Chapter 17: Pension Plans ACCT 405 SmartBook

Correctly match the terms on the left with the correct description on the right. Terms: - Accumulated benefit obligation = - Projected benefit obligation = - Vested benefit obligation = Descriptions: - The actuary's estimate of the present value of the total retirement benefit earned so far by employees incorporating estimated future salary levels. - The actuary's estimate of the present value of the total retirement benefit earned so far by employees based on existing compensation levels. - The actuary's estimate of the present value of the total retirement benefits earned by employees if they left the company today.

- Accumulated benefit obligation = The actuary's estimate of the present value of the total retirement benefit earned so far by employees based on existing compensation levels. - Projected benefit obligation = The actuary's estimate of the present value of the total retirement benefit earned so far by employees incorporating estimated future salary levels. -Vested benefit obligation = The actuary's estimate of the present value of the total retirement benefits earned by employees if they left the company today.

Which of the following functions typically are performed by a pension plan trustee? (Select all that apply.) - Accumulates earnings on pension plan assets. - Accepts contributions to the pension plan. - Invests contributions to the pension plan. - Pays funds to plan retirees. - Recognizes periodic pension expense. - Makes contributions to the pension plan.

- Accumulates earnings on pension plan assets - Accepts contributions to the pension plan - Invests contributions to the pension plan - Pays funds to plan retirees

The interest cost on the projected benefit obligation is found by multiplying what two amounts? - Market interest rate - Assumed discount rate - Average benefit obligation over the course of the year - Projected benefit obligation at the beginning of the year

- Assumed discount rate - Projected benefit obligation at the beginning of the year

What is reduced when pension benefits are paid to retired employees? (Select all that apply.) - The service cost - The plan assets - The vesting period - The pension benefit obligation

- The plan assets - The pension benefit obligation

Which of the following factors may motivate employers to sponsor a pension plan? (Select all that apply.) - To enhance the company's competitiveness in the labor market. - To enhance employees' loyalty to the company and reduce employee turnover. - To fulfill a moral obligation. - To meet legal requirements that companies sponsor pension plans.

- To enhance the company's competitiveness in the labor market. - To enhance employees' loyalty to the company and reduce employee turnover. - To fulfill a moral obligation.

Which of the following factors may motivate employers to sponsor a pension plan? (Select all that apply.) - To enhance the company's competitiveness in the labor market. - To meet legal requirements that companies sponsor pension plans. - To fulfill a moral obligation. - To enhance employees' loyalty to the company and reduce employee turnover.

- To enhance the company's competitiveness in the labor market. - To fulfill a moral obligation. - To enhance employees' loyalty to the company and reduce employee turnover.

Identify the components of pension expense in a defined benefit plan. (Select all that apply.) - amortization of gains or losses - pension benefits paid to employees - interest cost accrued on pension liability - contributions made to pension plan - expected return on plan assets - service cost during the current period - amortization of prior service cost

- amortization of gains or losses - interest cost accrued on pension liability - expected return on plan assets - service cost during the current period - amortization of prior service cost

Natch Company revises its estimate of future salary levels from $50 million to $60 million. In recording this revision, Natch will (Select all that apply.) - credit Gain-OCI for $10 million - credit PBO for $10 million - debit Loss-OCI for $10 million - credit PBO for $60 million - debit plan assets for $10 million - debit plan assets for $60 million

- credit PBO for $10 million - debit Loss-OCI for $10 million

Natch Company revises its estimate of future salary levels from $50 million to $60 million. In recording this revision, Natch will (Select all that apply.) - debit plan assets for $60 million - credit PBO for $60 million - credit PBO for $10 million - debit plan assets for $10 million - debit Loss-OCI for $10 million - credit Gain-OCI for $10 million

- credit PBO for $10 million - debit Loss-OCI for $10 million

Natch Company originally estimated the return on plan assets to be $5 million. The actual return on plan assets was $4 million. In recording this Natch will (Select all that apply.) - debit plan assets for $4 million. - credit Gain-OCI for $1 million. - debit plan assets for $1 million. - credit plan assets for $1 million. - debit Loss-OCI for $4 million. - credit Gain-OCI for $4 million. - debit Loss-OCI for $1 million.

