Pension Plans

Question 1

True or False:
When a company sets aside in a financial institution, usually banks, to provide its retired employees with future benefits, it is funding a pension plan.

Answer 1

True

Question 2

True or False:
In both a non contributory pension plan and defined benefit contribution plan, the employee bears no cost of the stated benefits in the plan.

Answer 2

False
Under no contributory plans, the employer bears the entrie cost while in defined benefit, the employer and employee add cost.

Question 3

True or False:
When a company decides to start a pension plan, it ahs to use the services of an actuary to estimate the amount of pension obligation.

Answer 3

True

Question 4

True or False:
The accounting for defined benefit pension plans is simple and straight forward

Answer 4

False

Question 5

True or False:
An employee who is 100% vested in a retirement plan owns 100% of it and the employer cannot forfeit, even if the employee does not provide additional services.

Answer 5

True

Question 6

True or False:
The pension plan should be funded immediately after the actuary has provided the company with an assessment of the retirement benefits amount for current and retired employees.

Answer 6

False

Question 7

True or False:
the difference between the projected benefit obligation and the accumulated benefit obligation is only the vested versus the nonvested employees.

Answer 7

False
The accumulated benefit obligation includes benefits for vested and nonvested employees at current salaries, whereas, the projected benefit obligation includes benefits for vested and nonvested employees at future salaries.
The difference has two aspects:

1- Vested and nonvested employees.

– The PBO includes benefits of vested and nonvested employees.

– The accumulated benefit obligation includes benefits of nonvested employees.

2- Current and future salaries

– The PBO uses future salaries.

– The accumulated benefit obligation uses current salaries.

Question 8

True or False:
Under a pension plan, if an employee’s salary increases, the projected benefit obligation will be greater than the accumulated benefit obligation.

Answer 8

True
The PBO considerers the future salary in measuring the pension liability, whereas the accumulated benefit obligation considers the current salary. Therefore, the accumulated benefit obligation will bot be affected by the salary increase unlike the PBO.

Question 9

True or False:
The pension plan is considered to be overfunded when the fair value of the plan assets is greater than the PBO.

Answer 9

True

Question 10

True or False:
The service cost represents the accumulated benefit obligation earned by the participants in the current period.

Answer 10

False
The service costs represent the present value of the projected benefit obligation, not the accumulated benefit obligation, earned by participants in the current period. Service costs depend on factors such as job promotion, salary increases, and early retirement as these affect the final benefit amount.

Question 11

True or False:
The service cost component of a pension plan is defined as the amount of expense recognized in a period - that is measured by an actuary - as the present value of benefit attributed by the pension benefit formula to employees, for services provided in prior years.

Answer 11

False
The service cost is the expense caused by the increase in the pension benefits earned by the employees because of the services they have provided in the current year.

Question 12

True or False:
According to the FASB, the interest rate component used to determine the pension cost (interest on the liability) should be compounded annually.

Answer 12

False

Question 13

True or False:
The interest rate that the actuary uses to measure the PBO should be the same as the rate of return on plan assets.

Answer 13

False
The interest rate that the actuary uses to measure the PBO and the rate of return on plan assets is not the same. The interest rate used for the PBO is determined by the actuary, while the rate of return on plan assets is the return earned by the accumulated pension fund assets.

Question 14

True or False:
Interest expense is accrued each year on the PBO and is considered a part of pension expense.

Answer 14

True

Question 15

True or False:
When a company earns a positive actual rate of return on plan assets, the pension is decreased.

Answer 15

True
A positive return on plan assets reduces pension expense, and a negative return on plan assets increases pension expense.

Question 16

Which of the following statements describes the difference between the contributory and non-contributory pension plans?

a. Employers make contributions to the plan only in the contributory pension plans.
b. Under the non-contributory pension plans, contributions made by the employer are highly dependent on the employer’s ability to generate income.
c. In non-contributory pension plans, the employer bears the entire cost of the benefits. However, in the contributory pension plans, the employees bear part of the cost or voluntarily make payments to increase their benefits.
d. The non-contributory pension plans are funded only by the employer. Meanwhile, the contributory pension plans are funded by the employee.

Answer 16

c. In non-contributory pension plans, the employer bears the entire cost of the benefits. However, in the contributory pension plans, the employees bear part of the cost or voluntarily make payments to increase their benefits.

Question 17

The process of setting funds aside by the employer to a funding agency that is responsible for the accumulation of these pension assets and for making future payments to the retired employees is called:

a. funding the pension plan
b. starting the pension plan
c. insuring the pension plan
d. evaluating the pension plan

Answer 17

a. funding the pension plan

Question 18

​All of the following are characteristics of the defined contribution pension plan, except for:

a. The employer contributes to the pension plan a specific amount each period, based on a formula.
b. The employee is responsible for making the contributions and choosing investments offered by the plan.
c. The accounting for a defined contribution plan is easier than it is for the defined benefit plan.
d. The employer defines the benefit that the employees will receive by the term of the plan.

