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Chapter 17 Pensions and Other Postretirement Benefits

True/False Questions

1. The amount of the vested benefit obligation is lower than the projected benefit obligation and
greater than the accumulated benefit obligation.

Answer: False Learning Objective: 2 Level of Learning: 2

2. The projected benefit obligation may be less reliable than the accumulated benefit obligation.

Answer: True Learning Objective: 2 Level of Learning: 1

3. An upward revision of inflation and compensation trends would likely cause a gain in the
pension benefit obligation.

Answer: False Learning Objective: 3 Level of Learning: 2

4. Prior service cost is recognized as pension expense over a period of several years.

Answer: True Learning Objective: 3 Level of Learning: 1

5. Conceptually, the service method provides a better matching of costs and benefits in
amortizing prior service cost than does the straight-line method.

Answer: True Learning Objective: 3 Level of Learning: 1

6. A net gain or net loss affects pension expense only if it exceeds ten percent of the pension
benefit obligation or ten percent of plan assets, whichever is lower.

Answer: False Learning Objective: 3 Level of Learning: 1

7. Pension expense and funding amounts are both accounting decisions.

Answer: False Learning Objective: 5 Level of Learning: 1

8. The balance of prepaid or accrued pension cost expense is a combination of the funded status
of the plan, the unamortized prior service cost, and the unamortized net gain or loss.

Answer: True Learning Objective: 5 Level of Learning: 1

9. The minimum pension liability is the excess of the projected benefit obligation over the plan
assets.

Answer: False Learning Objective: 7 Level of Learning: 1

10. If a pension plan is underfunded, an additional liability must always be recorded.

Answer: False Learning Objective: 6 Level of Learning: 2

11. Unlike pensions, there is almost always an accrued liability for postretirement benefit plans
since very few are funded.

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Chapter 17 Pensions and Other Postretirement Benefits

Answer: True Learning Objective: 8 Level of Learning: 1

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Chapter 17 Pensions and Other Postretirement Benefits

12. The expected postretirement benefit obligation is the discounted present value of the total
benefits expected to be paid by the employer to the plan participants.

Answer: True Learning Objective: 9 Level of Learning: 1

Matching Pair Questions

Use the following to answer questions 13-17:

13-17. Listed below are ten terms followed by a list of phrases that describe or characterize five of
the terms. Match each phrase with the correct term by placing the letter designating the best
term in the space provided by the phrase.

Terms:
A. Additional liability
B. Contribution to pension-fund
C. Contributory pension plan
D. Gain or loss on PBO
E. Minimum pension liability adjustment
F. Noncontributory pension plan
G. Pension expense
H. Prior service cost
I. Service method
J. Straight-line method
Phrases:
13. ____ A contra equity account.
14. ____ A financing decision.
15. ____ All funding provided by the employer.
16. ____ An accounting decision.
17. ____ Approach most often used in practice.

Answer: 13-E; 14-B; 15-F; 16-G; 17-I

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Chapter 17 Pensions and Other Postretirement Benefits

Use the following to answer questions 18-22:

18-22. Listed below are ten terms followed by a list of phrases that describe or characterize five of
the terms. Match each phrase with the correct term by placing the letter designating the best
term in the space provided by the phrase.

Terms:
A. Additional liability
B. Contribution
C. Conceptual method
D. Gain or loss on PBO
E. Pension expense
F. Prior service cost
G. Service method
H. Straight-line method
I. Termination of plan
Phrases:
18. ____ Causes a gain or loss per SFAS 88.
19. ____ Caused by changes in estimates of factors in the PBO.
20. ____ Caused by plan amendment.
21. ____ Causes a debit to an intangible asset.
22. ____ Conceptually achieves a better matching of costs and benefits.

Answer: 18-I; 19-D; 20-F; 21-A; 22-G

Use the following to answer questions 23-27:

23-27. Listed below are ten terms followed by a list of phrases that describe or characterize five of
the terms. Match each phrase with the correct term by placing the letter designating the best
term in the space provided by the phrase.

Terms:
A. Accumulated benefit obligation
B. Accrued pension cost
C. Funded status
D. Interest cost
E. Pension Benefit Guaranty Corp.
F. Plan assets
G. Prepaid pension cost
H. Projected benefit obligation
I. Service cost
J. Time cost
Phrases:
23. ____ Created by "ERISA" legislation
24. ____ Created only by the passage of time
25. ____ Cumulative employer's contributions in excess of recognized pension expense.
26. ____ Current pay levels implicitly assumed.
27. ____ Difference between PBO and plan assets.

Answer: 23-E; 24-D; 25-G; 26-A; 27-C

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Chapter 17 Pensions and Other Postretirement Benefits

Use the following to answer questions 28-32:

28-32. Listed below are ten terms followed by a list of phrases that describe or characterize five of
the terms. Match each phrase with the correct term by placing the letter designating the best
term in the space provided by the phrase.
Terms:
A. Accumulated benefit obligation
B. Amortize unrecognized net loss
C. Delayed recognition
D. Funded status
E. Interest cost
F. Plan assets
G. Prepaid pension cost
H. Projected benefit obligation
I. Return less than expected
J. Vested benefit obligation
Phrases:
28. ____ Excess over 10% of plan assets or PBO.
29. ____ Future compensation levels estimated.
30. ____ Gain on plan assets.
31. ____ Increased by employer contributions.
32. ____ Not contingent on continued employment.

Answer: 28-B; 29-H; 30-C; 31-F; 32-J

Use the following to answer questions 33-37:

33-37. Listed below are ten terms followed by a list of phrases that describe or characterize five of
the terms. Match each phrase with the correct term by placing the letter designating the best
term in the space provided by the phrase.

Terms:
A. Choice between PBO and ABO
B. Defined benefit plan
C. Defined contribution plan
D. Discount rate
E. Expected return
F. Intangible asset
G. Pension Right Protection Act of 1950
H. Retiree benefits paid
I. Service cost
J. Vesting requirements
Phrases:
33. ____ Protection for employee pension rights.
34. ____ Recorded if an additional liability is recognized, provided you have an unrecognized
prior service cost.
35. ____ Reduce both the PBO and plan assets.
36. ____ Retirement benefits specified by formula.
37. ____ Return on plan assets included in the calculation of pension expense.

Answer: 33-J; 34-F; 35-H; 36-B; 37-E

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Chapter 17 Pensions and Other Postretirement Benefits

Use the following to answer questions 38-42:

38-42. Listed below are ten terms followed by a list of phrases that describe or characterize five of
the terms. Match each phrase with the correct term by placing the letter designating the best
term in the space provided by the phrase.

Terms:
A. Choice between defined benefit and defined contribution plan
B. Choice between PBO and ABO
C. Defined contribution plan
D. Discount note
E. EPBO
F. Expected return
G. Intangible asset
H. Losses or (gains) on plan assets
I. Service cost
J. Stated pension rate
Phrases:
38. ____ Return on plan assets lower or (higher) than expected.
39. ____ Risk borne by employee.
40. ____ The primary component of annual pension expense.
41. ____ Trade-off between relevance and reliability.
42. ____ Used by actuaries to adjust for the time value of money.
43. ____ Actuarial estimate of postretirement benefits to be received by participants.

Answer: 38-H; 39-D; 40-I; 41-B; 42-D; 43-E

Use the following to answer question 44-49:

Listed below are eight terms followed by a list of phrases that describe or characterize the terms.
Match each phrase with the correct term by placing the letter designating the best term in the space
provided by the phrase.

Terms:
A. APBO (Postretirement)
B. Attribution
C. EPBO
D. Interest cost
E. Postretirement benefit cost
F. Postretirement benefit obligation
G. Postretirement health care
J. Service cost
Phrases:
44. ____ Discounted present value of postretirement benefit costs.
45. ____ Discount rate times beginning APBO.
46. ____ Portion of the EPBO attributed to the current period.
47. ____ Process of assigning the cost of benefits to the years during which those benefits are
assumed to be earned by employees.
48. ____ Related to need, not service.
49. ____ The portion of the EPBO attributed to employee service to date.

Answer: 44-E; 45-D; 46-J; 47-B; 48-G; 49-A

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Multiple Choice Questions

50. Which of the following statements typifies defined contribution plans?


A) Investment risk is borne by the corporation sponsoring the plan.
B) The plans are more complex than defined benefit plans.
C) Present value factors are used to determine the annual contributions to the plan.
D) The employer's obligation is satisfied by making the periodic contribution to the plan.

Answer: D Learning Objective: 1 Level of Learning: 2

51. Which of the following is not a requirement for a qualified pension plan?
A) It cannot discriminate in favor of highly paid employees.
B) It must cover at least 80% of the employees.
C) It must be funded in advance of retirement.
D) Benefits must vest after a specified period of service, commonly five years.

Answer: B Learning Objective: 1 Level of Learning: 1

52. Which of the following is not a characteristic of a qualified pension plan?


A) It can be limited to highly-compensated salaried employees.
B) It must be funded in advance of retirement.
C) Benefits must vest after a specified period of service.
D) It must cover at least 70% of employees.

Answer: A Learning Objective: 1 Level of Learning: 1

53. Which of the following is not usually part of the pension formula under a defined benefit
plan?
A) Age at retirement.
B) Number of years of service.
C) Seniority at time of retirement.
D) Compensation level.

Answer: C Learning Objective: 1 Level of Learning: 1

54. Which of the following describes defined benefit pension plans?


A) They raise few accounting issues for employers.
B) Retirement benefits depend on how much money has accumulated in an individual's
account.
C) They are simple to construct.
D) Retirement benefits are based on the plan benefit formula.

Answer: D Learning Objective: 1 Level of Learning: 1

55. Which of the following describes defined benefit pension plans?


A) The investment risk is borne by the employee.
B) The plans are simple and easy to construct.
C) The investment risk is borne by the employer.
D) Retirement benefits depend on the individual's account balance.

Answer: C Learning Objective: 1 Level of Learning: 1

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Chapter 17 Pensions and Other Postretirement Benefits

56. Pension expense is decreased by:


A) Amortization of prior service cost.
B) Amortization of unrecognized net gain.
C) Benefits paid to retired employees.
D) Prior service cost.

Answer: B Learning Objective: 5 Level of Learning: 1

57. The PBO is increased by:


A) An increase in the average life expectancy of employees.
B) Amortization of prior service cost.
C) An increase in the actuary's assumed discount rate.
D) A return on plan assets that is lower than expected.

Answer: A Learning Objective: 3 Level of Learning: 2

58. Defined contribution pension plans that link the amount of contributions to company
performance are often called:
A) Incentive savings plans.
B) Thrift plans.
C) Savings plans.
D) None of the above.

Answer: A Learning Objective: 1 Level of Learning: 1

59. Interest cost is calculated by multiplying the:


A) ABO by the expected return on the plan assets.
B) ABO by the discount rate.
C) PBO by the expected return on plan assets.
D) PBO by the discount rate.

Answer: D Learning Objective: 5 Level of Learning: 1

60. The accounting for defined contribution pension plans is easy because each year:
A) The employer records pension expense equal to the amount paid out to retirees.
B) The employer records pension expense based on an amount provided by the actuary.
C) The employer records pension expense equal to the annual contribution.
D) The employer records pension expense based on the earnings of the plan assets.

Answer: C Learning Objective: Level of Learning: 1

61. The annual pension expense for what type of pension plan(s) is recorded by a journal entry
that includes a debit to pension expense, a credit to cash and a debit (credit) to prepaid
(accrued) pension cost?
A) A defined benefit plan only.
B) A defined contribution plan only.
C) Both a defined benefit and a defined contribution plan.
D) This is not the correct entry.

Answer: A Learning Objective: 1 Level of Learning: 2

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Chapter 17 Pensions and Other Postretirement Benefits

62. Which of the following is not an uncertainty that complicates determining how much to set
aside each year to ensure that sufficient funds are available to provide the benefits promised
under a defined benefit plan?
A) Employee turnover.
B) Number of employees who retired last year.
C) Future inflation rates.
D) Future compensation levels.

Answer: B Learning Objective: 4 Level of Learning: 1

63. To help assess the uncertainties that surround a defined benefit pension plan, corporations
frequently hire a(n):
A) CPA.
B) Attorney.
C) Investment analyst.
D) Actuary.

Answer: D Learning Objective: 1 Level of Learning: 1

64. Pension gains related to plan assets occur when:


A) The return on plan assets is higher than expected.
B) The vested benefit obligation is less than expected.
C) Retiree benefits paid out are less than expected.
D) The accumulated benefit obligation is more than expected.

Answer: A Learning Objective: 5 Level of Learning: 2

65. The key elements of a defined benefit pension plan include all of the following except:
A) The periodic expense.
B) The plan assets.
C) Amortized future benefits.
D) The employer's obligation.

