Test bank intermediate accounting 12e ch20

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 20 ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITS TRUE-FALSE—Conceptual Answer No Description F T F T T F F T F T F F T F T F F T F 10 11 12 13 14 15 16 17 18 19 T 20 Funded pension plan Qualified pension plans Defined-contribution plan liability Defined-benefit plans Vested benefit obligation Accumulated benefit obligation Definition of service cost Definition of interest cost Recognizing projected benefit obligation Prepaid/Accrued Pension Cost balance Plan amendment and projected benefit obligation increase Years-of-service amortization method Expected return and actual return Unexpected gains and losses Unrecognized Net Gain/Loss account and the corridor Amortization of net gains and losses Recognizing a minimum liability Reporting accrued pension cost and additional liability balances Recording Excess of Additional Pension Liability Over Unrecognized Prior Service Cost Reconciliation of PBO and fair value of plan assets MULTIPLE CHOICE—Conceptual Answer d c d c b b a c a a d d d a c b No 21 22 23 24 25 S 26 S 27 S 28 29 30 31 32 33 34 35 36 Description Factors considered by actuaries Process of funding a pension plan Accounting problems in pension plans Nature of a defined-contribution plan Nature of a defined-benefit plan Defined-contribution plan characteristics Accounting for a defined-benefit plan Pension obligation measurement using future salaries Definition of accumulated benefit obligation Projected benefit obligation as a measure of pension obligation Alternative measures of the pension obligation Characteristics of vested benefits Pension funding and pension expense recognition Components of pension expense Service cost calculated using future compensation levels Settlement interest rates To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - Test Bank for Intermediate Accounting, Twelfth Edition MULTIPLE CHOICE—Conceptual (cont.) Answer a b b c d a c b a d b a a c b b a d b c c c b a d b c d No 37 38 39 P 40 P 41 42 43 44 S 45 S 46 47 48 49 50 51 52 53 S 54 55 56 *57 *58 *59 *60 *61 *62 *63 *64 Description Nature of plan assets Definition of actual return on plan assets Prepaid/accrued pension cost Items included in net pension cost Definition of accrued pension cost Recognition of prior service costs Amortization of prior service costs Amortization methods for prior service costs Defined-benefit plan amendment Unexpected gains and losses Recording unrecognized gains and losses Use of market-related asset values Gain or loss caused by a plant closing Switch from a defined-benefit plan to a defined-contribution plan Recognition of a minimum liability Intangible asset—deferred pension cost Identification of a balance sheet account Recognition of pension asset Disclosures of pension plan information Function of Pension Benefit Guaranty Corporation Postretirement health care benefits Disclosures of postretirement benefits Transition amount Postretirement benefits Accrual period Expected postretirement benefit obligation Transition amount Item not recognized P These questions also appear in the Problem-Solving Survival Guide These questions also appear in the Study Guide *This topic is dealt with in an Appendix to the chapter S MULTIPLE CHOICE—Computational Answer d c a b c a b d d b b a d No Description 65 66 67 68 69 70 71 72 73 74 75 76 77 Calculate pension expense to be recognized Calculate pension expense Calculate pension expense for the period Calculate pension expense to be recognized Determine pension expense to be recognized Calculate intangible asset to be reported Calculate total pension liability to be reported Calculate pension expense Calculate pension expense Calculate pension expense Calculate actual return on plan assets Calculate unexpected gain on plan assets Calculate unrecognized net loss amortization To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Pensions and Postretirement Benefits MULTIPLE CHOICE—Computational Answer b c b c b b a a c a c c b b c b a d d d c b a c c b b b No 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 *103 *104 *105 Description Calculate projected benefit obligation balance Calculate fair value of plan assets Calculate amortization of prior service cost Calculate interest cost Determine actual return on plan assets Calculate the unexpected gain on plan assets Determine the corridor Calculate amortization of unrecognized net gain Calculate accrued pension cost recognized in the balance sheet Calculate total pension liability Calculate total pension liability reflecting minimum liability Calculate minimum liability Calculate amount of intangible asset Calculate minimum liability Calculate amount of intangible asset Calculate minimum liability to be reported Calculate intangible asset to be reported Calculate total pension liability to be reported Calculate amount of intangible asset to be reported Determine balance of projected benefit obligation Determine fair value of plan assets Calculate additional pension