- credit plan assets for $1 million - debit Loss-OCI for $1 million

The following information refers to O'Shea Company's defined benefit pension plan for the current year. Service cost: $5,000; interest cost: $2,000; amortization of prior service cost: $1,000; amortization of net loss: $500; expected return on plan assets: $3,000. O'Shea Company's journal entry to record pension-related costs would include (Select all that apply.)

- credit to PBO of $7,000 - debit to plan assets of $3,000

Natch Company originally estimated the return on plan assets to be $5 million. The actual return on plan assets was $4 million. In recording this Natch will (Select all that apply.) - credit Gain-OCI for $4 million. - debit Loss-OCI for $4 million. - debit Loss-OCI for $1 million. - debit plan assets for $1 million. - credit Gain-OCI for $1 million. - credit plan assets for $1 million. - debit plan assets for $4 million.

- debit Loss-OCI for $1 million - credit plan assets for $1 million

The following information refers to Dora Company's defined benefit pension plan for the current year. Service cost: $3,000; interest cost: $2,000; amortization of prior service cost: $700; amortization of net loss: $300; expected return on plan assets: $3,000. Dora Company's journal entry to record pension-related costs would include (Select all that apply.) - debit to pension expense for $3,000. - debit to pension expense for $2,700. - credit to amortization of net loss—OCI for $300. - debit to prior service cost—OCI for $700. - credit to amortization of prior service cost—OCI for $700.

- debit to pension expense for $3,000 - credit to amortization of net loss-OCI for $300 - credit to amortization of prior service cost-OCI for $700

The following information refers to O'Shea Company's defined benefit pension plan for the current year. Service cost: $5,000; interest cost: $2,000; amortization of prior service cost: $1,000; amortization of net loss: $500; expected return on plan assets: $3,000. O'Shea Company's journal entry to record pension-related costs would include (Select all that apply.).

- debit to pension expense for $5,500. - credit to amortization of prior service cost—OCI for $1,000. - credit to amortization of net loss—OCI for $500.

The following information refers to Dora Company's defined benefit pension plan for the current year. Service cost: $3,000; interest cost: $2,000; amortization of prior service cost: $700; amortization of net loss: $300; expected return on plan assets: $3,000. Recognition of pension expense will include (Select all that apply.) - debit to plan assets for $3,000. - debit to PBO of $5,000. - credit to PBO of $5,000. - credit to plan assets for $3,000.

- debit to plan assets for $3,000 - credit to PBO of $5,000

Which of the following components of pension expense reduce the expense? (Select all that apply.) - amortization of prior service cost - expected return on plan assets - service cost during current period - amortization of gains - interest cost accrued on pension liability

- expected return on plan asses - amortization of gains

Which of the following are advantages of defined contribution pension plans (as compared to defined benefit pension plans) for the employer? (Select all that apply) - lower financial risk - less paper work - lower contribution costs - lower administrative cost

- lower financial risk - less paper work - lower administrative cost

Which of the following factors may change the balance of the PBO? (Select all that apply.) - gross sales revenue - payments to employees - net income of the company - gains and losses - contributions by employer

- payments to employees - gains and losses

Which of the following factors may change the balance of the PBO? (Select all that apply.) - payments to employees - net income of the company - gross sales revenue - contributions by employer - gains and losses

- payments to employees - gains and losses

Identify the components of pension expense. - payments to retirees - return on plan assets - amortization of gains or losses - service cost - employer contributions to plan - amortization of prior service cost - interest cost

- return on plan assets - amortization of gains or losses - service cost - amortization of prior service cost - interest cost

Which of the following will increase the PBO? (Select all that apply.) - service cost - Loss on PBO - interest cost - actuarial gain on PBO

- service cost - Loss on PBO - interest cost

Which of the following components of pension expense also affect the pension obligation? (Select all that apply.) - interest cost - service cost - return on plan assets - amortization of prior service cost

- service cost - interest cost

Which of the following factors may change the balance of the PBO? (Select all that apply.) - payments to retired employees - gains and losses - contributions by employer - prior service cost - service cost - interest cost

- service cost - prior service cost - interest cost - gains and losses - payments to retired employees

Which of the following represent common reasons for the curtailment or settlement of defined benefit pension plans?