Answer: C Learning Objective: 6 Level of Learning: 1

66. Which of the following is a correct statement concerning the reporting of the pension plan on
the face of the balance sheet?
A) Only the plan assets are reported.
B) Only the pension obligation is reported.
C) Both the pension obligation and the plan assets are reported.
D) Neither the pension obligation nor the plan assets are reported.

Answer: D Learning Objective: 7 Level of Learning: 1

67. SFAS 87 applies to:


A) Defined benefit pension plans.
B) Defined contribution pension plans.
C) Post employment health plans.
D) Defined benefit and defined contribution plans.

Answer: A Learning Objective: 1 Level of Learning: 1

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Chapter 17 Pensions and Other Postretirement Benefits

68. Pension expense consists of at least three components which are:


A) Service costs, prior service costs, and gain on plan assets.
B) Service costs, interest costs, and gain from revisions in pension liability.
C) Service costs, contribution costs, and prior service costs.
D) Service costs, interest costs, and expected return on plan assets.

Answer: D Learning Objective: 5 Level of Learning: 1

69. The pension expense is a direct composite of periodic changes that occur:
A) In the pension obligation.
B) In the pension obligation and the plan assets.
C) In the plan assets.
D) In the pension obligation and the plan liability.

Answer: B Learning Objective: 5 Level of Learning: 1

70. Which of the following is not a way of measuring the pension obligation?
A) Accumulated benefit obligation.
B) Vested benefit obligation.
C) Retiree benefit obligation.
D) Projected benefit obligation.

Answer: C Learning Objective: 2 Level of Learning: 1

71. The portion of the obligation that plan participants are entitled to receive regardless of their
continued employment is called the:
A) Vested benefit obligation.
B) Retiree benefit obligation.
C) Actual benefit obligation.
D) True benefit obligation.

Answer: A Learning Objective: 2 Level of Learning: 1

72. Which of the following is true?


A) A projected benefits approach is used to determine minimum pension liability.
B) An accumulated benefits approach is used to determine the periodic pension expense.
C) A vested benefits approach is used to determine the periodic pension expense.
D) An accumulated benefits approach is used to determine the minimum pension liability.

Answer: D Learning Objective: 7 Level of Learning: 1

73. Consider the following:


I. present value of vested benefits at present pay levels
II. present value of nonvested benefits at present pay levels
III. present value of additional benefits related to projected pay increases

Which of the above constitutes the accumulated benefit obligation?


A) I & II.
B) I, II, III.
C) II & III.
D) II only.

Answer: A Learning Objective: 2 Level of Learning: 2

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Chapter 17 Pensions and Other Postretirement Benefits

74. Consider the following:


I. present value of vested benefits at present pay levels
II. present value of nonvested benefits at present pay levels
III. present value of additional benefits related to projected pay increases

Which of the above constitutes the projected benefit obligation?


A) III only.
B) I, II.
C) I, II, III.
D) II only.

Answer: C Learning Objective: 2 Level of Learning: 2

75. Consider the following:


I. present value of vested benefits at present pay levels
II. present value of nonvested benefits at present pay levels
III. present value of additional benefits related to projected pay increases

Which of the above constitutes the vested benefit obligation?


A) I & II.
B) I, II, III.
C) II.
D) I only.

Answer: D Learning Objective: 2 Level of Learning: 2

76. Interest cost will:


A) Increase the PBO and increase pension expense.
B) Increase pension expense and reduce plan assets.
C) Increase the PBO and reduce plan assets.
D) Increase pension expense and reduce the return on plan assets.

Answer: A Learning Objective: 3 Level of Learning: 1

77. ERISA made major changes in the requirements for pension plan:
A) Vesting.
B) Reporting.
C) Taxing.
D) Investing.

Answer: A Learning Objective: 1 Level of Learning: 1

78. Compared to the ABO, the PBO usually is:


A) Less material.
B) Less representationally faithful.
C) Less relevant.
D) Less reliable.

Answer: D Learning Objective: 2 Level of Learning: 1

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Chapter 17 Pensions and Other Postretirement Benefits

79. Compared to the PBO, the ABO usually is:


A) More relevant.
B) More representationally faithful.
C) More reliable.
D) More material.

Answer: C Learning Objective: 2 Level of Learning: 1

80. The projected benefit obligation is computed by actuaries using:


A) Future value concepts.
B) Present value concepts.
C) Market value concepts.
D) Fair value concepts.

Answer: B Learning Objective: 2 Level of Learning: 1

81. The component of pension expense that results from amending a pension plan to give
recognition to previous service of currently enrolled employees is called:
A) Prior service costs.
B) Previous service costs.
C) Retiree service costs.
D) Transition costs.

Answer: A Learning Objective: 6 Level of Learning: 1

82. Payment of retirement benefits:


A) Increases the PBO.
B) Increases the ABO.
C) Reduces the GBO.
D) Reduces the PBO.

Answer: D Learning Objective: 3 Level of Learning: 2

83. An underfunded pension plan means that:


A) PBO is less than plan assets.
B) PBO exceeds plan assets.
C) ABO is less than plan assets.
D) ABO exceeds plan assets.

Answer: B Learning Objective: 3 Level of Learning: 2

84. An overfunded pension plan means that:


A) PBO is less than plan assets.
B) PBO exceeds plan assets.
C) ABO is less than plan assets.
D) ABO exceeds plan assets.

Answer: A Learning Objective: 3 Level of Learning: 2

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85. Required financial statement disclosures pertaining to defined benefit pension plans do not
include:
A) The fair value of plan assets.
B) The composition of pension expense.
C) The number of retired employees.
D) A reconciliation between the funded status and balance sheet amounts.

Answer: C Learning Objective: 7 Level of Learning: 1

86. When the service method is used for amortizing prior service costs, the amount recognized
each year is
A) In proportion to the fraction of the total remaining service years worked during the year.
B) A constant amount or fixed amount.
C) Prior service cost divided by the average remaining service life of the active employee
group.
D) Prior service cost divided by the average estimated retirement age of the currently
enrolled employee group.

Answer: A Learning Objective: 5 Level of Learning: 2

87. Under SFAS 87, delayed recognition of gains and losses achieves:
A) Income averaging.
B) Expense averaging.
C) Income optimization.
D) Income smoothing.

Answer: D Learning Objective: 5 Level of Learning: 1

88. Conceptually, the pension liability is best measured by the:


A) Minimum pension liability.
B) Accrued pension costs.
C) Accumulated benefit obligation.
D) Projected benefit obligation.

Answer: D Learning Objective: 6 Level of Learning: 1

89. Which of the following results are among the memorandum accounts that combine for the
prepaid (accrued) cost on the balance sheet?
A) Plan assets
B) Projected benefit obligation
C) Unamortized net loss
D) All of the above are correct.

Answer: D Learning Objective: 7 Level of Learning: 1

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Chapter 17 Pensions and Other Postretirement Benefits

90. If no estimates are changed and no benefits are paid, which of the following amounts related
to post-retirement benefits will not increase with each additional year of service before the full
eligibility date?
A) Interest cost.
B) Postretirement benefit expense.
C) APBO.
D) Service cost.

Answer: D Learning Objective: 9 Level of Learning: 2

91. Prior to 1993, postretirement benefits generally were accounted for on the:
A) Accrual basis.
B) Cash basis.
C) Modified accrual basis.
D) Hybrid basis.

Answer: B Learning Objective: 8 Level of Learning: 1

92. Under SFAS 106, accounting for postretirement benefits must adhere to the:
A) Accrual basis of accounting.
B) Cash basis of accounting.
C) Modified accrual basis.
D) Modified cash basis.

Answer: A Learning Objective: 8 Level of Learning: 1

93. Accounting for postretirement benefits is similar, in most respects, to accounting for:
A) Payroll taxes.
B) Health insurance costs for current employees.
C) Pensions.
D) Sick pay and vacation pay.

Answer: C Learning Objective: 8 Level of Learning: 1

94. Eligibility for postretirement health care benefits usually is based on the employee's:
A) Job title.
B) Number of years in the profession.
C) Number of years in the current position.
D) Age and/or years of service.

Answer: D Learning Objective: 8 Level of Learning: 1

95. Eligibility requirements and the nature of benefits are specified in the:
A) Written plan.
B) The informal plan.
C) Substantive plan.
D) Severance plan.

Answer: A Learning Objective: 8 Level of Learning: 1

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Chapter 17 Pensions and Other Postretirement Benefits

96. When measuring the obligation and expense for postretirement benefits, changes in the cost-
sharing arrangements are considered:
A) As soon as the company demonstrates the desire to make the change.
B) When the change would increase the company's obligation and the intended change has
been communicated to plan participants.
C) Only after the plan is formally amended.
D) When the company can demonstrate the intent and ability to make the change and has
communicated the intended change to plan participants.

Answer: D Learning Objective: 9 Level of Learning: 2

97. Pension benefits and postretirement health benefits are typically similar in their:
A) Application of present value concepts.
B) Vesting policies.
C) Coverage for eligible dependents.
D) Relationship between cost of coverage and length of service.

Answer: A Learning Objective: 8 Level of Learning: 1

98. Postretirement health care benefits paid by the employer are:


A) Anticipated actual costs of providing the promised health care.
B) Estimated by a defined benefits formula.
C) Estimated by Medicare.
D) Determined by Blue Cross.

Answer: A Learning Objective: 8 Level of Learning: 1

99. Which of the following is not included among the assumptions needed to estimate
postretirement health care benefits?
A) Employee turnover.
B) Expected retirement age of plan participants.
C) Life expectancy of plan participants.
D) Return on plan assets.

Answer: D Learning Objective: 9 Level of Learning: 1

100. Which of the following factors is generally not of greater significance when estimating
postretirement health care benefits as opposed to estimating defined pension benefits?
A) Turnover.
B) Dependency status.
C) Expected compensation increases.
D) Inflation.

Answer: C Learning Objective: 8 Level of Learning: 2

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Chapter 17 Pensions and Other Postretirement Benefits

101. Which one of the following assumptions is needed to estimate both postretirement health care
benefits and pension benefits?
A) Per capita claims cost.
B) Expected cost trend rate.
C) Benefits provided by other governmental or private plans.
D) Employee turnover.

Answer: D Learning Objective: 8 Level of Learning: 1

102. The postretirement benefit obligation is the:


A) Future value of the estimated benefits during retirement.
B) Present value of the estimated benefits during retirement.
C) Fair value of the estimated benefits during retirement.
D) Actual value of estimated benefits during retirement.

Answer: B Learning Objective: 9 Level of Learning: 2

103. The company's total obligation for postretirement benefits is measured by:
A) APBO.
B) HMOP.
C) HOBO.
D) EPBO.

Answer: D Learning Objective: 9 Level of Learning: 1

104. The APBO increases each year by the:


A) Interest accrued on the APBO and the portion of the EPBO attributed to that year.
B) Interest accrued on the EPBO and the portion of the EPBO attributed to that year.
C) Interest accrued on the APBO and the portion of the APBO attributed to that year
D) Interest accrued on the EPBO and the portion of the APBO attributed to that year.

Answer: A Learning Objective: 9 Level of Learning: 2

105. The process of assigning the cost of benefits to the years during which those benefits are
assumed to be earned by employees is called:
A) Restitution.
B) Retribution.
C) Attribution.
D) Assignation.

Answer: C Learning Objective: 9 Level of Learning: 1

106. The attribution approach required by SFAS 106 is to assign:


A) An equal fraction of the EPBO to each year the employee is on the company payroll.
B) An equal fraction of the APBO to each year the employee is on the company payroll.
C) An equal fraction of the APBO to each year of service from the employee's hire date to
the employee's full eligibility date.
D) An equal fraction of the EPBO to each year of service from the employee's hire date to
the employee's full eligibility date.

Answer: D Learning Objective: 9 Level of Learning: 2

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Chapter 17 Pensions and Other Postretirement Benefits

107. The attribution period for postretirement benefits spans each year of service from the
employee's date of hire to the employee's date of:
A) Full eligibility.
B) Death.
C) Retirement.
D) Termination.

Answer: A Learning Objective: 9 Level of Learning: 1

108. The attribution period does not include:


A) The first five years of service.
B) The year of hire.
C) The employee probation period.
D) The years of service beyond the full eligibility date.

Answer: D Learning Objective: 9 Level of Learning: 1

109. Which of the following is not a potential cost component of postretirement benefit expense?
A) Return plan assets.
B) Prior service cost.
C) Retiree benefits paid.
D) Transition amount.

Answer: C Learning Objective: 10 Level of Learning: 1

110. Which of the following is not a potential cost component of postretirement benefit expense?
A) Return on APBO.
B) Transition amount.
C) Service cost.
D) Interest cost.

