Define Projected Benefit Obligation

Base the computation on both 1) v___ and n____ed service using f____ s___es.

Because future salaries are 2) e___ed to be h___er than cu___t salaries, results in the
3) l___st measurement of the pension obligation

Answer 10

1) vested and nonvested service using future salaries
2) expected to be higher than current salaries
3) largest

Question 11

Also, companies must recognize on their 1) b___e s___t the f___ o____ed or u____ded status of their defined benefit pension plan.

The overfunded or underfunded status is measured as the 2) di____ce between the f___ v___ of the p___ as____s and the pr___d be___it o___ion

Answer 11

1) balance sheet the full overfunded or underfunded status of their defined benefit pension plan
2) difference between the fair value of the plan assets and the projected benefit obligation

Question 12

Pension expense should be accounted for on the 1) a___al b__s.

In other words, pension expense should be recorded 2) e___ pe___d that the employee w___s, even though the employee will n__ rec__ pe___n b___ts until a___r retirement

Answer 12

1) accrual basis
2) each period that the employee works, even though the employee will not receive pension benefits until after retirement

Question 13

What are the 5 components of pension expense?

1. S___e c___t
2. In___t e___se
3. R___n on __n as___s
4. Am____n of p___r se___ce c___s
5. G___ or l__

Answer 13

1. Service cost
2. Interest expense
3. Return on plan assets
4. Amortization of prior service costs
5. Gain or loss

Question 14

Define Service Cost

The expense caused by the 1) i___e in p___on be___s pa___e (the p___ed be___fit ob___n) to employees because of their services rendered 2) d___g the cu___nt y___r.

3) Act___s compute service cost as the 4) p___nt v___e of the 5) n__ benefits earned by employees 6) du___g the cu___t y___r.

Answer 14

1) increase in pension benefits payable (the projected benefit obligation)
2) during the current year
3) Actuaries
4) present value
5) new
6) during the current year.

Question 15

Define Interest Expense

Because a pension is a 1) d___ed compensation arrangement, it is recorded on a 2) d__ed basis.

Interest expense accrues each year on the projected benefit obligation based on a selected 3) i___t r___ called the se____nt ra__.

Answer 15

1) deferred
2) discounted
3) interest rate called the settlement rate.

Question 16

Define Return on Plan Assets

An___l pe____n e___se is adjusted for i___st re__e and di___d r___e that accumulates within the pension fund.

Annual pension expense is also adjusted for inc___s and de___es in the m___t v___e of the fund assets

Answer 16

Annual pension expense is adjusted for interest revenue and dividend revenue that
accumulates within the pension fund.

Annual pension expense is also adjusted for increases and decreases in the market value of the fund assets

Question 17

Return on Plan Assets

If the return on the plan assets is positive (i.e., the 1) p__n a___ts earn a r___n d___g the period), it is 2) su____d in computing pension expense. (In other words, a g___ on the plan assets re___s net pension expense).

If the return is negative (i.e., there is a 3) l__s) during the period, it is 4) ad____ in computing pension expense. (Actually, for purposes of computing net pension expense, we use the 5) “ex___” rate of return on plan assets, rather than the actual rate of
return.)

Answer 17

1) plan assets earn a return during the period
2) subtracted in computing pension expense. (In other words, a gain on the plan assets reduces net pension expense)
3) loss
4) added
5) “expected”

Question 18

Define Amortization of Prior Service Cost.

Because 1) p___ am_____nts are granted with the expectation that the employer will realize 2) ec___ic be___ts in fu___e periods, the cost (called 3) “p___r se___e co__” or P___) of providing these retroactive
benefits is allocated to pension expense in the 4) fu___e, specifically to the remaining service-years of the affected employees

Answer 18

1) plan amendments
2) economic benefits in future periods
3) “prior service cost” or PSC
4) future,

Question 19

Define Gain or Loss.

Two items comprise the gain or loss:
(1) changes in f__r v__e of the p___n a___s – i.e., the difference between the ac___l return and the e__ed return on plan assets

(2) changes in f___ v___e of the pr___ed b___it
ob___n – i.e., amo____on of the u___ed net g___ or lo___ from pre___s periods. The gain or loss component of pension expense comes from la__e ch___s in the fa__ v__e of plan assets and from changes in the P___.

Answer 19

(1) changes in fair value of the plan assets – i.e., the difference between the actual return and the expected return on plan assets

(2) changes in fair value of the projected benefit
obligation – i.e., amortization of the unrecognized net gain or loss from previous periods. The gain or loss component of pension expense comes from large changes in the fair value of plan assets and from changes in the PBO.

Question 20

What’s the formula for Net Pension Expense?

_ Se___e Cost
_ I___st Cost
_ Ex____d Return on Plan Assets
_ Am____n of P___r S___e Cost (if any)
+/- G___ or L___s (if any, calculated using the c____or approach)
= Net Pension Expense

Answer 20

+ Service Cost
+ Interest Cost
– Expected Return on Plan Assets
+ Amortization of Prior Service Cost (if any)
+/- Gain or Loss (if any, calculated using the corridor approach)

Question 21

Assets and Liabilities.

 Companies must recognize on their balance sheet the 1) o____d (pension a__t) or u____d (pension li___y) status of their defined benefit pension plan.

 1.1) N__ f____d st___s is the difference between the f___r v____ of the pl___n a___ts and the p___d b___t ob___on.

 This is represented by the net 2) a___t/li___ity account from the pension worksheet.

 3) O____d status is when the net funded status is an a___t; un_____ed status is when the net funded status is a liability.

 The 4) o___d/u___ed status is recognized on the balance sheet by showing the corresponding net asset or liability

Answer 21

1) overfunded (pension asset) or underfunded (pension liability) status of their defined benefit pension plan
1.1) Net funded status is the difference between the fair value of the plan assets and the projected benefit obligation.
2) asset/liability
3) Overfunded status is when the net funded status is an asset; underfunded status is when the net funded status is a liability
4) overfunded/underfunded status is recognized on the balance sheet by showing the corresponding net asset or liability

Question 22

Current versus Noncurrent Status:

 N____ portion of a pension a___t is reported as cu___t
 Any o___d status is classified as a n___t a___t.
 A pension li___ is reported as n___nt except the portion of the liability that represents the amount of be___ payments to be paid in the next ___ months (which would be classified as a cu___ li____y).

Answer 22

 No portion of a pension asset is reported as current.
 Any overfunded status is classified as a noncurrent asset.
 A pension liability is reported as noncurrent except the portion of the liability that represents the amount of benefit
payments to be paid in the next 12 months (which would be classified as a current liability).