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CHAPTER 20

ACCOUNTING FOR PENSIONSAND POSTRETIREMENT BENEFITS

TRUE-FALSE—ConceptualAnswer No. Description

F 1. Funded pension plan.T 2. Qualified pension plans.F 3. Defined-contribution plan liability.T 4. Defined-benefit plans.T 5. Vested benefit obligation.F 6. Accumulated benefit obligation. F 7. Definition of service cost.T 8. Definition of interest cost.F 9. Recognizing projected benefit obligation.T 10. Prepaid/Accrued Pension Cost balance.F 11. Plan amendment and projected benefit obligation increase.F 12. Years-of-service amortization method. T 13. Expected return and actual return.F 14. Unexpected gains and losses.T 15. Unrecognized Net Gain/Loss account and the corridor.F 16. Amortization of net gains and losses.F 17. Recognizing a minimum liability.T 18. Reporting accrued pension cost and additional liability balances.F 19. Recording Excess of Additional Pension Liability Over Unrecognized Prior

Service Cost.T 20. Reconciliation of PBO and fair value of plan assets.

MULTIPLE CHOICE—ConceptualAnswer No. Description

d 21. Factors considered by actuaries.c 22. Process of funding a pension plan.d 23. Accounting problems in pension plans.c 24. Nature of a defined-contribution plan.b 25. Nature of a defined-benefit plan.b S26. Defined-contribution plan characteristics.a S27. Accounting for a defined-benefit plan.c S28. Pension obligation measurement using future salaries.a 29. Definition of accumulated benefit obligation.a 30. Projected benefit obligation as a measure of pension obligation.d 31. Alternative measures of the pension obligation.d 32. Characteristics of vested benefits.d 33. Pension funding and pension expense recognition.a 34. Components of pension expense.c 35. Service cost calculated using future compensation levels.b 36. Settlement interest rates.

Test Bank for Intermediate Accounting, Twelfth Edition

MULTIPLE CHOICE—Conceptual (cont.)Answer No. Description

a 37. Nature of plan assets.b 38. Definition of actual return on plan assets.b 39. Prepaid/accrued pension cost.c P40. Items included in net pension cost.d P41. Definition of accrued pension cost.a 42. Recognition of prior service costs.c 43. Amortization of prior service costs.b 44. Amortization methods for prior service costs.a S45. Defined-benefit plan amendment.d S46. Unexpected gains and losses.b 47. Recording unrecognized gains and losses.a 48. Use of market-related asset values.a 49. Gain or loss caused by a plant closing.c 50. Switch from a defined-benefit plan to a defined-contribution plan.b 51. Recognition of a minimum liability.b 52. Intangible asset—deferred pension cost.a 53. Identification of a balance sheet account.d S54. Recognition of pension asset.b 55. Disclosures of pension plan information.c 56. Function of Pension Benefit Guaranty Corporation.c *57. Postretirement health care benefits.c *58. Disclosures of postretirement benefits.b *59. Transition amount.a *60. Postretirement benefits.d *61. Accrual period.b *62. Expected postretirement benefit obligation.c *63. Transition amount.d *64. Item not recognized.

P These questions also appear in the Problem-Solving Survival Guide.S These questions also appear in the Study Guide.*This topic is dealt with in an Appendix to the chapter.

MULTIPLE CHOICE—ComputationalAnswer No. Description

d 65. Calculate pension expense to be recognized.c 66. Calculate pension expense.a 67. Calculate pension expense for the period.b 68. Calculate pension expense to be recognized.c 69. Determine pension expense to be recognized.a 70. Calculate intangible asset to be reported.b 71. Calculate total pension liability to be reported.d 72. Calculate pension expense.d 73. Calculate pension expense.b 74. Calculate pension expense.b 75. Calculate actual return on plan assets.a 76. Calculate unexpected gain on plan assets.d 77. Calculate unrecognized net loss amortization.

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Accounting for Pensions and Postretirement Benefits

MULTIPLE CHOICE—ComputationalAnswer No. Description

b 78. Calculate projected benefit obligation balance.c 79. Calculate fair value of plan assets.b 80. Calculate amortization of prior service cost.c 81. Calculate interest cost.b 82. Determine actual return on plan assets.b 83. Calculate the unexpected gain on plan assets.a 84. Determine the corridor.a 85. Calculate amortization of unrecognized net gain.c 86. Calculate accrued pension cost recognized in the balance sheet.a 87. Calculate total pension liability.c 88. Calculate total pension liability reflecting minimum liability.c 89. Calculate minimum liability.b 90. Calculate amount of intangible asset.b 91. Calculate minimum liability.c 92. Calculate amount of intangible asset.b 93. Calculate minimum liability to be reported.a 94. Calculate intangible asset to be reported.d 95. Calculate total pension liability to be reported.d 96. Calculate amount of intangible asset to be reported.d 97. Determine balance of projected benefit obligation.c 98. Determine fair value of plan assets.b 99. Calculate additional pension liability amount.a 100. Calculate additional pension liability amount.c 101. Calculate minimum liability.c 102. Determine amount of intangible assets.b *103. Calculate postretirement expense.b *104. Calculate postretirement expense.b *105. Calculate postretirement expense.

MULTIPLE CHOICE—CPA AdaptedAnswer No. Description

d 106. Determine the projected benefit obligation.b 107. Nature of interest cost.a 108. Calculate prepaid pension cost.c 109. Determine the accrued pension cost.d 110. Comparison of service costs and pension costs in consecutive years.a 111. Calculate prepaid pension cost.c 112. Calculate the minimum pension liability.c 113. Minimum liability of a defined-benefit plan.b 114. Minimum liability of a defined-benefit plan.d 115. Determine the amount of pension liability to be reported.

EXERCISESItem Description

E20-116 Pension accounting terminology.E20-117 Pension assets.E20-118 Measuring and recording pension expense.

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EXERCISES (cont.)Item Description

E20-119 Measuring and recording pension expense.E20-120 Additional pension liability.E20-121 Pension reconciliation schedule.E20-122 Pension plan calculations.E20-123 Pension plan calculation and entries.E20-124 Corridor amortization.E20-125 Corridor approach amortization of net gains and losses.E20-126 Pension plan calculations and journal entries.

*E20-127 Computing and recording postretirement expense.*E20-128 Computing postretirement expense and APBO.

PROBLEMSItem Description

P20-129 Measuring, recording, and reporting pension expense and liability.P20-130 Measuring and recording pension expense.P20-131 Preparing a pension work sheet.P20-132 Amortization of prior service cost.

CHAPTER LEARNING OBJECTIVES

1. Distinguish between accounting for the employer's pension plan and accounting for the pension fund.

2. Identify types of pension plans and their characteristics.

3. Explain alternative measures for valuing the pension obligation.

4. List the components of pension expense.

5. Use a worksheet for employer's pension plan entries.

6. Describe the amortization of unrecognized prior service costs.

7. Explain the accounting procedure for recognizing unexpected gains and losses.

8. Explain the corridor approach to amortizing unrecognized gains and losses.

9. 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.

