Test bank intermediate accounting 12e ch20

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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

1.
2.
3.
4.
5.
6.
7.
8.
9.
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.


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20 - 2

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.


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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 - 3


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Test Bank for Intermediate Accounting, Twelfth Edition

20 - 4

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
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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Accounting for Pensions and Postretirement Benefits

20 - 5

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item

Type

Item

Type

Item

1.

TF

2.

TF

21.

3.

TF

4.

TF

23.

5.
6.

TF
TF

S

28.
29.

MC
MC

30.
31.

7.
8.
33.
34.
35.

TF
TF
MC
MC

MC

36.
37.
38.
39.
P
40.

MC
MC
MC
MC
MC

65.
66.
67.
68.
69.

9.

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 1
MC
22. MC
Learning Objective 2
MC
24. MC
25.
Learning Objective 3
MC
32. MC
129.
MC
116.
E
Learning Objective 4

MC
72. MC
82.
MC
73. MC
106.
MC
74. MC
107.
MC
75. MC
108.
MC
81. MC
109.
Learning Objective 5
MC
78. MC
79.
Learning Objective 6
MC
80. MC
120.
MC
110. MC
121.
Learning Objective 7
MC
122.
E

131.
E
129.
P
Learning Objective 8
MC
86. MC
122.
MC
119.
E
123.
MC
121.
E
124.
Learning Objective 9
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


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20 - 6

Test Bank for Intermediate Accounting, Twelfth Edition

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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Accounting for Pensions and Postretirement Benefits

20 - 7

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
1.
2.
3.
4.
5.

Ans.
F
T
F
T
T

Item
6.
7.
8.

9.
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.


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20 - 8
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.


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Accounting for Pensions and Postretirement Benefits

20 - 9

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.


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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.

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Accounting for Pensions and Postretirement Benefits

20 - 11

S

Whenever a defined-benefit plan is amended and credit is given to employees for years of
service provided before the date of amendment
a. 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.

S

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

45.

46.

a.
b.

c.
d.

Asset
Gains & Losses
Yes
No
Yes
No

Liability
Gains & Losses
Yes
No
No
Yes

47.

Unrecognized gains and losses that relate to the computation of pension expense should
be
a. 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 Return
Corridor
on Plan Assets
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No

49.

A pension fund gain or loss that is caused by a plant closing should be
a. 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 reported
a. 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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20 - 12 Test Bank for Intermediate Accounting, Twelfth Edition
51.

A minimum liability for pension expense is reported when
a. 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 when
a. 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.

S

54.

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 Board
a. 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 expense
b. The amount paid from the pension fund to retirees during the period
c. The funded status of the plan and the amounts recognized in the financial statements

d. The rates used in measuring the benefit amounts

56.

The main purpose of the Pension Benefit Guaranty Corporation is to
a. 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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Accounting for Pensions and Postretirement Benefits

20 - 13

*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 period
b. A schedule showing changes in postretirement benefits and plan assets during the year
c. The amount of the actuarial liability for postretirement benefits
d. 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 the
a. 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 except
a. 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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20 - 14 Test Bank for Intermediate Accounting, Twelfth Edition

*64.

Which of the following is a significant item not recognized in the accounts and in the
financial statements?
a. Accumulated postretirement benefit obligation
b. Postretirement benefit plan assets
c. Expected postretirement benefit obligation
d. All of these.

Multiple Choice Answers—Conceptual
Item

21.
22.
23.
24.
25.
26.
27.

Ans.

d
c
d
c
b
b
a

Item

28.
29.
30.
31.
32.
33.
34.

Ans.

c
a
a
d
d
d
a

Item

35.
36.
37.
38.
39.
40.
41.

Ans.

c
b
a
b
b
c
d

Item

42.
43.
44.
45.
46.
47.
48.

Ans.

a
c
b
a
d
b
a

Item

49.
50.
51.
52.
53.
54.
55.

Ans.

Item

Ans.