Answer: A Learning Objective: 10 Level of Learning: 1

111. The amount of cash paid annually for unfunded postretirement health benefit plans, assuming
they are not independently insured, usually is equal to:
A) The amount required by the actuarial formula.
B) The present value of future benefits.
C) The amount necessary to cover future benefits.
D) The amount necessary to pay the current year's medical cost.

Answer: D Learning Objective: 9 Level of Learning: 2

112. With pensions, service cost reflects additional benefits employees earn from an additional
year's service. The service cost for retiree health plans is:
A) An allocation to the current year of a portion of an estimated fixed total cost.
B) An allocation to the current year of a portion of an existing liability.
C) An amount earned by a defined benefit formula.
D) The amount paid to retired employees.

Answer: A Learning Objective: 8 Level of Learning: 2

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Chapter 17 Pensions and Other Postretirement Benefits

113. Prior service cost is attributed to the service of active employees from the date of the
amendment to:
A) The partial eligibility date.
B) The retirement date.
C) The full eligibility date.
D) The date of death.

Answer: C Learning Objective: 10 Level of Learning: 1

114. A negative plan amendment is one that reduces the APBO. The effect of a negative
amendment should:
A) First be offset against any unrecognized transition obligation and, second, against any
unrecognized prior service cost, with any remainder amortized over the period to full
eligibility.
B) First be offset against any unrecognized transition obligation and, second, against any
unrecognized prior service cost, with any remainder written off in the current year.
C) First be offset against any unrecognized prior service cost and, second, against any
unrecognized transition obligation, with any remainder written off in the current year.
D) First be offset against any unrecognized prior service cost and, second, against any
unrecognized transition obligation, with any remainder amortized over the period to full
eligibility.

Answer: D Learning Objective: 10 Level of Learning: 2

115. Gains and losses can occur with postretirement benefit plans when:
A) Either the APBO or the return on plan assets turns out to be different than expected.
B) Either the EPBO or the return on plan assets turns out to be different than expected.
C) Either the APBO, the EPBO, or the return on plan assets turns out to be different than
expected.
D) Either the APBO or the EPBO turns out to be different than expected.

Answer: A Learning Objective: 9 Level of Learning: 2

116. A net gain or loss affects the postretirement benefit expense only if it exceeds an amount equal
to what percentage of the APBO or plan assets, whichever is higher?
A) 10%.
B) 5%.
C) 15%.
D) 20%.

Answer: A Learning Objective: 10 Level of Learning: 1

117. The amortization of a net gain has what effect on postretirement benefit expense?
A) Decreases it.
B) Has no effect on it.
C) Increases it (but only by the amount over 10% of the APBO).
D) Increases it (regardless of the amount).

Answer: A Learning Objective: 10 Level of Learning: 2

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Chapter 17 Pensions and Other Postretirement Benefits

118. The transition obligation related to postretirement health care benefits is:
A) Capitalized.
B) Expensed immediately.
C) Either expensed immediately or amortized over a period of years.
D) Amortized over a period of years.

Answer: C Learning Objective: 9 Level of Learning: 2

119. When the transition obligation is written off immediately instead of over a period of years, the
amount is reported on the income statement as:
A) A change in estimate.
B) A change in accounting principle.
C) An extraordinary item.
D) An operating expense.

Answer: B Learning Objective: 9 Level of Learning: 1

120. The transition amount that was created upon the adoption of SFAS 106 was almost always
a(n):
A) Transition liability.
B) Transition asset.
C) Operating expense.
D) Deferred revenue.

Answer: A Learning Objective: 9 Level of Learning: 1

121. Which one of the following is not a required disclosure for postretirement benefit plans?
A) Change in the APBO.
B) The net periodic postretirement benefit expense and its components.
C) The weighted average discount rate.
D) The percentage of employees who participate in the plan.

Answer: D Learning Objective: 9 Level of Learning: 1

Use the following to answer questions 122-125:

The following information reconciles the funded status of Havana Corporation's defined benefit
pension plan with the amount reported in its balance sheet for the prepaid (accrued) pension:

($ in 000s) 2006 2006


Beginning balances Ending balances

Projected benefit obligation ($6,000) ($6,504)


Plan assets 5,760 6,336
Funded status ($240) ($168)
Unamortized prior service cost 600 552
Unamortized net loss 720 672
Prepaid (accrued) pension cost $ 1,080 $ 1,056

At the end of 2006, Havana contributed $696 thousand to the pension fund and benefit payments of
$624 thousand were made to retirees. The expected rate of return on plan assets was 10%, and the
actuary's discount rate is 8%. There were no changes in actuarial estimates and assumptions regarding
the PBO.

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Chapter 17 Pensions and Other Postretirement Benefits

122. What is Havana's 2006 actual return on plan assets?


A) $504 thousand
B) $618 thousand
C) $1,128 thousand
D) None of the above is correct.

Answer: A Learning Objective: 4 Level of Learning: 3


Rationale:
The computation ($ in 000s) is as follows:
Plan assets
Beginning of 2006 $5,760
Actual return ? 504
Cash contributions 696
Less: Retiree benefits (624)
End of 2006 $6,336

123. What is Havana's 2006 gain or loss on plan assets?


A) $115.2 thousand
B) $160.8 thousand
C) $276 thousand
D) None of the above is correct.

Answer: D Learning Objective: 4 Level of Learning: 3


Rationale:
The computation (in $ 000s) is as follows:
Expected return $576 (10% x $5,760)
Actual return (504) from question 122
Loss on plan assets $ 72

124. What is the 2006 service cost for Havana's plan?


A) $276 thousand
B) $528 thousand
C) $648 thousand
D) Cannot be determined from the given information.

Answer: C Learning Objective: 3 Level of Learning: 3


Rationale:
The computation is as follows:
Beginning of 2006 $6,000
Service cost ? $648
Interest cost 480 (8% x $6,000)
Loss (gain) on PBO 0
Less: Retiree benefits (624)
End of 2006 $6,504

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Chapter 17 Pensions and Other Postretirement Benefits

125. What is the 2006 pension expense for Havana's plan?


A) $594 thousand
B) $606 thousand
C) $678 thousand
D) None of the above is correct.

Answer: B Learning Objective: 5 Level of Learning: 3


Rationale:
The computation is as follows:
Service cost $ 648 (from question 124)
Interest cost 480 (8% x $6,000)
less: Expected return on plan assets (576) (10% x $5,760)
Amortization of:
a. Prior service cost 48 ($600 - 552)
b. Net loss 6 ($720 - 642 - 72*)
Pension expense $606
* 2006 gain on plan assets

Use the following to answer questions 126-130:

Oregon Co.'s employees are eligible for retirement with benefits at the end of the year in which both
age 60 is attained and they have completed 35 years of service. The benefits provide 15 years
reimbursement for health care services of $20,000 annually, beginning one year from the date of
retirement.

Ralph Young was hired at the beginning of 1970 by Oregon at age 21 and is expected to retire at the
end of 2008 (age 60). The discount rate is 4%. The plan is not prefunded.

126. What is the present value of Ralph's net benefits as of his expected retirement date, rounded to
the nearest dollar?
A) $166,580
B) $222,368
C) $300,000
D) None of the above is correct.

Answer: B Learning Objective: 9 Level of Learning: 3


Rationale:
PVA = A x PV factor (Table 4) where n=15 and i=4%
= $20,000 x 11.11839
= $222,368 (rounded).

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Chapter 17 Pensions and Other Postretirement Benefits

127. With respect to Ralph, what is Oregon's expected postretirement benefit obligation (EPBO) at
the end of 2006, rounded to the nearest dollar?
A) $137,045
B) $182,942
C) $246,810
D) $768,000.

Answer: B Learning Objective: 9 Level of Learning: 3


Rationale:
EPBO (12/31/06) = PV at 12/31/2008 x PV Factor (Table 2) where n=2 and i=4%
= $222,368 x 0.82270
= $182,942 (rounded).

128. With respect to Ralph, what is Oregon's accumulated postretirement benefit obligation
(APBO) at the end of 2006, rounded to the nearest dollar?
A) $129,832
B) $233,820
C) $173,313
D) None of the above is correct.

Answer: C Learning Objective: 9 Level of Learning: 3


Rationale:
APBO (12/31/2006) = EBPO (12/31/2006) x (Years of service / Attribution period)
= $182,942 x 36 years / 38 years
= $173,313 (rounded).

129. With respect to Ralph, what is the service cost to be included in Oregon's 2006 postretirement
benefit expense, rounded to the nearest dollar?
A) $3,606
B) $6,495
C) $20,211
D) $4,814

Answer: D Learning Objective: 10 Level of Learning: 3


Rationale:
The correct computation is as follows:
Service cost = EBPO (12/31/2006) x (1 year / Attribution period)
= $182,942 x 1 year / 38 years
= $4,814 (rounded).

130. With respect to Ralph, what is the interest cost to be included in Oregon's 2007 postretirement
benefit expense, rounded to the nearest dollar?
A) $6,933
B) $5,193
C) $9,353
D) None of the above is correct.

Answer: A Learning Objective: 10 Level of Learning: 3


Rationale:
Interest cost = ABPO (1/1/2007) x discount rate
= $173,313 x 4%
= $6,933 (rounded)

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Chapter 17 Pensions and Other Postretirement Benefits

131. Data for 2006 were as follows: PBO, January 1, $240,000 and December 31, $270,000;
pension plan assets (fair value) January 1, $180,000, and December 31, $230,000. The
projected benefit obligation was underfunded at the end of 2006 by:
A) $30,000.
B) $60,000.
C) $20,000.
D) $40,000.

Answer: D Learning Objective: 5 Level of Learning: 3


Rationale:
PBO $(270,000 )
Plan assets 230,000
Funded status $(40,000 )

132. A company's defined benefit pension plan had a PBO of $265,000 on January 1, 2006. During
2006, pension benefits paid were $40,000. The actuarial discount rate for the plan for this year
was 10%. Service cost for 2006 was $80,000. Plan assets (fair value) increased during the year
by $45,000. The amount of the PBO at December 31, 2006, was:
A) $225,000.
B) $305,000.
C) $331,500.
D) None of the above is correct.

Answer: C Learning Objective: 3 Level of Learning: 3


Rationale:
PBO/1/1 $265,000
Service cost 80,000
Interest cost ($265,000 x 10%) 26,500
Benefits paid (40,000
PBO 12/31 $331,500

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Chapter 17 Pensions and Other Postretirement Benefits

133. Scallion Company received the following reports on its defined benefit pension plan for the
current calendar year:

PBO Plan assets


Balance, January 1 $400,000 Balance, January 1 $250,000
Service cost 195,000 Actual return 25,000
Interest cost 32,000 Annual contribution 110,000
Benefits paid (80,000) Benefits paid (80,000)
Balance, December 31 $547,000 Balance, December 31 $305,000

The long-term expected rate of return on plan assets is 10%. Assuming no other data are
relevant, what is the pension expense for the year?
A) $195,000.
B) $227,000.
C) $172,000.
D) $202,000.

Answer: D Learning Objective: 5 Level of Learning: 3


Rationale:

Service cost $195,000


Interest cost 32,000
Expected return on plan assets (25,000 )
Pension expense $202,000

134. Fox Company received the following reports on its defined benefit pension plan for the
current calendar year:

PBO Plan assets


Balance, January 1 $600,000 Balance, January 1 $500,000
Service cost 360,000 Actual return 50,000
Interest cost 64,000 Annual contribution 220,000
Benefits paid (90,000) Benefits paid (90,000)
Balance, December 31 $934,000 Balance, December 31 $680,000

The long-term expected rate of return on plan assets is 8%. Assuming no other data are
relevant, what is the pension expense for the year?
A) $384,000.
B) $360,000.
C) $424,000.
D) $374,000.

Answer: A Learning Objective: 5 Level of Learning: 3


Rationale:

Service cost $360,000


Interest cost 64,000
Expected return on plan assets (40,000 )
Pension expense $384,000

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Chapter 17 Pensions and Other Postretirement Benefits

135. The following information is related to the defined benefit pension plan of Dreamworld
Company for 2006:

Service cost $60,000


Contributions to pension plan 110,000
Benefits paid to retirees 150,000
Plan assets (fair value), January 1 640,000
Plan assets (fair value), December 31 750,000
Actual return on plan assets 150,000
PBO, January 1 900,000
PBO, December 31 960,000
Discount rate 10%
Long-term expected return on plan assets 9%

Assuming no other relevant data exist, what is the pension expense for 2006?
A) $190,000.
B) $92,400.
C) $60,000.
D) $170,000.

