Ch.14 Pensions and Other Postretirement + Complete Test Bank

Chapter 14

Multiple Choice

1. The accumulated benefit obligation measures
   1. The pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
   2. The level cost that will be sufficient, together with interest to provide the total benefits at retirement.
   3. The shortest possible period for funding to maximize the tax deduction.
   4. The pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels
2. In a defined-benefit plan, the process of funding refers to
   1. Determining the projected benefit obligation.
   2. Determining the amount that might be reported for pension expense.
   3. Determining the accumulated benefit obligation.
   4. Making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.
3. In accounting for a defined-benefit pension plan
   1. The employer's responsibility is simply to make a contribution each year based on the formula established in the plan.
   2. The expense recognized each period is equal to the cash contribution.
   3. The liability is determined based upon known variables that reflect future salary levels promised to employees.
   4. An appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised
4. APB Opinion No. 8 set minimum and maximum limits on the annual provision for pension cost. An amount that was always included in the calculation of both the minimum and the maximum limit is
5. Normal cost
6. Amortization of past service cost
7. Interest on unfunded past and prior service costs
8. Retirement benefits paid
9. 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
10. An offset to the liability for prior service cost
11. Accrued or prepaid pension cost
12. An operating expense in this period
13. An accrued actuarial liability
14. A corporation has a defined-benefit plan. A pension liability will result at the end of the year if
    1. The projected benefit obligation exceeds the fair value of the plan assets.
    2. The fair value of the plan assets exceeds the projected benefit obligation.
    3. The amount of employer contributions exceeds the pension expense.
    4. The amount of pension expense exceeds the amount of employer contributions
15. Benefits under a pension plan that are not contingent upon an employee’s continuing service are
16. Granted under a plan of defined contribution
17. Based upon terminal funding
18. Actuarially unsound
19. Vested
20. According to SFAS No. 87, “Employer’s Accounting for Pensions,” gains and losses should be
21. Fully allocated to current and future periods
22. Offset against pension expense in the year of occurrence
23. Allocated if any unrecognized gain or loss at the beginning of the year is in excess of 10 percent of the greater of the projected benefit obligation or the market value of the plan assets
24. Disclosed in a note to the financial statements using separate schedules for both gains and losses
25. 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
    1. An offset to the liability for prior service cost.
    2. Accumulated other comprehensive income
    3. A pension asset or liability.
    4. Other comprehensive income
26. The interest on the projected benefit obligation component of pension expense
    1. May be stated implicitly or explicitly when reported.
    2. Reflects the incremental borrowing rate of the employer.
    3. Reflects the rates at which pension benefits could be effectively settled.
    4. Is the same as the expected return on plan assets
27. Which of the following components of pension expense could result in a decrease to the annual pension expense amount?
    1. Service Cost.
    2. Actual return on plan assets.
    3. Interest on the liability.
    4. Amortization of prior service cost
28. The actual return on plan assets
    1. Is equal to interest expenses accrued each year on the projected benefit obligation, just as it does on any discounted debt.
    2. Is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period.
    3. Is equal to the change in the fair value of the plan assets during the year.
    4. Includes interest, dividends, and changes in the fair value of the fund assets
29. According to SFAS No. 87, prior service costs should be
30. Charged to retained earnings as a cost relating to the past
31. Amortized over the service period of each employee expected to receive benefits
32. Taken into consideration only by expensing interest on the unfunded amount
33. Recorded in full as a liability at their discounted present value
34. In a defined benefit plan, the amount of annual funding depends on
    1. Compensation levels.
    2. Interest earnings.
    3. Turnover
    4. All of the above
35. According to SFAS No. 87, which of the following is never recorded as a component of annual pension cost?
36. Amortization of the intangible asset recorded as the offset to the minimum pension liability
37. Amortization of prior service cost
38. Amortization of gains and losses
39. Amortization of the transition amount
40. Gains and losses that relate to the computation of pension expense should be
    1. Recorded only if a loss is determined.
    2. Recorded currently as an adjustment to pension expense in the period incurred.
    3. Amortized over a 15-year period an amount in excess of the accumulated benefit obligation.
    4. Recorded currently and in the future by applying the corridor method which provides the amount to be amortized
41. A pension liability is reported when
42. Accumulated other comprehensive income exceeds the fair value of pension plan assets.
43. The projected benefit obligation exceeds the fair value of pension plan assets.
44. The accumulated benefit obligation is less than the fair value of pension plan assets.
45. The pension expense reported for the period is greater than the funding amount for the same period
46. The funded status of a defined benefit pension plan is equal to the
47. Vested benefit obligation minus the fair value of the pension plan assets.
48. Accumulated benefit obligation minus the fair value of the pension plan assets.
49. Projected benefit obligation minus the fair value of the pension plan assets.
50. Projected benefits plus the fair value of the pension plan assets minus employer contributions to the pension plan.
51. If the projected benefit obligation of a defined benefit pension plan exceeds the fair value of the pension plan assets, the employer must report
52. The difference as a liability in the balance sheet and a corresponding adjustment to the amount of pension expense reported in earnings.
53. The difference as a liability in the balance sheet and a corresponding adjustment to other comprehensive income, net of deferred income taxes.
54. The difference as an asset in the balance sheet and a corresponding adjustment to the amount of pension expense reported in earnings.
55. The difference as an asset in the balance sheet and a corresponding adjustment to other comprehensive income, net of deferred income taxes.
56. Whenever a defined-benefit pension plan is amended, and credit is given to employees for their years of service provided before the date of amendment
    1. Both the pension expense and the projected benefit obligation are usually relatively more than the previous amount
    2. Both the pension expense and the projected benefit obligation are usually relatively smaller than the previous amount
    3. Both the pension expense and the projected benefit obligation are usually the same as previous amount
    4. The expected change cannot be determined
57. The funded status of a defined benefit pension plan is reported in the balance sheet.
58. As an asset, if the pension plan is underfunded.
59. As a liability, if the pension plan is underfunded.
60. Because it measures the minimum pension plan liability.
61. When it exceeds the projected benefit obligation.
62. A company that maintains a defined-benefit pension plan for its employees should report a pension asset or liability on each balance sheet date equal to the
    1. Funded status relative to the projected benefit obligation.
    2. Projected benefit obligation.
    3. Accumulated benefit obligation.
    4. Plan’s vested benefits
63. Some theorists argue that the best measure of the employer’s defined benefit pension plan obligation is the accumulated benefit obligation.
64. Since the accumulated benefit obligation is measured using current salaries, it represents the conservative floor for a company’s pension obligation to its employees.
65. It is consistent with the measurement of pension expense.
66. Since the accumulated benefit obligation is measured using future salaries, it represents the conservative floor for a company’s pension obligation to its employees.
67. The accumulated benefit obligation measures the present value of the amounts that employees will receive from the pension plan once they retire.