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SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item TypeLearning Objective 1

1. TF 2. TF 21. MC 22. MCLearning Objective 2

3. TF 4. TF 23. MC 24. MC 25. MC S26. MC S27. MCLearning Objective 3

5. TF S28. MC 30. MC 32. MC 129. P6. TF 29. MC 31. MC 116. E

Learning Objective 47. TF 36. MC 65. MC 72. MC 82. MC 116. E 130. P8. TF 37. MC 66. MC 73. MC 106. MC 117. E

33. MC 38. MC 67. MC 74. MC 107. MC 118. E34. MC 39. MC 68. MC 75. MC 108. MC 119. E35. MC P40. MC 69. MC 81. MC 109. MC 129. P

Learning Objective 59. TF 10. TF P41. MC 78. MC 79. MC 110. MC 131. P

Learning Objective 611. TF 42. MC 44. MC 80. MC 120. E 130. P12. TF 43. MC S45. MC 110. MC 121. E 132. P

Learning Objective 713. TF S46. MC 83. MC 122. E 131. P14. TF 76. MC 117. E 129. P

Learning Objective 815. TF 48. MC 77. MC 86. MC 122. E 125. E16. TF 49. MC 84. MC 119. E 123. E 130. P47. MC 50. MC 85. MC 121. E 124. E

Learning Objective 917. TF S54. MC 90. MC 96. MC 102. MC 119. E 129. P18. TF 70. MC 91. MC 97. MC 111. MC 120. E 130. P19. TF 71. MC 92. MC 98. MC 112. MC 121. E 131. P51. MC 87. MC 93. MC 99. MC 113. MC 122. E52. MC 88. MC 94. MC 100. MC 114. MC 123. E53. MC 89. MC 95. MC 101. MC 115. MC 126. E

Learning Objective 1020. TF 55. MC 56. MC

Learning Objective *1157. MC

Learning Objective *1258. MC 60. MC 62. MC 64. MC 104. MC 127. E59. MC 61. MC 63. MC 103. MC 105. MC 128. E

Note: TF = True-False E = ExerciseMC = Multiple Choice P = Problem

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TRUE-FALSE—Conceptual

1. A pension plan is contributory when the employer makes payments to a funding agency.

2. Qualified pension plans permit deductibility of the employer’s contributions to the pension fund.

3. An employer reports no liability on its balance sheet in a defined-contribution plan.

4. Employers are at risk with defined-benefit plans because they must contribute enough to meet the cost of benefits that the plan defines.

5. Companies compute the vested benefit obligation using only vested benefits, at current salary levels.

6. The accumulated benefit obligation bases the deferred compensation amount on both vested and nonvested service using future salary levels.

7. Service cost is the expense caused by the increase in the accumulated benefit obligation because of employees’ service during the current year.

8. The interest component of pension expense is the interest for the period on the projected benefit obligation outstanding during the period.

9. 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.

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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—ConceptualItem Ans. Item Ans. Item Ans. Item Ans.1. F 6. F 11. F 16. F2. T 7. F 12. F 17. F3. F 8. T 13. T 18. T4. T 9. F 14. F 19. F5. T 10. T 15. T 20. 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 toa. 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 excepta. 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 thata. 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.

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25. In a defined-benefit plan, a formula is used thata. 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.

S26. 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.

S27. In accounting for a defined-benefit pension plana. 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.

S28. 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 obligationb. Accumulated benefit obligationc. Projected benefit obligationd. Restructured benefit obligation

29. The accumulated benefit obligation measuresa. 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 thata. 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.

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31. Differing measures of the pension obligation can be based ona. 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 benefitsa. 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 excepta. 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 thata. 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 expensea. 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 includea. 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.

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38. The actual return on plan assetsa. 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 asa. 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.

P40. 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?

Amortization ofFair value unrecognized prior

of plan assets service costa. Yes Yesb. Yes Noc. No Yesd. No No

P41. A corporation has a defined-benefit plan. An accrued pension cost will result at the end of the first year if thea. 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 toa. 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 bea. 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 aa. 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.

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S45. Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date of amendmenta. both the accumulated benefit obligation and the projected benefit obligation are

usually greater than before.b. both the accumulated benefit obligation and the projected benefit obligation are

usually less than before.c. the expense and the liability should be recognized at the time of the plan change.d. the expense should be recognized immediately, but the liability may be deferred until a

reasonable basis for its determination has been identified.

S46. The unexpected gains or losses that result from changes in the projected benefit obligation are called

Asset LiabilityGains & Losses Gains & Losses

a. Yes Yesb. No Noc. Yes Nod. No Yes

47. Unrecognized gains and losses that relate to the computation of pension expense should bea. recorded currently as an adjustment to pension expense in the period incurred.b. recorded currently and in the future by applying the corridor method which provides

the amount to be amortized.c. amortized over a 15-year period.d. recorded only if a loss is determined.

48. Market-related asset value is used to determine the corridor and to calculate the expected return on plan assets.

Expected ReturnCorridor on Plan Assets

a. Yes Yesb. Yes Noc. No Yesd. No No

49. A pension fund gain or loss that is caused by a plant closing should bea. recognized immediately as a gain or loss on the plant closing.b. spread over the current year and future years.c. charged or credited to the current pension expense.d. recognized as a prior period adjustment.

50. When a company switches from a defined-benefit to a defined-contribution plan, any gain arising must generally be reporteda. in the current and prospective periods on a straight-line basis.b. as a prior period adjustment.c. currently as a gain.d. in the current and prospective periods on a declining-balance method over the

average remaining service life of existing employees.

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51. A minimum liability for pension expense is reported whena. the projected benefit obligation exceeds the fair value of pension plan assets.b. the accumulated benefit obligation exceeds the fair value of pension plan assets.c. the pension expense reported for the period is greater than the funding amount for the

same period.d. vested benefits exceed the fair value of pension plan assets.

52. An intangible asset (deferred pension cost) is created whena. the accumulated benefit obligation exceeds the fair value of pension plan assets, but

accrued pension cost and unrecognized prior service cost is greater than this excess.b. the accumulated benefit obligation exceeds the fair value of pension plan assets, but

accrued pension cost is less than this excess, and unrecognized prior service cost exists.

c. pension plan assets at fair value exceed the accumulated benefit obligation.d. pension plan assets at book value exceed the projected benefit obligation.

53. Which of the following statements is correct?a. There is an account titled Additional Pension Liability.b. There is an account titled Minimum Pension Liability.c. Accrued pension cost and additional pension liability should be reported separately on

the balance sheet.d. None of these.

S54. According to the FASB, immediate recognition of a liability (referred to as the minimum liability) is required when the accumulated benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the accumulated benefit obligation, the Boarda. requires recognition of an asset.b. requires recognition of an asset if the excess fair value of plan assets exceeds the

corridor amount.c. recommends recognition of an asset but does not require such recognition.d. does not permit recognition of an asset.

55. Which of the following disclosures of pension plan information would not normally be required by Statement of Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits”?a. The major components of pension expenseb. The amount paid from the pension fund to retirees during the periodc. The funded status of the plan and the amounts recognized in the financial statementsd. The rates used in measuring the benefit amounts

56. The main purpose of the Pension Benefit Guaranty Corporation is toa. require minimum funding of pensions.b. require plan administrators to publish a comprehensive description and summary of

their plans.c. administer terminated plans and to impose liens on the employer's assets for certain

unfunded pension liabilities.d. all of these.