- the inherent risk of the plans for employers - the cost and burden of paperwork and reporting requirement related to the plans

Identify the key elements associated with defined benefit pension plans. (Select all that apply.) - the pension expense - the pension obligation - the settlement amount - the plan assets

- the pension expense - the pension obligation - the plan assets

The following information pertains to Carter Company's defined benefit pension plan: PBO beginning balance: $100,000; current year service cost: $8,000, interest cost: $10,000; actuarial gains: $2,000, employer contributions to plan: $10,000, payments to retirees: $5,000. The ending balance of the company's PBO is A. $111,000. B. $121,000. C. $116,000. D. $115,000.

A. $111,000 Reason: $100,000 + $8,000 + $10,000 - $2,000 - $5,000

At the beginning of the year, Klein Company's pension plan showed pension plan assets of $4 million and a PBO of $4.5 million; unamortized prior service cost of $500,000; and no unamortized gains or losses. During the year, service cost was $310,000. The expected return on plan assets was 8% and the discount rate estimate was 6%. The plan assets earned an actual return of 5%. The average remaining service period is 10 years. The company should recognize pension expense for the current year of A. $310,000. B. $1,010,000. C. $165,000.

A. $310,000 Reason: [$4.5 million x 6% discount rate = $270,000 IC] [$4 million x 8% = $320,000 Exp return] [$500,000/10 years = $50,000 PSC amort] SC 310,000 + IC 270,000 - Exp return 320,000 + PSC amort 50,000

At the beginning of the year, Klein Company's pension plan showed pension plan assets of $4 million and a PBO of $4.5 million; unamortized prior service cost of $500,000; and no unamortized gains or losses. During the year, service cost was $310,000; $400,000 was paid to retirees; and the company contributed $340,000 to the plan. The expected return on plan assets was 8% and the discount rate estimate was 6%. The plan assets earned an actual return of 5%. The average remaining service period is 10 years. At the end of the year, the balance of the pension plan assets will be A. $4,140,000. B. $4,800,000. C. $5,065,000.

A. $4,140,000 Reason: 4 million x 5% actual return = 200,000 4 million + actual return 200,000 + contribution to plan 340,000 - paid to retirees 400,000 = $4,140,000

Which of the following ignores possible pay increases for employees? A. Accumulated benefit obligation B. Both ABO and PBO C. Projected benefit obligation

A. Accumulated benefit obligation

Which of the following reduces the projected benefit obligation? A. Benefits paid to retirees B. Interest cost C. Prior service cost D. Service cost

A. Benefits paid to retirees

Which type of pension plan has less paperwork and is less costly to maintain? A. Defined contribution plan B. Defined benefit plan

A. Defined contribution plan

Which of the following statements is correct regarding a defined contribution pension plan? A. The employer promises to contribute a specified percentage of its employees' pay to a pension plan. B. The employees are required to contribute a specified percentage of their pay to a pension plan. C. The employer promises that its employees will receive a specific percentage of their current pay after retirement.

A. The employer promises to contribute a specified percentage of its employees' pay to a pension plan

Which of the following is true regarding qualified pension plans? A. They provide tax advantages for the employer and employee. B. They provide tax advantages for the employee only. C. They provide tax advantages for the employer only.

A. They provide tax advantages for the employer and employee

True or false: The accumulated benefit obligation, the vested benefit obligation, and the projected benefit obligation are all ways to measure the pension obligation. A. True B. False

A. True

When the PBO decreases due to a revised estimate, we have _____ on PBO. A. a gain B. a loss C. no effect

A. a gain

Smith Company estimates that its pension plan will earn a return of 10%. The actual return is 7.5% This will result in A. a loss on plan assets. B. an immediate recognition of C. pension expense. D. a gain on plan assets.

A. a loss on plan assets

The following information relates to Tool Company's defined benefit pension plan at December 31, the end of the reporting period. PBO: $5 million; plan assets: $4.5 million. On its balance sheet, Tool Company should show A. a net pension liability of $500,000. B. a pension asset of $4.5 million and a pension liability of $5 million. C. a net pension liability of $9.5 million.

A. a net pension liability of $500,000 Reason: $5 million - $4.5 million = $500,000

The projected benefit obligation uses A. a projection of what salaries will be at retirement. B. an average of historic salaries. C. the current salary levels of employees.

A. a projection of what salaries will be at retirement

Interest cost is the discount rate times the PBO balance _____ of the year. A. at the beginning B. at the end C. average

A. at the beginning

A relatively low expected return on plan assets means the employer should A. contribute more. B. make no change. C. contribute less.