Answer 18

d. The employer defines the benefit that the employees will receive by the term of the plan.

Question 19

​According to the accounting for a defined benefit pension plan, which of the following is not true?

a. The employer sets funds aside in a funding agency to make future payments for the retired employees.
b. Employers are at risk with defined benefit plans because they must contribute enough to meet the cost of benefits that the plan defines.
c. The employer is not responsible for making up any shortfall in the accumulated assets held by the funding agency that manages and accumulates the plan assets.
d. An entity that established a defined benefit pension plan should recognize the amount contributed to the plan each period in the pension expense computation.

Answer 19

c. The employer is not responsible for making up any shortfall in the accumulated assets held by the funding agency that manages and accumulates the plan assets.

Question 20

A lot of factors like morality, length of employee service, compensation levels, and age are used in a formula when the plan is:

a. a defined contribution plan
b. a defined benefit plan or a defined contribution plan
c. a defined benefit plan
d. none of these choices are correct

Answer 20

b. a defined benefit plan or a defined contribution plan

Question 21

​All of the following are factors affecting the measurement of the present value of the pension plan benefits (Projected Benefit Obligation), except for:

a. The financial measures of the entity setting up the plan such as income level and financial ratios.
b. The benefit provisions (Benefits for vested and nonvested employees at future salaries).
c. The actuarial assumptions.
d. Employee’s characteristics such as mortality, compensation levels, and employee service years.

Answer 21

a. The financial measures of the entity setting up the plan such as income level and financial ratios.

Question 22

Which of the following methods for measuring the pension liability requires the use of the current salaries?

a. retrospective benefit obligation
b. projected benefit obligation
c. accumulated benefit obligation
d. vested projected obligation

Answer 22

c. accumulated benefit obligation

Question 23

​What is the proper basis used to account for the net pension cost?

a. The cash basis of accounting: the amount of net pension cost is determined by the amount contributed by the employer to the plan for that period .
b. The accrual basis of accounting: the net pension cost is computed and accrued based on events and transactions affecting a pension plan.
c. The fair value basis: the net pension cost represents the fair value of the benefits earned by the employee during the period.
d. The prospective basis: the net pension cost represents the expected future value of the employee’s benefits.

Answer 23

b. The accrual basis of accounting: the net pension cost is computed and accrued based on events and transactions affecting a pension plan.

Question 24

All of the following are factors that directly affect the measurement of the pension cost except for:

a. taxes
b. gains and losses
c. service cost
d. prior service cost

Answer 24

a. taxes

Question 25

All of the following components of the pension expense would increase it except for: a. interest on the liability b. amortization of unrecognized prior service cost c. actual return on plan assets d. service cost

Answer 25

c. actual return on plan assets

Question 26

The following information relates to Jack’s corporation pension plan and plan assets: Plan assets at the beginning of 20X1, $1,000,000 Plan assets at the end of 20X1, $1,820,000 Benefits paid during 20X1, $250,000 Contributions made by Jack corporation during 20X1, $400,000 The actual return on Jack’s plan assets during 20X1 is: a. $570,000 b. $970,000 c. $670,000 d. $170,000

Answer 26

c. $670,000 Change in the fair value of plan assets (Increase) = $1,820,000 – $1,000,000 = $820,000 Actual return on plan assets computation: Change in the fair value of plan assets: $820,000 Deduct: (Contributions to plan – Benefits paid): ($400,000 – $250,000) = ($150,000) ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ Actual return on plan assets: $670,000

Question 27

In 20X1, the pension expense for ABC amounted to $52,000, and ABC funded the plan for $48,000 for the same year. The journal entry to recognize the pension Asset/Liability account would include a: a. credit to Cash for $52,000. b. debit to Pension Asset/Liability for $4,000. c. debit to Pension Expense for $48,000. d. credit to Pension Asset/Liability for $4,000.

Answer 27

d. credit to Pension Asset/Liability for $4,000. The difference between the amount of pension expense and the amount funded is a liability; because the pension plan is underfunded. The journal entry for this transaction is: DR) Pension Expense 52,000 CR) Cash 48,000 CR) Pension Asset/Liability 4,000

Question 28

On January 1, 20X1, XYZ Co. has the following balances: Projected benefit obligation $1,500,000 Fair value of plan assets 1,350,000 The settlement rate is 8%. Other data related to the pension plan for 20X1 are: Service cost $150,000 Amortization of unrecognized prior service costs 30,000 Contributions 220,000 Benefits paid 80,000 Actual return on plan assets 164,000 Amortization of unrecognized net gain 18,000 The fair value of plan assets at December 31, 20X1 is: a. $1,654,000 b. $1,374,000 c. $1,666,000 d. $1,734,000

Answer 28

a. $1,654,000 Fair value of plan assets, 1/1/X1 $1,350,000 Add: actual return on plan assets 164,000 Add: contributions 220,000 Less: benefits paid (80,000_ FV of plan assets 12/31/X1 = $1,654,000

Question 29

True or False: Under the pension plan’s amendment, when a company provides benefits to employees for years of service before the date of initiation or amendment of the pension plan, and it expects to pay these benefits in the future, the cost of these benefits should be expensed in the year when the amendment occurred.