Answer: B Learning Objective: 5 Level of Learning: 3


Rationale:
Service cost $60,000
Interest cost ($900,000 x 10%) 90,000
Expected return on plan assets ($640,000 x 9%) (57,600 )
Pension expense $92,400

136. The following information is related to the defined benefit pension plan of Simpson Company
for 2006:

Service cost $90,000


Contributions to pension plan 140,000
Benefits paid to retirees 110,000
Plan assets (fair value), January 1 540,000
Plan assets (fair value), December 31 650,000
Actual return on plan assets 80,000
PBO, January 1 800,000
PBO, December 31 870,000
Discount rate 10%
Long-term expected return on plan assets 9%

Assuming no other relevant data exists, what is the pension expense for 2006?
A) $90,000.
B) $230,600.
C) $121,400.
D) $154,000.

Answer: C Learning Objective: 5 Level of Learning: 3


Rationale:
Service cost $90,000
Interest cost ($800,000 x 10%) 80,000
Expected return on plan assets ($540,000 x 9%) (48,600 )
Pension expense $121,400

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Chapter 17 Pensions and Other Postretirement Benefits

137. Mars Inc. has a defined benefit pension plan. On December 31, 2006 (the end of the fiscal
year), the company received the PBO report from the actuary. The following information was
included in the report: ending PBO, $110,000, benefits paid to retirees, $10,000, interest cost,
$7,200. The discount rate applied by the actuary was 8%. What was the beginning PBO?
A) $90,000.
B) $100,000.
C) $107,200.
D) $112,000.

Answer: A Learning Objective: 3 Level of Learning: 3


Rationale: PBO, 1/1/06 = $7,200/8% = $90,000

138. Louie Company has a defined benefit pension plan. On December 31, 2006 (the end of the
fiscal year), the company received the PBO report from the actuary. The following
information was included in the report: ending PBO, $110,000, benefits paid to retirees,
$10,000, interest cost, $8,000. The discount rate applied by the actuary was 8%. What was the
service cost for 2006?
A) $2,000.
B) $12,000.
C) $18,000.
D) $92,000.

Answer: B Learning Objective: 3 Level of Learning: 3


Rationale:
Beginning PBO ($8,000/8%) $100,000
Service cost 12,000 *
Interest cost 8,000
Retiree benefits paid (10,000 )
Ending PBO $110,000

*$110,000 + $10,000 $8,000 $100,000 = $12,000

139. Colombo Enterprises has a defined benefit pension plan. At the end of 2006, the following
data were available: beginning PBO, $75,000; service cost, $14,000; interest cost, $6,000;
benefits paid for the year, $9,000; ending PBO, $89,000; and the expected return on plan
assets, $10,000. There were no other pension related costs for 2006. The journal entry to
record the annual pension costs will include a debit to pension expense for:
A) $20,000.
B) $15,000.
C) $12,000.
D) $10,000.

Answer: D Learning Objective: 5 Level of Learning: 3


Rationale:
Service cost 14,000
Interest cost 6,000
Expected return on plan assets (10,000 )
Pension expense $10,000

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Chapter 17 Pensions and Other Postretirement Benefits

140. Castillo Company has a defined benefit pension plan. At the end of 2006, the following data
were available: beginning PBO, $75,000; service cost, $18,000; interest cost, $5,000; benefits
paid for the year, $9,000; ending PBO, $89,000; the expected return on plan assets, $10,000;
and cash deposited with pension trustee, $17,000. There were no other pension related costs
for 2006.The journal entry to record the annual pension costs will include a debit(credit) to
prepaid/accrued pension cost for:
A) $4,000.
B) $(4,000).
C) $(6,000).
D) $2,000.

Answer: A Learning Objective: 5 Level of Learning: 3


Rationale:
Service cost 18,000
Interest cost 5,000
Expected return on plan assets (10,000 )
Pension expense $13,000

Pension expense 13,000


Prepaid (accrued) pension cost 4,000
Cash 17,000

141. On January 1, 2005, WOW amended its defined benefit pension plan. The amount of prior
service costs caused by this action was $720,000. WOW uses the service method for
amortizing prior service costs. The following service years were provided by the company
actuary: 2005, 20; 2006, 15; 2007, 12; 2008, 8; and 2009, 5. Twenty employees benefit from
this amendment. If WOW uses the straight-line method of amortizing unrecognized prior
service costs, the 2006 amortization amount would be:
A) $12,000.
B) $180,000.
C) $144,000.
D) $300,000.

Answer: B Learning Objective: 3 Level of Learning: 3


Rationale:
Total service years = 20 + 15 + 12 + 8 + 5 = 60

Amortization in 2006 = 15/60 x $720,000 = $180,000

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 207


Chapter 17 Pensions and Other Postretirement Benefits

Use the following to answer questions 142-144:

The following pension spreadsheet is for the current year for Old Tucson Corporation (OTC).

$ in millions PBO Plan Prior Net Pension Cash Prepaid


debit (credit) Assets Service (Gain) Expense (Accrued)
Cost Loss Cost
Beginning balance (500) 250 58
Service cost 62
Interest cost
Actual return on assets (25)
Gain/loss on assets 2
Amortization of:
Prior service cost (6)
Net gain/loss
Loss on PBO (25) 25
Contributions to fund
Retiree benefits paid 43 (43)
Journal entry (56)
Ending balance (574) 288 54 78 (154)

142. What is OTC's pension expense for the year?


A) $78.
B) $72.
C) $66.
D) $18.

Answer: A Learning Objective: 5 Level of Learning: 3


Rationale:
$78 from K below
a. Amount from pension expense column (dr = cr)
b. $(574) + $500 + $62 + $25 - $43 + $(30)
c. Amount from pension expense column (dr = cr)
d. $288 - $250 + $43 = $56
e. $54 + $6 = $60
f. Amount from pension expense column (dr = cr)
g. $78 - $58 + $2 $25 = $(3)
h. Amount from PBO column (dr = cr)
i. Amount from prior service column (dr = cr)
j. Amount from net (gain) loss column (dr = cr)
k. Column total.
l. $(500) + $250 + $60 + $58 = $(132)
m. $78 - $(56) = $(22) (dr = cr)

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Chapter 17 Pensions and Other Postretirement Benefits

143. What was the balance of the prepaid (accrued) pension cost account at the beginning of the
year?
A) Credit balance of $176.
B) Credit balance of $132.
C) Debit balance of $132.
D) Debit balance of $176.

Answer: B Learning Objective: 5 Level of Learning: 3


Rationale:
$132 from L below
a. Amount from pension expense column (dr = cr)
b. $(574) + $500 + $62 + $25 - $43 + $(30)
c. Amount from pension expense column (dr = cr)
d. $288 - $250 + $43 = $56
e. $54 + $6 = $60
f. Amount from pension expense column (dr = cr)
g. $78 - $58 + $2 $25 = $(3)
h. Amount from PBO column (dr = cr)
i. Amount from prior service column (dr = cr)
j. Amount from net (gain) loss column (dr = cr)
k. Column total.
l. $(500) + $250 + $60 + $58 = $(132)
m. $78 - $(56) = $(22) (dr = cr)

144. What was the funded status of the plan at the end of the year?
A) Overfunded by $154.
B) Underfunded by $574.
C) Underfunded by $286.
D) Overfunded by $134.

Answer: C Learning Objective: 5 Level of Learning: 3


Rationale: $574 $288 = $286

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 209


Chapter 17 Pensions and Other Postretirement Benefits

Use the following to answer questions 145-147:

The following refers to the pension spreadsheet for the current year for Banana Republic Corporation
(BRC).

$ in millions PBO Plan Prior Net Pension Cash Prepaid


Debit (credit) Assets Service (Gain) Expense (Accrued)
Cost Loss Cost
Beginning balance (700) 28 (90) 88
Service cost 62
Interest cost
Actual return on assets (68)
Gain/loss on assets 7
Amortization of:
Prior service cost (4)
Net gain/loss 2
Loss on PBO (3) 3
Contributions to fund
Retiree benefits paid (65)
Journal entry (45)
Ending balance 898 24 (92) 79

145. What was BRC's pension expense for the year?


A) $44.
B) $46.
C) $50.
D) $54.

Answer: D Learning Objective: 5 Level of Learning: 3


Rationale:
From l below
a. Amount from pension expense column (dr = cr)
b. Amount from plan assets column (dr = cr)
c. $(79) + $898 - $24 + $92 = $(751)
d. $(751) + $700 +$62 + $3 = $850
e. $88 + $700 + $90 = $850
f. Amount from pension expense column (dr = cr)
g. $898 - $850 + $68 + $65 = $45
h. Amount from pension expense column (dr = cr)
i. Amount from PBO column (dr = cr)
j. Amount from prior service column (dr = cr)
k. Amount from net (gain) loss column (dr = cr)
l. Column total.
m. Amount from plan assets column (dr = cr)
n. $79 - $88 = $(9)

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Chapter 17 Pensions and Other Postretirement Benefits

146. What was the funded status of the plan at the end of the year?
A) Overfunded by $79.
B) Overfunded by $147.
C) Underfunded by $147.
D) Underfunded by $672.

Answer: B Learning Objective: 5 Level of Learning: 3


Rationale:
$898 751 (c.) = $147
a. Amount from pension expense column (dr = cr)
b. Amount from plan assets column (dr = cr)
c. $(79) + $898 - $24 + $92 = $(751)
d. $(751) + $700 +$62 + $3 = $850
e. $88 + $700 + $90 = $850
f. Amount from pension expense column (dr = cr)
g. $898 - $850 + $68 + $65 = $45
h. Amount from pension expense column (dr = cr)
i. Amount from PBO column (dr = cr)
j. Amount from prior service column (dr = cr)
k. Amount from net (gain) loss column (dr = cr)
l. Column total.
m. Amount from plan assets column (dr = cr)
n. $79 - $88 = $(9)

147. What was the expected return on plan assets for the year?
A) $68.
B) $75.
C) $61.
D) $59.

Answer: C Learning Objective: 5 Level of Learning: 3


Rationale: $68 $7 = $61

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 211


Chapter 17 Pensions and Other Postretirement Benefits

Use the following to answer questions 148-150:

The following refers to the pension spreadsheet for the current year for Pancho Villa Enterprises
(PVE).

$ in millions PBO Plan Prior Net Pension Cash Prepaid


debit (credit) Assets Service (Gain) Expense (Accrued)
Cost Loss Cost
Beginning balance 450 60 55 165
Service cost (85)
Interest cost (25)
Actual return on assets 52
Gain/loss on assets 3
Amortization of:
Prior service cost
Net gain/loss (1)
Loss on PBO (65)
Contributions to fund 40
Retiree benefits paid
Journal entry
Ending balance (325) 54 122

148. What was PVE's pension expense for the year?


A) $250.
B) $50.
C) $68.
D) $62.

Answer: D Learning Objective: 5 Level of Learning: 3


Rationale:
From m below
a. $165 - $450 - $60 - $55 = $(400)
b. $(325) + $400 + $85 + $25 + $65 = $250
c. Amount from PBO column (dr = cr)
d. Column total.
e. $54 - $60 = $(6)
f. $122 - $55 + $3 + $1 = $65
g-l. Amount from previous columns (dr = cr)
m. Column total.
n. Amount from plan assets column (dr = cr)
o. Column total.
p. $62 - $40 = $22 (dr = cr)
q. Column total.

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Chapter 17 Pensions and Other Postretirement Benefits

149. What was the funded status of the plan at the end of the year?
A) Overfunded by $143.
B) Underfunded by $33.
C) Overfunded by $33.
D) Underfunded by $182.

Answer: B Learning Objective: 5 Level of Learning: 3


Rationale:
$292 $325 (d) = $(33)
a. $165 - $450 - $60 - $55 = $(400)
b. $(325) + $400 + $85 + $25 + $65 = $250
c. Amount from PBO column (dr = cr)
d. Column total.
e. $54 - $60 = $(6)
f. $122 - $55 + $3 + $1 = $65
g-l. Amount from previous columns (dr = cr)
m. Column total.
n. Amount from plan assets column (dr = cr)
o. Column total.
p. $62 - $40 = $22 (dr = cr)
q. Column total.

150. What was the balance of the prepaid (accrued) pension cost account at the end of the year?
A) Debit balance of $143.
B) Debit balance of $187.
C) Debit balance of $54.
D) Debit balance of $176.

Answer: A Learning Objective: 5 Level of Learning: 3


Rationale:
$165 - $22 (p) = $143
a. $165 - $450 - $60 - $55 = $(400)
b. $(325) + $400 + $85 + $25 + $65 = $250
c. Amount from PBO column (dr = cr)
d. Column total.
e. $54 - $60 = $(6)
f. $122 - $55 + $3 + $1 = $65
g-l. Amount from previous columns (dr = cr)
m. Column total.
n. Amount from plan assets column (dr = cr)
o. Column total.
p. $62 - $40 = $22 (dr = cr)
q. Column total.