liability amount Calculate additional pension liability amount Calculate minimum liability Determine amount of intangible assets Calculate postretirement expense Calculate postretirement expense Calculate postretirement expense MULTIPLE CHOICE—CPA Adapted Answer d b a c d a c c b d No 106 107 108 109 110 111 112 113 114 115 Description Determine the projected benefit obligation Nature of interest cost Calculate prepaid pension cost Determine the accrued pension cost Comparison of service costs and pension costs in consecutive years Calculate prepaid pension cost Calculate the minimum pension liability Minimum liability of a defined-benefit plan Minimum liability of a defined-benefit plan Determine the amount of pension liability to be reported EXERCISES Item E20-116 E20-117 E20-118 Description Pension accounting terminology Pension assets Measuring and recording pension expense 20 - To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Test Bank for Intermediate Accounting, Twelfth Edition 20 - EXERCISES (cont.) Item E20-119 E20-120 E20-121 E20-122 E20-123 E20-124 E20-125 E20-126 *E20-127 *E20-128 Description Measuring and recording pension expense Additional pension liability Pension reconciliation schedule Pension plan calculations Pension plan calculation and entries Corridor amortization Corridor approach amortization of net gains and losses Pension plan calculations and journal entries Computing and recording postretirement expense Computing postretirement expense and APBO PROBLEMS Item P20-129 P20-130 P20-131 P20-132 Description Measuring, recording, and reporting pension expense and liability Measuring and recording pension expense Preparing a pension work sheet Amortization of prior service cost CHAPTER LEARNING OBJECTIVES Distinguish between accounting for the employer's pension plan and accounting for the pension fund Identify types of pension plans and their characteristics Explain alternative measures for valuing the pension obligation List the components of pension expense Use a worksheet for employer's pension plan entries Describe the amortization of unrecognized prior service costs Explain the accounting procedure for recognizing unexpected gains and losses Explain the corridor approach to amortizing unrecognized gains and losses Explain the recognition of a minimum liability 10 Describe the requirements for reporting pension plans in financial statements *11 Identify the differences between pensions and postretirement healthcare benefits *12 Contrast accounting for pensions to accounting for other postretirement benefits To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Pensions and Postretirement Benefits 20 - SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item TF TF 21 TF TF 23 TF TF S 28 29 MC MC 30 31 33 34 35 TF TF MC MC MC 36 37 38 39 P 40 MC MC MC MC MC 65 66 67 68 69 TF 10 TF 11 12 TF TF 42 43 MC MC S 13 14 TF TF 46 76 MC MC 83 117 15 16 47 TF TF MC 48 49 50 MC MC MC 77 84 85 17 18 19 51 52 53 TF TF TF MC MC MC 54 70 71 87 88 89 MC MC MC MC MC MC 90 91 92 93 94 95 20 TF 55 MC 56 57 MC 58 59 Note: MC MC S S 60 61 P 41 44 45 MC MC TF = True-False MC = Multiple Choice 62 63 Type Item Type Item Learning Objective MC 22 MC Learning Objective MC 24 MC 25 Learning Objective MC 32 MC 129 MC 116 E Learning Objective MC 72 MC 82 MC 73 MC 106 MC 74 MC 107 MC 75 MC 108 MC 81 MC 109 Learning Objective MC 78 MC 79 Learning Objective MC 80 MC 120 MC 110 MC 121 Learning Objective MC 122 E 131 E 129 P Learning Objective MC 86 MC 122 MC 119 E 123 MC 121 E 124 Learning Objective MC 96 MC 102 MC 97 MC 111 MC 98 MC 112 MC 99 MC 113 MC 100 MC 114 MC 101 MC 115 Learning Objective 10 MC Learning Objective *11 Learning Objective *12 MC 64 MC 104 MC 103 MC 105 E = Exercise P = Problem Type Item Type Item Type MC S 26 MC S 27 MC MC MC MC MC MC 116 117 118 119 129 E E E E P 130 P MC 110 MC 131 P E E 130 132 P P E E E 125 130 E P MC MC MC MC MC MC 119 120 121 122 123 126 E E E E E E 129 130 131 P P P MC MC 127 128 E E P P To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - Test Bank for Intermediate Accounting, Twelfth Edition TRUE-FALSE—Conceptual A pension plan is contributory when the employer makes payments to a funding agency Qualified pension plans permit deductibility of the employer’s contributions to the pension fund An employer reports no liability on its balance sheet in a defined-contribution plan Employers are at risk with defined-benefit plans because they must contribute enough to meet the cost of benefits that the plan defines Companies compute the vested benefit obligation using only vested benefits, at current salary levels The accumulated benefit obligation bases the deferred compensation amount on both vested and nonvested service using future salary levels Service cost is the expense caused by the increase in the accumulated benefit obligation because of employees’ service during the current year The interest component of pension expense is the interest for the period on the projected benefit obligation outstanding during the period Companies recognize