Answer 29

False Prior service cost is the benefits earned by employees for years of service before the date of initiation or amendment of the pension plan and expected to be received in the future. According to FASB, prior service cost is reported in the other comprehensive income (OCI). Subsequently, the prior service cost is amortized over the remaining service lives of the employees who are expected to benefit from the change in the plan.

Question 30

True or False: The pension plans asset's market value is either the fair value of plan assets or the measured value that rationally and systematically considers the changes in fair value.

Answer 30

True

Question 31

The following information relates to Harry's pension plan for the year 20X1: Actual return on plan assets: 10,000 Contributions made: 4,000 Interest on vested benefits: 7,000 Current service cost: 13,000 Interest on liability (PBO) : 9,000 Amortization of PSC: 5,000 The amount to be reported as pension expense for 2021 is: a. 18,000 b. 13,000 c. 27,000 d. 17,000

Answer 31

d. 17,000 Pension Expense Computation: Service cost $13,000 Interest on projected benefit obligation 9,000 Amortization of prior service cost 5,000 Actual return on plan assets (10,000) ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ Pension expense $17,000

Question 32

Which of the following statements is true when an entity amends its pension plan and grants the employees benefits for services they have provided in the prior years? a. The prior service cost that results from the pension plan amendment should be expensed immediately once the plan is amended. Also, an increase in the pension obligation is required immediately. b. The prior service cost that results from the pension plan amendment and the pension obligation increase can be recognized later until the related benefits are paid. c. Projected benefit obligation and accumulated benefit obligation will increase. d. Projected benefit obligation and accumulated benefit obligation will decrease.

Answer 32

c. Projected benefit obligation and accumulated benefit obligation will increase. The pension plan amendment increases both projected benefit obligation and accumulated benefit obligation. When a pension plan is amended, the prior service cost is recognized in the other comprehensive income (OCI) and amortized over the average remaining service life of all active employees. The pension liability should be increased once the pension plan is amended; because the employer incurred the amounts of these benefits and expects to pay them in the future.

Question 33

Steve is the pension plan trustee for Jack Co. Steve provided the following information related to Jack's pension plan for 20X1: Market related asset value: 1/1) 6,000,000, 12/31 6,200,000 PBO: 1/1 8,400,000 12/31) 8,700,000 Accumulated benefit obligation 1/1) 2,200,000 12/31) 2,500,000 Unrealized net gains and losses 1/1) 0 12/31) 310,000 Actual return on plan assets: 12/31) 580,000 The amortization of the unrecognized prior service cost is $175,000, the service cost for 20X1 is $850,000. The settlement rate is 12% and the expected rate of return is 10%. What is the amount of pension expense for 20X1? a. $1,265,000 b. $1,433,000 c. $1,453,000 d. $1,313,000

Answer 33

b. $1,433,000 Pension Expense Computation: Expected return = $6,000,000 × 10% = $600,000 Interest on liability = $8,400,000 × 12% = $1,008,000 Pension expense: Add: Service cost $ 850,000 Add: Interest cost 1,008,000 Add: amortization of unrecognized prior service cost 175,000 Deduct: Expected return (600,000) ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ Pension expense $1,433,000 The positive expected return will reduce the pension expense. The difference between the actual and expected return on the plan asset should be assigned to other comprehensive income (OCI) as a loss because the expected return exceeds the actual return.

Question 34

The following information relates to the Ocean Company’s pension plan: Projected benefit obligation $1,150,000 Plan assets 940,000 Cumulative unrecognized net loss 320,000 Average remaining service life of all active employees 8 years What is the minimum amount of the loss that can be amortized for the current year based on the above data? a. 40,000 b. 32,000 c. 28,250 d. 25,625

Answer 34

d. 25,625 Under the corridor approach, the entity can amortize the difference between the cumulative gains and losses balance and 10% of the higher between these balances: 1- The beginning balance of the projected benefit obligation. 2- The beginning balance of the plan assets. And divide the difference by the average remaining service life of all active employees. The Projected benefit obligation of $1,150,000, is higher. Corridor threshold = 10% × $1,150,000 = $115,000 Cumulative unrecognized net loss > Corridor threshold, 320,000 > 115,000, so the amortization of the difference is permitted according to FASB The difference that can be amortized = $320,000 – $115,000 = $205,000 The amortization of the current year = $205,000 / 8 = $25,625