1. Benefits that are not contingent on the employee continuing in the service of the company are
2. Accumulated benefits.
3. Projected benefits.
4. Benefits earned to date.
5. Vested benefits.
6. The corridor approach
7. Is used to determine how much interest to add to the service cost and amortization of prior service in order to calculate pension expense for the period.
8. Is used to determine the minimum amount of accumulated unamortized net gains or losses that must be amortized during the accounting period.
9. Is used to determine the amount of prior service cost to expense each accounting period.
10. Is use to determine the pension plan’s funded status.
11. The main purpose of the Pension Benefit Guaranty Corporation is to
    1. Pay pension to participants of failed pension plans
    2. Require a voluntary termination of a pension plan whenever the risks related to nonpayment of the pension obligation seem high.
    3. Require plan administrators to publish a comprehensive description and summary of their plans.
    4. Require minimum funding of pensions
12. Which of the following is not a difference between defined benefit pension plans and other postretirement benefits (OPBs)?
13. Unlike defined benefit pension plan payments, there is no cap on the amount of OPBs benefit to be paid to participants.
14. Unlike defined benefit pension plans, management promises OPBs payments in exchange for current services.
15. Unlike defined benefit pension plans, employees do not accumulate additional OPBs benefits with each year of service.
16. Unlike defined benefit pension plans, OPBs do not vest.
17. The expected postretirement benefit obligation (EPBO) is
18. Similar to the defined benefit pension plan’s projected benefit obligation because it is the obligation attributable to employee service rendered to date.
19. Used to calculate the interest component of OPBs expense before full eligibility is achieved.
20. Recognized over the life expectancy of the employees when most participants are fully eligible to receive benefits.
21. The actuarial present value of the total benefits expected to be paid assuming full eligibility is achieved.