the projected benefit obligation in their accounts and in their financial statements 10 The Prepaid/Accrued Pension Cost account balance equals the difference between the projected benefit obligation and the pension plan assets 11 Companies should recognize the entire increase in projected benefit obligation due to a plan initiation or amendment as pension expense in the year of amendment 12 The FASB requires the years-of-service method for amortization of unrecognized prior service cost 13 The difference between the expected return and the actual return is referred to as the unexpected gain or loss 14 The unexpected gains and losses from changes in the projected benefit obligation are called asset gains and losses 15 The Unrecognized Net Gain/Loss account is limited to 10 percent of the larger of the beginning balances of the projected benefit obligation or the market-related plan assets value 16 If the unrecognized gain or loss is less than the corridor, the net gains and losses are subject to amortization 17 A minimum liability is recognized when the projected benefit obligation exceeds the fair value of pension plan assets To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Pensions and Postretirement Benefits 20 - 18 Companies can combine the accrued pension cost balance and the additional liability balance for balance sheet purposes 19 When the additional liability exceeds the amount of unrecognized prior service cost, the excess is credited to Excess of Additional Pension Liability Over Unrecognized Prior Service Cost 20 Companies must disclose a reconciliation of how the projected benefit obligation and the fair value of plan assets changed during the year either in their financial statements or in the notes True-False Answers—Conceptual Item Ans F T F T T Item 10 Ans F F T F T Item 11 12 13 14 15 Ans F F T F T Item 16 17 18 19 20 Ans F F T F T MULTIPLE CHOICE—Conceptual 21 In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), the following are considered by the actuary: a retirement and mortality rate b interest rates c benefit provisions of the plan d all of these factors 22 In a defined-benefit plan, the process of funding refers to a determining the projected benefit obligation b determining the accumulated benefit obligation c making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims d determining the amount that might be reported for pension expense 23 In all pension plans, the accounting problems include all the following except a measuring the amount of pension obligation b disclosing the status and effects of the plan in the financial statements c allocating the cost of the plan to the proper periods d determining the level of individual premiums 24 In a defined-contribution plan, a formula is used that a defines the benefits that the employee will receive at the time of retirement b ensures that pension expense and the cash funding amount will be different c requires an employer to contribute a certain sum each period based on the formula d ensures that employers are at risk to make sure funds are available at retirement To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - 25 Test Bank for Intermediate Accounting, Twelfth Edition In a defined-benefit plan, a formula is used that a requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee b defines the benefits that the employee will receive at the time of retirement c requires that pension expense and the cash funding amount be the same d defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees S Which of the following is not a characteristic of a defined-contribution pension plan? a The employer's contribution each period is based on a formula b The benefits to be received by employees are defined by the terms of the plan c The accounting for a defined-contribution plan is straightforward and uncomplicated d The benefit of gain or the risk of loss from the assets contributed to the pension fund are borne by the employee S In accounting for a defined-benefit pension plan a an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised b the employer's responsibility is simply to make a contribution each year based on the formula established in the plan c the expense recognized each period is equal to the cash contribution d the liability is determined based upon known variables that reflect future salary levels promised to employees S 28 Alternative methods exist for the measurement of the pension obligation (liability) Which measure requires the use of future salaries in its computation? a Vested benefit obligation b Accumulated benefit obligation c Projected benefit obligation d Restructured benefit obligation 29 The accumulated benefit obligation measures a the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels b the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels c an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement d the shortest possible period for funding to maximize the tax deduction 30 The projected benefit obligation is the measure of pension obligation that a is required