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*57. Which of the following statements is true about postretirement health care benefits?a. They are generally funded.b. The benefits are well-defined and level in dollar amount.c. The beneficiary is the retiree, spouse, and other dependents.d. The benefit is payable monthly.

*58. Which of the following disclosures of postretirement benefits would not be required by professional pronouncements?a. Postretirement expense for the periodb. A schedule showing changes in postretirement benefits and plan assets during the yearc. The amount of the actuarial liability for postretirement benefitsd. The assumptions and rates used in computing the EPBO and APBO

*59. At the beginning of the year of adoption of Statement of Financial Accounting Standards No. 106, a transition amount is computed as the excess of thea. expected postretirement benefit obligation over the fair value of plan assets or vice

versa.b. accumulated postretirement benefit obligation over the fair value of plan assets or vice

versa.c. expected postretirement benefit obligation over the fair value of plan assets, but not

vice versa.d. accumulated postretirement benefit obligation over the fair value of plan assets, but

not vice versa.

*60. Postretirement benefits may include all of the following excepta. severance pay to laid-off employees.b. dental care.c. legal and tax services.d. tuition assistance.

*61. Which of the following statements is correct?a. The period over which postretirement benefits are accrued is called the attribution

period.b. The accrual period generally begins when an employee is hired.c. The accrual period generally ends on the date the employee is eligible to receive the

benefits and ceases to earn additional benefits.d. All of these.

*62. Which of the following statements about the expected postretirement benefit obligation (EPBO) is not correct?a. The EPBO is an actuarial present value.b. The EPBO is recorded in the accounts.c. The EPBO is used in measuring periodic expense.d. All of these are correct.

*63. Which of the following statements about the immediate recognition of a transition amount is not correct?a. The transition amount is recognized in the income statement as the effect of a change

in accounting principle.b. The transition amount is recognized in the income statement net of tax.c. Restatement of previously issued annual financial statements is permitted.d. The transition amount is recognized in the balance sheet as a long-term liability.

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*64. Which of the following is a significant item not recognized in the accounts and in the financial statements?a. Accumulated postretirement benefit obligationb. Postretirement benefit plan assetsc. Expected postretirement benefit obligationd. All of these.

Multiple Choice Answers—ConceptualItem Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

21. d 28. c 35. c 42. a 49. a 56. c *63. c22. c 29. a 36. b 43. c 50. c *57. c *64. d23. d 30. a 37. a 44. b 51. b *58. c24. c 31. d 38. b 45. a 52. b *59. b25. b 32. d 39. b 46. d 53. a *60. a26. b 33. d 40. c 47. b 54. d *61. d27. a 34. a 41. d 48. a 55. b *62. b

MULTIPLE CHOICE—Computational

65. Presented below is pension information related to Tyler, Inc. for the year 2008:Service cost $72,000Interest on projected benefit obligation 54,000Interest on vested benefits 24,000Amortization of prior service cost due to increase in benefits 12,000Expected return on plan assets 18,000

The amount of pension expense to be reported for 2008 isa. $108,000.b. $144,000.c. $162,000.d. $120,000.

66. Koble, Inc. sponsors a defined-benefit pension plan. The following data relates to the operation of the plan for the year 2008.

Service cost $ 200,000Contributions to the plan 220,000Actual return on plan assets 180,000Projected benefit obligation (beginning of year) 2,400,000Market-related and fair value of plan assets (beginning of year) 1,600,000

The expected return on plan assets and the settlement rate were both 10%. The amount of pension expense reported for 2008 isa. $200,000.b. $260,000.c. $280,000.d. $440,000.

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67. Presented below is information related to Marley Inc. pension data for 2008.Service cost $900,000Actual return on plan assets 210,000Interest on projected benefit obligation 390,000Amortization of unrecognized net loss 90,000Amortization of unrecognized prior service cost 165,000Expected return on plan assets 180,000

What amount should be reported for pension expense in 2008?a. $1,365,000b. $1,335,000c. $1,515,000d. $1,155,000

68. Randel, Inc. received the following information from its pension plan trustee concerning the operation of the company's defined-benefit pension plan for the year ended December 31, 2007.

January 1, 2008 December 31, 2008Market-related asset value $4,200,000 $4,500,000Projected benefit obligation 4,800,000 5,160,000Accumulated benefit obligation 840,000 1,020,000Unrecognized net (gains) and losses -0- (90,000)

The service cost component of pension expense for 2008 is $360,000 and the amortization of unrecognized prior service cost is $60,000. The settlement rate is 10% and the expected rate of return is 9%. What is the amount of pension expense for 2008?a. $360,000b. $522,000c. $531,000d. $432,000

Use the following information for questions 69 through 71.

The following information for Monroe Enterprises is given below:December 31, 2008

Assets and obligationsPlan assets (at fair value) $1,200,000Market-related asset value 1,160,000Accumulated benefit obligation 1,280,000Projected benefit obligation 1,840,000

Amounts to be RecognizedPrepaid/(accrued) pension cost at beginning of year (32,000)Pension expense (240,000)Contribution 216,000Prepaid/(accrued) pension cost at end of year $ (56,000)

Unrecognized prior service costs $ 275,000Unrecognized gains (net) (140,000)

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69. What is the pension expense that Monroe Enterprises should report for 2008?a. $216,000b. $80,000c. $240,000d. $168,000

70. What is the amount that Monroe Enterprises should report as Intangible Asset—Deferred Pension Cost as of December 31, 2008?a. $24,000b. $80,000c. $48,000d. $ -0-

71. What is the amount that should be reported as the total liability related to pensions as of December 31, 2008?a. $24,000b. $80,000c. $48,000d. $1,280,000

72. The following information is related to the pension plan of King, Inc. for 2008.

Actual return on plan assets $200,000Amortization of unrecognized net gain 82,500Amortization of unrecognized prior service cost 150,000Expected return on plan assets 230,000Interest on projected benefit obligation 362,500Service cost 800,000

Pension expense for 2008 isa. $1,195,000.b. $1,165,000.c. $1,030,000.d. $1,000,000.

73. Presented below is pension information for Welch Company for the year 2008:

Actual return on plan assets $24,000Interest on vested benefits 15,000Service cost 30,000Interest on projected benefit obligation 21,000Amortization of prior service cost due to increase in benefits 18,000

The amount of pension expense to be reported for 2008 isa. $93,000.b. $69,000.c. $60,000.d. $45,000.

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74. Downing, Inc. received the following information from its pension plan trustee concerning the operation of the company's defined-benefit pension plan for the year ended December 31, 2008.

1/1/08 12/31/08 Projected benefit obligation $11,400,000 $11,760,000Market-related asset value 6,000,000 6,900,000Accumulated benefit obligation 2,400,000 2,760,000Unrecognized net (gains) and losses -0- 240,000

The service cost component of pension expense for 2008 is $840,000 and the amortization of unrecognized prior service cost is $180,000. The settlement rate is 10% and the expected rate of return is 8%. What is the amount of pension expense for 2008?a. $1,716,000b. $1,680,000c. $1,608,000d. $1,440,000


The following data are for the pension plan for the employees of Nickels Company.