A. contribute more

The _____ return is included in the calculation of pension expense. A. expected B. actual C. average

A. expected

The ______ return on plan assets is an assumption made by management, and the ______ return on plan assets is the income on investments reported by the trustee. A. expected; actual B. actual; expected C. interest; amended D. investment; estimated

A. expected; actual

Grady Company estimates that its pension plan will earn a long-term expected rate of return of 8%. Suppose that because of a global financial crisis, the company revises its estimate to 7%. Grady should probably A. increase its annual contributions to the plan. B. decrease its annual contributions to the plan. C. not change its annual contributions to the plan.

A. increase its annual contributions to the plan

A pension-related gain will occur if the PBO is ______ than expected or if the return on plan assets is ______ than expected. A. lower; higher B. higher; higher C. higher; lower D. lower; lower

A. lower; higher

For many companies, pension expense tends to be A. one of the largest expenses reported on the income statement. B. one of the smallest expenses reported on the income statement. C. an average expense reported on the income statement.

A. one of the largest expenses reported on the income statement

Walden Company sponsors a pension plan. In its income statement, Walden should classify the related expense as a(n) A. operating expense. B. a loss. C. other expense.

A. operating expense

Prior service cost is recognized as pension expense A. over the future service period of the employees receiving the benefit. B. on a straight-line basis over the next 10 years. C. immediately when the retroactive amendment is made.

A. over the future service period of the employees receiving the benefit

Which of the following pension-related items is a component of both the balance of pension plan assets and the pension obligation? A. payments to retirees B. service cost C. employer contributions to the pension plan

A. payments to retirees

Smith Corp. sponsors a 401(k) plan for all its full-time employees. The company contributes 5% of each employee's salary to the plan. Total payroll for the year was $1 million. When recognizing the cost associated with this pension plan, Smith should debit A. pension expense. B. wages expense. C. salaries expense. D. pension liability.

A. pension expense

The cumulative gains and losses due to pension estimate revisions are A. reported in the balance sheet. B. reported in the statement of comprehensive income. C. reported in the income statement.

A. reported in the balance sheet

Gains and losses that occur due to revisions are A. reported in the statement of comprehensive income. B. reported in the income statement. C. reported in the balance sheet.

A. reported in the statement of comprehensive income

In a defined benefit pension plan, the annual pension expense reflects changes in A. the pension obligation and the plan assets. B. only the plan assets. C. only the pension obligation

A. the pension obligation and the plan assets

Identify the pension benefit obligation that typically provides the most relevant measure of the employer's pension obligation. A. the projected benefit obligation B. the accumulated benefit obligation C. the vested benefit obligation

A. the projected benefit obligation

Which of the following are methods of measuring the pension obligation? (Select all that apply.) Service benefit obligation Accumulated benefit obligation Vested benefit obligation Length of service obligation Projected benefit obligation Prior service obligation

Accumulated benefit obligation Vested benefit obligation Projected benefit obligation

The following information pertains to Blum Company's defined benefit pension plan: PBO beginning balance: $100,000; current year service cost: $10,000, interest cost: $8,000; actuarial loss: $3,000, employer contributions to plan: $12,000, payments to retirees: $6,000. The ending balance of the company's PBO is A. $121,000. B. $115,000. C. $109,000. D. $127,000.

B. $115,000 Reason: 100,000 + 10,000 + 8,000 + 3,000 - 6,000 = $115,000

Sheller Company estimates that its pension plan asset will earn a return of 10%. The beginning balance of plan assets was $500,000 and the ending balance was $560,000. During the year, the plan earned an actual return of 8%. As a result of this, pension expense will decrease by A. $40,000. B. $50,000. C. $53,000. D. $44,800. E. $56,000.

B. $50,000 Reason: The expected return on plan assets reduce pension expense. $500,000 x 10% = $50,000

Which type of pension fund guarantees a set amount will be available at retirement? A. Defined contribution pension plan B. Defined benefit pension plan

B. Defined benefit pension plan

In which type of pension plan does the employee bear the risk of uncertain investment returns? A. Defined benefit plan B. Defined contribution plan C. Both types of plan

B. Defined contribution plan

Who bears the risk in a defined contribution pension plan? A. Both the employee and employer B. The employee C. The employer

B. The employee

Smith Company adds its annual cash investment to plan assets in the amount of $5 million. The journal entry to record this includes A. a debit to cash. B. a debit to plan assets. C. a debit to pension expense. D. a credit to plan assets. E. a credit to pension liability.