to be used for reporting the service cost component of pension expense b requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels c requires the longest possible period for funding to maximize the tax deduction d is not sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense 26 27 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Pensions and Postretirement Benefits 20 - 31 Differing measures of the pension obligation can be based on a all years of service—both vested and nonvested—using current salary levels b only the vested benefits using current salary levels c both vested and nonvested service using future salaries d all of these 32 Vested benefits a usually require a certain minimum number of years of service b are those that the employee is entitled to receive even if fired c are not contingent upon additional service under the plan d are defined by all of these 33 The relationship between the amount funded and the amount reported for pension expense is as follows: a pension expense must equal the amount funded b pension expense will be less than the amount funded c pension expense will be more than the amount funded d pension expense may be greater than, equal to, or less than the amount funded 34 The computation of pension expense includes all the following except a service cost component measured using current salary levels b interest on projected benefit obligation c expected return on plan assets d All of these are included in the computation 35 In computing the service cost component of pension expense, the FASB concluded that a the accumulated benefit obligation provides a more realistic measure of the pension obligation on a going concern basis b a company should employ an actuarial funding method to report pension expense that best reflects the cost of benefits to employees c the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense d all of these 36 The interest on the projected benefit obligation component of pension expense a reflects the incremental borrowing rate of the employer b reflects the rates at which pension benefits could be effectively settled c is the same as the expected return on plan assets d may be stated implicitly or explicitly when reported 37 One component of pension expense is expected return on plan assets Plan assets include a contributions made by the employer and contributions made by the employee when a contributory plan of some type is involved b plan assets still under the control of the company c only assets reported on the balance sheet of the employer as prepaid pension cost d none of these To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - 10 Test Bank for Intermediate Accounting, Twelfth Edition 38 The actual return on plan assets a is equal to the change in the fair value of the plan assets during the year b includes interest, dividends, and changes in the market value of the fund assets c is equal to the actual rate of return times the fair value of the plan assets at the beginning of the period d all of these 39 In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as a an offset to the liability for prior service cost b accrued or prepaid pension cost c an accrued actuarial liability d a charge or credit to unrealized appreciation and depreciation P 40 Which of the following items should be included in the net pension cost calculated by an employer who sponsors a defined-benefit pension plan for its employees? a b c d P Fair value of plan assets Yes Yes No No Amortization of unrecognized prior service cost Yes No Yes No 41 A corporation has a defined-benefit plan An accrued pension cost will result at the end of the first year if the a accumulated benefit obligation exceeds the fair value of the plan assets b fair value of the plan assets exceeds the accumulated benefit obligation c amount of employer contributions exceeds the net periodic pension cost d amount of net periodic pension cost exceeds the amount of employer contributions 42 When a company adopts a pension plan, prior service costs should be charged to a operations of current and future periods b operations of prior periods c operations of the current period d retained earnings 43 When a company amends a pension plan, for accounting purposes, prior service costs should be a treated as a prior period adjustment because no future periods are benefited b amortized in accordance with procedures used for income tax purposes c amortized under accrual accounting to current and future periods benefited d treated as an expense of the period during which the funding occurs 44 Prior service cost is amortized on a a straight-line basis over the expected future years of service b years-of-service method or on a straight-line basis over the average remaining service life of active employees c straight-line basis over 15 years d straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Pensions and Postretirement Benefits 20 - 33 Ex 20-121 (cont.) Instructions Prepare a schedule which reconciles the funded status of the pension plan with the amounts reported in