1/1/07 12/31/07 12/31/08 Accumulated benefit obligation $7,500,000 $7,800,000 $10,200,000Projected benefit obligation 8,100,000 8,400,000 11,100,000Market-related asset value 6,600,000 8,700,000 9,300,000Plan assets (at fair value) 6,900,000 9,000,000 9,900,000Unrecognized net loss -0- 1,440,000 1,500,000Settlement rate (for year) 10% 9%Expected rate of return (for year) 8% 7%

Nickels’ contribution was $1,260,000 in 2008 and benefits paid were $1,125,000. Nickels esti-mates that the average remaining service life is 15 years.

75. The actual return on plan assets in 2008 wasa. $900,000.b. $765,000.c. $600,000.d. $465,000.

76. The actual return on plan assets in 2008 was $765,000. The unexpected gain on plan assets in 2008 wasa. $156,000.b. $135,000.c. $114,000.d. $72,000.

77. The corridor for 2008 was $870,000. The amount of unrecognized net loss amortized in 2008 wasa. $100,000.b. $96,000.c. $42,000.d. $38,000.

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Use the following information for questions 78 and 79.

On January 1, 2008, Kinder Co. has the following balances:

Projected benefit obligation $2,100,000Fair value of plan assets 1,800,000

The settlement rate is 10%. Other data related to the pension plan for 2008 are:

Service cost $180,000Amortization of unrecognized prior service costs 60,000Contributions 300,000Benefits paid 105,000Actual return on plan assets 237,000Amortization of unrecognized net gain 18,000

78. The balance of the projected benefit obligation at December 31, 2008 isa. $2,685,000.b. $2,385,000.c. $2,355,000.d. $2,337,000.

79. The fair value of plan assets at December 31, 2008 isa. $2,430,000.b. $2,250,000.c. $2,232,000.d. $2,214,000.

80. Gillum, Inc. has a defined-benefit pension plan covering its 50 employees. Gillum agrees to amend its pension benefits. As a result, the projected benefit obligation increased by $1,500,000. Gillum determined that all its employees are expected to receive benefits under the plan over the next 5 years. In addition, 20% are expected to retire or quit each year. Assuming that Gillum uses the years-of-service method of amortization for prior service cost, the amount reported as amortization of prior service cost in year one after the amendment isa. $300,000.b. $500,000.c. $150,000.d. $400,000.


The following information relates to the pension plan for the employees of Polzin Co.:

1/1/07 12/31/07 12/31/08 Accum. benefit obligation $5,280,000 $5,520,000 $7,200,000Projected benefit obligation 5,580,000 5,976,000 8,004,000Fair value of plan assets 5,100,000 6,240,000 6,888,000Market-related value of assets 4,920,000 6,192,000 6,780,000Unrecognized net (gain) or loss -0- (864,000) (960,000)Settlement rate (for year) 11% 11%Expected rate of return (for year) 8% 7%

Polzin estimates that the average remaining service life is 16 years. Polzin's contribution was $378,000 in 2008 and benefits paid were $282,000.

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81. The interest cost for 2008 isa. $537,840.b. $607,200.c. $657,360.d. $880,440.

82. The actual return on plan assets in 2008 isa. $408,000.b. $456,000.c. $588,000.d. $648,000.

83. The unexpected gain or loss on plan assets in 2008 isa. $39,360 loss.b. $22,560 gain.c. $152,640 gain.d. $214,560 gain.

84. The corridor for 2008 isa. $619,200.b. $624,000.c. $678,000.d. $800,400.

85. The amount of unrecognized net gain amortized in 2008 isa. $15,300.b. $15,000.c. $11,626.d. $9,977.

86. Presented below is information related to Bitner Manufacturing Company as of December 31, 2008:

Projected benefit obligation in excess of plan assets $900,000Unrecognized net gain 300,000Unrecognized prior service cost 405,000

The amount to be reported as accrued pension cost at the end of 2008 isa. $ -0-.b. $1,005,000.c. $795,000.d. $900,000.

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Barkley Corporation received the following report from its actuary at the end of the year:December 31, 2007 December 31, 2008

Projected benefit obligation $1,600,000 $1,800,000Market-related asset value 1,400,000 1,420,000Accumulated benefit obligation 1,300,000 1,480,000Fair value of pension plan assets 1,380,000 1,440,000Prepaid pension cost 80,000 100,000Assume that no prepaid or accrued pension cost exists on January 1, 2007.

87. The amount reported as the total pension liability at December 31, 2007 isa. $ -0-.b. $200,000.c. $220,000.d. $300,000.

88. The amount reported as the total pension liability at December 31, 2008 isa. $ -0-.b. $140,000.c. $40,000.d. $60,000.


The following information relates to Haywood, Inc.: For the Year Ended December 31, 2007 2008

Plan assets (at fair value) $1,260,000 $1,824,000Pension expense 570,000 450,000Accumulated benefit obligation 1,620,000 1,884,000Annual contribution to plan 600,000 450,000Unrecognized prior service cost 480,000 420,000

Prior to 2007, cumulative pension expense recognized equaled cumulative contributions.

89. The amount reported as the total liability for pensions on the December 31, 2007 balance sheet isa. $ -0-.b. $30,000.c. $360,000.d. $390,000.

90. The amount reported as an intangible asset on the December 31, 2007 balance sheet isa. $ -0-.b. $390,000.c. $360,000.d. $30,000.

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91. The amount reported as the total liability for pensions on the December 31, 2008 balance sheet isa. $ -0-.b. $60,000.c. $3960,000.d. $30,000.

92. The amount reported as an intangible asset on the December 31, 2008 balance sheet isa. $ -0-.b. $60,000.c. $90,000.d. $30,000.

Questions 93 and 94 relate to the information which follows:

Presented below is information related to Kluth Inc. as of December 31, 2008.Unrecognized gains and losses $ 90,000Projected benefit obligation 3,600,000Accumulated benefit obligation 3,420,000Vested benefits 1,620,000Market-related asset value 3,330,000Plan assets (at fair value) 3,384,000Unrecognized prior service cost -0-

Assume that cumulative pension expense equaled pension funding through 2008.

93. The amount reported as the total pension liability on Kluth's balance sheet at December 31, 2008 is as follows:a. $ -0-.b. $36,000.c. $90,000.d. $216,000.

94. The amount reported as an intangible asset on Kluth's balance sheet at December 31, 2008 is as follows:a. $ -0-.b. $36,000.c. $90,000.d. $216,000.

95. Coble Company has a defined-benefit plan. At the end of 2008, it has determined the following information related to its pension plan:

Projected benefit obligation $700,000Market-related asset value of pension plan 600,000Accumulated benefit obligation 660,000Accrued pension cost 35,000Fair value of pension plan assets 610,000

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The amount of the total pension liability that is reported in Coble's balance sheet at the end of 2008 isa. $100,000.b. $60,000.c. $25,000.d. $50,000.