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Chapter 17 Pensions and Other Postretirement Benefits

151. Assume the actuary estimates the net cost of providing health care benefits to a particular
employee during his retirement years to have a present value of $60,000. If the benefits relate
to an estimated 25 years of service and five of those years have been completed,
A) The EPBO would be $12,000.
B) The EPBO would be $8,400.
C) The APBO would be $8,400.
D) The APBO would be $12,000.

Answer: D Learning Objective: 9 Level of Learning: 3


Rationale: $60,000 x 5/25 = $12,000 APBO

152. The estimated medical costs are expected to be $7,500 during an employee's retirement. The
retiree is expected to pay 30% of the cost and Medicare is expected to pay 50% of the cost.
What is the company's estimated net cost of benefits?
A) $5,250.
B) $7,500.
C) $1,500.
D) $3,750.

Answer: C Learning Objective: 9 Level of Learning: 3


Rationale: $7,500 x (1 - .30 - .50) = $1,500

153. The EPBO for a particular employee on January 1, 2006, was $30,000. The APBO at the
beginning of the year was $6,000. The appropriate discount rate for this postretirement plan is
5%. The employee is expected to serve the company for a total of twenty-five years with five
of those years already served as of January 1, 2006. What is the APBO at December 31, 2006?
A) $6,300.
B) $7,200
C) $7,500.
D) $7,560.

Answer: D Learning Objective: 9 Level of Learning: 3


Rationale: ($30,000 x 1.05) x 6/25 = $7,560

154. The EPBO for a particular employee on January 1, 2006, was $150,000. The APBO at the
beginning of the year was $30,000. The appropriate discount rate for this postretirement plan
is 5%. The employee is expected to serve the company for a total of twenty-five years with
five of those years already served as of January 1, 2006. What is the APBO at December 31,
2006?
A) $37,800.
B) $42,800.
C) $31,500.
D) $30,000.

Answer: A Learning Objective: 9 Level of Learning: 3


Rationale: ($150,000 x 1.05) x 6/25 = $37,800

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Chapter 17 Pensions and Other Postretirement Benefits

155. Assume that at the beginning of the current year, a company has an unrecognized net gain of
$25,000,000. At the same time, assume the APBO and the plan assets are $200,000,000 and
$150,000,000, respectively. The average remaining service period for the employees expected
to receive benefits is 10 years. What is the amount of amortization to postretirement benefit
expense for the year?
A) $3,000,000.
B) $ 500,000.
C) $2,500,000.
D) $1,500,000.

Answer: B Learning Objective: 10 Level of Learning: 3


Rationale: [$25,000,000 - ($200,000,000 x 10%)]/10 = $500,000

156. Assume that at the beginning of the current year, a company has an unrecognized net gain of
$60,000,000. At the same time, assume the APBO and the plan assets are $300,000,000 and
$450,000,000, respectively. The average remaining service period for the employees expected
to receive benefits is 10 years. What is the amount of amortization to postretirement benefit
expense for the year?
A) $6,000,000.
B) $15,000,000.
C) $1,500,000.
D) $7,500,000.

Answer: C Learning Objective: 10 Level of Learning: 3


Rationale: [$60,000,000 - ($450,000,000 x 10%)]/10 = $1,500,000

Use the following to answer questions 157-159:

The following data is for Guava Company's retiree health care plan for the current calendar year.

Number of employees covered 5


Years employed as of January 1 4 (each)
Attribution period 20 years
EPBO, January 1 $60,000
EPBO, December 31 $4,000
Interest rate 6%
Funding and plan assets none

157. What is the interest cost to be included in the current year's postretirement benefit expense?
A) $3,600.
B) $720.
C) $768.
D) $4,000.

Answer: B Learning Objective: 10 Level of Learning: 3


Rationale:
APBO at 1/1 = $60,000 x 4/20 = $12,000
Interest cost = $12,000 x 6% = $720

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Chapter 17 Pensions and Other Postretirement Benefits

158. What is the service cost to be included in the current year's postretirement benefit expense?
A) $3,000.
B) $3,180.
C) $3,200.
D) $4,000.

Answer: C Learning Objective: 10 Level of Learning: 3


Rationale: $64,000 x 1/20 = $3,200

159. What is the correct entry to record postretirement benefit expense for the
current year?
A) Postretirement benefit expense 3,920
Accrued postretirement benefit cost 3,920
B) Postretirement benefit expense 3,920
Cash 3,920
C) Postretirement benefit expense 4,000
Accrued postretirement benefit cost 4,000
D) Postretirement benefit expense 7,600
Accrued postretirement benefit cost 7,600

Answer: A Learning Objective: 10 Level of Learning: 3


Rationale:
Service cost: $64,000 x 1/20 = $3,200
Interest cost: $60,000 x 4/20 x 6% = 720
Postretirement benefit expense $3,920

Problems

160. On January 1, 2006, Coda Company's projected benefit obligation was $30 million. During
2006, pension benefits paid by the trustee were $4 million. Service cost for 2006 is $10
million. Pension plan assets increased during 2006 by $5 million as expected. At the end of
2006, there were no unrecognized pension costs. The actuary's discount rate was 10%.

Required:
Determine the amount of the projected benefit obligation at December 31, 2006.

Answer:
(in millions)
Beginning PBO $30
Service cost 10
Interest cost (10% x $30) 3
Loss (gain) on PBO 0
Less benefits paid (4)
Ending PBO $39

Learning Objective: 3 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

161. Jetson Company determined its pension expense to be $15 million in 2006. Following are two
independent situations:
(1.) Jetson contributed $8 million to the pension fund at the end of 2006.
(2.) Jetson contributed $18 million to the pension fund at the end of 2006.

Required:
Prepare the appropriate journal entries to record Jetson's pension expense and contribution in
each situation.

Answer:
1) Pension expense (given) 15,000,000
Prepaid (accrued) pension cost 7,000,000
Cash (given) 8,000,000

2) Pension expense (given) 15,000,000


Prepaid (accrued) pension cost 3,000,000
Cash (given) 18,000,000

Learning Objective: 5 Level of Learning: 3

162. The following information relates to Hatami Company's defined benefit pension plan during
2006:

Plan assets at fair value, January 1 $600,000,000


Expected return on plan assets 50,000,000
Actual return on plan assets 40,000,000
Contributions to the pension fund (end of year) 90,000,000
Amortization of unrecognized loss 0
Pension benefits paid (end of year) 32,000,000
Pension expense 60,000,000

Required:
Determine the balance of pension plan assets at fair value on December 31, 2006.

Answer:
(in millions)
Plan assets beginning of 2006 $600
Actual return 40
Cash contributions 90
Retiree benefits (32)
Plan assets end of 2006 $698

Learning Objective: 4 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

163. The following information relates to Schmidt Sausage Co.'s defined benefit pension plan
during 2006:

Plan assets at fair value, January 1 $400,000,000


Expected return on plan assets 40,000,000
Actual return on plan assets 32,000,000
Contributions to the pension fund (end of year) 60,000,000
Amortization of unrecognized loss 8,000,000
Pension benefits paid (end of year) 9,000,000
Pension expense 54,000,000

Required:
Determine the amount of pension plan assets at fair value on December 31, 2006.

Answer:
(in millions)
Plan assets beginning of 2006 $400
Actual return 32
Cash contributions 60
Retiree benefits (9)
Plan assets end of 2006 $483

Learning Objective: 4 Level of Learning: 3

164. Pension data for Matta Corporation include the following for the current calendar year:

Discount rate, 10%


PBO, January 1 $360,000,000
PBO, December 31 450,000,000
ABO, January 1 200,000,000
ABO, December 31 275,000,000
Cash contributions to pension fund, December 31 100,000,000
Benefit payments to retirees, December 31 54,000,000

Required:
Assuming no change in actuarial assumptions and estimates, determine the service cost
component of pension expense for the current year.

Answer:
($ in millions)
Beginning PBO, January 1 $360
Service cost ?
Interest cost (10% x $360) 36
Loss (gain) on PBO 0
Retiree benefits paid (54)
Ending PBO, December 31 $450

Service cost = $450 - $360 - $36 + $54 = $108

Learning Objective: 3 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

165. Pension data for Sewell Corporation include the following for the current calendar year:

Discount rate, 8%
Expected return on plan assets, 10%
Actual return on plan assets, 12%
PBO, January 1 $620,000,000
Plan assets, January 1 630,000,000
Plan assets, December 31 670,000,000
Benefit payments to retirees, December 31 55,000,000

Required:
Assuming cash contributions were made at the end of the year, what was the amount of those
contributions?

Answer:
($ in millions)
Plan assets beginning of the year $630
Actual return (12% x $630) 75.6
Cash contributions ?
Retiree benefits (55)
Plan assets end of the year $670

Cash contributions = $670 - $630 - $75.6 + $55 = $19.4

Learning Objective: 4 Level of Learning: 3

166. Pension data for Goldman Company included the following for the current calendar year:

Service cost $100,000


PBO, January 1 750,000
Plan assets, January 1 800,000
Amortization of prior service cost 6,000
Amortization of net loss 2,000
Discount rate, 8%
Expected return on plan assets, 10%
Actual return on plan assets, 12%

Required:
Determine pension expense for the year.

Answer:
Service cost $100,000
Interest cost (8% x $750,000) 60,000
Expected return ($800,000 x 10%) (80,000)
Amortization of prior service cost 6,000
Amortization of net loss 2,000
Pension expense $88,000

*(12% x $800,000) - (10% x $800,000)

Learning Objective: 5 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

167. Lasagna Corporation has a defined benefit pension plan. Lasagna received the following
information for the current calendar year:

Projected benefit obligation


Balance, January 1 $100,000,000
Service cost 18,000,000
Interest cost 10,000,000
Benefits paid (8,000,000)
Balance, December 31 $120,000,000
Plan assets
Balance, January 1 $70,000,000
Actual return on plan assets 7,000,000
Contribution 16,000,000
Benefits paid (8,000,000)
Balance, December 31 $85,000,000

The expected long-term return on plan assets is 10%. There were no other relevant data for the
year.

Required:
(1.) Determine Lasagna Corporation's pension expense for the year.
(2.) Prepare the journal entry to record the pension expense and funding for the year.

Answer:
(in millions)
1) Service cost $18
Interest cost 10
Expected return (70 x 10%) (7)
Pension expense $21

2) Pension expense 21
Prepaid (accrued) pension cost 5
Cash 16

Learning Objective: 5 Level of Learning: 3

220 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition


Chapter 17 Pensions and Other Postretirement Benefits

168. Burrito Corporation has a defined benefit pension plan. Burrito received the following
information for the current calendar year:

Projected benefit obligation


Balance, January 1 $150,000,000
Service cost 25,000,000
Interest cost 15,000,000
Benefits paid (12,000,000)
Balance, December 31 $178,000,000
Plan assets
Balance, January 1 $90,000,000
Actual return on plan assets 11,000,000
Contribution 23,000,000
Benefits paid (12,000,000)
Balance, December 31 $112,000,000

The expected long-term return on plan assets is 10%. There were no other relevant data for the
year.

Required:
(1.) Determine Burrito's pension expense for the year.
(2.) Prepare the journal entry to record the pension expense and funding for the year.

Answer:
($ in millions)
1) Service cost $25
Interest cost 15
Expected return (9)
Pension expense $31

2) Pension expense 31
Prepaid (accrued) pension cost 8
Cash 23

Learning Objective: 5 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

169. Pension data for the Ben Franklin Company include the following for the current calendar
year:

Discount rate, 8%
Expected return on plan assets, 10%
Actual return on plan assets, 9%
Service cost $200,000

January 1:
PBO $1,400,000
ABO 1,000,000
Plan assets 1,500,000
Amortization of prior service cost 20,000
Amortization of net gain 4,000
December 31:
Cash contributions to pension fund $220,000
Benefit payments to retirees 240,000

Required:
(1.) Determine pension expense for the year.
(2.) Prepare the journal entry to record pension expense and funding for the year.

Answer:
1) Service cost $200,000
Interest cost (8% x $1,400,000) 112,000
Expected return (150,000 )
Amortization of prior service cost 20,000
Amortization of net gain (4,000)
Pension expense $178,000

2) Pension expense 178,000


Prepaid (accrued) pension cost 42,000
Cash 220,000

Learning Objective: 5 Level of Learning: 3

222 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition


Chapter 17 Pensions and Other Postretirement Benefits

170. Pension data for Sam Adams Inc. include the following for the current calendar year:

Discount rate, 8%
Expected return on plan assets, 10%
Actual return on plan assets, 9%
Service cost $400,000

January 1:
PBO 3,000,000
ABO 2,000,000
Plan assets 3,200,000
Amortization of prior service cost 30,000
Amortization of net gain 7,000
December 31:
Cash contributions to pension fund $275,000
Benefit payments to retirees 310,000

Required:
(1.) Determine pension expense for the year.
(2.) Prepare the journal entry to record pension expense and funding for the year.