Aguilar Company's balance sheet at December 31, 2008 Solution 20-121 Aguilar Company Pension Reconciliation Schedule For Year Ended December 31, 2008 Actuarial present value of benefit obligations: Vested benefit obligation $505,000 Accumulated benefit obligation $683,000 Projected benefit obligation Plan assets at fair value Projected benefit obligation in excess of plan assets Unrecognized prior service cost Unrecognized net (gain) or loss Prepaid/accrued pension cost Additional pension liability Accrued pension cost liability recognized in the balance sheet $(865,000) 630,000 (235,000) 300,000 (80,000) (15,000) (38,000) $ (53,000) Ex 20-122—Pension plan calculations The following information is for the pension plan for the employees of Faulk, Inc Accumulated benefit obligation Projected benefit obligation Fair value of plan assets Market-related value of assets Net (gain) or loss Settlement rate Expected rate of return 12/31/07 $2,800,000 3,040,000 3,080,000 2,960,000 (425,000) 8% 7% 12/31/08 $3,760,000 4,000,000 3,520,000 3,440,000 (480,000) 8% 6% Faulk estimates that the average remaining service life is 15 years Faulk's contribution was $520,000 in 2008 and benefits paid were $280,000 Instructions (a) Calculate the interest cost for 2008 (b) Calculate the actual return on plan assets in 2008 (c) Calculate the unexpected gain or loss in 2008 (d) Calculate the corridor for 2008 and the amortization of the net gain for 2008 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - 34 Test Bank for Intermediate Accounting, Twelfth Edition Solution 20-122 (a) $3,040,000 × 8% = $243,200 (b) Fair value of plan assets (12/31/08) Fair value of plan assets (1/1/08) Contributions Benefits paid Actual return on plan assets $3,520,000 (3,080,000) 440,000 (520,000) 280,000 $ 200,000 (c) Actual return (see b.) Expected return ($2,960,000 × 6%) Unexpected gain $ 200,000 177,600 $ 22,400 (d) 10 × $2,960,000 = $296,000; 10 × $3,040,000 = $304,000 The corridor is the larger, $304,000 $425,000 – $304,000 = $121,000; $121,000 ÷ 15 = $8,067 amortization of net gain Ex 20-123—Pension plan calculations and entries Information about the pension plan of Crown Co is as follows: Accumulated benefit obligation Projected benefit obligation Unrecognized prior service cost Fair value of plan assets Market-related value of assets Pension expense Contribution Discount rate (for year) 12/31/07 $4,700,000 4,800,000 1,800,000 4,650,000 4,900,000 1,000,000 985,000 9% 12/31/08 $4,930,000 5,020,000 1,600,000 4,800,000 4,980,000 1,400,000 1,350,000 8% Accrued pension cost was $10,000 at January 1, 2007 and $25,000 at January 1, 2008 Instructions (a) What is the corridor for 2008? (b) Calculate the minimum liability at December 31, 2008 (c) Prepare entries for 2008 to record the pension expense and contribution, and to record the pension liability Solution 20-123 (a) 10 × $4,800,000 = $480,000; 10 × $4,900,000 = $490,000 The corridor is the larger, $490,000 (b) Accumulated benefit obligation Fair value of plan assets Minimum liability $4,930,000 (4,800,000) $ 130,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Pensions and Postretirement Benefits 20 - 35 Solution 20-123 (cont.) (c) Pension Expense 1,400,000 Prepaid/Accrued Pension Cost Cash Intangible Asset—Deferred Pension Cost Additional Pension Liability Minimum liability $130,000 Accrued pension cost, 1/1/08 $25,000 Accrued 2008 50,000 (75,000) Additional liability $ 55,000 50,000 1,350,000 55,000 55,000 Ex 20-124—Corridor amortization Explain corridor amortization Solution 20-124 The FASB invented the corridor approach for amortizing pension plan gains and losses when they get too large The unrecognized net gain or loss gets too large when it exceeds the arbitrarily selected criterion of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related asset value Any systematic method of amortizing the excess unrecognized gain or loss may be used but it cannot be less than the amount computed using the straight-line over the average remaining service-life of all active employees Ex 20-125—Corridor approach amortization of net gains and losses Hanna Company has 200 employees who are expected to receive benefits under the company's defined-benefit pension plan The total number of service-years of these employees is 2,000 The actuary for the company's pension plan calculated the following net gains and losses: For the Year Ended December 31 2007 2008 2009 (Gain) Or Loss $660,000 (594,000) 990,000 Prior to 2007, there was no unrecognized net gain or loss Information about the company's projected benefit obligation and market-related asset values follows: As of January 2007 2008 2009 Projected benefit obligation $2,100,000 $2,340,000 $2,940,000 Market-related asset values 1,680,000 2,460,000 2,550,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - 36 Test Bank for Intermediate Accounting, Twelfth Edition Ex 20-125 cont.) Instructions Based on the above information about Hanna Company, prepare a schedule which reflects the amount of unrecognized net gain or loss to be amortized