B. a debit to plan assets

The employer's obligation to pay retirement benefits in the future is a key element in A. a defined contribution pension plan. B. a defined benefit pension plan. C. both types of plan.

B. a defined benefit pension plan

When the PBO decreases due to a revised estimate, we have _____ on PBO. A. no effect B. a gain C. a loss

B. a gain

Grady Company estimates that its pension plan will earn a long-term expected rate of return of 8%. Suppose that due to a stock market boom, the company revises its estimate to 9%. Grady should probably A. not change its annual contributions to the plan. B. decrease its annual contributions to the plan. C. increase its annual contributions to the plan.

B. decrease its annual contributions to the plan

Vogel Company contributes 6% of its employees' annual salary to a pension plan. Vogel sponsors a A. defined benefit pension plan. B. defined contribution pension plan.

B. defined contribution pension plan

In an employer pension plan, some or all of the contributions to the retirement fund are often provided by the A. employee. B. employer. C. government.

B. employer

The ______ return on plan assets is an assumption made by management, and the ______ return on plan assets is the income on investments reported by the trustee. A. interest; amended B. expected; actual C. actual; expected D. investment; estimated

B. expected; actual

Austin Company has a net loss pension amortization amount of $500,000 in the current year. This amount will _____ pension expense. A. not change B. increase C. decrease

B. increase

Amortization of pension-related losses _____ pension expense. A. decreases B. increases C. does not affect

B. increases

Prior service cost _____ the pension benefit obligation. A. decreases B. increases C. has no impact on

B. increases

Service cost _____ the obligation to pay benefits. A. has no impact on B. increases C. decreases

B. increases

Prior service cost _____ expensed as it is incurred and is included in _____. A. is; net income B. is not; other comprehensive income C. is not; net income D. is; other comprehensive income

B. is not; other comprehensive income

In the financial statements, pension-related net gains or losses should be classified as A. a deferred pension asset. B. other comprehensive income. C. a deferred long-term liability.

B. other comprehensive income

Service cost, interest cost, the return on plan assets, prior service cost amortization, and net gain or loss amortization make up A. the projected benefit obligation. B. pension expense. C. the plan assets.

B. pension expense

Murphy Company incurs a loss from changing a pension related assumption. This loss is A. immediately included in net income. B. reported as other comprehensive income. C. immediately included in pension expense.

B. reported as other comprehensive income

Gains and losses that occur due to revisions are A. reported in the income statement. B. reported in the statement of comprehensive income. C. reported in the balance sheet.

B. reported in the statement of comprehensive income

Which of the following components of pension expense also affects pension plan assets? A. interest cost B. return on plan assets C. service cost D. amortization of prior service cost

B. return on plan assets

If benefits are fully vested, A. the employee has the right to receive them after a one year waiting period. B. the employee has the right to receive them even if their employment ceases today. C. the employee has the right to receive a portion of the benefits based on length of service.

B. the employee has the right to receive them even if their employment ceases today

Pension plan assets are netted with the PBO and a net pension ____________ or ___________ is reported on the employer's balance sheet.

Blank 1: asset Blank 2: liability

Fill in the blank question. The increase in the PBO attributable to employee service performed during the current year is referred to as __________ __________. (Enter one word per blank.)

Blank 1: service Blank 2: cost

The following information pertains to Abel Corporation's pension plan. PBO: 1/1/17: $6,000,000; 12/31/17: $6,600,000. The discount rate is 6% and the expected return on plan assets is 8% for the year ended December 31, 2017. The interest cost component of pension expense for 2017 will be A. $528,000. B. $480,000. C. $360,000. D. $396,000.

C. $360,000 Reason: PBO 1/1/17 x discount rate $6,000,000 x 6% = $360,000

Green Company sponsors a defined benefit pension plan. The pension formula is calculated based on the following formula: 1.5% x number of service years x final salary. The assumed discount rate is 5%. If an employee is expected to retire in 10 years with a final annual salary of $200,000, has earned 20 years of service, and is expected to receive an annual pension for 20 years, the current PBO rounded to the full dollar will be A. $60,000. B. $1,200,000. C. $459,041. D. $281,813 E. $747,733.