Answer:
1) Service cost $400,000
Interest cost (8% x $3,000,000) 240,000
Expected return (10% x $3,200,000) (320,000)
Amortization of prior service cost 30,000
Amortization of net gain (7,000)
Pension expense $343,000

2) Pension expense 343,000


Prepaid (accrued) pension cost 68,000
Cash 275,000

Learning Objective: 5 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

171. The following is the pension spreadsheet for the current year for Desperado Corporation.

$ in millions PBO Plan Prior Net Pension Cash Prepaid


debit (credit) Assets Service (Gain) Loss Expense (Accrued)
Cost Cost
Beginning balance (500) 250 58
Service cost 62
Interest cost
Actual return on assets (25)
Gain/loss on assets 2
Amortization of:
Prior service cost (6)
Net gain/loss
Loss on PBO (25) 25
Contributions to fund
Retiree benefits paid 43 (43) _____ ____ ____
Journal entry ____ ____ ____ ___ (56) _____
Ending balance (574) 288 54 78 (154)

Required:
(1.) Complete the pension spreadsheet.
(2.) Prepare the journal entry to record pension expense for the year.

Answer:
1)
$ in millions PBO Plan Prior Net Pension Cash Prepaid
debit (credit) Assets Service (Gain) Loss Expense (Accrued)
Cost Cost
Beginning balance (500) 250 60 58 (132)
Service cost (62) 62
Interest cost (30) 30
Actual return on assets 25 (25)
Gain/loss on assets (2) 2
Amortization of: 6
Prior service cost (6)
Net gain/loss (3)
Loss on PBO (25) 25 3
Contributions to fund 56 (56)
Retiree benefits paid 43 (43) _______ _____
Journal entry ______ ____ _____ ____ 78 (56) (22)
Ending balance (574) 288 54 78 (154)

2) Pension expense 78
Cash 56
Prepaid/Accrued pension cost 22

Learning Objective: 5 Level of Learning: 3

224 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition


Chapter 17 Pensions and Other Postretirement Benefits

172. The following is the pension spreadsheet for the current year for Swiss Mist Corporation.

$ in millions PBO Plan Prior Net Pension Cash Prepaid


debit (credit) Assets Service (Gain)Loss Expense (Accrued)
Cost Cost
Beginning balance (700) 28 (90) 88
Service cost 62
Interest cost
Actual return on assets (68)
Gain/loss on assets 7
Amortization of:
Prior service cost (4)
Net gain/loss 2
Loss on PBO (3) 3
Contributions to fund
Retiree benefits paid (65) ___ ___ ___
Journal entry ___ ___ ___ ___ (45) _____
Ending balance 898 24 (92) 79

Required:
(1.) Complete the pension spreadsheet.
(2.) Prepare the journal entry to record pension expense for the year.

Answer:
1)
$ in millions PBO Plan Prior Net Pension Cash Prepaid
debit (credit) Assets Service (Gain)Loss Expense (Accrued)
Cost Cost
Beginning balance (700) 850 28 (90) 88
Service cost (62) 62
Interest cost (51) 51
Actual return on assets 68 (68)
Gain/loss on assets (7) 7
Amortization of:
Prior service cost (4) 4
Net gain/loss 2 (2)
Loss on PBO (3) 3
Contributions to fund 45 (45)
Retiree benefits paid 65 (65) _____ _____
Journal entry _____ _____ _____ ____ 54 (45) (9)
Ending balance (751) 898 24 (92) 79

2) Pension expense 54
Cash 45
Prepaid/Accrued pension cost 9

Learning Objective: 5 Level of Learning: 3

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 225


Chapter 17 Pensions and Other Postretirement Benefits

173. Vrable Corporation has a defined benefit pension plan. Two alternative possibilities for
pension-related data for the current calendar year are shown below:

Case 1 Case 2
Unrecognized net loss (gain), Jan. 1 $240,000 $(230,000)
Loss (gain) on plan assets (8,000) (6,000)
Loss (gain) on PBO (17,000) 12,000
ABO, Jan. 1 (1,900,000) (1,500,000)
PBO, Jan. 1 (2,500,000) (1,700,000)
Plan assets, Jan.1 2,100,000 2,000,000
Average remaining service period
of active employees (years) 10 12

Required:
For each independent case, calculate amortization of the net loss or gain that should be
included as a component of pension expense for the current year.

Answer:
Case 1 Case 2
Unamortized net loss or gain $240,000 $230,000
Less: 10% corridor* 250,000 200,000
Excess none $ 30,000
Service period 12 yrs
Amortization $2,500

*10% times the PBO or plan assets, whichever is larger (beginning of year amount)

Learning Objective: 5 Level of Learning: 3

174. Hall of Fame Co. has a defined benefit pension plan. Two alternative possibilities for pension-
related data for the current calendar year are shown below:

Case 1 Case 2
Unrecognized net loss (gain), Jan. 1 $(230,000) $210,000
Loss (gain) on plan assets (6,000) 2,000
Loss (gain) on PBO 12,000 (220,000)
ABO, Jan. 1 (1,500,000) (1,350,000)
PBO, Jan. 1 (1,700,000) (1,600,000)
Plan assets, Jan.1 2,000,000 1,450,000
Average remaining service period
of active employees (years) 12 10

Required:
(1.) For each independent case, calculate amortization of the net loss or gain that should be
included as a component of pension expense for the current year.
(2.) Determine the unamortized net loss or gain as of December 31 of the current year.

226 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition


Chapter 17 Pensions and Other Postretirement Benefits

Answer:
(1.) Case 1 Case 2
Unamortized net loss or gain $230,000 $210,000
Less: 10% corridor* 200,000 160,000
Excess $ 30,000 $ 50,000
Service period 12 yrs 10 yrs.
Amortization $2,500 $5,000

*10% times the PBO or plan assets, whichever is larger (beginning of year amount)

(2.) Case 1 Case 2


Balance, January 1 $(230,000) $210,000
Loss (gain) on plan assets (6,000) 2,000
Amortization 2,500 (5,000)
Loss (gain) on PBO 12,000 (220,000)
Unamortized net loss (gain), 12/31 $(221,500) $(13,000)

Learning Objective: 5 Level of Learning: 3

175. Torch Company has a defined benefit pension plan. On December 31, 2006, the following
pension-related data were available:

Unamortized prior service cost $6,000,000


Projected benefit obligation 25,000,000
Accumulated benefit obligation 18,000,000
Plan assets 15,000,000
Accrued pension cost 1,000,000

Required:
(1.) Determine Torch's minimum pension liability to be reported on the December 31, 2006,
balance sheet and prepare any journal entry necessary to achieve that reporting objective.
(2.) Assume the same facts as in requirement 1, except that there was a prepaid pension cost of
$1,000,000. Determine Torch's minimum pension liability to be reported on the December
31, 2006 balance sheet and prepare any journal entry necessary to achieve that reporting
objective.

Answer:
1.) ABO $(18,000,000)
Plan assets 15,000,000
Minimum liability (3,000,000)

Pension liability (cr) $(3,000,000)


Accrued pension cost (cr) (1,000,000)
Additional liability (cr) $(2,000,000)

Intangible pension asset 2,000,000


Additional liability 2,000,000

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Chapter 17 Pensions and Other Postretirement Benefits

2.) The minimum liability is still $3 million as shown above.


The journal is now as follows:
Intangible pension asset 4,000,000
Additional liability 4,000,000

Additional liability (cr. bal) $(4,000,000)


Prepaid pension cost (dr. bal) 1,000,000
Pension liability $(3,000,000)

The $3 million pension liability is reported on the balance sheet as a single amount.

Learning Objective: 7 Level of Learning: 3

176. Rodeo Corporation amended its defined benefit pension plan on January 31, 2006, to increase
retirement benefits earned with each service year. The actuary estimated the prior service cost
to be $216,000. Rodeo's 80 present employees are expected to retire at the rate of about 10
each year at the end of each of the next 8 years beginning on December 31, 2006.

Required:
Using the service method, calculate the amount of prior service cost to be amortized to
pension expense in each of the next 8 years.

Answer:
Prior Svc, Amount
Year # of Emp. Fraction Cost Amort.
2006 80 80/360 $216,000 $48,000
2007 70 70/360 216,000 42,000
2008 60 60/360 216,000 36,000
2009 50 50/360 216,000 30,000
2010 40 40/360 216,000 24,000
2011 30 30/360 216,000 18,000
2012 20 20/360 216,000 12,000
2013 10 10/360 216,000 6,000
360 $216,000

Learning Objective: 5 Level of Learning: 3

228 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition


Chapter 17 Pensions and Other Postretirement Benefits

177. Waddle Company amended its defined benefit pension plan on January 31, 2006, to increase
retirement benefits earned with each service year. The actuary estimated the prior service cost
to be $216,000. Waddle's 80 present employees are expected to retire at the rate of about 10
each year at the end of each of the next 8 years.

Required:
Using the straight-line method, calculate the amount of prior service cost to be amortized to
pension expense in each of the next 8 years.

Answer:
# of
Year Emp.
2006 80
2007 70
2008 60
2009 50
2010 40
2011 30
2012 20
2013 10
360

360/80 = 4.5 years = average service life

$216,000/ 4.5 = $48,000 per year

Learning Objective: 5 Level of Learning: 3

178. Carolina Consulting Company has a defined benefit pension plan. The following pension-
related data were available for the current calendar year:

PBO:
Balance, Jan. 1 $240,000
Service cost 41,000
Interest cost (5% discount rate) 12,000
Gain from changes in actuarial assumptions in 2006 (5,000)
Benefits paid to retirees (20,000)
Balance, Dec. 31 $268,000

Plan assets:
Balance, Jan.1 $250,000
Actual return (expected return was $22,500) 20,000
Contributions 35,000
Benefits paid (20,000)
Balance, Dec. 31 $285,000

ABO, Dec. 31 $245,000

January 1, 2006, balances:


Prepaid (accrued) pension cost (credit balance) ($ 6,000)
Unrecognized prior service cost (amortization $4,000/yr.) 4,000
Unrecognized net gain (amortization, if any, over 15 years) 1,000

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Chapter 17 Pensions and Other Postretirement Benefits

There were no other relevant data.

Required:
(1.) Calculate the 2006 pension expense. Show calculations.
(2.) Prepare the 2006 journal entry to record pension expense and funding.
(3.) Prepare any 2006 journal entry necessary to record any additional pension liability
needed.

Answer:
Requirement 1
Service cost $41,000
Interest cost 12,000
Actual return on plan assets ($20,000)
Adjusted for $2,500 loss on plan assets (22,500)
Amortization of prior service cost 4,000
Amortization of net gain (1,000)
Pension expense $33,500

Computation of net gain amortization:


Net gain (previous gains exceeded previous losses) $40
10% of $250 (greater than $240) (25)
Amount to be amortized $15
15
Amortization $1

Requirement 2
Pension expense 33,500
Prepaid (accrued) pension cost 1,500
Cash 35,000

Requirement 3
No entry needed since the accumulated benefit obligation does not exceed the plan assets.

Learning Objective: 5 Level of Learning: 3

230 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition


Chapter 17 Pensions and Other Postretirement Benefits

179. The following is the pension spreadsheet for the current year for Sparky Corporation.

$ in millions PBO Plan Prior Net Pension Cash Prepaid


debit (credit) Assets Service (Gain) Loss Expense (Accrued)
Cost Cost
Beginning balance 450 60 55 165
Service cost (85)
Interest cost (25)
Actual return on assets 52
Gain/loss on assets 3
Amortization of:
Prior service cost
Net gain/loss (1)
Loss on PBO (65)
Contributions to fund 40
Retiree benefits paid ____ ____ ____
Journal entry ______ _____ ____ ___ ____
Ending balance (325) 54 122

Required:
(1.) Complete the pension spreadsheet.
(2.) Prepare the journal entry to record pension expense for the year.