by the company as a component of pension expense for the years 2007, 2008, and 2009 The company amortizes unrecognized net gains or losses using the straight-line method over the average service life of participating employees Solution 20-125 Corridor Test and Gain/Loss Amortization Schedule Beginning of Year Cumulative PBO Plan Assets Corridor (Gain) Or Loss 2007 $2,100,000 $1,680,000 $210,000 $ -02008 2,340,000 2,460,000 246,000 660,000 2009 2,940,000 2,550,000 294,000 24,600** Amortization $ -041,400* -0- Average Service Years = 2,000 ÷ 200 = 10 years *$660,000 – $246,000 = $414,000 ÷ 10 = $41,400 **$660,000 – $594,000 – $41,400 = $24,600 Ex 20-126—Pension plan calculations and journal entry On January 1, 2008, Stine Co had the following balances: Projected benefit obligation Fair value of plan assets $7,200,000 7,200,000 Other data related to the pension plan for 2008: Service cost Unrecognized prior service cost Contributions to the plan Benefits paid Actual return on plan assets Settlement rate Expected rate of return 315,000 -0459,000 450,000 432,000 9% 6% Instructions (a) Determine the projected benefit obligation at December 31, 2008 There are no net gains or losses (b) Determine the fair value of plan assets at December 31, 2008 (c) Calculate pension expense for 2008 (d) Prepare the journal entry to record pension expense and the contributions for 2008 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Pensions and Postretirement Benefits 20 - 37 Solution 20-126 (a) Projected benefit obligation, January Service cost Interest cost (9% × $7,200,000) Benefits paid Projected benefit obligation, December 31 $7,200,000 315,000 648,000 (450,000) $7,713,000 (b) Fair value of plan assets, January Actual return Contributions Benefits paid Fair value of plan assets, December 31 $7,200,000 432,000 459,000 (450,000) $7,641,000 (c) Service cost Interest cost (9% × $7,200,000) Actual return on plan assets Pension expense (d) Pension Expense Accrued/Prepaid Pension Cost Cash $315,000 648,000 (432,000) $531,000 531,000 72,000 459,000 *Ex 20-127—Computing and recording postretirement expense The following information is related to the Hight Co postretirement benefits plan for 2008: Service cost $168,000 Discount rate 10% EPBO, January 1, 2008 820,000 APBO, January 1, 2008 640,000 Unrecognized transition amount amortization 32,800 Actual return on plan assets in 2008 22,400 Expected return on plan assets in 2008 29,000 Contributions (funding) 224,000 Instructions (a) Compute the amount of postretirement expense for 2008 (Show computations.) (b) Prepare the journal entry to record postretirement expense and Hight's contributions for 2008 *Solution 20-127 (a) Service cost Interest cost (10% × $640,000) Amortization of transition amount Actual return on plan assets Unexpected loss Postretirement expense—2008 (b) Postretirement Expense Cash Prepaid/Accrued Cost $168,000 64,000 32,800 (22,400) (6,600) $235,800 235,800 224,000 11,800 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - 38 Test Bank for Intermediate Accounting, Twelfth Edition *Ex 20-128—Computing postretirement expense and APBO The following information is related to the postretirement benefits plan of Gordon, Inc for 2008: Service cost $ 280,000 Discount rate 8% APBO, January 1, 2008 2,100,000 EPBO, January 1, 2008 2,400,000 Actual return on plan assets in 2008 104,000 Expected return on plan assets in 2008 95,600 Amortization of unrecognized transition amount 107,200 Amortization of unrecognized net gain 7,200 Contributions (funding) 400,000 Benefit payments 208,000 Instructions (a) Compute the amount of postretirement expense for 2008 (Show computations.) (b) Compute the amount of the APBO at December 31, 2008 *Solution 20-128 (a) Service cost Interest cost (8% × $2,100,000) Actual return on plan assets Unexpected gain Amortization of transition amount Amortization of net gain Postretirement expense—2008 (b) APBO, January 1, 2008 Service cost Interest cost Benefit payments APBO, December 31, 2008 $280,000 168,000 (104,000) 8,400 107,200 (7,200) $452,400 $2,100,000 280,000 168,000 (208,000) $2,340,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Pensions and Postretirement Benefits 20 - 39 PROBLEMS Pr 20-129—Measuring, recording, and reporting pension expense and liability Eckert, Inc on January 1, 2008 initiated a noncontributory, defined-benefit pension plan that grants benefits to its 100 employees for services rendered in years prior to the adoption of the pension plan The total expected service-years of the 100 employees who are expected to receive benefits under the plan is 1,200 An actuarial consulting firm has indicated that the present value of the projected benefit obligation on January 1, 2008 was $5,040,000 On December 31, 2008 the following information was provided concerning the pension plan's operations for its first year Employer's contribution at end of year $1,600,000 Service cost 600,000 Accumulated benefit obligation 5,090,000 Projected benefit obligation 6,000,000 Plan assets (at fair value) 1,600,000 