96. Presented below is pension information related to Marten Company as of December 31, 2008:

Accumulated benefit obligation $3,000,000Projected benefit obligation 3,500,000Market-related asset value 2,400,000Plan assets (at fair value) 2,500,000Accrued pension cost 300,000Unrecognized prior service cost 100,000

The amount to be reported as Intangible Asset—Deferred Pension Cost as of December 31, 2008 isa. $500,000.b. $1,000,000.c. $200,000.d. $100,000.


On January 1, 2008, Nen Co. has the following balances:

Projected benefit obligation $4,200,000Fair value of plan assets 3,750,000

The settlement rate is 10%. Other data related to the pension plan for 2008 are:Service cost $240,000Amortization of unrecognized prior service costs 54,000Contributions 270,000Benefits paid 225,000Actual return on plan assets 264,000Amortization of unrecognized net gain 18,000

97. The balance of the projected benefit obligation at December 31, 2008 isa. $4,572,000.b. $4,590,000.c. $4,629,000.d. $4,635,000.

98. The fair value of plan assets at December 31, 2008 isa. $3,531,000.b. $3,789,000.c. $4,059,000.d. $4,284,000.

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Use the following information for 99 and 100.

Spencer Company has the following information at December 31, 2008 related to its pension plan:

Projected benefit obligation $4,000,000Accumulated benefit obligation 3,200,000Plan assets (fair value) 2,000,000Accrued pension cost 300,000

99. The amount of additional pension liability Spencer Company would recognize at December 31, 2008 isa. $300,000.b. $900,000.c. $1,200,000.d. $1,500,000.

100. What amount of additional pension liability would be recognized if Spencer Company had prepaid pension cost of $220,000 rather than accrued pension cost of $300,000?a. $1,420,000b. $1,200,000c. $980,000d. $220,000

Use the following information for 101 and 102.

101. The following pension plan information is for Ladd Company at December 31, 2008.

Projected benefit obligation $8,400,000Accumulated benefit obligation 7,500,000Plan assets (at fair value) 6,150,000Market-related asset value 6,450,000Unrecognized prior service cost 540,000Pension expense for 2008 3,000,000Contribution for 2008 2,400,000

Prior to 2008, cumulative pension expense equaled cumulative contributions. The amount to be reported as the total liability for pensions on the December 31, 2008 balance sheet isa. $2,250,000.b. $1,950,000.c. $1,350,000.d. $1,050,000.

102. The amount to be reported as Intangible Asset—Deferred Pension Cost on the December 31, 2008 balance sheet isa. $1,350,000.b. $750,000.c. $540,000.d. $450,000.

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*103. The following facts relate to the Lional Co. postretirement benefits plan for 2008:Service cost $170,000Discount rate 9%APBO, January 1, 2008 $1,500,000EPBO, January 1, 2008 $2,000,000Benefit payments to employees $115,000

The amount of postretirement expense for 2008 isa. $170,000.b. $305,000.c. $350,000.d. $420,000.

*104. The following facts relate to the postretirement benefits plan of Ramsey, Inc. for 2008:Service cost $680,000Discount rate 8%APBO, January 1, 2008 (transition amount) $4,000,000EPBO, January 1, 2008 $4,800,000Average remaining service to full eligibility 20 yearsAverage remaining service to expected retirement 25 years

The amount of postretirement expense for 2008 isa. $840,000.b. $1,160,000.c. $1,200,000.d. $1,224,000.

*105. The following facts relate to the Albers Co. postretirement benefits plan for 2008:Service cost $126,000Discount rate 10%EPBO, January 1, 2008 $1,095,000APBO, January 1, 2008 $900,000Actual return on plan assets in 2008 $31,500Expected return on plan assets in 2008 $24,000

The amount of postretirement expense for 2008 isa. $184,500.b. $192,000.c. $211,500.d. $216,000.

Multiple Choice Answers—ComputationalItem Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans

.65. d 71. b 77. d 83. b 89. c 95. d 101. c66. c 72. d 78. b 84. a 90. b 96. d 102. c67. a 73. d 79. c 85. a 91. b 97. d *103. b68. b 74. b 80. b 86. c 92. c 98. c *104. b69. c 75. b 81. c 87. a 93. b 99. b *105. b70. a 76. a 82. b 88. c 94. a 100. a

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MULTIPLE CHOICE—CPA Adapted

106. The following information pertains to Mellon Co.'s pension plan:

Actuarial estimate of projected benefit obligation at 1/1/08 $72,000Assumed discount rate 10%Service costs for 2008 $18,000Pension benefits paid during 2008 $15,000

If no change in actuarial estimates occurred during 2008, Mellon's projected benefit obligation at December 31, 2008 wasa. $64,200.b. $75,000.c. $79,200.d. $82,200.

107. Interest cost included in the net pension cost recognized for a period by an employer sponsoring a defined-benefit pension plan represents thea. shortage between the expected and actual returns on plan assets.b. increase in the projected benefit obligation due to the passage of time.c. increase in the fair value of plan assets due to the passage of time.d. amortization of the discount on unrecognized prior service cost.

108. On January 1, 2008, Pratt Corp. adopted a defined-benefit pension plan. The plan's service cost of $300,000 was fully funded at the end of 2008. Prior service cost was funded by a contribution of $120,000 in 2008. Amortization of prior service cost was $48,000 for 2008. What is the amount of Pratt’s prepaid pension cost at December 31, 2008?a. $72,000b. $120,000c. $168,000d. $180,000

109. Reser Corp., a company whose stock is publicly traded, provides a noncontributory defined-benefit pension plan for its employees. The company's actuary has provided the following information for the year ended December 31, 2008:

Projected benefit obligation $600,000Accumulated benefit obligation 525,000Fair value of plan assets 825,000Service cost 240,000Interest on projected benefit obligation 24,000Amortization of unrecognized prior service cost 60,000Expected and actual return on plan assets 82,500

The market-related asset value equals the fair value of plan assets. Prior contributions to the defined-benefit pension plan equaled the amount of net periodic pension cost accrued for the previous year end. No contributions have been made for 2008 pension cost. In its December 31, 2008 balance sheet, Reser should report an accrued pension cost ofa. $406,500.b. $324,000.c. $241,500.d. $217,500.

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110. Effective January 1, 2007, Quayle Co. established a defined-benefit plan with no retro-active benefits. The first of the required equal annual contributions was paid on December 31, 2007. A 10% discount rate was used to calculate service cost and a 10% rate of return was assumed for plan assets. All information on covered employees for 2007 and 2008 is the same. How should the service cost for 2008 compare with 2007, and should the 2007 balance sheet report an accrued or a prepaid pension cost?

Service Cost Pension Cost for 2008 Reported on the

Compared to 2007 2007 Balance Sheeta. Equal to Accruedb. Equal to Prepaidc. Greater than Accruedd. Greater than Prepaid


Tomlin Co. provides retirement benefits to employees through a funded defined-benefit pension plan. The company administering the plan provided the following information for the year ended December 31, 2008:

Plan assets at fair value $1,200,000Accumulated benefit obligation 1,335,000Pension expense 300,000Employer's contribution, 12/1/08 360,000Unrecognized prior service cost 30,000

On December 31, 2007, the accrued/prepaid pension cost account had a debit balance of $45,000. Assume that the fair value of the plan assets is equal to the market-related asset value. Prior to 2008, the fair value of plan assets exceeded the accumulated benefit obligation.