Item

Ans.

a
c
b
b
a
d
b

56.
*57.

*58.
*59.
*60.
*61.
*62.

c
c
c
b
a
d
b

*63.
*64.

c
d

MULTIPLE CHOICE—Computational
65.

Presented below is pension information related to Tyler, Inc. for the year 2008:
Service cost
$72,000
Interest on projected benefit obligation
54,000
Interest on vested benefits
24,000

Amortization of prior service cost due to increase in benefits
12,000
Expected return on plan assets
18,000
The amount of pension expense to be reported for 2008 is
a. $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
$ 200,000
Contributions to the plan
220,000
Actual return on plan assets
180,000
Projected benefit obligation (beginning of year)
2,400,000
Market-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 is
a. $200,000.
b. $260,000.
c. $280,000.
d. $440,000.

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Accounting for Pensions and Postretirement Benefits
67.

20 - 15

Presented below is information related to Marley Inc. pension data for 2008.
Service cost
$900,000
Actual return on plan assets
210,000
Interest on projected benefit obligation
390,000
Amortization of unrecognized net loss
90,000
Amortization of unrecognized prior service cost
165,000
Expected return on plan assets
180,000
What amount should be reported for pension expense in 2008?
a. $1,365,000
b. $1,335,000
c. $1,515,000
d. $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, 2008
Market-related asset value
$4,200,000
$4,500,000
Projected benefit obligation
4,800,000
5,160,000
Accumulated benefit obligation
840,000
1,020,000
Unrecognized 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. $360,000
b. $522,000
c. $531,000
d. $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 obligations
Plan assets (at fair value)
Market-related asset value

Accumulated benefit obligation
Projected benefit obligation
Amounts to be Recognized
Prepaid/(accrued) pension cost at beginning of year
Pension expense
Contribution
Prepaid/(accrued) pension cost at end of year
Unrecognized prior service costs
Unrecognized gains (net)

$1,200,000
1,160,000
1,280,000
1,840,000

(32,000)
(240,000)
216,000
$ (56,000)
$ 275,000
(140,000)


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20 - 16 Test Bank for Intermediate Accounting, Twelfth Edition
69.

What is the pension expense that Monroe Enterprises should report for 2008?
a. $216,000

b. $80,000
c. $240,000
d. $168,000

70.

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

71.

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

72.

The following information is related to the pension plan of King, Inc. for 2008.
Actual return on plan assets
Amortization of unrecognized net gain
Amortization of unrecognized prior service cost
Expected return on plan assets
Interest on projected benefit obligation

Service cost

$200,000
82,500
150,000
230,000
362,500
800,000

Pension expense for 2008 is
a. $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
Interest on vested benefits
Service cost
Interest on projected benefit obligation
Amortization of prior service cost due to increase in benefits
The amount of pension expense to be reported for 2008 is
a. $93,000.
b. $69,000.
c. $60,000.
d. $45,000.

$24,000
15,000

30,000
21,000
18,000


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Accounting for Pensions and Postretirement Benefits
74.

20 - 17

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
$11,760,000
Market-related asset value
6,000,000
6,900,000
Accumulated benefit obligation
2,400,000
2,760,000
Unrecognized net (gains) and losses
-0240,000
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. $1,716,000
b. $1,680,000
c. $1,608,000
d. $1,440,000

Use the following information for questions 75 through 77.
The following data are for the pension plan for the employees of Nickels Company.
Accumulated benefit obligation
Projected benefit obligation
Market-related asset value
Plan assets (at fair value)
Unrecognized net loss
Settlement rate (for year)
Expected rate of return (for year)

1/1/07
$7,500,000
8,100,000
6,600,000
6,900,000
-0-

12/31/07
$7,800,000
8,400,000
8,700,000
9,000,000
1,440,000
10%

8%

12/31/08
$10,200,000
11,100,000
9,300,000
9,900,000
1,500,000
9%
7%

Nickels’ contribution was $1,260,000 in 2008 and benefits paid were $1,125,000. Nickels estimates that the average remaining service life is 15 years.
75.