Market-related asset value 1,600,000 Expected return on plan assets 9% Settlement rate 8% Instructions (a) What is the prior service cost at January 1, 2008? (b) Compute the pension expense recognized in 2008 Assume the prior service cost is amortized over the average remaining service life of the employees (c) Prepare the journal entries to reflect accounting for the company's pension plan for the year ended December 31, 2008 (d) Indicate the amounts that are reported on the income statement and the balance sheet for 2008 Solution 20-129 (a) $3,780,000 (b) Service cost Interest on projected benefit obligation ($5,040,000 × 8%) Amortization of prior service cost* Pension expense—2008 $ 600,000 403,200 420,000 $1,423,200 *1,200 ——— = 12 years average remaining service life 100 $5,040,000 ————— = $420,000 12 (c) Pension Expense 1,423,200 Prepaid Pension Cost 176,800 Cash 1,600,000 Intangible Asset—Deferred Pension Cost 3,666,800* Additional Pension Liability 3,666,800 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - 40 Test Bank for Intermediate Accounting, Twelfth Edition Solution 20-129 (cont.) *Accumulated benefit obligation Plan assets (at fair value) Unfunded accumulated benefit obligation Prepaid pension cost Additional pension liability (d) ($5,090,000) 1,600,000 (3,490,000) 176,800 ($3,666,800) Income statement Pension Expense $1,423,200 Balance sheet Intangible Asset—Deferred Pension Cost $3,666,800 Accrued Pension Cost $3,490,000 Pr 20-130—Measuring and recording pension expense Presented below is information related to the pension plan of Vector Inc for the year 2008 The service cost of pension expense is $240,000 using the projected benefits approach The projected benefit obligation and the accumulated benefit obligation at the beginning of the year are $300,000 and $280,000, respectively The expected return on plan assets is 9% and the settlement rate is 10% The unrecognized prior service cost at the beginning of the year is $140,000 The company has a workforce of 200 employees, all who are expected to receive benefits under the plan The total number of service-years is 1,000 and the service-years attributable to 2008 is 200 The company has decided to use the years-of-service method of amortization for these costs At the beginning of the period, the market-related asset value was $280,000 and the fair value of pension plan assets, $284,000 The company had an unrecognized net loss at the beginning of the period of $90,000 Any amortization of unrecognized net loss is recognized on a straight-line basis over the average remaining service-life of the employees The contribution made to the pension fund in 2008 was $231,000 Instructions (a) Determine the pension expense to be reported on the income statement for 2008 (Round all computations to nearest dollar.) (b) Prepare the journal entry(ies) to record pension expense for 2008 Solution 20-130 (a) Service cost (projected benefits approach) Interest on projected benefit obligation (10% × $300,000) Expected return on plan assets (9% × $280,000) Amortization of prior service cost (1) Amortization of loss (2) Pension expense $240,000 30,000 (25,200) 28,000 12,000 $284,800 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Pensions and Postretirement Benefits 20 - 41 Solution 20-130 (cont.) (1) $140,000 ———— = $140 1,000 200 × $140 = $28,000 (2) Market-related asset value $276,000 10% $ 27,600 Projected benefit obligation $300,000 10% $ 30,000 Net loss (beginning of period) Higher of 10% of projected benefit obligation or market-related asset value Amount to be amortized ($ 90,000) 30,000 ($ 60,000) 1,000 Expected Future Years of Service ——— = ——————————————— = years 200 Number of Employees $60,000 ———— = $12,000 years (b) Pension Expense Prepaid/Accrued Pension Cost Cash 284,800 53,800 231,000 Pr 20-131—Preparing a pension work sheet The accountant for Jarvis Corporation has developed the following information for the company's defined-benefit pension plan for 2008: Service cost $500,000 Actual return on plan assets 260,000 Annual contribution to the plan 900,000 Amortization of unrecognized prior service cost 105,000 Benefits paid to retirees 60,000 Settlement rate 10% Expected rate of return on plan assets 8% The accumulated benefit obligation at December 31, 2008, amounted to $4,250,000 Instructions (a) Using the above information for Jarvis Corporation, complete the pension work sheet for 2008 Indicate (credit) entries by parentheses Calculated amounts should be supported (b) Prepare the journal entries to reflect the accounting for the company's pension plan for the year ending December 31, 2008 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Pr 20-131 (cont.) Jarvis Corporation Pension Work Sheet—2008 —————————————————————————————————————————————————————————— General Journal Entries Memo Entries —————————————————————————————————————————————————————————— Unrecog- Unrecognized nized Annual Prepaid/ AddiProjected Prior Net Pension (Accrued) tional Pension Benefit Plan Service (Gain) Expense Cash Cost Liability Intangible