111. At December 31, 2008, what is the amount of prepaid pension cost?a. $105,000b. $90,000c. $60,000d. $15,000

112. In Tomlin's December 31, 2008 balance sheet, what is the amount of the minimum pension liability?a. $30,000b. $60,000c. $135,000d. $240,000

113. Yeager Co. maintains a defined-benefit pension plan for its employees. At each balance sheet date, Yeager should report a minimum liability at least equal to thea. accumulated benefit obligation.b. projected benefit obligation.c. unfunded accumulated benefit obligation.d. unfunded projected benefit obligation.

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114. Ohlman, Inc. maintains a defined-benefit pension plan for its employees. As of December 31, 2008, the market value of the plan assets is less than the accumulated benefit obligation. The projected benefit obligation exceeds the accumulated benefit obligation. In its balance sheet as of December 31, 2008, Ohlman should report a minimum liability in the amount of thea. excess of the projected benefit obligation over the value of the plan assets.b. excess of the accumulated benefit obligation over the value of the plan assets.c. projected benefit obligation.d. accumulated benefit obligation.

115. At December 31, 2008, the following information was provided by the Nilges Corp. pension plan administrator:

Fair value of plan assets $4,500,000Accumulated benefit obligation 5,580,000Projected benefit obligation 7,200,000

What is the amount of the pension liability that should be shown on Nilges' December 31, 2008 balance sheet?a. $7,200,000b. $2,700,000c. $1,620,000d. $1,080,000

Multiple Choice Answers—CPA AdaptedItem Ans. Item Ans. Item Ans. Item Ans. Item Ans.106. d 108. a 110. d 112. c 114. b107. b 109. c 111. a 113. c 115. d

DERIVATIONS — ComputationalNo. Answer Derivation65. d $72,000 + $54,000 + $12,000 – $18,000 = $120,000.

66. c $200,000 + ($2,400,000 × .10) – ($1,600,000 × .10) = $280,000.

67. a $900,000 + $390,000 + $90,000 + $165,000 – $180,000 = $1,365,000.

68. b $360,000 + $60,000 + ($4,800,000 × .10) – ($4,200,000 × .09) = $522,000.

69. c $240,000.

70. a $1,280,000 – $1,200,000 = $80,000$80,000 – $56,000 = $24,000.

71. b $24,000 + $56,000 = $80,000.

72. d $800,000 + $362,500 – $230,000 – $82,500 + $150,000 = $1,000,000.

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DERIVATIONS — Computational (cont.)No. Answer Derivation73. d $30,000 + $21,000 + $18,000 – $24,000 = $45,000.

74. b $840,000 + ($11,400,000 × .10) – ($6,000,000 × .08) + $180,000 = $1,680,000.

75. b ($9,900,000 – $9,000,000) – $1,260,000 + $1,125,000 = $765,000

76. a $765,000 – ($8,700,000 × .07) = $156,000.

77. d ($1,440,000 – $870,000) ÷ 15 = $38,000.

78. b $2,100,000 + $180,000 + ($2,100,000 × .10) – $105,000 = $2,385,000.

79. c $1,800,000 + $237,000 + $300,000 – $105,000 = $2,232,000.

80. b 50 + 40 + 30 + 20 + 10 = 150.$1,500,000 ÷ 150 = $10,000/service yr.$10,000 × 50 = $500,000.

81. c $5,976,000 × .11 = $657,360.

82. b ($6,888,000 – $6,240,000) – ($756,000 – $564,000) = $456,000.

83. b $456,000 – ($6,192,000 × .07) = $22,560.

84. a $6,192,000 × .10 = $619,200.

85. a ($864,000 – $619,200) ÷ 16 = $15,300.

86. c $900,000 + $300,000 – $405,000 = $795,000.

87. a FV of assets > ABO.

88. c $1,480,000 – $1,440,000 = $40,000.

89. c $1,620,000 – $1,260,000 = $360,000.

90. b $600,000 – $570,000 = $30,000 (prepaid pension cost)$360,000 + $30,000 = $390,000.

91. b $1,884,000 – $1,824,000 = $60,000.

92. c $450,000 – $450,000 = 0.$60,000 + $30,000 (from prior year) = $90,000.

93. b $3,420,000 – $3,384,000 = $36,000.

94. a Unrecognized prior service cost is zero.

95. d $660,000 – $610,000 = $50,000.

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DERIVATIONS — Computational (cont.)No. Answer Derivation96. d $3,000,000 – $2,500,000 – $300,000 = $200,000 (additional liability).

additional liability > unrecognized prior service cost.Unrecognized prior service cost = $100,000.

97. d $4,200,000 + $240,000 – $225,000 + ($4,200,000 × .10) = $4,635,000.

98. c $3,750,000 + $264,000 + $270,000 – $225,000 = $4,059,000.

99. b ($3,200,000 – $2,000,000) – $300,000 = $900,000.

100. a ($3,200,000 – $2,000,000) + $220,000 = $1,420,000.

101. c $7,500,000 – $6,150,000 = $1,350,000

102. c $540,000; limited to unrecognized PSC.

*103. b $170,000 + $135,000 = $305,000.

*104. b $680,000 + $320,000 + $160,000 = $1,160,000.

*105. b $126,000 + $90,000 – $31,500 + $7,500 = $192,000.

DERIVATIONS — CPA AdaptedNo. Answer Derivation106. d $72,000 + $18,000 + ($72,000 × .10) – $15,000 = $82,200.

107. b Conceptual.

108. a ($300,000 + $120,000) – ($300,000 + $48,000) = $72,000.

109. c $240,000 + $24,000 – $82,500 + $60,000 = $241,500.

110. d Conceptual.

111. a $360,000 – $300,000 + $45,000 = $105,000.

112. c $1,335,000 – $1,200,000 = $135,000.

113. c Conceptual.

114. b Conceptual.

115. d $5,580,000 – $4,500,000 = $1,080,000.

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EXERCISES

Ex. 20-116—Pension accounting terminology.

Briefly explain the following terms:(a) Service cost(b) Interest cost(c) Prior service cost(d) Vested benefits

Solution 20-116(a) The service cost component of pension expense is the actuarial present value of benefits

attributed by the pension benefit formula to employee service during the current period.

(b) The interest cost component of pension expense is the interest for the period on the projected benefit obligation outstanding during the period. To simplify the calculation, the amount of interest is computed by applying a single rate to the beginning balance of the projected benefit obligation.

(c) When a defined-benefit plan is initiated or amended, credit that is given to employees for service provided before the date of initiation or amendment results in prior service cost. The amount of prior service cost is computed by an actuary.

(d) Vested benefits are those the employee is entitled to receive even if the employee is no longer employed under the plan.

Ex. 20-117—Pension assets.

Discuss the following ideas related to pension assets:(a) Market-related asset value.(b) Actual return on plan assets.(c) Expected return on plan assets.(d) Unexpected gains and losses on plan assets.

Solution 20-117(a) Market-related asset value is a moving average of pension plan assets calculated over not

more than five years.

(b) The actual return on plan assets is computed by finding the change in the fair value of plan assets during the period. This change is adjusted by deducting contributions and adding benefits paid out during the year.