The actual return on plan assets in 2008 was
a. $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 was
a. $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 was
a. $100,000.
b. $96,000.
c. $42,000.
d. $38,000.


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20 - 18 Test Bank for Intermediate Accounting, Twelfth Edition
Use the following information for questions 78 and 79.
On January 1, 2008, Kinder Co. has the following balances:
Projected benefit obligation
Fair value of plan assets

$2,100,000
1,800,000

The settlement rate is 10%. Other data related to the pension plan for 2008 are:
Service cost
Amortization of unrecognized prior service costs
Contributions
Benefits paid
Actual return on plan assets
Amortization of unrecognized net gain

$180,000
60,000

300,000
105,000
237,000
18,000

78.

The balance of the projected benefit obligation at December 31, 2008 is
a. $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 is
a. $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 is

a. $300,000.
b. $500,000.
c. $150,000.
d. $400,000.

Use the following information for questions 81 through 85.
The following information relates to the pension plan for the employees of Polzin Co.:
Accum. benefit obligation
Projected benefit obligation
Fair value of plan assets
Market-related value of assets
Unrecognized net (gain) or loss
Settlement rate (for year)
Expected rate of return (for year)

1/1/07
$5,280,000
5,580,000
5,100,000
4,920,000
-0-

12/31/07
$5,520,000
5,976,000
6,240,000
6,192,000
(864,000)
11%
8%

12/31/08
$7,200,000
8,004,000
6,888,000
6,780,000
(960,000)
11%
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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Accounting for Pensions and Postretirement Benefits

20 - 19

81.

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

82.

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

83.

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

84.

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

85.

The amount of unrecognized net gain amortized in 2008 is
a. $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
Unrecognized net gain
Unrecognized prior service cost

$900,000
300,000
405,000

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


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20 - 20 Test Bank for Intermediate Accounting, Twelfth Edition
Use the following information for questions 87 and 88.
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
$1,800,000
Market-related asset value
1,400,000

1,420,000
Accumulated benefit obligation
1,300,000
1,480,000
Fair value of pension plan assets
1,380,000
1,440,000
Prepaid pension cost
80,000
100,000
Assume 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 is
a. $ -0-.
b. $200,000.
c. $220,000.
d. $300,000.

88.

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

Use the following information for questions 89 through 92.
The following information relates to Haywood, Inc.:

Plan assets (at fair value)
Pension expense
Accumulated benefit obligation
Annual contribution to plan
Unrecognized prior service cost

For the Year Ended December 31,
2007
2008
$1,260,000
$1,824,000
570,000
450,000
1,620,000
1,884,000
600,000
450,000
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 is
a. $ -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 is
a. $ -0-.
b. $390,000.
c. $360,000.
d. $30,000.


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Accounting for Pensions and Postretirement Benefits

20 - 21

91.

The amount reported as the total liability for pensions on the December 31, 2008 balance
sheet is
a. $ -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 is
a. $ -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
$ 90,000
Projected benefit obligation
3,600,000
Accumulated benefit obligation
3,420,000
Vested benefits
1,620,000
Market-related asset value
3,330,000
Plan assets (at fair value)
3,384,000
Unrecognized prior service cost
-0Assume 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
$700,000
Market-related asset value of pension plan
600,000
Accumulated benefit obligation
660,000
Accrued pension cost
35,000
Fair value of pension plan assets
610,000


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20 - 22 Test Bank for Intermediate Accounting, Twelfth Edition
The amount of the total pension liability that is reported in Coble's balance sheet at the
end of 2008 is
a. $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
$3,000,000
Projected benefit obligation
3,500,000
Market-related asset value
2,400,000
Plan assets (at fair value)
2,500,000
Accrued pension cost
300,000
Unrecognized prior service cost
100,000
The amount to be reported as Intangible Asset—Deferred Pension Cost as of December
31, 2008 is
a. $500,000.
b. $1,000,000.
c. $200,000.
d. $100,000.