C. $459,041 Reason: 1/5% x 20 x $200,000 = $60,000 use n = 20, i = 5%, FV = 0, PMT = 60,000 = PV is $747,732.60 use n = 10, i = 5%, FV = $747,732.60, PMT = 0 = Current PBO is $459,041

The following information relates to Bay Company's pension plan. Beginning balance in plan assets: $600,000; cash contributions to pension plan: $70,000; payments to retirees: $50,000; actual return on plan assets: $56,000; expected rate of return on plan assets: 8%; discount rate: 6%. The plan asset ending balance will be A. $726,000. B. $668,000. C. $676,000.

C. $676,000 Reason: $600,00 + $70,000 + $56,000 - $50,000 = $676,000

Which of the following reduces the projected benefit obligation? A. Service cost B. Interest cost C. Benefits paid to retirees D. Prior service cost

C. Benefits paid to retirees

In which type of pension plan are the employee's retirement benefits completely dependent upon how well investments perform? A. Both defined benefit and defined contribution plans B. Defined benefit plan C. Defined contribution plan

C. Defined contribution plan

Which return is used to calculate pension expense? A. The average return B. The actual return C. The expected return

C. The expected return

Which pension benefit obligation is the most representationally faithful? A. The vested benefit obligation B. The accumulated benefit obligation C. The projected benefit obligation

C. The projected benefit obligation

Smith Company adds its annual cash investment to plan assets in the amount of $5 million. The journal entry to record this includes A. a debit to pension expense. B. a credit to plan assets. C. a credit to cash. D. a credit to pension liability. E. a debit to pension obligation.

C. a credit to cash

Smart Company revises an estimate resulting in an increase in the PBO. This revision results in _____ on PBO. A. a gain B. no effect C. a loss

C. a loss

Smith Company estimates that its pension plan will earn a return of 10%. The actual return is 7.5% This will result in A. an immediate recognition of pension expense. B. a gain on plan assets. C. a loss on plan assets.

C. a loss on plan assets

The following information relates to Sand Company's defined benefit pension plan at December 31, the end of the reporting period. PBO: $5 million; plan assets: $5.8 million. On its balance sheet, Sand should show A. a pension asset of $5.8 million and a pension liability of $5 million. B. nothing, because the plan is overfunded. C. a net pension asset of $800,000.

C. a net pension asset of $800,000.

The pension expense related to a defined benefit contribution plan is made up of changes that occur in A. only the pension obligation. B. only the plan assets. C. both the pension obligation and plan assets.

C. both the pension obligation and plan assets

Smith Corp. sponsors a 401(k) plan for all its full-time employees. The company contributes 5% of each employee's salary to the plan. Total payroll for the year was $1 million. When recognizing the employer's annual contribution, Smith should credit A. salaries payable. B. wages payable. C. cash. D. pension liability.

C. cash

Payment of retirement benefits _____ the PBO. A. does not change B. increases C. decreases

C. decreases

Buddy Company started a defined benefit pension plan during the current year. The plan has a 5-year vesting period. The average age of the company's employees is 26 years; their expected retirement age is 60 years. The company should begin recognizing pension expense A. 5 years from now. B. when the employees start retiring. C. during the current year.

C. during the current year

From an income statement perspective, pension expense represents A. a product cost. B. an administrative expense. C. employee compensation.

C. employee compensation

A pension-related loss will occur if the PBO is ______ than expected or if the return on plan assets is ______ than expected. A. lower; higher B. higher; higher C. higher; lower D. lower; lower

C. higher; lower

The pension plan assets balance is reported A. in the income statement B. in the balance sheet C. in the disclosure notes D. in the statement of cash flows

C. in the disclosure notes

Greene Company sponsors a defined benefit pension plan. During the current year, the company retroactively changes the benefit formula from the current—1.5% x service years x final year's salary—to 1.8% x service years x final year's salary. As a result of this change, prior service cost will A. stay the same. B. decrease. C. increase.

C. increase

Grady Company estimates that its pension plan will earn a long-term expected rate of return of 8%. Suppose that because of a global financial crisis, the company revises its estimate to 7%. Grady should probably A. not change its annual contributions to the plan. B. decrease its annual contributions to the plan. C. increase its annual contributions to the plan.

