ACC 221 Chapter 17A Smartbook LO 1-4

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 $121,000. $116,000. $111,000. $115,000.

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

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 $121,000. $109,000. $115,000. $127,000.

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

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 $281,813 $747,733. $60,000. $1,200,000. $459,041.

$459,041. Reason: 1.5% x 20 x $200,000 = $60,000 use n = 20, i = 5% PVA 12.46221 x $60,000 = $747,732.60 use n=10, i = 5% PV .61391 x $747,732.60

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 $60,000. $747,733. $1,200,000. $281,813 $459,041.

$459,041. Reason: 1.5% x 20 x $200,000 = $60,000 use n = 20, i = 5% PVA 12.46221 x $60,000 = $747,732.60 use n=10, i = 5% PV .61391 x $747,732.60

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 $563,626 $695,247. $1,844,694. $45,227. $3,600,000.

$695,247. Reason: 2% x 30 x $200,000 = $120,000 use n = 30, i = 5% PVA 15.37245 x $120,000 = $1,844,694 use n=20, i = 5% PV .37689 x $1,844,694

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 $3,600,000. $45,227. $1,844,694. $695,247. $563,626

$695,247. Reason: 2% x 30 x $200,000 = $120,000 use n = 30, i = 5% PVA 15.37245 x $120,000 = $1,844,694 use n=20, i = 5% PV .37689 x $1,844,694

Helga Company sponsors a defined benefit pension plan. The beginning balance of plan assets is $1 million; the beginning balance of the PBO is $1.1 million; the expected rate of return is 9%, the discount rate is 7%, and the salary trend rate is 4%. The interest cost is equal to $70,000. $44,000. $90,000. $77,000. $99,000.

$77,000. Reason: $1.1 million x 7%

Correctly match the terms on the left with the correct description on the right. Accumulated benefit obligation Projected benefit obligation Vested 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. 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 matches 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 matches 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 matches The actuary's estimate of the present value of the total retirement benefits earned by employees if they left the company today.

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

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

Which of the following reduces the projected benefit obligation? Benefits paid to retirees Prior service cost Service cost Interest cost

Benefits paid to retirees

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

Defined benefit pension plan

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

Defined contribution plan

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

Defined contribution plan

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

Defined contribution plan

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

Pension or Retirement

Which of the following items is designed to provide income to individuals during retirement? Postretirement benefits other than pensions Pension plans Net income

Pension plans

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

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

Which pension benefit obligation is the most representationally faithful? The vested benefit obligation The projected benefit obligation The accumulated benefit obligation

The projected benefit obligation

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

They provide tax advantages for the employer and employee.

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

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

True Reason: There is not uniformity concerning which definition is most appropriate for pension accounting and all three are allowed.

Benefits that employees have the right to receive even if their employment were to cease are referred to as _____ benefits.

Vested

The plan assets set aside by the employer are a key element in a defined contribution pension plan. both types of plan. a defined benefit pension plan.

a defined benefit pension plan.

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

a loss

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

a projection of what salaries will be at retirement.

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. projected benefit obligation. vested benefit obligation.

accumulated benefit obligation.

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

amortization of gains expected return on plan assets

The employer's obligation, the plan assets, and the periodic expense of having the pension plan are key elements of a defined _____ pension plan.

benefit

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

both the pension obligation and plan assets.

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

contribution

In a defined _____ pension plan, the employer records pension expense equal to the amount of the annual contribution.

contribution

Smith Corp. sponsors a 401(k) plan for all its full-time employees. The company contributes 3% of each employee's salary to the plan. Total payroll for the year was $2 million. When recognizing the employer's annual contribution, Smith should (Select all that apply.) debit OCI $60,000 debit PBO $60,000 debit pension expense $60,000 credit pension expense $60,000 credit cash $60,000 debit cash $60,000

debit pension expense $60,000 credit cash $60,000

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

decreases

Byrd Company promised its employees a fixed percentage of their preretirement pay based on a certain calculation. Byrd sponsors a: defined benefit pension plan. defined contribution pension plan.

defined benefit pension plan.

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

defined contribution pension plan.

Decreases and increases in estimates of the PBO because of estimate revisions are called _____ and _____.

gains or gain losses or loss

A loss on PBO will _____ the PBO and prior service cost will _____ the PBO. increase; decrease increase; increase decrease; decrease decrease; increase

increase; increase

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

increases

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

one of the largest expenses reported on the income statement.

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

payments to employees gains and losses

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

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

The increase in the PBO due to retroactively applying a plan amendment is referred to as _____ _____ cost.

prior service

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

projected

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

qualified or qualifying

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

reported as a net amount in the balance sheet.

Increase in the PBO attributable to employee service during the current period is referred to as _____ cost.

service

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

service cost Loss on PBO interest cost

Identify the components of pension expense in a defined benefit plan. (Select all that apply.) service cost during the current period pension benefits paid to employees amortization of prior service cost amortization of gains or losses 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

The increase in the projected benefit obligation attributable to employee work performed during the period is referred to as pension cost. salary cost. service cost. prior service cost.

service cost.

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

the projected benefit obligation

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

vested