(c) The expected return on plan assets is found by multiplying the expected rate of return by the market-related asset value at the beginning of the period.

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(d) An unexpected asset gain occurs when the actual return on plan assets is greater than the expected return on plan assets and an unexpected loss occurs when the actual return is less than the expected return.

Ex. 20-118—Measuring and recording pension expense.

Gregory, Inc. received the following information from its pension plan trustee concerning the operation of the company's defined-benefit pension plan for the year ended December 31, 2008:

January 1, 2008 December 31, 2008Projected benefit obligation $2,500,000 $2,850,000Market-related asset value 1,250,000 1,600,000Accumulated benefit obligation 1,930,000 2,620,000Unrecognized net (gains) and losses -0- 300,000

The service cost component for 2008 is $150,000 and the amortization of prior service cost is $240,000. The company's actual funding of the plan in 2008 amounted to $510,000. The expected return on plan assets and the settlement rate were both 8%.

Instructions(a) Determine the pension expense to be reported in 2008.(b) Prepare the journal entry to record pension expense and the employers' contribution to the

pension plan in 2008.

Solution 20-118(a) Service cost $150,000

Interest on projected benefit obligations ($2,500,000 × 8%) 200,000Expected return on plan assets ($1,250,000 × 8%) (100,000)Amortization of prior service cost 240,000Pension expense—2008 $490,000

(b) Pension Expense .......................................................................... 490,000Prepaid/Accrued Pension Cost ..................................................... 20,000

Cash .................................................................................. 510,000

Ex. 20-119—Measuring and recording pension expense.

Presented below is information related to Major Department Stores, Inc. pension plan for 2008.Accumulated benefit obligation (at year-end) $600,000Service cost 520,000Funding contribution for 2008 500,000Settlement rate used in actuarial computation 10%Expected return on plan assets 9%Amortization of prior service cost 100,000Amortization of unrecognized net gains 48,000Projected benefit obligation (at beginning of period) 480,000Market-related asset value (at beginning of period) 360,000

Instructions

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(a) Compute the amount of pension expense to be reported for 2008. (Show computations.)(b) Prepare the journal entry to record pension expense and the employer's contribution for

2008.

Solution 20-119(a) Service cost $520,000

Interest on projected benefit obligation ($480,000 × 10%) 48,000Expected return on plan assets ($360,000 × 9%) (32,400)Amortization of prior service cost 100,000Amortization of unrecognized net gains (48,000)Pension expense—2008 $587,600

(b) Pension Expense........................................................................... 587,600Prepaid/Accrued Pension Cost.......................................... 87,600Cash................................................................................... 500,000

Ex. 20-120—Additional pension liability.

Reese Co. had the following selected balances at December 31, 2008:

Projected benefit obligation $4,700,000Accumulated benefit obligation 4,550,000Fair value of plan assets 4,340,000Unrecognized prior service cost 170,000Accrued pension cost 50,000

Instructions(a) Calculate the additional pension liability.(b) Prepare the journal entry to record the additional pension liability. There was no additional

pension liability balance at the beginning of the year.

Solution 20-120(a) Accumulated benefit obligation ($4,550,000)

Fair value of plan assets 4,340,000Minimum liability (210,000)Accrued pension cost 50,000Additional liability ($ 160,000)

(b) Intangible Asset—Deferred Pension Cost..................................... 160,000Additional Pension Liability................................................ 160,000

Ex. 20-121—Pension reconciliation schedule.

Aguilar Company has available the following information about its defined-benefit pension plan for the year ending December 31, 2008:

Service cost for 2008 $ 25,000Accumulated benefit obligation 683,000Plan assets at fair value 630,000Unrecognized prior service cost 300,000Vested benefit obligation 505,000Market-related asset value 725,000

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Projected benefit obligation 865,000Unrecognized net gain 80,000Interest on projected benefit obligation 64,000Additional pension liability 38,000

Ex. 20-121 (cont.)

InstructionsPrepare 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 20-121Aguilar Company

Pension Reconciliation ScheduleFor Year Ended December 31, 2008

Actuarial present value of benefit obligations:Vested benefit obligation $505,000

Accumulated benefit obligation $683,000

Projected benefit obligation $(865,000)Plan assets at fair value 630,000Projected benefit obligation in excess of plan assets (235,000)Unrecognized prior service cost 300,000Unrecognized net (gain) or loss (80,000)Prepaid/accrued pension cost (15,000)Additional pension liability (38,000)Accrued pension cost liability recognized in the balance sheet $ (53,000)

Ex. 20-122—Pension plan calculations.

The following information is for the pension plan for the employees of Faulk, Inc.

12/31/07 12/31/08 Accumulated benefit obligation $2,800,000 $3,760,000Projected benefit obligation 3,040,000 4,000,000Fair value of plan assets 3,080,000 3,520,000Market-related value of assets 2,960,000 3,440,000Net (gain) or loss (425,000) (480,000)Settlement rate 8% 8%Expected rate of return 7% 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.

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Test Bank for Intermediate Accounting, Twelfth Edition20 - 34


Solution 20-122(a) $3,040,000 × 8% = $243,200

(b) Fair value of plan assets (12/31/08) $3,520,000Fair value of plan assets (1/1/08) (3,080,000)

440,000Contributions (520,000)Benefits paid 280,000Actual return on plan assets $ 200,000

(c) Actual return (see b.) $ 200,000Expected return ($2,960,000 × 6%) 177,600Unexpected gain $ 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: 12/31/07 12/31/08

Accumulated benefit obligation $4,700,000 $4,930,000Projected benefit obligation 4,800,000 5,020,000Unrecognized prior service cost 1,800,000 1,600,000Fair value of plan assets 4,650,000 4,800,000Market-related value of assets 4,900,000 4,980,000Pension expense 1,000,000 1,400,000Contribution 985,000 1,350,000Discount rate (for year) 9% 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 $4,930,000Fair value of plan assets (4,800,000)Minimum liability $ 130,000

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Solution 20-123 (cont.)

(c) Pension Expense........................................................................... 1,400,000Prepaid/Accrued Pension Cost.......................................... 50,000Cash................................................................................... 1,350,000

Intangible Asset—Deferred Pension Cost..................................... 55,000Additional Pension Liability................................................ 55,000

Minimum liability $130,000Accrued pension cost, 1/1/08 $25,000Accrued 2008 50,000 (75,000)Additional liability $ 55,000

Ex. 20-124—Corridor amortization.

Explain corridor amortization.

Solution 20-124The 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 (Gain) Or Loss

2007 $660,0002008 (594,000)2009 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 1 2007 2008 2009

Projected benefit obligation $2,100,000 $2,340,000 $2,940,000Market-related asset values 1,680,000 2,460,000 2,550,000

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Ex. 20-125 cont.)

InstructionsBased 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 20-125Corridor Test and Gain/Loss Amortization Schedule

Beginning of Year Cumulative PBO Plan Assets Corridor (Gain) Or Loss Amortization

2007 $2,100,000 $1,680,000 $210,000 $ -0- $ -0-2008 2,340,000 2,460,000 246,000 660,000 41,400*2009 2,940,000 2,550,000 294,000 24,600** -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 $7,200,000Fair value of plan assets 7,200,000

Other data related to the pension plan for 2008:

Service cost 315,000Unrecognized prior service cost -0-Contributions to the plan 459,000Benefits paid 450,000Actual return on plan assets 432,000Settlement rate 9%Expected rate of return 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.