C. increase its annual contributions to the plan

The projected benefit obligation _____ each year by the amount of that year's service cost. A. is unchanged B. decreases C. increases

C. increases

Prior service cost _____ expensed as it is incurred and is included in _____. A. is; other comprehensive income B. is; net income C. is not; other comprehensive income D. is not; net income

C. is not; other comprehensive income

Sheller Company estimates that its pension plan asset will earn a return of 10%. The beginning balance of plan assets was $500,000 and the ending balance was $560,000. During the year, the plan earned a return of 8%. This will result in a A. loss of $11,200. B. no gain or loss. C. loss of $10,000. D. gain of $10,000. E. gain of $11,200.

C. loss of $10,000 Reason: $500,000 x 10% = $50,000 $500,000 x 8% = $40,000 $50,000 - $40,000 = $10,000

Prior service cost is recognized as pension expense A. on a straight-line basis over the next 10 years. B. immediately when the retroactive amendment is made. C. over the future service period of the employees receiving the benefit.

C. over the future service period of the employees receiving the benefit

The pension obligation and the plan assets are A. not reported on the balance sheet. B. reported individually in the balance sheet. C. reported as a net amount in the balance sheet.

C. reported as a net amount in the balance sheet

The cumulative gains and losses due to pension estimate revisions are A. reported in the income statement. B. reported in the statement of comprehensive income. C. reported in the balance sheet.

C. reported in the balance sheet

The cumulative gains and losses due to pension estimate revisions are A. reported in the statement of comprehensive income. B. reported in the income statement. C. reported in the balance sheet.

C. reported in the balance sheet

Gains and losses that occur due to revisions are A. reported in the balance sheet. B. reported in the income statement. C. reported in the statement of comprehensive income.

C. reported in the statement of comprehensive income

The increase in the projected benefit obligation attributable to employee service during the current year is referred to as A. pension benefit. B. prior service cost. C. service cost.

C. service cost

Net gains or losses may arise from which of the following source(s)? A. only the plan assets B. only the PBO C. the PBO and/or plan assets

C. the PBO and/or plan assets

The following information pertains to Carter Company's defined benefit pension plan: PBO beginning balance: $100,000; current year service cost: $8,000, interest cost: $10,000; actuarial gains: $2,000, employer contributions to plan: $10,000, payments to retirees: $5,000. The ending balance of the company's PBO is A. $115,000. B. $121,000. C. $116,000. D. $111,000.

D. $111,000 Reason: $100,000 + $8,000 + $10,000 - $2,000 - $5,000 = $111,000

Violet Company sponsors a defined benefit pension plan. The pension formula is calculated based on the following formula: 2% x number of service years x final salary. The assumed discount rate is 5%. If an employee is expected to retire in 20 years with a final annual salary of $200,000, has earned 30 years of service, and is expected to receive an annual pension for 30 years, the current PBO rounded to the full dollar will be A. $3,600,000. B. $1,844,694. C. $45,227. D. $563,626 E. $695,247.

D. $695,247 Reason: 2% x 30 x $200,000 = $120,000 use n = 30, i = 5%, PMT = $120,000, FV = 0, = PV is $1,844,694 use n = 20, i = 5%, PMT = 0, FV = $1,844,694, = Current PBO is $695,247

Which of the following decreases a pension plan assets? A. Employer contributions B. Expected return C. Positive return D. Retiree benefits

D. Retiree benefits

Which of the following will decrease the PBO? A. Loss on PBO B. Service cost C. Interest cost D. Retiree benefits paid E. Prior service cost

D. Retiree benefits paid

In the financial statements, prior service cost should be classified as A. an addition to current period pension expense. B. a long-term liability. C. a deferred pension asset. D. accumulated other comprehensive income.

D. accumulated other comprehensive income

Pension benefits are paid to retired employees of Smith Company in the amount of $200,000. The recording of this payment includes a credit to A. service cost. B. PBO. C. pension expense. D. plan assets.

D. plan assets

Prior service cost typically is amortized straight-line over A. 20 years. B. the average retirement period of employees. C. the pension benefit vesting period. D. the average remaining service period of employees. E. the average remaining time until employees retire.

D. the average remaining service period of employees

Green Company sponsors a defined benefit pension plan. The pension formula is calculated based on the following formula: 1.5% x number of service years x final salary. The assumed discount rate is 5%. If an employee is expected to retire in 10 years with a final annual salary of $200,000, has earned 20 years of service, and is expected to receive an annual pension for 20 years, the current PBO rounded to the full dollar will be A. $281,813 B. $60,000. C. $1,200,000. D. $747,733. E. $459,041.