Obligation Assets Cost or Loss —————————————————————————————————————————————————————————— Bal., Dec 31, 2007 (375,000) (3,750,000) 2,750,000 625,000 —————————————————————————————————————————————————————————— Service Cost —————————————————————————————————————————————————————————— Interest Cost —————————————————————————————————————————————————————————— Actual return —————————————————————————————————————————————————————————— Unexpected gain/loss —————————————————————————————————————————————————————————— Amortization of PSC —————————————————————————————————————————————————————————— Contributions —————————————————————————————————————————————————————————— Benefits —————————————————————————————————————————————————————————— Unrecognized gain/loss amort —————————————————————————————————————————————————————————— Minimum liability adjustment Journal entry for 2008 Balance, Dec 31, 2008 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Solution 20-131 Accounting for Pensions and Postretirement Benefits Jarvis Corporation Pension Work Sheet—2008 —————————————————————————————————————————————————————————— General Journal Entries Memo Entries —————————————————————————————————————————————————————————— Unrecog- Unrecognized nized Annual Prepaid/ AddiProjected Prior Net Pension (Accrued) tional Pension Benefit Plan Service (Gain) Expense Cash Cost Liability Intangible Obligation Assets Cost or Loss —————————————————————————————————————————————————————————— Bal., Dec 31, 2007 (375,000) (3,750,000) 2,750,000 625,000 —————————————————————————————————————————————————————————— Service Cost 500,000 (500,000) —————————————————————————————————————————————————————————— Interest Cost (1) 375,000 (375,000) —————————————————————————————————————————————————————————— Actual return (260,000) 260,000 —————————————————————————————————————————————————————————— Unexpected gain/loss (2) 40,000 (40,000) —————————————————————————————————————————————————————————— Amortization of PSC 105,000 (105,000) —————————————————————————————————————————————————————————— Contributions (900,000) 900,000 —————————————————————————————————————————————————————————— Benefits 60,000 (60,000) —————————————————————————————————————————————————————————— Unrecognized gain/loss amort —————————————————————————————————————————————————————————— Minimum liability (165,000) 165,000 adjustment (3) Journal entry (900,000) 140,000 for 2008 760,000 Balance, Dec 31, 2008 (235,000) (165,000) 165,000 (4,565,000) 3,850,000 520,000 (40,000) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - 44 Test Bank for Intermediate Accounting, Twelfth Edition Solution 20-131 (cont.) (b) (1) $3,750,000 × 10% = $375,000 (2) $260,000 – ($2,750,000 × 8%) = $40,000 (3) Accumulated Benefit Obligation Plan assets at fair value Unfunded accumulated benefit Prepaid/Accrued Pension Cost Additional liability $(4,250,000) 3,850,000 (400,000) 235,000 $ (165,000) Minimum Liability Pension Expense Prepaid/Accrued Pension Cost Cash 760,000 140,000 Intangible Asset—Deferred Pension Cost Additional Pension Liability 165,000 900,000 165,000 Pr 20-132—Amortization of prior service cost using years-of-service method On January 1, 2007, Quayle Incorporated amended its pension plan which caused an increase of $6,000,000 in its projected benefit obligation The company has 400 employees who are expected to receive benefits under the company's defined-benefit pension plan The personnel department provided the following information regarding expected employee retirements: Number of Employees 40 120 60 160 20 400 Expected Retirements On December 31 2007 2008 2009 2010 2011 The company plans to use the years-of-service method in calculating the amortization of unrecognized prior service cost as a component of pension expense Instructions Prepare a schedule which shows the amount of annual prior service cost amortization that the company will recognize as a component of pension expense from 2007 through 2011 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Accounting for Pensions and Postretirement Benefits Solution 20-132 Computation of Service-Years Year 2007 2008 2009 2010 2011 40 120 120 60 60 60 160 160 160 160 40 240 180 640 20 20 20 20 20 100 Cost Per Service Year: $6,000,000 ÷ 1,200 = $5,000 Quayle Incorporated Computation of Annual Prior Service Cost Amortization Year 2007 2008 2009 2010 2011 Total Service-Years 400 360 240 180 20 1,200 Cost Per Service-Year $5,000 5,000 5,000 5,000 5,000 Annual Amortization $2,000,000 1,800,000 1,200,000 900,000 100,000 $6,000,000 Total 400 360 240 180 20 1,200 20 - 45 ... slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - 30 Test Bank for Intermediate Accounting, Twelfth Edition EXERCISES Ex 20-116—Pension accounting terminology Briefly... E E P P To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - Test Bank for Intermediate Accounting, Twelfth Edition TRUE-FALSE—Conceptual A pension... retirement To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 20 - 25 Test Bank for Intermediate Accounting, Twelfth Edition In a defined-benefit plan,