Essay

1. Discuss the difference between defined benefit and defined contribution pension plans.
2. Discuss the cost approach and benefits approach actuarial funding methods.
3. Define the following components of pension cost: under SFAS No. 87 (FASB ASC 715):
   1. Service cost
   2. Interest cost
   3. Return on plan assets
   4. Prior service cost
   5. Amortization of gains and losses
4. What factors must be considered by actuaries in measuring the amount of pension benefits under a defined benefit plan?
5. What is the minimum liability as it relates to reporting pensions on corporate financial statements?
6. What four categories of information are required to be disclosed under the provisions of SFAS No. 35 (FASB ASC 960)?
7. Net assets available for benefits
8. Changes in net assets during the reporting period
9. The actuarial present value of accumulated plan benefits
10. The significant effects of factors such as plan amendments and changes in actuarial assumptions on the year-to-year change in the actuarial present value of accumulated plan benefits
11. Discuss the characteristics that make accounting for other postretirement benefits more difficult than accounting for pensions.
12. Defined benefit pension payments are determined by formula, whereas the future cash outlays for OPBs depend on the amount of services, such as medical care, that the employees will eventually receive. Unlike pension plan payments, there is no “cap” on the amount of benefits to be paid to participants. Hence, the future cash flows associated with OPBs are much more difficult to predict.
13. Unlike defined pension benefits, employees do not accumulate additional OORB benefits with each year of service.
14. OPBs do not vest. That is, employees who leave have no further claim to future benefits. Employees have no statutory right to vested health care benefits. Defined benefits are covered by stringent minimum vesting, participation, and funding standards, and are insured by the Pension Benefit Guaranty Corporation under ERISA. Health and other OPBs are explicitly excluded from ERISA.
15. What changes in accounting for pensions were required by SFAS No. 158 (FASB ASC 715)?
    1. Recognize the funded status of a benefit plan in its statement of financial position. This amount is to be measured as the difference between plan assets at fair value and the projected benefit obligation.
    2. Recognize as a component of other comprehensive income, net of tax, the gains or losses, and prior service costs or credits that arise during the period but were not recognized as components of net periodic benefit cost.
    3. Measure DBPP and OPBP assets and obligations as of the date of the benefit provider's fiscal year-end.
    4. Disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation.
16. Discuss the differences between defined benefit pension plans (DBPP) and other postretirement benefit plans (OPBP) with respect to:
17. How they are funded
18. The amount of benefits received
19. How the benefit amount is paid
20. Actuarial predictability of an individual plan
21. DBPPs are usually funded as benefits are earned; whereas, OPBPs are generally not funded.
22. The amount of a DBPP is generally well defined and consists of a level dollar amount each period; whereas, the amount of a OPBP can vary considerably depending on the benefits claimed.
23. The DBPP is usually paid monthly’ whereas, a OPBP is paid as needed.
24. The amount of a DBPP is fairly predictable; whereas, the utilization of a OPBP is difficult to predict.
25. Discuss the Employee Retirement Income Security Act.

In 1974, the U. S. Congress passed the Employee Retirement Income Security Act (ERISA), also known as the Pension Reform Act of 1974. The basic goals of this legislation were to create standards for the operation of pension funds and to correct abuses in the handling of pension funds. ERISA does not require employers to establish pension plans, and it generally does not require that pension plans provide a minimum level of benefits. Instead, it regulates the operation of a pension plan once it has been established by establishing guidelines for employee participation in pension plans, vesting provisions, minimum funding requirements, financial statement disclosure of pension plans, and the administration of the pension plan.

One of the major provisions of ERISA was the creation of the Pension Benefit Guarantee

Corporation (PGBC). The PGBC is an independent agency of the U.S. government to encourage the continuation and maintenance of voluntary private DBPPs, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations. The major goal of the PBGC is to pay pension to participants of failed pension plans. This is accomplished through an insurance program.

FASB Interpretation No. 3 stated that ERISA is concerned with pension funding requirements and that accounting for pension costs was not affected by ERISA. The provisions of FASB ASC 715 are also not affected by ERISA. Accounting standards for pension costs are concerned with periodic expense and liability recognition, whereas the provisions of ERISA are concerned mainly with the funding policies of pension plans.