E. $459,041 Reason: 1/5% x 20 x $200,000 = $60,000 use n = 20, i = 5%, FV = 0, PMT = 60,000 = PV is $747,732.60 use n = 10, i = 5%, FV = $747,732.60, PMT = 0 = Current PBO is $459,041

The actuary's estimate of the total postretirement benefits, discounted to present value, expected to be received by plan participants is called

EPBO (estimated plan benefit obligation

Correctly match the type of postretirement benefit obligation with the correct description

Expected postretirement benefit obligation - The actuary's estimate of the present value of the total postretirement benefits to be received by plan participants Accumulated post retirement benefit obligation - The portion of the EPBO attributed to employee service to date

When a pension plan is terminated,

GAAP requires a change in earnings to be reported at the time of termination.

What is the most common postretirement benefit other than pensions?

Health care

Serafin Company's balance sheet shows a pension asset of $550,000. Its notes indicate that, during the current year, the company contributed $470,000 to the pension fund and retirees received $400,000 in pension payments. From this information we can deduce that the pension plan is

Overfunded by $550,000

What does the primary difference between accounting for pensions and for other postretirement benefits relate to?

Service cost

Which of the following measures of the employer's pension obligation incorporates estimated future salary levels?

The projected benefit obligation

T/F: AOIC in the balance sheet is reported net of tax

True

What is the term used for benefits employees have the right to receive even if their employment ceases?

Vested benefits

The plan assets set aside by the employer are a key element in

a defined benefit pension plan.

The __________ benefit obligation is an estimate of the discounted present value of the retirement benefits earned so far by employees based on existing salary levels.

accumulated

The estimate of the total retirement benefits discounted to present value, earned so far by employees using existing compensation levels is the

accumulated benefit obligation

Other comprehensive income items are reported

as they occur and then as an accumulated balance on the balance sheet.

Defined _________ pension plans promise fixed retirement benefits defined by a designated formula to employees after retirement

benefit

A defined __________ pension plan has less risk to the employer.

contribution

When using the service method to allocate prior service cost, the amount amortized ____ over the years

decreases

The _____ aspect of providing _____ benefits creates an accounting issue

deferred; postretirement

Accumulated other comprehensive income is reported in the _____ section of the balance sheet

equity

The pension ___________ reported in the income statement is made up of changes that occur in the pension obligation and the plan assets.

expense

Which of the following are common benefits that are classified as postretirement benefits other than pensions?

group legal services life insurance (also medical and dental insurance)

The annual cost of providing preretirement benefits

is part of the annual compensation expense.

Recognizing pension expense during an employee's service years rather than during retirement represents an application of ____________ the costs with the benefits provided.

matching

Service cost, interest cost, and prior service cost amortization are all components of ___________ expense.

pension

_____________ plans often enhance productivity and reduce employee turnover in companies.

pension

The resources a company will use to satisfy the pension obligation are referred to as pension _________ ___________.

plan assets

The __________ benefit obligation is the most relevant as it includes estimated pay increases.

projected

The interest cost associated with pension plans is determined by multiplying the beginning balance of the _________ benefit obligation by the assumed discount rate. (Enter only one word.)

projected

Pension plans that are established according to tight guidance and provide important tax advantages are called __________ plans

qualified

Gains and losses recognized as part of OCI and AOCI are

reduced by the applicable tax effect.

The ______ of allocating prior service cost allocates prior service cost to each year in proportion to the fraction of the total remaining service years worked in each of those years.

service method

Identify the key elements associated with defined benefit pension plans.

the plan assets the pension obligation the pension expense

The APBO is

the portion of the EPBO attributed to employee service to date.

A pension fund ________ accepts employer contributions, invests those contributions, and pays benefits to retired employees.

trustee

Turner Company's balance sheet shows a pension liability of $150,000. Its notes indicate that, during the current year, the company contributed $450,000 to the pension fund and retirees received $420,000 in pension payments. From this information we can deduce that the pension plan is

underfunded by $150,000

Benefits that employees have the right to receive even if their employment were to cease are referred to as ____________ benefits. (Enter only one word.)

vested

The _______ benefit obligation is the portion of benefits employees are entitled to regardless of continued employment.

vested