Chapter 17

A company may hire an actuary to help it a. estimate the company's pension obligation. b. administer the pension fund assets. c. reduce the risk associated with a pension plan.

a

Administering terminated pension plans is one purpose of a. the PBGC. b. the ERISA. c. the FDIC. d. the employer.

a

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

a

In a defined benefit plan, the ______ bear(s) the risk of achieving the retirement objective. In a defined contribution plan, the ______ bear(s) the risk of achieving the retirement objective. a. employer; employees b. employer; employer c. employees; employer d. employees; employees

a

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

a, b, c

Which of the following conditions must be met for a pension plan to qualify for special tax treatment? (Select all that apply.) a. The plan cannot favor highly compensated employees. b. Benefits must vest after a specific period of time. c. The plan must cover at least 70% of the company's employees. d. The plan must cover at least 90% of a company's employees. e. The plan must be funded before retirement and assets must be held by an irrevocable trust.

a, b, c, e

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

a, c

Which of the following represent a potential source of gains and losses associated with defined benefit pension plans? (Select all that apply.) a. differences between the actual and expected return on plan assets b. changes in the pay structure relating to employees covered by the pension c. changes in the assumptions made in calculating the benefit obligation

a, c

A(n) _____ is a professional trained in a particular branch of statistics and mathematics used to assess the various uncertainties related to a defined benefit pension plan.

actuary

Deviations from actuary estimates are referred to as a. pension revenues and expenses. b. gains and losses on pension asset or liability. c. correction of errors when accounted for.

b

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

b

Muller Company's actuary reports that the employees' life expectancy has risen an average of 0.57 years. As a result of this revised estimate a. a gain associated with a lower PBO will occur. b. a loss associated with a higher PBO will occur. c. a gain associated with the plan assets will occur. d. a loss associated with the plan assets will occur.

b

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

b

The pension obligation balance and the plan asset balance are reported a. in the statement of cash flows. b. in the disclosure notes. c. in the income statement. d. in the balance sheet.

b

Which of the following factors may contribute to the recent popularity of defined contribution pension plans and decreasing popularity of defined benefit plans? (Select all that apply.) a. The desire to build long-term employee loyalty. b. Employers' increasing unwillingness to bear the risk of defined benefit plans. c. The cost of administering defined benefit plans.

b, c

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

b, c, d

Which of the following are uncertainties related to funding a defined benefit pension plan? (Select all that apply.) Multiple select question. a. Stock price b. Life expectancy c. Retirement age d. Return on plan assets e. Employee turnover f. Net income

b, c, d, e

Select the two factors that must be compared to calculate prior service cost. a. pension expense prior to the plan amendment b. PBO balance after the plan amendment c. pension expense after the plan amendment d. PBO balance prior to the plan amendment e. plan assets balance after the plan amendment f. plan assets balance before the plan amendment

b, d

Which of the following are common examples of defined contribution pension plans? (Select all that apply.) a. Mortgage REITs b. 401(k) plans c. Traditional IRA plans d. Thrift plans e. Roth IRA plans f. Savings plans

b, d, f

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

benefit

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, when the employees start retiring. b. 5 years from now. c. during the current year.

c

For a pension plan to be qualified for special tax treatment, a. it must cover all highly compensated employees. b. it cannot cover any highly compensated employees. c. it must cover at least 70% of employees who are not highly compensated. d. it must cover at least 50% of employees who are not highly compensated.

c

In a defined benefit pension plan, the annual pension expense reflects changes in a. only the plan assets. b. only the pension obligation. c. the pension obligation and the plan assets.

c

Setting vesting standards is a key purpose of a. the PBGC b. the employer. c. the ERISA d. the FDIC

c

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

Which of the following components of pension expense also affects pension plan assets? a. interest cost b. amortization of prior service cost c. return on plan assets d. service cost

c

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.) a. credit pension expense $60,000 b. debit OCI $60,000 c. debit pension expense $60,000 d. credit cash $60,000 e. debit cash $60,000 f. debit PBO $60,000

c, d

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

c, d

A defined ____ pension plan guarantees a set amount will be put into the pension fund.

contribution

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

contribution

Thrift plans, savings plans, and 401(k) plans are examples of typical defined ___ plans.

contribution

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

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

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

qualified

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

service

True or false: Pension expense is part of other comprehensive income.

False

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

Pension