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Solution 20-126(a) Projected benefit obligation, January 1 $7,200,000

Service cost 315,000Interest cost (9% × $7,200,000) 648,000Benefits paid (450,000)Projected benefit obligation, December 31 $7,713,000

(b) Fair value of plan assets, January 1 $7,200,000Actual return 432,000Contributions 459,000Benefits paid (450,000)Fair value of plan assets, December 31 $7,641,000

(c) Service cost $315,000Interest cost (9% × $7,200,000) 648,000Actual return on plan assets (432,000)Pension expense $531,000

(d) Pension Expense........................................................................... 531,000Accrued/Prepaid Pension Cost.......................................... 72,000Cash................................................................................... 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 $168,000Discount rate 10%EPBO, January 1, 2008 820,000APBO, January 1, 2008 640,000Unrecognized transition amount amortization 32,800Actual return on plan assets in 2008 22,400Expected return on plan assets in 2008 29,000Contributions (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 $168,000

Interest cost (10% × $640,000) 64,000Amortization of transition amount 32,800Actual return on plan assets (22,400)Unexpected loss (6,600)Postretirement expense—2008 $235,800

(b) Postretirement Expense................................................................ 235,800Cash .................................................................................. 224,000Prepaid/Accrued Cost ....................................................... 11,800

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*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 $ 280,000Discount rate 8%APBO, January 1, 2008 2,100,000EPBO, January 1, 2008 2,400,000Actual return on plan assets in 2008 104,000Expected return on plan assets in 2008 95,600Amortization of unrecognized transition amount 107,200Amortization of unrecognized net gain 7,200Contributions (funding) 400,000Benefit 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 $280,000

Interest cost (8% × $2,100,000) 168,000Actual return on plan assets (104,000)Unexpected gain 8,400Amortization of transition amount 107,200Amortization of net gain (7,200)Postretirement expense—2008 $452,400

(b) APBO, January 1, 2008 $2,100,000Service cost 280,000Interest cost 168,000Benefit payments (208,000)APBO, December 31, 2008 $2,340,000

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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 $1,600,000Service cost 600,000Accumulated benefit obligation 5,090,000Projected benefit obligation 6,000,000Plan assets (at fair value) 1,600,000Market-related asset value 1,600,000Expected 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 $ 600,000Interest on projected benefit obligation ($5,040,000 × 8%) 403,200Amortization of prior service cost* 420,000Pension expense—2008 $1,423,200

*1,200 ——— = 12 years average remaining service life 100

$5,040,000————— = $420,000 12

(c) Pension Expense.......................................................................... 1,423,200Prepaid Pension Cost.................................................................... 176,800

Cash................................................................................... 1,600,000

Intangible Asset—Deferred Pension Cost..................................... 3,666,800*Additional Pension Liability................................................ 3,666,800

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*Accumulated benefit obligation ($5,090,000)Plan assets (at fair value) 1,600,000Unfunded accumulated benefit obligation (3,490,000)Prepaid pension cost 176,800Additional pension liability ($3,666,800)

(d) Income statementPension Expense $1,423,200

Balance sheetIntangible 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.

1. The service cost of pension expense is $240,000 using the projected benefits approach.

2. 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%

3. 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.

4. 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.

5. 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) $240,000

Interest on projected benefit obligation (10% × $300,000) 30,000Expected return on plan assets (9% × $280,000) (25,200)Amortization of prior service cost (1) 28,000Amortization of loss (2) 12,000

Pension expense $284,800

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(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) ($ 90,000)Higher of 10% of projected benefit obligation or market-related

asset value 30,000Amount to be amortized ($ 60,000)

1,000 Expected Future Years of Service——— = ——————————————— = 5 years 200 Number of Employees

$60,000———— = $12,000 5 years

(b) Pension Expense........................................................................... 284,800Prepaid/Accrued Pension Cost............................................. 53,800Cash...................................................................................... 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 $500,000Actual return on plan assets 260,000Annual contribution to the plan 900,000Amortization of unrecognized prior service cost 105,000Benefits paid to retirees 60,000Settlement 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.

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Pr. 20-131 (cont.) Jarvis CorporationPension Work Sheet—2008

——————————————————————————————————————————————————————————General Journal Entries Memo Entries

——————————————————————————————————————————————————————————Unrecog- Unrecog-

nized nizedAnnual Prepaid/ Addi- Projected Prior NetPension (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——————————————————————————————————————————————————————————

Unexpectedgain/loss

——————————————————————————————————————————————————————————Amortization

of PSC——————————————————————————————————————————————————————————

Contributions——————————————————————————————————————————————————————————

Benefits——————————————————————————————————————————————————————————

Unrecognized gain/loss amort.

——————————————————————————————————————————————————————————Minimum liability

adjustment Journal entry

for 2008 Balance,

Dec. 31, 2008

Solution 20-131 Jarvis CorporationPension Work Sheet—2008

——————————————————————————————————————————————————————————General Journal Entries Memo Entries

——————————————————————————————————————————————————————————Unrecog- Unrecog-

nized nizedAnnual Prepaid/ Addi- Projected Prior NetPension (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——————————————————————————————————————————————————————————

Unexpectedgain/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

adjustment (3) (165,000) 165,000Journal entry

for 2008 760,000 (900,000) 140,000 Balance,

Dec. 31, 2008 (235,000) (165,000) 165,000 (4,565,000) 3,850,000 520,000 (40,000)

Accounting for P

ensions and Postretirem

ent Benefits



(1) $3,750,000 × 10% = $375,000

(2) $260,000 – ($2,750,000 × 8%) = $40,000

(3) Accumulated Benefit Obligation $(4,250,000)Plan assets at fair value 3,850,000Unfunded accumulated benefit (400,000) Minimum LiabilityPrepaid/Accrued Pension Cost 235,000Additional liability $ (165,000)

(b) Pension Expense........................................................................... 760,000Prepaid/Accrued Pension Cost...................................................... 140,000

Cash................................................................................... 900,000

Intangible Asset—Deferred Pension Cost..................................... 165,000Additional Pension Liability................................................ 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:

Expected RetirementsNumber of Employees On December 31

40 2007120 2008

60 2009160 2010 20 2011400

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.

InstructionsPrepare 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.

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Solution 20-132Computation of Service-Years

Year Total2007 40 120 60 160 20 4002008 120 60 160 20 3602009 60 160 20 2402010 160 20 1802011 20 20

40 240 180 640 100 1,200

Cost Per Service Year: $6,000,000 ÷ 1,200 = $5,000.

Quayle IncorporatedComputation of Annual Prior Service Cost Amortization

Total Cost Per AnnualYear Service-Years Service-Year Amortization2007 400 $5,000 $2,000,0002008 360 5,000 1,800,0002009 240 5,000 1,200,0002010 180 5,000 900,0002011 20 5,000 100,000

1,200 $6,000,000

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