Answer:
1)
$ in millions PBO Plan Prior Net Pension Cash Prepaid
debit (credit) Assets Service (Gain)Loss Expense (Accrued)
Cost Cost
Beginning balance (400) 450 60 55 165
Service cost (85) 85
Interest cost (25) 25
Actual return on assets 52 (52)
Gain/loss on assets 3 (3)
Amortization of:
Prior service cost (6) 6
Net gain/loss (1) 1
Loss on PBO (65) 65
Contributions to fund 40 (40)
Retiree benefits paid 250 (250) ___ ___
Journal entry ____ ___ ___ ___ 62 (40) (22)
Ending balance (325) 292 54 122 143

2) Pension expense 62
Cash 40
Prepaid/Accrued pension cost 22

Learning Objective: 5 Level of Learning: 3

Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 231


Chapter 17 Pensions and Other Postretirement Benefits

Use the following to answer questions 180-186:

In its 2004 annual report to shareholders, Icebox Foods Incorporated disclosed the following
information, pertaining to its defined benefit pension plans for U.S. employees:

(in millions)
Service cost $ 107
Interest cost 320
Expected return on
plan assets (628)
Amortization:
Unrecognized net
(gain) loss from
experience differences (21)
Prior service cost 8
Settlements (12)
Net pension
(income) cost $(226)

In 2004, retiring employees elected lump-sum payments, resulting in settlement gains of $12 million.

The changes in the projected benefit obligation and plan assets at December 31, 2004, were as follows:

(in millions)
Projected benefit obligation at
January 1 $ 4,327
Service cost 107
Interest cost 339
Benefits paid (403)
Acquisitions 71
Settlements 14
Actuarial losses 500
Other 9

Projected benefit obligation at


December 31 $4,964

Fair value of plan assets at


January 1 $7,039
Actual return on plan assets (356)
Contributions 40
Benefits paid (394)
Acquisitions (45)
Actuarial gains (losses) 108
Fair value of plan assets at
December 31 $6,392

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Chapter 17 Pensions and Other Postretirement Benefits

180. Compute the interest rate used by Icebox for its pension plan?

Answer: Rate = Interest cost/Beg. PBO = 320/4,327 = 7.4%

Learning Objective: 5 Level of Learning: 3

181. Compute the expected rate of return on Icebox's pension fund assets?

Answer: Rate = Expected return/Beg. plan assets = 628/7,039 = 8.9%

Learning Objective: 5 Level of Learning: 3

182. Compute the actual rate of return on Icebox's pension fund assets during 2004.

Answer: Rate = Actual return/Beg. plan assets = (356)/7,039 = 5.1%

Learning Objective: 5 Level of Learning: 3

183. Explain why the settlements reduce the pension cost for 2004 by $12 million.

Answer: As noted, the settlements came from certain retirees electing lump-sum payments
instead of annuities. Although the lump-sum payments required the use of cash sooner than
would otherwise be made, Icebox reduced its total pension cost by making the settlements in
2004.

Learning Objective: 5 Level of Learning: 3

184. At year-end in 2004, Icebox's pension plan had $60 million in unrecognized prior service cost.
What percent of the prior service cost was amortized during 2004?

Answer: The amortization in 2004 was $8 million; thus, the previously unamortized amount of
prior service costs was $8 million + $60 million, totaling $68 million. The percentage
amortized was $8/$68 = 11.8%.

Learning Objective: 5 Level of Learning: 3

185. At year-end in 2004, Outbox's pension plan had $755 million in unrecognized actuarial losses
and $60 million in unrecognized prior service cost. Compute the net prepaid (or accrued)
pension cost at December 31, 2004.

Answer:
Excess (deficit) of plan assets
versus benefit obligations at
December 31 $1,395
Unrecognized actuarial
losses (gains) 755
Unrecognized prior
service cost 60
Net prepaid pension asset $ 2,210

Learning Objective: 5 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

186. Show the journal entry to record the pension expense and funding for 2004.

Answer:
Prepaid pension cost 266
Pension income 226
Cash 40

Learning Objective: 5 Level of Learning: 3

187. Hart Corporation has an unfunded postretirement health care benefit plan. Life insurance and
medical care benefits are provided to employees who render 12 years of service and attain age
55 while in service to the company. At the end of 2006, John Sousa is 35. He was hired by
Hart five years ago at age 30 and is expected to retire at the age of 62. The expected
postretirement benefit obligation for John is $50,000 at the end of 2006 and $49,000 at the end
of 2007.

Required:
Calculate the accumulated postretirement benefit obligation at the end of 2006 and the service
cost for 2006 pertaining to John.

Answer:
APBO: $50,000 x 5/25 = $10,000
Service Cost: $50,000 x 1/25=$2,000
25-year attribution period (age 30 to 55)

Learning Objective: 9 Level of Learning: 3

188. Bernard Corporation has an unfunded postretirement health care benefit plan. Life insurance
and medical care benefits are provided to employees who render 12 years of service and attain
age 55 while in service to the company. At the end of 2006, Teri Clark is 35. She was hired by
Bernard five years ago at age 30 and is expected to retire at the age of 62. The expected
postretirement benefit obligation for Teri is $50,000 at the end of 2006 and $60,000 at the end
of 2007.

Required:
Calculate the accumulated postretirement benefit obligation at the end of 2006 and 2007 and
the service cost for 2006 and 2007 pertaining to Teri.

Answer:
APBO Service Cost
2006: $50,000 x 5/25 = $10,000 $50,000 x 1/25 = $2,000
2007: $60,000 x 6/25 = $14,400 $60,000 x 1/25 = $2,400
25-year attribution period (age 30 to 55)

Learning Objective: 9 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

189. On January 1, 2006, Tom's Transport Company's accumulated postretirement benefit


obligation was $30,000,000. At the end of 2006, retiree benefits paid were $3,500,000. Service
cost for 2006 is $6,000,000. At the end of 2006, there were no unrecognized postretirement
benefit costs. Assumptions regarding the trend of future health care costs were revised at the
end of 2006. This revision caused the actuary to revise downward the estimate of the APBO
by $500,000. The appropriate discount rate was 6%.

Required:
Determine the amount of the accumulated postretirement benefit obligation at December 31,
2006.

Answer:
January 1, 2006, balance in APBO $30,000,000
Service cost (given) 6,000,000
Interest cost (6% x $30,000,000) 1,800,000
Gain on APBO (500,000 )
Retiree benefits ( 3,500,000 )
December 31, 2006, balance in APBO $33,800,000

Learning Objective: 9 Level of Learning: 3

190. Silver Springs Company has an unfunded retiree health care plan. Each of the company's four
employees has been with the organization since its inception at the beginning of 2005. As of
the end of 2006, the actuary estimates the total net cost of providing benefits to employees
during their retirement years to have a present value of $196,000. Each of the employees will
become fully eligible for benefits after 28 more years of service, but aren't expected to retire
for 30 more years. The interest rate is 8%.

Required:
(1.) What is the expected postretirement benefit obligation at the end of 2006?
(2.) What is the accumulated postretirement benefit obligation at the end of 2006?

Answer:
(1.) $196,000 EPBO at the end of 2006 (given)
(2.) $196,000 x 2/30 = $13,067 APBO at the end of 2006

Learning Objective: 9 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

191. Crystal Company has an unfunded retiree health care plan. Each of the company's four
employees has been with the organization since its inception at the beginning of 2005. As of
the end of 2006, the actuary estimates the total net cost of providing benefits to employees
during their retirement years to have a present value of $196,000. Each of the employees will
become fully eligible for benefits after 28 more years of service, but aren't expected to retire
for 30 more years. The interest rate is 8%.

Required:
(1.) What is the expected postretirement benefit obligation at the end of 2006?
(2.) What is the accumulated postretirement benefit obligation at the end of 2006?
(3.) What is the expected postretirement benefit obligation at the end of 2007?
(4.) What is the accumulated postretirement benefit obligation at the end of 2007?

Answer:
(1.) $196,000 EPBO at the end of 2006 (given)
(2.) $196,000 x 2/30 = $13,067 APBO at the end of 2006
(3.) $196,000 x 1.08 = $211,680 EPBO at the end of 2007
(4.) $211,680 x 3/30 = $21,168 APBO at the end of 2007

Learning Objective: 9 Level of Learning: 3

192. The following data is available pertaining to Firewall Corporation's retiree health plan for
2006:

Number of employees covered 4


Years employed as of January 1, 2006 5 (each)
Attribution period 20 years
EPBO, January 1 $100,000
EPBO, December 31 $106,000
Interest rate 6%
Funding none

Required:
(1.) What is the APBO at the beginning of 2006?
(2.) What is the interest cost for 2006?
(3.) What is service cost for 2006?
(4.) Prepare the journal entry to record the postretirement benefit expense for 2006.

Answer:
(1.) $100,000 x 5/20 =$25,000
(2.) $25,000 x 6% = $1,500
(3.) $106,000 x 1/20 = $5,300
(4.) Postretirement benefit expense ($1,500 + $5,300) 6,800
Accrued postretirement benefit cost 6,800

Learning Objective: 10 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

193. Careful Consulting Company has an unfunded postretirement benefit plan. On December 31,
2006, the following data was available concerning changes in the plan's accumulated
postretirement benefit obligation with respect to one of Careful's employees:

APBO, January 1 $32,728


Interest cost ($32,728 x 8%) 2,618
Service cost: ($88,000 x 1/22) 4,000
APBO, December 31 $39,346

Required:
(1.) Over how many years is the expected postretirement benefit obligation being expensed?
(3.) What is the expected postretirement benefit obligation at the end of 2006?
(4.) When was the employee hired?
(5.) What is the expected postretirement benefit obligation at the beginning of 2006?

Answer:
(1.) 22 years
(2.) $88,000
(3.) $88,000 x ?/22 = $39,346 The employee was hired 9.8 years prior to Dec. 31, 2006,
around the middle of March, 1997.
(4.) ? x 1.08 =$88,000 Answer is $81,481.

Learning Objective: 10 Level of Learning: 3

194. Data pertaining to the postretirement health care benefit plan of Amazing Delivery Service
include the following for the current calendar year.

Service cost $100,000


APBO, January 1 $600,000
Plan assets (fair value), January 1 $40,000
Unrecognized prior service cost none
Unrecognized transition obligation,
(current year amortization, $1,000) $30,000
Retiree benefits paid (end of year) $75,000
Unrecognized net gain, (current year
amortization, $500) $82,000
Contribution to health care fund (end of year) $172,000
Return on plan assets (actual and expected) 10%
Discount rate 7%

Required:
(1.) Determine Amazing's postretirement benefit expense for the current year.
(2.) Prepare the journal entry to record the benefit expense and funding for the current year.

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Chapter 17 Pensions and Other Postretirement Benefits

Answer:
(1.) Service cost $100,000
Interest cost (7% x $600,000) 42,000
Return on plan assets (10% x $40,000) (4,000)
Amortization of prior service cost 0
Amortization of net gain (500)
Amortization of transition obligation 1,000
Postretirement benefit expense $138,500

(2.) Postretirement benefit expense 138,500


Prepaid (accrued) postretirement benefit cost 33,500
Cash 172,000

Learning Objective: 10 Level of Learning: 3

195. Data pertaining to the postretirement health care benefit plan of Danielson Delivery Service
include the following for the current calendar year.

Service cost $150,000


APBO, January 1 $800,000
Plan assets (fair value), January 1 $80,000
Unrecognized prior service cost none
Unrecognized transition obligation,
(current year amortization, $2,000) $60,000
Retiree benefits paid (end of year) $90,000
Unrecognized net gain, (current year
amortization, $1,000) $92,000
Contribution to health care fund (end of year) $85,000
Return on plan assets (actual and expected) 10%
Discount rate 8%

Required:
(1.) Determine Danielson's postretirement benefit expense for the current year.
(2.) Prepare the journal entry to record the benefit expense and funding for the current year.

Answer:
(1.) Service cost 150,000
Interest cost (8% x $800,000) 64,000
Return on plan assets (10% x $80,000) (8,000)
Amortization of prior service cost 0
Amortization of net gain (1,000)
Amortization of transition obligation 2,000
Postretirement benefit expense $207,000

(2.) Postretirement benefit expense 207,000


Prepaid (accrued) postretirement benefit cost 122,000
Cash 85,000

Learning Objective: 10 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

196. Bazerman Inc. has a postretirement health care benefit plan. On January 1 of the current
calendar year, the following plan-related data were available.

Unrecognized net loss $244,000


Accumulated postretirement benefit obligation $2,200,000
Fair value of plan assets $450,000
Average remaining service period to retirement 12 years
Average remaining service period to full eligibility 10 years

The rate of return on plan assets during the year was 12%. The expected return was 10%. The
actuary revised assumptions regarding the APBO at the end of the year, resulting in a $42,000
increase in the estimate of the obligation.

Required:
(1.) Calculate any amortization of net loss that should be included as a component of
postretirement benefit expense for the current year.
(2.) Determine the unrecognized net loss or gain as of December 31 of the current year.