Use the following information for questions 97 and 98.
On January 1, 2008, Nen Co. has the following balances:
Projected benefit obligation
Fair value of plan assets

$4,200,000

3,750,000

The settlement rate is 10%. Other data related to the pension plan for 2008 are:
Service cost
$240,000
Amortization of unrecognized prior service costs
54,000
Contributions
270,000
Benefits paid
225,000
Actual return on plan assets
264,000
Amortization of unrecognized net gain
18,000
97.

The balance of the projected benefit obligation at December 31, 2008 is
a. $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 is
a. $3,531,000.
b. $3,789,000.
c. $4,059,000.
d. $4,284,000.

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Accounting for Pensions and Postretirement Benefits

20 - 23

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
$4,000,000
Accumulated benefit obligation
3,200,000
Plan assets (fair value)
2,000,000
Accrued pension cost
300,000
99.

The amount of additional pension liability Spencer Company would recognize at
December 31, 2008 is
a. $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. $1,420,000
b. $1,200,000
c. $980,000
d. $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
Accumulated benefit obligation
Plan assets (at fair value)
Market-related asset value
Unrecognized prior service cost
Pension expense for 2008
Contribution for 2008

$8,400,000
7,500,000
6,150,000
6,450,000
540,000
3,000,000
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
is

a. $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 is
a. $1,350,000.
b. $750,000.
c. $540,000.
d. $450,000.


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20 - 24 Test Bank for Intermediate Accounting, Twelfth Edition
*103. The following facts relate to the Lional Co. postretirement benefits plan for 2008:
Service cost
$170,000
Discount rate
9%
APBO, January 1, 2008
$1,500,000
EPBO, January 1, 2008
$2,000,000
Benefit payments to employees
$115,000
The amount of postretirement expense for 2008 is
a. $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
$680,000
Discount rate
8%
APBO, January 1, 2008 (transition amount)
$4,000,000
EPBO, January 1, 2008
$4,800,000
Average remaining service to full eligibility
20 years
Average remaining service to expected retirement
25 years
The amount of postretirement expense for 2008 is
a. $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
$126,000
Discount rate
10%
EPBO, January 1, 2008
$1,095,000
APBO, January 1, 2008
$900,000

Actual return on plan assets in 2008
$31,500
Expected return on plan assets in 2008
$24,000
The amount of postretirement expense for 2008 is
a. $184,500.
b. $192,000.
c. $211,500.
d. $216,000.

Multiple Choice Answers—Computational
Item

65.
66.
67.
68.
69.
70.

Ans.

d
c
a
b
c
a

Item

71.
72.
73.
74.
75.
76.

Ans.

b
d
d
b
b
a

Item

77.
78.
79.
80.
81.
82.

Ans.

d
b

c
b
c
b

Item

83.
84.
85.
86.
87.
88.

Ans.

b
a
a
c
a
c

Item

89.
90.
91.
92.
93.

94.

Ans.

Item

Ans.

Item

Ans

c
b
b
c
b
a

95.
96.
97.
98.
99.
100.

d
d
d
c

b
a

101.
102.
*103.
*104.
*105.

c
c
b
b
b


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Accounting for Pensions and Postretirement Benefits

20 - 25

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
Assumed discount rate
Service costs for 2008
Pension benefits paid during 2008

$72,000
10%
$18,000
$15,000

If no change in actuarial estimates occurred during 2008, Mellon's projected benefit
obligation at December 31, 2008 was
a. $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 the
a. 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. $72,000
b. $120,000

c. $168,000
d. $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
$600,000
Accumulated benefit obligation
525,000
Fair value of plan assets
825,000
Service cost
240,000
Interest on projected benefit obligation
24,000
Amortization of unrecognized prior service cost
60,000
Expected 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 of
a. $406,500.
b. $324,000.
c. $241,500.
d. $217,500.