CHAPTER 6 EMPLOYEE BENEFITS

PROBLEMS

6 – 1. (Red Hot Company)

(a) Beginning liability for compensated absences 6 x 420 = P2,520

(b) Employee Benefit Expense for Sick Leave and Vacation Leave

Sick Leave 5 x P450 P2,250 10 x 420 4,200 2 x 400 800 2 x 380 760 P8,010 Vacation Leave 12 x P450 P5,400 12 x 420 5,040 2 x 400 800 5 x 380 1,900 13,140 Total P21,150

(c) Liability for Compensated Absences 2,520

Employee Benefit Expense – Compensated Absences 10,280 Cash 12,800

Total amount paid for compensated absences Sick leave (as computed above) 8,010 Vacation leave 7 x 450 3,150 3 x 420 1,260 1 x 380 380 4,790 12,800 (d) Employee Benefit Expense – Compensated Absences 10,870

Liability for Compensated Absences 10,870 Liability for Compensated Absences, 12/31/12 Employee Unused Vacation Days Rate Amount A. B. Santos 12-7 5 P450 P2,250 C. D. Garcia 12+6 -3 15 420 6,300 E. F. Cruz 2 2 400 800 G. H. Buen 5 – 1 4 380 1,520 Total P10,870

6-2. (Green Grass Company)

(a) Total payment in 2012 35 x 12 x 450 P189,000 25 x 10 x 45 112,500 P301,500

Liability, beginning of 2012 (13-10) x 20 x 450) (27,000) Liability, end of 2012 (12 – 10) x 40 x 450) 36,000 Sick leave expense in 2012 P310,500

(b) P36,000 (see above)

Chapter 6 – Employee Benefits

68

(c) Liability for Compensated Absences 27,000 Compensated Absences 27,000 Compensated Absences 301,500 Cash 301,500 Compensated Absences 36,000 Liability for Compensated Absences 36,000 6-3. (Blue Jeans Company)

(a) Retirement Benefit Expense = Required Contribution = (P6,000,000 x 8%) + (35,000,000 - P10,000,000)5% =P1,730,000

(b) 1. Retirement Benefit Expense 1,730,000

Prepaid Retirement Benefit Cost 70,000 Cash 1,800,000

2. Retirement Benefit Expense 1,730,000 Cash 1,500,000 Accrued Retirement Benefit Cost 230,000 6-4. (Yellow Ribbon Trading)

Defined Benefit Cost Benefit Liability (Asset)

Profit or

Loss

Other Comprehensive

Income

Benefit

Obligation

Plan Assets

Beginning balances P3,000,000 P2,600,000 Current service cost P1,000,000 1,000,000 Interest cost 10% x 3,000,000 300,000 300,000 10% x 2,600,000 (260,000) 260,000 Actuarial gain or loss Benefit obligation 100,000 100,000 Plan assets 300,000 -260,000

(40,000)

40,000

Benefits paid (350,000) (350,000) Contributions 900,000 Ending balances 1,040,000 60,000 4,050,000 3,450,000

(a) Net Prepaid/Accrued Benefit Cost, December 31, 2012 P3,000,000 – P2,600,000 = P 400,000 (b) Retirement benefit expense in 2013 P1,040,000 (c) Defined benefit cost taken to OCI P 60,000 (d) Retirement Benefit Expense 1,040,000 Remeasurement of Defined Benefit Asset/ Liabiility – OCI 60,000 Cash 900,000 Defined Benefit Liability/Asset 200,000 (e) Benefit Obligation P4,050,000 Plan Assets 3,450,000

Chapter 6 – Employee Benefits

69

(f) Net defined benefit liability/asset: Beginning balance P400,000 liability Underfunding (see entry d) 200,000 Ending balance P600,000 liability

Reconciled with the memorandum records: Defined benefit obligation P4,050,000 Plan assets 3,450,000 Net liability P 600,000 6-5. (Midnight Black)

Defined Benefit Cost Benefit Liability (Asset)

Profit or

Loss

Other Comprehensive

Income

Benefit

Obligation

Plan Assets

Balances, beginning 1,350,000 1,250,000 Service cost 2,000,000 2,000,000 Interest cost 9% x 1,350,000 121,500 121,500 9% x 1,250,000 (112,500) 112,500 Actuarial loss On ben obligation 50,000 50,000 On plan assets 2,000 (2,000) Past service cost 300,000 300,000 Benefits paid (120,000) (120,000) Contributions 2,360,000 Balances, end 2,309,000 52,000 3,701,500 3,600,500

(a) Retirement Benefit Expense 2,309,000 Remeasurement of Defined Benefit Liability/Asset 52,000 Cash 2,360,000 Defined Benefit Liability/Asset 1,000

(b) Defined benefit liability , end Beginning balance (1,350,000 – 1,250,000) P100,000 Underfunding 1,000 Defined benefit liability, end P101,000

Or P3,701,500 – P3,600,500 = P101,000

Chapter 6 – Employee Benefits

70

6-6. Brown Cup Defined Benefit Cost Benefit Liability (Asset)

Profit or Loss

Other Comprehensive

Income

Benefit

Obligation

Plan Assets

Beginning balances 8,200,000 8,500,000 Current service cost 1,200,000 1,200,000 Interest cost 10% x 8,200,000 820,000 820,000 10% x 8,500,000 (850,000) 850,000 Actuarial gain or loss On Ben. Obligation (40,000) (40,000)* On Plan Assets 780,000-850,000

70,000

(70,000)

Contribution 1,500,000 Ending balances 1,170,000 30,000 10,180,000 10,780,000

*Squeezed

(a) P8,200,000 – P8,500,000 = P300,000 asset (b) Actuarial gain or loss On plan assets 780,000 – 850,000 = 70,000 loss On benefit obligation (squeezed, see above) = 40,000 gain (c) Defined Benefit Cost In profit or loss 1,170,000 In other comprehensive income 30,000 (d) Retirement Benefit Expense 1,170,000 Remeasurement of Defined Benefit Asset/Liability – OCI 30,000 Defined Benefit Liability/Asset 1,200,000 Defined Benefit Liability/Asset 1,500,000 Cash 1,500,000 (e) Defined Benefit Asset: Beginning balance P300,000 Overfunding (1,500,000 – 1,200,000) 300,000 Ending balance – asset P600,000 (f) Remeasurement of Defined Benefit Asset/Liability – OCI 50,000 Defined Benefit Asset/Liability 50,000

6-7. (White Flower Company) (a) Fair value of plan asset, ending P4,950,000 Fair value of plan assets, beginning P4,600,000 Contributions to the plan 500,000 Benefits paid (700,000) Balance, before actual return P4,400,000 Actual return on plan assets P 550,000

Chapter 6 – Employee Benefits

71

(b) Actual return P 550,000 Expected return based on interest rate of 10% 10% x P4,600,000 460,000 Actuarial gain taken to OCI P 90,000 6-8. (Orange Gem Company) (a) Worksheet

Defined Benefit Cost Benefit Liability (Asset)

Profit or

Loss

Other Comprehensive

Income

Benefit

Obligation

Plan Assets

Beginning balances 9,000,000 8,000,000 Current service cost 1,000,000 1,000,000 Interest cost 10% x 9,000,000 900,000 900,000 10% x 8,000,000 (800,000) 800,000 Actuarial gain/loss Benefit obligation (50,000)* (50,000)* Plan assets 640,000-800,000

160,000

(160,000)

Benefits paid (600,000) (600,000) Contributions 2,000,000 Past service cost 800,000 800,000 Ending balances 1,900,000 110,000 11,050,000 10,040,000

*squeezed (b) Retirement Benefit Expense 1,900,000 Remeasurement of Defined Benefit Liability/Asset – OCI 110,000 Defined Benefit Liability/Asset 2,010,000 Defined Benefit Liability/Asset 2,000,000 Cash 2,000,000

(c) Defined Benefit Liability/Asset, Dec. 31, 2013 Beginning balance (9,000,000 – 8,000,000) P1,000,000 Underfunding (2,010,000 – 2,000,000) 10,000 Defined benefit liability, Dec. 31, 2013 P1,010,000 (d) Or 11,050,000 – 10,040,000 = P1,010,000

Chapter 6 – Employee Benefits

72

MULTIPLE CHOICE QUESTIONS

Theory MC1 C MC6 A MC2 B MC7 A MC3 A MC8 A MC4 D MC9 D MC5 A MC10 D MC11 A MC12 NO NO. 12 MC13 C MC14 B MC15 A MC16 B

Problems

MC17 B 140,000 + 9%(3,200,000) – 9%(3,000,000) = 158,000 MC18 D 185,000 – 270,000 = 85,000; 85,000 + 20,000 = 105,000 loss MC19 C 158,000 +105,000 = 263,000 total retirement benefit cost

263,000 – 204,000 = 59,000 underfunding; 200,000 beg. Liability + 50,000 = 259,000

MC20 A 3,200,000 – (2,500,000 +800,000 – 340,000) = 240,000 MC21 C 240,000 – (10% x 3,200,000) = 80,000 loss MC22 B 5,000,000 – 3,800,000 = 1,200,000 liability MC23 A Full amount of past service cost is recognized as expense MC24 A Actuarial gain or loss is taken to other comprehensive income, not in

profit or loss MC25 B 600,000 + 580,000 + 12%(5,000,000 – 3,800,000) = 1,324,000 MC26 C 3,800,000 + 550,000 + 750,000 = 5,100,000 MC27 D ABO= 5,000,000 + 600,000 + 580,000 + 12% (5,000,000) – 70,000 =

6,710,000 MC28 B Total retirement benefit cost = 1,324,000 – 70,000 – (550,000-456,000)

= 1,160,000; 1,160,000 – 750,000 = 410,000 underfunding MC29 D ABO= 6,710,000; PA = 5,100,000; net liability = 6,710,000 – 5,100,000

=1,610,000 MC30 C Actuarial loss on plan assets = 5,565,000 – (5,035,000+503,500 +

425,000 – 390,000) = 8,500 Actuarial gain on benefit obligation = 32,500 + 8,500 = 41,000 Service cost = 5,629,000 – (4,600,000 + 460,000 - 41,000 – 390,000) =1,000,000 (or prepare worksheet and squeeze)

MC31 A 503,500 – 8,500 = 495,000 MC32 A 1,000,000 + 460,000 – 503,500 – 32,500 = 924,000 MC33 A 600,000 – 240,000 = 360,000 (Current service cost is fully funded, so

the underfunding arises from past service cost.) MC34 C 4,400,000 + 12%(4,400,000) + 1,480,000 – 50,000 - 600,000 =

5,758,000 MC35 D 2,400,000 + 300,000 – 2,500,000 = 200,000 liability MC36 C 4,200,000 – 3,300,000 = 900,000 asset; however, the asset amount is

limited by the present value of future refunds and reductions in future contributions of P500,000; so the defined benefit asset will be shown at P500,000 only.