Answer:
(1.) Unrecognized net loss $244,000
10% of $2,200,000 220,000
Excess at beginning of year $ 24,000
Average remaining service years 12
Amount amortized to expense $ 2,000

(2.) Unamortized net loss, January 1 $244,000


Gain on plan assets [(12% - 10%) x $450,000] (9,000)
Amortization from part 1 (2,000)
Loss on APBO 42,000
Unamortized net loss, December 31 $275,000

Learning Objective: 10 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

197. Oberon Company provides postretirement health care benefits to employees who provide at
least 10 years of service and reach the age of 65 while in service. On January 1 of the current
year, the following plan-related data were available.

Unrecognized transition obligation $30,000,000


APBO balance $104,000,000
Fair value of plan assets none
Average remaining service period to retirement 20 years
Average remaining service period to full eligibility 15 years

On January 1 of the current year, Oberon amends the plan to provide dental benefits. The
actuary determines that the cost of making the amendment increases the APBO by
$10,000,000. Management chooses to amortize this amount on a straight-line basis. The
service cost is $60,000,000. The appropriate interest rate is 10%.

Required:
Calculate the postretirement benefit expense for the current year.

Answer:
($ in
thousands)
Service cost $60,000
Interest cost [10% x ($104,000 + $10,000)] 11,400
Return on plan assets 0
Amortization of transition obligation ($30,000/20) 1,500
Amortization of prior service cost ($10,000/15) 667
Postretirement benefit expense $73,567

Learning Objective: Level of Learning: 3

198. Lender Company provides postretirement health care benefits to employees who provide at
least 10 years of service and reach the age of 65 while in service. On January 1 of the current
calendar year, the following plan-related data were available.

Unrecognized transition obligation $60,000,000


APBO balance $150,000,000
Fair value of plan assets none
Average remaining service period to retirement 25 years
Average remaining service period to full eligibility 20 years

On January 1 of the current year, Lender amends the plan to provide dental benefits. The
actuary determines that the cost of making the amendment increases the APBO by
$20,000,000. Management chooses to amortize this amount on a straight-line basis. The
service cost is $40,000,000. The appropriate interest rate is 10%.

Required:
Calculate the postretirement benefit expense for the current year.

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Chapter 17 Pensions and Other Postretirement Benefits

Answer:
($ in
millions)
Service cost $40.0
Interest cost [10% x ($150 + $20)] 17.0
Return on plan assets 0
Amortization of transition obligation ($60/25) 2.4
Amortization of prior service cost ($20/20) 1.0
Postretirement benefit expense $60.4

Learning Objective: 10 Level of Learning: 3

199. Brown Industries provides postretirement health care benefits to employees. On January 1 of
the current calendar year, the following data were available.

Unrecognized prior service cost $ 50,000


APBO $480,000
Fair value of plan assets none
Average remaining service period to retirement 25 years
Average remaining service period to full eligibility 20 years

On January 1 of the current year, Brown amends its plan due to increasing health care costs.
The amendment establishes an annual maximum of $4,000 for medical benefits under the
plan. The actuary determines that the effect of this amendment is to decrease the APBO by
$90,000. Management amortizes prior service cost on a straight-line basis. The interest rate is
10%. Service cost for the current year is $95,000.

Required:
(1.) Calculate the prior service cost amortization for the current year.
(2.) Calculate the postretirement benefit expense for the current year.

Answer:
(1.) The negative prior service cost must be offset against any existing prior service cost
before it can be amortized.

Unrecognized prior service cost $50,000


Reduction for amendment (90,000)
Negative prior service cost $(40,000)
Service period to full eligibility 20
Amortization amount $(2,000)

(2.) Service cost $95,000


Interest cost [10% x ($480,000 - $90,000)] 39,000
Return on plan assets 0
Amortization of prior service expense (2,500)
Postretirement benefit expense $132,000

Learning Objective: 10 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

Essay

Instructions:

The following answers point out the key phrases that should appear in students' answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.

200. Differentiate between a defined contribution pension plan and a defined benefit pension plan.

Answer:
A defined contribution plan promises fixed annual contributions to a pension fund. The
employee often chooses where the funds are invested. Retirement pay depends on the size of
the fund.

A defined benefit plan promises fixed benefits defined by a designated formula. Employers
have the responsibility to ensure that sufficient funds are available to provide promised
benefits.

Learning Objective: 1 Level of Learning: 1

201. Discuss the key quantitative elements of accounting for a defined benefit pension plan.

Answer:
The key elements of a defined benefit pension plan are:
1) the employer's obligation to pay retirement benefits in the future,
2) the plan assets set aside by the employer from which to pay the
retirement benefits in the future, and
3) the periodic expense of having a pension plan.

Learning Objective: 1 Level of Learning: 1

202. Differentiate between the projected benefit obligation, the accumulated benefit obligation, and
the vested benefit obligation.

Answer:
The accumulated benefit obligation is the actuary's estimate of the total retirement benefits
earned so far by employees, applying the pension formula using existing compensation levels.

The projected benefit obligation is the actuary's estimate of the total retirement benefits earned
so far by employees, applying the pension formula using estimated future compensation
levels.

The vested benefit obligation is that portion of the accumulated benefit obligation that plan
participants are entitled to receive regardless of their continued employment.

Learning Objective: 2 Level of Learning: 1

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Chapter 17 Pensions and Other Postretirement Benefits

203. Pension plans typically require some minimum period of employment before benefits vest.
What is the 1974 federal law governing vesting (as well as other aspects of pensions)? What
are the vesting rules?

Answer: The Employee Retirement Income Security Act (ERISA) of 1974, as amended,
governs, among other things, vesting rules for pension plans. Beginning in 1989, benefits must
vest (a) fully within 5 years or (b) 20% within 3 years with another 20% vesting each
subsequent year until fully vested after 7 years.

Learning Objective: 2 Level of Learning: 2

204. What is the theoretical and practical trade-off when measuring the pension liability using the
projected benefit obligation compared to the accumulated benefit obligation?

Answer: The PBO uses projected future compensation levels while the ABO uses current
compensation levels. When the liability is measured by the PBO, reliability is sacrificed for
relevancy and representational faithfulness.

Learning Objective: 2 Level of Learning: 2

205. Discuss income smoothing as the term relates to pension plans.

Answer: Gains and losses can occur when either the PBO or the return on plan assets turns out
to be different than expected. The gains and losses receive delayed recognition. This delayed
recognition achieves income smoothing. The justification for delayed recognition is that over
time these gains and losses cancel one another out. Recognition is delayed until a "corridor"
amount has been exceeded, and then only a portion of the excess is included in pension
expense. Fluctuations in earnings that would be caused by immediate recognition of these
gains and losses are avoided. Therefore, income smoothing is achieved.

Learning Objective: 6 Level of Learning: 2

206. What are the possible components of pension expense? Which of these elements would exist
in every plan?

Answer:
1) service cost; 2) interest cost; 3) actual return on plan assets (adjusted for gain on the plan
assets); 4) amortization of prior service cost; and 5) amortization of net loss or gain

Since virtually all pension funds have plan assets and a PBO, #s 1, 2, & 3 would always exist.

Item 4 would only be required if prior service cost is created by plan amendments.

Item 5 would probably be present in every plan unless actual and expected returns were equal
and there were no changes in factors affecting the PBO computation.

Learning Objective: 6 Level of Learning: 2

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Chapter 17 Pensions and Other Postretirement Benefits

Use the following to answer questions 207-208:

In its 2004 annual report to shareholders, NS Corporation disclosed the following information about
its pension plan:

(In Millions) 2004 2003


PROJECTED BENEFIT OBILGATION
Beginning balance $120.0 $102.2
Service cost 4.1 5.5
Interest cost 7.0 6.5
Benefits paid (2.6) (4.4)
Actuarial loss 6.6 11.4
Exchange rate adjustment (12.2) (1.2)
Ending balance $122.9 $120.0

For fiscal 2004 and 2003, the company recorded adjustments for minimum liability of $16.0 million
and $6.2 million, respectively. This was related to one of its defined benefit plans representing an
excess of unfunded accumulated benefit obligations over previously recorded pension cost liabilities.
The increase in unfunded accumulated benefit obligations was primarily attributable to a reduction in
the assumed discount rate. This was combined with the effect of fixed rate increases in benefits under
the terms of the plan in excess of current inflation rates. The corresponding offset was recorded as a
component of accumulated other comprehensive loss.

207. Explain how NS determines its minimum pension liability and why it needed the reported
adjustments during 2003 and 2004.

Answer: The minimum pension liability for NS is the excess of its accumulated benefit
obligation over the fair value of the plan assets. Because the company reduced its assumed
discount rate on pension obligations, the present value of the obligations increased sufficiently
such that the minimum pension liability increased. This required the adjustments mentioned
in the footnote.

Learning Objective: 7 Level of Learning: 2

208. Why did the company record the offset as a component of accumulated other comprehensive
loss?

Answer: The additional minimum liability exceeds the unrecognized prior service cost ($0 in
this case, as seen by its absence in the PBO computation), so the excess is debited to a
shareholders' equity account (minimum pension liability adjustment or unrealized pension
cost) and reported as a component of accumulated other comprehensive income (loss).

Learning Objective: 7 Level of Learning: 3

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Chapter 17 Pensions and Other Postretirement Benefits

209. Discuss the accounting for postretirement benefits prior to 1993 and under SFAS No. 106.

Answer: Prior to 1993, postretirement costs were accounted for on a pay-as-you-go basis,
meaning the expense each year was simply the amount of insurance premiums or medical
claims paid, depending upon the way the company provides health care costs for retirees.
SFAS 106 requires a completely different approach. The expected future health care costs for
retirees now must be recognized as an expense over the years necessary for employees to earn
the benefits. This is the accrual basis which is also used for pension accounting.

Learning Objective: 8 Level of Learning: 2

210. How do retiree health benefits differ from pension benefits?

Answer:
Retiree health benefits differ fundamentally from pension benefits in such important respects
as:
(1.) Pension benefits usually are based on the number of years worked, whereas the level of
health care benefits is usually unrelated to length of service.
(2.) The cost of providing health care coverage can vary significantly from retiree to retiree.
(3.) The retiree often has to share in the cost of health care benefits.
(4.) Health care coverage is frequently provided for spouses and dependents.
(5.) Vesting doesn't exist in health care plans.

Learning Objective: 8 Level of Learning: 2

211. What is different about the expected postretirement benefit obligation and the accumulated
postretirement benefit obligation?

Answer:
The EPBO is the actuary's estimate of the TOTAL postretirement benefits (at their discounted
present value) expected to be received by plan participants.

The APBO is that portion of the EPBO attributed to employee service to date.

Learning Objective: 9 Level of Learning: 1

212. The components of postretirement benefit expense are similar to the components of pension
expense. How does the service cost component differ between the two expenses?

Answer: The service cost for pensions reflects additional benefits employees earn from an
additional year's service, whereas the service cost for retiree health care benefits is simply an
allocation of a portion of a fixed total cost to the current year.

Learning Objective: 8 Level of Learning: 2

213. What are the six components of postretirement benefit expense?

Answer: Service cost, 2) interest cost 3) actual return on plan assets adjusted for gains and
losses on the plan assets (the expected return), 4) amortization of prior service cost, 5)
amortization of net loss or gain, and 6) amortization of transition liability (or asset).

Learning Objective: 10 Level of Learning: 1

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Chapter 17 Pensions and Other Postretirement Benefits

214. In its 2004 annual report to shareholders, the Edward Thomas Companies Inc. (ETCI)
disclosed the following information, regarding its postemployment benefit plans

The Company and certain of its affiliates sponsor postemployment benefit plans covering
substantially all salaried and certain hourly employees. The cost of these plans is charged to
expense over the working life of the covered employees. Net postemployment costs consisted
of the following for the years ended December 31, 2004, 2003 and 2002:

(in millions)
2004 2003 2002
Service cost $34 $26 $ 24
Amortization of
unrecognized net loss 8 6 2
Other expense -- -- 161
Net postemployment costs $42 $32 $187

The company instituted workforce reduction programs in its tobacco and North American food
operations in 2002. These actions resulted in incremental postemployment costs, which are
shown as other expense above.

Required:
Describe the three components in the net postemployment costs disclosed by ETCI.

Answer: The service cost each year is an allocation of the EBPO. The amortization of
unrecognized net loss is an allocation of losses from revisions in benefit plan estimates (e.g.,
healthcare cost increases) that are spread out over time as an income smoothing mechanism.
As noted in the footnote, the other expenses are due to workforce reduction programs in 2002.
Presumably, the company offered increased or accelerated benefits to entice these workers to
terminate employment. Alternatively, these additional/accelerated benefits are the result of
existing contracts with labor unions.

Learning Objective: 10 Level of Learning: 3

246 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition